The potential battleship that is
continues to slowly gather steam. Still, market players whose livelihood is potentially threatened by the system express little concern -- at least publicly. But that's not to say the electronic trading system hasn't caught their attention.
Jan. 29, institutional investors hooked into the system have been able to trade large blocks of
of OptiMark trading, with anonymity and at the optimal price. On Thursday, four other names went "live" at the
Black & Decker
last week announced an agreement with the
Toronto Stock Exchange
to create a new company that will operate a call market for the exchange.
'OptiMark could be a revolutionary device,' said John Wing of Chicago-Kent College of Law. 'I don't know who will be injured, but I think it will inherently reduce compensation to all people in the institutional equity business.'
"Who knows how anything new will work, but potentially OptiMark could be a revolutionary device," said John Wing, executive director of the Center for the Study of Law and Financial Markets at
Chicago-Kent College of Law
. "If institutions do use it in an active way, I think it could have a major impact on the way things are done. I don't know who will be injured, but I think it will inherently reduce compensation to all people in the institutional equity business."
Given the track record of OptiMark Chairman William Lupien and investment in the system by "major market factors" such as
, "it would be unwise to short
OptiMark," Wing said. Years ago, many market players thought
, Lupien's prior attempt to bring technological innovation to Wall Street, "wouldn't have a very big impact," he recalled.
Their Lips Are Sealed
At this point, reports about OptiMark are purely anecdotal. The system is operating as designed, according to OptiMark officials. But they declined to disclose the volume of 3M shares the system has handled this week or the name of any institutions that used it.
New York Stock Exchange
officials said exchange rules preclude the 3M specialist firm,
, from talking about the "trading experience" of any given stock. The Pacific Exchange 3M specialist declined to comment and a P-Coast spokesman said the exchange is not releasing any volume information pertaining to OptiMark-traded stocks.
As OptiMark and other electronic trading systems gain acceptance, some observers question the future of human involvement in trading. Such a dramatic change is a remote possibility and a long ways off if it comes to fruition. Presently, so-called third-market trading operations of brokerages and others institutions seem most directly threatened by OptiMark. Yet the company's officials say they are not aiming to take market share from anyone, and third-market participants -- those involved in the off-market trading of large blocks of stock (usually defined as trades of 10,000 shares or more) -- are somewhat nonchalant.
"We're keeping a close eye" on OptiMark, said John Shaw, head of equity trading at
, one of the biggest third-market operators in the industry. "The market can use all the liquidity sources available, and OptiMark has the potential to be a fine one. But our network of
account executives also does a fine job."
Shaw estimated OptiMark system handled about half of the 3M volume on the Pacific Exchange Tuesday, or about 16,000 shares. By comparison, Jefferies "represents about 3% of the
NYSE tape everyday," he said.
Cantor Sees No Threat
Peter DaPuzzo, president of
institutional equity division, another of the industry's largest third-market participants, was more blunt. "I don't view it as a threat," DaPuzzo said. "I can't see how institutions are going to have enough time to put in all the parameters
to begin the matching process and then get out if the market changes."
OptiMark is further limited because it does not alert a potential buyer or seller when there's a bid or offer that is close to, but not directly matching, their requested price, DaPuzzo said. "There's nothing that says, 'You're getting warmer.' Those bid and offers could be so close, but if you can't see them, they could sit there forever," he said.
DaPuzzo described Cantor's third-market operations as a "human OptiMark with a lot more finesse." Unlike computerized systems, third-market players such as Cantor can use their contacts with various players on the Street to "discreetly and confidentially try to line up the other side of a trade, to find a source of a supply of stock or bids not obviously out there," he said. "If you put
a bid or offer in the machine and no one knows it's there, it's like a tree falling in the woods. Does it make a sound?"
Other potential shortfalls to OptiMark include the inability of the system to do due diligence on investors using the system, said Mike Missal, a securities attorney at
Kirkpatrick & Lockhart
. "In a great market, there are less concerns, but if the market flattens out and turns the other way, you start worrying about suitability -- can they afford the risks involved?" Missal said.
In response to the fraud concerns, an OptiMark executive said while institutions interact directly in the system, they must designate a broker who is ultimately responsible to clear and settle trades. As for issues raised by DaPuzzo, users can cancel a trade anytime before it is completed, the executive said. OptiMark cannot tell a buyer or seller when there's a close counter bid or offer in the system, but users can construct a variety of profiles and -- because of the frequency of matching cycles -- have numerous opportunities to adjust if they find they aren't being aggressive enough, he said.
Clearly, market players are still figuring out just what OptiMark can do and where it will fit within the Wall Street hierarchy. Dan Cooper, a professor of finance at
, sought the middle ground and believes that's where OptiMark will ultimately succeed or fail.
"OptiMark should be very good for facilitating a specific type of trade -- an institutional block trade -- quickly, anonymously and at the best prices," Cooper said. OptiMark "will have a positive impact for institutional investors, but I don't think you'll see much of a ripple effect in the broader market. A sign of a good innovation is one that improves the marketplace efficiency for a particular desired group while not hurting others."