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OptiMark Showing Promise in Its Early Days, but Still Limited by Size


NEW YORK — Two months after its launch, OptiMark Technology's highly touted new electronic stock-trading system is still on its shakedown cruise--but it's already handling up to 3 million shares a day, officials say.

The OptiMark system, which operates as a facility of the Pacific Exchange, is designed to allow institutions to trade large blocks of stock directly with each other, with total anonymity and potentially better prices.

It could someday change the way many institutions and individuals alike trade.

But for now, it's still too early to tell whether OptiMark can fulfill its promise as a low-cost, low-"friction" market of the future.

OptiMark currently trades all exchange-listed stocks in the Standard & Poor's 500 index. Eventually it will include all 2,600 New York and American stock exchange stocks that also trade on the Pacific Exchange.

There remains a chicken-or-egg problem: Traders aren't using OptiMark for really large block trades yet because there isn't enough liquidity--or available shares--in the system to assure them that their trades will be completed.

And there isn't enough liquidity yet because traders aren't committing big trades.

Every market innovation encounters such early resistance, said Junius Peake, finance professor at the University of Northern Colorado. Once OptiMark reaches a critical mass of liquidity, trading volume "will explode," Peake predicted.

The brokerage community can be expected to indulge OptiMark's growing pains because such top Wall Street names as Bankers Trust, CS First Boston, A.G. Edwards, Goldman, Sachs & Co., Loomis Sayles and PaineWebber are investors in the Durango, Colo.-based firm.

Peake himself has a modest stake in OptiMark, acquired from an early investor, he said. The shares are not publicly traded.

OptiMark has attracted such interest because it can potentially help improve market efficiency--meaning get the best possible price for both buyers and sellers, with minimal trading costs.

If perfect candor were possible in the markets, a trader might announce: "I want to sell 100,000 shares of XYZ Corp., for which the current market bid price is $50 a share. I'm so anxious to unload this position that I'd take as little as $49.50 if I could sell it all, $49.75 if I could sell half, and so on."

Plenty of buyers might be happy to take such a deal, but they would never hear about it because no seller would risk exposing his or her bargaining position so nakedly. Just knowing that someone is under pressure to sell a big block of shares can automatically drive the price down.

Instead, traders either must negotiate big trades with a single buyer or try to sell off a position bit by bit without calling undue attention to what they are doing.

Either approach is inherently inefficient because it fails to marry a "natural" buyer and seller--those whose desires as to both price and quantity perfectly complement each other.

OptiMark uses sophisticated software to allow customers to enter anonymous "profiles" that describe in detail how much stock they would be interested in buying or selling at what range of prices.

Unlike on the New York Stock Exchange or Nasdaq where trading is continuous, OptiMark operates as a series of computer-run auctions, conducted every, two, five, 10 or 30 minutes, depending on the trading volume of the stock involved.

When a buyer's profile matches a seller's at the end of an auction cycle, the trade is automatically executed on the Pacific Exchange, with OptiMark receiving a penny-a-share fee. Until the trade is cleared, neither side--and no third party--knows who is involved.

Ultimately, OptiMark hopes for all its customers' trades to be executed entirely within its system. But for the time being, with liquidity still developing, OptiMark must tap the buying and selling interest in other markets via the Intermarket Trading System, or ITS, which links U.S. exchanges.

Thus, a certain percentage of OptiMark trades--a number OptiMark won't disclose--are executed on the stock exchanges of New York, Chicago or elsewhere.

Bob Gasser, head of U.S. equity trading at J.P. Morgan & Co., said that using the ITS tends to defeat the purpose of OptiMark because it can tip off the rest of the market.

"If you take stock in New York, you're very visible," Gasser said.

Therefore, Morgan's trading desk switches off the ITS system when entering an OptiMark profile, even if it means that a trade won't get done. Gasser thinks that as OptiMark grows, it will be a useful trading system in smaller stocks where confidentiality is paramount.

Erik Conley, a vice president on the trading desk of Northern Trust Co., said he has encountered "very few problems" in using OptiMark, although he has yet to put a very large trade through it.

Aside from the anonymity, Conley has found that about 50% of the time OptiMark provides some share-price improvement over quoted prices in other markets.

The price improvements have been modest and the trades so far have been small, but "small bits add up," Conley said.

"Our focus is clearly on institutions for some while," OptiMark Chief Executive Phillip Riese said. Once the system has attracted all the institutional support it feels it needs, it may expand the focus to individual investors, he said.

As it is, investors are free to ask their brokers to enter stock orders through the OptiMark system.


Thomas S. Mulligan can be reached by e-mail at

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