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Tim Quast
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We're All HFTs Now

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May 31, 2000

AZX Looks for an Order Transfusion

By Peter Chapman

These are critical days for the struggling Arizona Stock Exchange.

The electronic call auction system has partnered with Goldman Sachs, Salomon Smith Barney, Lehman Brothers, J.P. Morgan and others.

They plan to offer the buyside an alternative to Nasdaq's chaotic opening.

The pilot program, which ends June 22, lets institutions submit bids and offers on six Nasdaq stocks - Dell Computer, Amazon.com, Red Hat, Palm, Northwest Airlines, and Smurfit-Stone Container.

The auction process produces a single opening price for each security. It is billed as an alternative to the daily groping for the correct' opening price that occurs as multiple dealers raise and lower their bids and offers. Dell, for instance, is traded by 90 market makers.

"This is an attempt to demonstrate how Nasdaq could open with multiple participants," said Steve Wunsch, the New York-based president of the AZX. "The Nasdaq process needs to be fixed."

The AZX, which has been around in some form since 1991, is in dire need of order flow.

That's a problem experienced by other innovative trading systems. AZX averages about 10,000 shares a day, according to Wunsch.

That's a far cry from the millions of shares traded daily by alternative trading systems like POSIT and Instinet.

Without the support of the New York bankers, sources said Arizona was likely headed for the sunset.

Goldman has reportedly bought a 25 percent stake from Wunsch. That may quiet the naysayers.

A major reason behind the AZX's minimal use has been broker fear of disintermediation, according to Wunsch. If top institutional traders are now buying in then the AZX may have a fighting chance.