NEW YORK -- The potential for the success of the Primex Auction System -- to be created by Goldman Sachs Group Inc.; Merrill Lynch & Co.; and Bernard L. Madoff Investment Securities -- is great, and so is the competition.
Traditionally, brokerages have invested in electronic trading systems such as BRASS and OptiMark, but since these firms are forming Primex Trading N.A. LLC, others might follow, industry observers said.
Glen Shipway, chief executive officer of Primex, said his system will complement existing trading models in both auction and dealer marketplaces, as well as electronic communication networks.
While the technology is not targeted to either institutional or retail clients, it will be able to handle large volumes of trades, presumably from institutions, he said.
The Primex Auction System won't be officially launched for almost a year. In the next five to six months, Primex executives will decide whether to be part of an exchange.
Investors using existing alternative trading systems welcomed the Primex announcement.
"Anything that provides liquidity and transparency, we will look into," said Steve Kornrumpf, director of the New Jersey Division of Investment, Trenton.
Trades conducted using Instinet, another electronic trading system, total about 30% of the over-the-counter volume of the $84 billion fund's $2 billion domestic small-cap equity allocation. In trading less liquid stocks, Mr. Kornrumpf said, Instinet was most helpful as a go-between in the bid/ask process.
Traders at the fund also use POSIT, and they are pleased with the results, although POSIT often is more time consuming because its auctions are less frequent than Instinet's, Mr. Kornrumpf said.
Mike Neumark, director of marketing at Investment Technology Group, New York, which owns POSIT, said given the proliferation of trading on electronic communications networks, or ECNs, in the past year alone, it wouldn't be surprising if more systems are launched.
POSIT is 10 years old; about 400 institutions use it every day, he noted. Targeting only institutional investors and broker/dealers, POSIT trades 25 million shares a day at six stock auctions.
The concept behind Primex is good because it's applying an algorithm trading tool similar to Bloomberg LP's Discretion tool, said Kim Bang, business manager in New York for Bloomberg's Tradebook.
Primex would be welcome to become a partner in Bloomberg's Super ECN, which also is affiliated with the POSIT system, he said. The links among the systems allow for trading 24 hours a day.
Such affiliations might not be a bad idea, industry observers say because all are scrambling to maintain volume.
Greg Rogers, head trader at Aronson + Partners, Philadelphia, said the system he uses, OptiMark, realized that a fragmented system does not work. (Fragmenting is when a system is trading independent of other ECNs. The market for the stocks on each trading system becomes smaller as more ECNs are launched.)
"It's a question of how many of these can be around at the same time and provide adequate liquidity," he said.
The success of Primex might be based on the chicken and the egg philosophy, he said: "Nobody else will put orders in, until others do."
There have been other attempts to fragment that have failed, he said, adding the major players in today's ECN market are Instinet with OTC trading volume and POSIT with the bulk of cross-trading clients from other ECN systems.
OptiMark also realized fragmentation was a mistake and takes on bids from other systems on a particular stock every two minutes, Mr. Rogers said.
A spokesman for OptiMark Technologies, Jersey City, N.J., said the system was created to overcome the existing structural bottlenecks in the exchange-based system, which made it more difficult for investors to trade large numbers of shares. Both small and large investors gain equal footing in the OptiMark system, he said.
Good for the market
As for Primex being a competitor, the firm views the development of any system that increases liquidity and provides buyers and sellers the potential to improve their trading results as good for the market.
Another key to Primex's success might be anonymity, said Harold Bradley, senior vice president at American Century Investments, Kansas City, Mo.
The decision has yet to be made on the depth of anonymity, Mr. Shipway said.
American Century, which is not isolated from the move to electronic communication networks, recently investing in Archipelago, a Chicago-based ECN. Other investors are New York-based J.P. Morgan & Co., Goldman Sachs and E*Trade.
Archipelago also has joined an investment consortium that plans to acquire a majority interest in Tradepoint Financial Networks PLC, a U.K.-based electronic trading system that was created to conduct pan-European electronic trading. Other members are J.P. Morgan and American Century, as well as Instinet Corp., Morgan Stanley Dean Witter & Co. and Warburg Dillon Read LLC, all based in New York.