Trading for institutions – anonymously

The Optimark trading engine, which could work on the TSE some day, uses complex algorythms to bring institutional investors like fund managers and brokers together anonymously on an electronic trading platform, where the program will electronically find the best possible match for them. Anonymity is important, because when money managers are trying to unload thousands of shares, they don’t want to tip their hat to the market, which would automatically start bidding the shares up.

“As a former trader, I love Optimark, it’s the next wave, but it may be too far ahead of its time right now,” said Mike Cormack, national sales manager for Archipelago LLC in an interview after the session.

The problem is that few traders use the technology. “It’s not compatible with human intermediation,” said Cormack. The Pacific Stock Exchange runs Optimark, but trading on the machine has been very spotty. Archipelago ECN is also Optimark compatible, but there just hasn’t been that much volume. But, Cormack isn’t completely skeptical.

“It would work with the right front end technology. And with the right pricing structure, Optimark could be phenomenal, but that may not be within the next 12 months,” says Cormack. “If the TSE has an electronic order book that’s the first step. It could work.”

Cormack isn’t convinced that traders will always be so technophobic. He interjected when Dr. Carole Ryavec, managing director of Plexus Group, presented a paper which suggested that electronic trading on alternative trading systems wasn’t effective for institutional trading.

When Ryavec suggested that Optimark was the trading technology she knew of that might allow cost-effective institutional trading, one US-based trader, who didn’t want to be named, asked “are you suggesting that Optimark may actually work one day?” There was some chortling in the audience, and then she responded. “Well I’d say it has a chance.”