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January 1, 2000

Rave Reviews for Levitt's Call Market

By William Hoffman

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  • Rave Reviews for Levitt's Call Market

While some dealers may balk at the idea, SEC Chairman Arthur Levitt's support for a unified price opening - more popularly known as a call market - is finding an enthusiastic reception among academic experts and institutional stock trading managers.

"I think it would be an excellent innovation," said Robert Schwartz, Professor of Finance for the Zicklin School of Business at Baruch College. "For natural buyers and sellers this is very efficient."

But Nasdaq seems reluctant to introduce, anytime soon, the type of call market envisaged by the Securities and Exchange Commission chairman. Some powerful market makers have reservations while Nasdaq itself has a plateful of other projects to keep it busy.

For Steve Wunsch, however, Levitt's recent calls for Nasdaq to adopt some form of single price opening "is good news." Wunsch is president of the Arizona Stock Exchange (AZX), operator of an electronic call market run out of New York.

Wunsch, who makes no secret that the AZX has considered partnering with suitable stock markets, added, "It's our understanding that during the next year it's going to be a big active topic of discussion."

Consensus Price

In a call market, trades are consolidated at a fixed point in time, at a single, "consensus" price, which presumably clears the market of all offered equities at one time. More traditional continuous markets, which have prevailed on U.S. exchanges for more than a century, match buyers and sellers more or less on the spot, throughout an agreed-upon trading day.

Call markets don't replace continuous markets, Schwartz explained. The former has to be tied into the latter in the right way. Design issues make the interaction between the two potentially more complex, he noted.

Harold Bradley, senior vice president of strategic investments at American Century Companies in Kansas City, Mo., said there are three basic types of call markets.

The Arizona Stock Exchange is perhaps the purest type, Bradley said. Wunsch added, "The theory of the single price auction is that it eliminates the `winner's curse'." The fear that a bidder may win a typical auction but pay a higher price in the process leads some people to bid less aggressively, Wunsch said. Single price auctions eliminate that problem by concluding the auction at a consensus price no matter how aggressively the participants bid, he said.

OptiMark operates a second type of call market, Bradley said, working across multiple markets to reach an effective clearing price, and allowing for more than one clearing price to emerge. W.R. Hambrecht operates a third type, Bradley said. That's a "Dutch auction call," clearing the market at the lowest bid that takes all shares off the market at one time, he said. This type of call auction leaves wholesalers in a position to most efficiently serve the customer while still making a profit, he added.

The Advantages

Wunsch, Bradley, and Schwartz believe that, in many circumstances, the call auction offers several advantages over continuous trading. "I have sitting on my desk right now multiple data runs illustrating locked and crossed markets with millions of shares traded, with the seller $2 or $3 under what the buyers are willing to pay," Bradley said.