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March 1, 2003

Back From the Drawing Board

By Peter Chapman

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OptiMark Says It Has a Bulge Bracket Solution

OptiMark is back.

The most spectacular technology flop on Wall Street is giving it another go.

This time, though, instead of taking on the New York Stock Exchange, it has set its sights on the program desks of the bulge bracket.

OptiMark has injected $30 million in cash, technology and intellectual property into a moribund purveyor of VWAP crosses formerly known as Ashton Technology.

In the process, it has transformed Ashton from a passive order-taking ATS into a risk-tolerant program trading house.

Now known as Vie Financial Group, the resuscitated shop is charged with elbowing its way into the business of guaranteed VWAP executions.

Traditionally dominated by such mammoth trading houses as Deutsche Bank, Morgan Stanley and others, the service of guaranteeing executions at the day's average price is aimed at buyside desks trading large lists.

To outbid the big boys, Vie employs a sophisticated proprietary algorithm that breaks down huge blocks into little chunks and feeds them piece-by-piece into the market. The algorithm's job is to trade the stock at or better than its volume weighted average price during a given time period.

Heading up the new enterprise is Dean Stamos, recruited from the alternative trading system NYFIX Millennium. "We are trying to create a hybrid," Stamos said. "We offer both anonymity and nearly zero market impact like an ATS, but with the fill rate of a traditional broker dealer."

Technically, Ashton was reborn through the efforts of OptiMark Innovations, the venture capital arm of OptiMark Holdings. OptiMark Holdings is the reconstituted OptiMark Technologies, the notorious brainchild of Bill Lupien.

The firm spent about $350 million over four years to build an ATS for the buyside.

The OptiMark system was intended to allow institutional desks to trade directly with each other, bypassing the Big Board. Apparently ahead of its time, it was considered too difficult to use and never got off the ground. Its operation was terminated in 2000.

OptiMark regrouped, however, as OptiMark Holdings, parent to two subsidiaries. One, OptiMark, Inc., offers consulting services to stock markets and others. Nasdaq's SuperMontage was built with the help and technology of OptiMark, Inc. The other, OptiMark Innovations, forms partnerships, makes acquisitions and invests in various businesses.

Ashton is OptiMark Innovation's first incubation. Over a period of seven years, Ashton itself spent a large sum - about $90 million - on an alternative trading system called eVWAP. Although easier to use than OptiMark, eVWAP never attracted sufficient order flow.

Vie Financial, unsurprisingly, is not an ATS. That could be interpreted as a sign that the Wall Street mania for creating black box ATSs has come to an end. Most have flopped. OptiMark is dead. eVWAP shut down last November. The Arizona Stock Exchange is defunct. Linx never got off the ground. Via-Net is still just talk. Liquidnet and NYFIX Millennium, which are praised by some pros, do not have heavy volume. Another respected player, POSIT, which is the granddaddy of them all, has seen its volume decline this year.

ATSs have two flaws. First, they generally execute no more than five or ten percent of their order flow. That frustrates traders. Frustrated traders stay away. That makes it difficult for the ATS to build critical mass.