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Non-Tech : Ashton Technology (ASTN) -- Ignore unavailable to you. Want to Upgrade?

To: LPS5 who wrote (3687)	3/26/2001 1:26:25 PM
From: mst2000	Read Replies (2) \| Respond to of 4443

A few questions (hope you don't mind our continuation of an interesting dialogue with an industry professional -- very useful for our "education" -- on the pluses and minuses of different approaches to meeting institutional trading needs): Would you agree that the "risk" associated with the "pricing" of a matched order is qualitatively different than the "risk" associated with not making the fill at all (as in the case where you submit an order into an electronic matching system that depends on price as well as "intent to trade" in order to establish a cross), in a way that might make the "risk" of that the eVWAP price is "inferior" somewhat more tolerable for an institutional trading party that might otherwise eschew electronic trading approaches altogether (i.e., as compared to the more typical risk of not "hitting the fill" in an electronic system due to illiquidity within the applicable trading system) -- especially where the task at hand for the institutional customer is filling a huge order that will require a variety of methodologies to fill, and where there is some recognition that parts of such a huge fill made the "regular way" will still necessarily be at "inferior" prices compared to other parts of the same block? Here's another one: Do you think the that the risk associated with getting a "true VWAP price" which may not be optimal (though, per Elkins McSherry, it actually is some 83% of the time), is qualitatively different (and possibly, in some cases, a more desirable or tolerable risk to endure) than the risk that taking a more active role in trading the position might lead to an adverse result -- that is, waiting for "information flow relating to a stock" and seeing if "something in the market" presents a fill price "far beyond the scope of VWAP, RPM, or any other measures" might actually lead to inferior pricing. It does seem to me that waiting on "signs" from the action taking place in the call market is likely to lead to price degradation a fair percentage of the time, where the information obtained reveals that it would have been better to step in a little heavier earlier and now it's too late. I recognize that what differentiates the best traders from the less effective traders is a combination of (i) superior knowledge of the market and its mechanisms for trading that makes such dynamic trading situations tend to be more favorable, and (ii) other resources available, including access to parties who can accommodate big block fills outside of the regular market (the 1 minute phone call, as you put it) and research and other capabilities that weigh on "timing" of trades -- at the same time, especially with index funds which do not time moves as much on performance or stock trends, but rather the need to remain true to the index in light of inflow and outflow of capital from the fund, and even with more "dynamic" event oriented trading customers, it would seem that the benchmark system which averages every trade over the course of a session (or any time period within the session) and allows matching and fills without revealing market presence does provide a useful (possibly even ideal) venue to fill as much a portion of your order as possible in a way the homogenizes timing risk and minimizes overall market impact. Which leads me to my last question. The second generation of eVWAP is going to be what they describe as a "semi-continuous" market, where parties can enter the system at 15 minute intervals and match with each other, with fills to be made at the volume weighted average price calculated during each 15 minute interval. As with the 1st generation eVWAP, there would be no human intervention, so that there would be, in effect, legitimate guaranties of anonymity if users elect to enter orders directly into the system (or have them processed through order routing mechanisms that auto-process unmatched residuals into the next 15 minute session throughout the trading day). On the one hand, such a system presents a more dynamic form of fill risk than pre-market eVWAP does -- and would thus need a higher level of trader attention (in the pre-market version, the trader knows before the market opens how much, if any, of its order in eVWAP was filled and can act accordingly for the rest of the day; with the semi-continuous market version, the trader would find out how much was "crossed" a few minutes before each matching interval begins, meaning the trader would have to pay closer attention); on the other hand, the semi-continuous market still provides an anonymous and secure venue for filling components of an order at an averaged price (applicable to the particular interval) with reduced market impact -- which would still seem desirable to the large block trader looking to reduce market impact from its presence in the call market, and would seem to cater a little more dynamically to the trading desk which is seeking to time its entry into the market intraday on a more dynamic basis and wants a clearer understanding of what will happen to its residual unmatched orders -- they could be routed back to the trader, into the next matching interval, or in whatever way the trader wants. My biggest concern about such a system would relate to its ability to generate sufficient liquidity to make fill risk associated with the venue tolerable -- but also think that if eVWAP gets utilized (as appears may be the case) by 3 or more of the world's largest money managers and 100-200 other large institutions and B/Ds, that problem may well be overcome, and the advantages of having an anonymous, secure, dynamic trading venue where the presence of the particular large block being traded is unknown to the counterparties filling into it may prove desirable in the face of the trade-off of minimizing market impact. OK, not my last question - one more (stop me before I ask again!): What do you think of the effect of decimilization on your job as a trader trying to fill large blocks? The media, quoting industry professionals, seems to portray that institutions and their traders are unhappy with it - that decimilization has made their jobs more difficult. What's your take on that. Thoughts? Comments? Talk amongst yourselves (w/ apologies to Michael Myers). Seriously, thank you for bothering to take the time to discuss these issues -- I am happy to return to the other message board if you prefer to carry on the dialogue there, btw. MST