LPS5 - I always had the impression that Optimark was hurt by two problems that do not affect eVWAP -- first was the lack of user friendliness -- the complexity built into the nature of the system itself -- which manifested itself in terms of the users feeling a lack of confidence that a trading preference questionnaire, fed into a patented algorythm, would result in the execution of a predictable volume of shares at a predictable price, as well as the fact that it involved too much work up front for the customer to display trading intentions to the system and then have to wait passively to see what matched. By contrast, eVWAP involves basically a single decision by the buyer -- to buy or sell and in what quantity of a particular stock -- and that's it. And the trader knows before the open exactly where it stands in terms of the fill. The price is the VWAP for the day, period, which at least 10% of the market is now trying to achieve manually through VWAP style trades that are charged out at 5 or 6 cents a share because of the labor and aggravation involved in the time slicing techniques. True? Now accepting that VWAP can be beaten some percentage of the time, nevertheless, if Elkins McSherry and the PHLX study I posted on the other SI message board are meaningful (Elkins McSherry says 83% of the time, traders do not beat the VWAP, the PHLX study shows, based on results of many trades by 7 large institutions over a one year period, that trading at a pure VWAP price would have involved a savings of between 8 and 12 basis points to the trader in either direction -- depending on the direction -- which I assume you would agree is a significant sum), then the strategy of achieving a VWAP price in a large block execution should have at least some intrinsic merit to it from the customer's perspective.
The second issue with Optimark as I understand it was their failure to overcome credit authorization issues associated with an anonymous trading system, as well as other "back room" issues that, collectively, resulted in the imposition of a very low limit on how much trading could be allowed per customer within the Optimark system, which in turn kept internal trading volumes low for a prolonged period. Since these systems need liquidity to succeed, the limitations effectively killed the system. Perhaps it can even be viewed as putting the cart before the horse -- to launch the system before liquidity was available, and then have to impose trading limits due to credit authorization problems, meant that the customer would achieve low matching efficiency and make it less likely to use it in the future. Which created a negative snowballing effect. Is this an accurate account?
In any event, eVWAP has solved the credit authorization issue entirely, without compromising anonymity, and has the capacity (again, without compromising anonymity) to implement soft-dollar allocations in order to collect (on behalf of a B/D introducing an institutional customer to the system) a full rate commission of 5 cents per share, to take out the portion payable to the PHLX and Croix for execution and clearing (if applicable - the user can also provide its own settlement though one of a dozen or so national clearing agents) -- of between 1 and 2 cents per share -- and send the balance to the B/D, even where the customer initiates the trade on its own interface without the B/D even knowing about it (something that might prove meaningful to a B/D that charges its customer 5 cents a share, and can then pay 1-2 cents to the PHLX and Croix to place and clear the trade though eVWAP, achieve a VWAP execution, and all without any of the "labor intensive" activity that the B/D would otherwise have to engages in to make the VWAP style fill). The objective of which was to make the system attractive not only to the customers, but to the B/Ds with whom those customers have had long standing business relationships and for whom they provide research and other back room services. And eVWAP's sponsors have made it a point to defer ramp up, to the frustration of ASTN's investors, pending the achievement of "critical mass" -- a sufficient base of users including what they decribe as "major list players" -- large money managers -- to ensure a reasonable matching efficiency out of the box -- so that they do not put the cart (ramp up) before the horse (liquidity). It appears that they believe they are now closing in on that threshold, as ramp up is clearly beginning, albeit it initially in "bursts" of volume.
As for the other "timing" points raised by your post, of course getting a fill on a $20 stock at noon for $17 is better than a VWAP fill on the same $20 stock for $19.75. I assume the example is hyperbole -- the $20 stock does not likely sell for $17 at noon and still have a VWAP of 19.75. And it's equally likely that the $20 stock is selling for $21.50 at noon, that the emerging VWAP is $20.80 and the trader is still looking for a fill, correct? If your assumption is that every time a trader works a block actively, he or she achieves a better price, well, of course that would be better than VWAP if your assumtpion were correct. I would assume however that, just as there is no universal basis to assert that eVWAP will always achieve a better price, it is also not universally true that traders achieve their objectives each time they enter the market. They win some and lose some, just like everybody else.
I am NOT looking for a concession that eVWAP is always better, or universally results in price improvement -- far from it -- nobody could possibly believe that to be the case. What I am looking for is confirmation that, as a tool within a universe of many tools that traders of institutional sized blocks will use to achieve an overall objective of meeting the customer's trading objectives at the most efficient possible cost (including trade results in the "cost" calculation), eVWAP has a place. That, it seems to me, is unquestionable, at least if the system succeeds in attracting sufficient sponsorship to have an acceptable matching efficiency without garnering so much of the market as to skew the "regular call market". I have never suggested that eVWAP is any more than one of many tools. And interestingly, I find your resistence to saying that the VWAP price might ever represent price improvement to what a good active trader might achieve as reflective of one of the major obstacles that this particular system faces -- convincing market participants (such as yourself) that a different (and worse still, an electronic) way of doing this might on some occasions actually be advantageous to what a toptrader can achieve, and thus to use it when it makes sense to do so.
Anyway, I hope we are not coming across as too strident or zealous -- I am truly trying to understand your view of this, to re-examine my own assumptions about it, and to see where I come out. And I truly appreciate the time you have taken to respond.
Take care.
MST |
