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August 31, 2003

Rethinking Call Market Trading

By Peter Chapman

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A Newcomer Plays Hardball in a Niche Business

An up-and-coming agency broker hopes to shake up the niche business of electronic call market trading.

Burlington Capital Markets entered the business of periodically matching orders with an after-hours cross dubbed BLOX this summer. The service is the first step in Burlington's plan to expand the use of electronic crossing by offering different products.

"Blox gets us into the game," said Jim Ross, a managing director and head of call market trading at Burlington. "Our intention is to innovate in an area that has lost some of its zeal for innovation. The founders of crossing have gotten bored with it."

Blox is actually the third new cross to be announced this year. In February, ITG, which dominates crossing with its POSIT system, launched an after-hours cross, competing with Instinet's "midnight" cross. Instinet then announced it would compete early next year against ITG in the intra-day space.

Ross joined Burlington in January after spending 14 years with Instinet, lastly in charge of institutional sales. At one time responsible for crossing at Instinet, he has formed an eight-person call market group at Burlington. The team has five ex-Instinet staffers, including Andrew Papandreadis, formerly head of call market technology at Instinet.

The business Burlington enters is a harsh one. Two players, ITG and Instinet, dominate a small pool of no more than 40 million shares per day. Newcomers have come and gone. The Arizona Stock Exchange, for instance, threw in the towel last year after 10 years of trying. Ashton Technology's six-year effort, eVWAP, also went nowhere.

Life hasn't been easy for the top dog either. ITG, which operates the most calls via its flagship POSIT service, has struggled with declining volume. Average shares traded per day have slumped to 27 million, comparable to levels last seen in 1999.

Electronic call auctions are the mirror opposite of continuous markets. They run infrequently and only for seconds at a time. Depending on the model, matches of buys and sells either "create" a price or are assigned a price derived from the continuous market. Their black box nature promises complete anonymity with zero market impact.

Electronic calls actually represent a subset of the much larger world of crossing. Most crossing is done by sales traders over the telephone when they match institutional buyers with sellers. Large indexers such as BGI and State Street run internal crosses. Manual call auctions are also used to open trading on the New York and American exchanges.

European Markets

Unlike the exchanges' opening auctions, which "discover" price based on supply and demand, the electronic crosses used in the U.S. derive their prices from the continuous market. They are considered "benchmark" crosses. Only in certain European markets are electronic calls used to set opening prices.

The one prominent example of an electronic call in the U.S. that attempted to market itself as a price discovery mechanism was the Arizona Stock Exchange. The state of Arizona, AZX's main creditor, mothballed the service last year.