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February 1, 1998

The Three Dimensions of Optimark

By John A. Byrne

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  • The Three Dimensions of Optimark

On Jan. 13, Durango, Colo.-based OptiMark Technologies and Nasdaq inked an agreement in principle to integrate OptiMark's supercomputer-driven matching system with the Nasdaq Stock Market. But first the plan must be approved by the Securities and Exchange Commission. OptiMark, of course, is not short of ambition, aiming to allow institutions and retail customers to trade anonymously and without disclosure, based on price, size and satisfaction levels.

OptiMark's chairman and chief executive is Bill Lupien, former head of Instinet and previously a specialist for 17 years on the Pacific Exchange (PCX). He co-invented OptiMark with John "Terry" Rickard, who is the company president.

Here, Lupien answers some questions on traders' minds.

Q: Your agreement with Nasdaq is big news.

A: Well, we have always recognized the need to provide investors with a way to trade over-the-counter as well as listed equities. So it was natural for us to approach Nasdaq, as the primary market in OTC stocks, to discuss offering OptiMark to National Association of Securities Dealers' members.

We were pleased when Nasdaq indicated not only an interest in making OptiMark a facility of Nasdaq, but expressed a desire in integratating OptiMark with its planned limit-order file. By increasing liquidity, the integration of OptiMark with Nasdaq will make trading OTC stocks more efficient and less costly for institutional investors.

In addition, brokers representing small investors will be able to use OptiMark to give their retail customers access to the better prices frequently offered by institutional investors something they cannot readily do today. For OptiMark, the agreement in principle with Nasdaq, the largest and fastest growing electronic market in the world, provides a level of credibility that will continue to attract buy-side and sell-side users.

Q: What inspired you to develop OptiMark ?

A: We were looking for a comprehensive solution to a pervasive problem plaguing the securities industry: how to find liquidity at a reasonable cost.

The structural deficiencies of the securities market primary among them, information leakage have forced traders to withhold liquidity in order to avoid giving the market information that might cause prices to move against them. Such adverse price moves typically associated with large orders and referred to as market impact and the inefficient strategies that traders use to avoid them, cost investors billions of dollars annually.

The problem has been getting worse every year, as more and more assets are concentrated in mutual funds and pension funds.

Q: So what exactly is OptiMark?

A: OptiMark is an optimal, supercomputer-driven, trade-matching mechanism with features to satisfy the trading desires of all market participants, from small retail investors to large institutional investors.

OptiMark incorporates two powerful, patented features. First, it allows the anonymous and non-disclosed representation of a trader's willingness to trade over a continuous range of prices and sizes. Second, it provides a means of optimizing the sequential allocation of trades between buyers and sellers at different prices and sizes based upon a measure of mutual willingness to trade and a deterministic set of trading rules. Additionally, order entry and cancellation can be accomplished at electronic speeds over a 100 percent FIX-compliant transaction network. OptiMark will function as a frequent - that is, every 90 seconds - multi-price call market.

Q: How much will OptiMark cost users?