A TWIST ON DO-IT-YOURSELF TRADING: 3 BROKERAGES READY OWN SYSTEM, OTHER FINANCIAL FIRMS COULD FOLLOW SUIT IF PRIMEX TRADING FLIES

The potential for the success of the Primex Auction System — to be created by Goldman Sachs Group Inc., Merrill Lynch & Co. Inc. 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 Goldman, Merrill and Madoff are forming Primex Trading NA LLC, other securities firms might follow suit and form their own trading systems, industry observers say.

Glen Shipway, chief executive officer of Primex, says 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 specifically to either institutional or retail clients, it will be able to handle a large volume of trades, presumably from institutional clients, he says.

Won’t open for almost a year

The Primex Auction System won’t be officially launched for almost a year. In the next five to six months, Primex executives will have to decide on whether to be part of an exchange. Investors using existing alternative trading systems welcome the Primex announcement.

“Anything that provides liquidity and transparency, we will look in to,” says Steve Kornrumpf, director of the New Jersey state Division of Investment in 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 says, Instinet was most helpful as a go-between in the bid/ask process.

Traders at the fund also use Posit, a system targeting institutional investors and broker-dealers, Mr. Kornrumpf says, and are pleased with the results although Posit often is more time consuming because its auctions are less frequent than Instinet’s.

Given the proliferation of trading on electronic communications networks in the past year alone, it wouldn’t be surprising if more are launched, says Mike Neumark, director of marketing at New York-based Investment Technology Group, which owns Posit.

Posit is 10 years old. About 400 institutions use it every day, he notes. Posit trades 25 million shares a day at six different stock auctions.

Primex applies an algorithm trading tool similar to Bloomberg LP’s Discretion tool, says Kim Bang, business manager in New York for Bloomberg’s Tradebook.

Mr. Bang says Primex would be welcome to become a partner in Bloomberg’s Super ECN, which also is affiliated with the Posit system. The links among the systems allows for trading 24 hours a day.

Such affiliations might not be a bad idea, observers say, because all are scrambling to maintain volume.

Greg Rogers, the head trader for Philadelphia-based Aronson + Partners, says the company running the system he uses, Optimark, realized that a fragmented system does not work.

Fragmenting occurs when a system is trading independent of other such communication networks. The market for the stocks on each trading system becomes smaller as more are launched.

“It’s a question of how many of these can be around at the same time and provide adequate liquidity,” Mr. Rogers says.

The success of Primex might be based on the chicken and the egg philosophy, he says. “Nobody else will put orders in, until others do.”

There have been other attempts to fragment that have failed, he says. The major players today, he notes, are Instinet with OTC trading volume and Posit with the bulk of cross-trading clients from other electronic communication network systems.

Optimark takes on bids from other systems on a particular stock every two minutes, Mr. Rogers says.

A spokesman for Optimark Technologies in Jersey City, N.J., says the system was created to overcome existing structural bottlenecks in the exchange-based system, which made it more difficult to trade a large block of shares. Both small and large investors gain an equal footing in the Optimark system, he says.

As for Primex being a competitor, the spokesman says, Optimark 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.

Crain News Service