Since the January debut of the OptiMark Trading System, officials of the Durango, Colo.-based company that designed the machine, say it is making headway in the crowded field of alternative trading systems (ATS). As evidence, OptiMark proudly cites the 650 traders who regularly use the system, as well as the 2,000 traders schooled to use the superanonymous black box-style computer.
To be sure, these numbers compare favorably with the rival ATS subspecies known as electronic communications networks. The Island ECN operated by Iselin, N.J.-based Datek Online Holdings, for instance, has some 200 users connected, though it is largely targeting retail trades and not the institutional customers OptiMark mostly wants.
Nasdaq
OptiMark, meanwhile, is preparing to set up a home with Nasdaq, which would transform OptiMark into a super ATS. In theory, the move would allow it to handle Nasdaq institutional order flow with less chance of market impact. OptiMark's computers will be stabled at Nasdaq's computer hub in Trumball, Conn.
Given that ECNs handle about 30 percent of all Nasdaq trades – up from 24 percent in the past two years – OptiMark comes at a critical juncture in Nasdaq's history. Whether its planned introduction on Nasdaq later this year turns into sweet revenge for Nasdaq, allowing it to suck back some of the order flow diverted to ECNs, remains to be seen.
Reuters Group's Instinet, which handles about 15 percent of Nasdaq trades, would appear to be the most vulnerable to attack from OptiMark, simply because both target the institutional business. Whether Instinet's recent stake in Archipelago, operated by Chicago-based Archipelago Holdings, will change the equation, is another remaining mystery.
Dark Side
Despite the bright possibilities, however, a more significant number hides a darker side of OptiMark.
OptiMark is still lagging its early transaction projections, executing only one million shares daily, instead of the anticipated two million to five million shares projected, according to published reports.
The momentum that OptiMark is likely to gain should its integration with Nasdaq take place, must also be measured against the mixed reviews for OptiMark by institutional traders.
At issue are concerns largely about OptiMark's ease of use. OptiMark officials do not deny that OptiMark is complicated for the average trader.
"Instead of teaching [traders] everything about what the OptiMark system can do, we now teach what works for the particular trader or set of traders," said OptiMark Chief Executive Phillip Riese.
The Hallmark
OptiMark's hallmark is a sophisticated profiling capability, which enables users to graphically depict scaled multi-order trades. This allows a trader to draw a profile or to select from several templates that represent commonly deployed trading strategies such as All' or Nothing' block trades. OptiMark also enables users to peg profiles to benchmarks, such as the current bid or ask price, which should make it unnecessary to re-enter profile parameters as the markets move.
Some traders do speak favorably about OptiMark's ease of use.
"I find it very easy for putting an order into," said Mike Cormack, the head trader at Kansas City-based American Century, a mutual fund giant that is a partial investor in OptiMark. Cormack and several other traders at his firm, were trained to use OptiMark sitting at their desks in Kansas.
"I find drawing the profiles relatively easy as well," Cormack added. "It's a labor-saving device. You don't have to continue putting multiple orders in over the course of the day. You can just edit the original profile you put in."
Other traders are so daunted by the graphical profiling capabilities that they refuse to touch them. "To enter trades, the system is user friendly. To understand the system is not quite as easy. You really have to go to class," said Marty Eng, a trader at investment-banking giant J.P. Morgan.
Eng, in fact, attended a one-day OptiMark training session to learn how to build and maintain profiles. That's roughly the average length of time spent at an OptiMark session learning about most of its sophisticated functions.
Connection
Meanwhile, J.P. Morgan is building a connection to OptiMark so that orders can be entered into the firm's existing terminals instead of through OptiMark. "That will be a lot easier because we can just enter the way we normally enter trades," Eng said.
Many experts, as well as institutional traders, applaud the system for its advanced capabilities. The head of trading at a major market-making firm is also a fan. "Conceptually, this thing is awesome," said the trader, who declined to be named. "It was designed by smart people for traders to graphically depict trading strategies, not just to enter orders."
Even so, this trader adds that the system's sophistication may ultimately be its own undoing.
"OptiMark has huge potential, but it's ahead of where people are comfortable," he said. "There's still limited liquidity in it. Until it gets a broader audience, this thing just isn't going to fly."
New Approach
OptiMark has always allowed the simple trade ticket style order entry ability for traders, in addition to its more sophisticated features. But perhaps because of the grumbling about the system's usability, OptiMark has changed its sales and training approaches in recent months.
Bells and whistles are being added to make OptiMark easier to use. Beta testing commenced recently on an electronic buy-side front-end trade routing connection made by Boston-based Eze Castle.
Stressing that OptiMark can easily be tailored to a trader's personal preference and trading style, the owners have redesigned its interface to enable customers to choose a screen layout that seems more intuitive and familiar.
"This simplifies it a lot from the early days when, frankly, we taught everything," said OptiMark's Riese.
Whether OptiMark succeeds in delivering eye-popping results in the crowded ATS market will depend in part on this new strategy.
