First Call Auction in Eleven Years Launches
Traders Magazine Online News, January 17, 2012
A former block trading executive is hoping to replicate the action in the upstairs market electronically.
Kevin Callahan, until 2009 a marketing official with upstairs shop JonesTrading, has formed Ax Trading to launch an electronic call auction. The alternative trading system lets buyside traders auction off their own orders automatically, much as an upstairs sales trader might do telephonically.
Kevin Callahan
Callahan says the process is cheaper and more efficient than using an upstairs desk. "I would argue that the entire upstairs market really runs on a call market model," Callahan said. "Nobody has done this before."
Bob Schwartz, a finance professor at Baruch College's Zicklin School of Business, an adviser to Ax, and an expert on call auctions agrees. "This is a great development," Schwartz said. "Ax Trading is an innovation in market structure."
Callahan, Ax's chief executive, was inspired to launch the company after reading Schwartz's book "The Electronic Call Auction: Market Mechanism and Trading: Building a Better Stock Market." Schwartz introduced Callahan to Peter Jenkins, a former buyside trader and NYSE Euronext executive, and the two men formed a partnership in 2009. Ax recently hired Jim Ross, a longtime champion of call auctions, who built systems for several agency brokerages.
A few of the exchanges run call auctions-both electronic and manual-at the opening and close. A couple of brokers have introduced electronic call auctions for entire portfolios in recent years, but failed to gain traction.
But the last time anyone tried to operate an electronic call auction for individual stocks was in 2001 when the 11-year-old Arizona Stock Exchange shut down. The system's demise followed that of OptiMark, another call market for stocks, in 2000.
Ax differs from these systems in at least three crucial ways. First, it operates during market hours; AZX was only permitted to operate after hours. Second, Ax does not operate on a fixed schedule. Traders can initiate an auction whenever they choose. Optimark and AZX auctions went off at set times during the day. Third, only limited information about an order is revealed to a potential counterparty. AZX, by contrast, was an open book.
Ax is geared toward trades of small capitalization stocks that may be difficult to get done in the public markets. To initiate an auction, a trader transmits a firm-and priced-order of at least 25,000 shares. Most orders are expected to be "blind" where the initiator only discloses symbol and size. He does not reveal whether he is a buyer or seller. Nor does he reveal his price.
The order triggers a series of email blasts to traders who have previously expressed interest in participating in auctions. Those traders then transmit their own orders. The entire process takes five minutes. Trades that get done occur at a price that clears the market.
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