|The money's in the math|
OptiMark teams with Ashton in new strategy
Peter Key Staff Writer
Ashton Technology Group Inc. has big dreams of making big money by offering cheap, anonymous trades for institutional stock investors.
Ashton can do so, it says, thanks to a mathematical formula it now owns as part of a cash and intellectual property investment totaling about $30 million.
The investment was made by OptiMark Innovations Inc., a partially owned subsidiary of Jersey City, N.J.-based OptiMark Holdings Inc.
Both Ashton and OptiMark once had their own big dreams.
Ashton invested in Internet-based technology for the financial industry in the hope that some of the technology would prove, if not revolutionary, highly lucrative.
OptiMark, for its part, developed an electronic trading system that it hoped would displace the specialists on the floor of the New York Stock Exchange.
Neither company realized its aspirations and both wound up in need of a turnaround, in OptiMark's case even though it received $340 million in venture capital.
OptiMark Holdings Inc., through OptiMark Inc. and that company's OptiMark Innovations subsidiary, now develops and sells technology used in exchanges. It also invests in businesses and forms partnerships that do so.
Ashton is now using an algorithm it got from OptiMark to perform trades for institutional investors that want to trade anonymously at the best price they can get on a given day. That's often something known in the industry as the VWAP, which stands for volume-weighted average price.
To calculate a stock's VWAP for a day, you first calculate the worth of all trades in the stock on that day, which consists of all the prices at which the stock traded multiplied by the number of shares traded at each price. You then divide that number by the total shares of the stock that traded during the day.
The result is considered to be a yardstick against which all trades of a stock on a given day can be measured. Sellers do well when they get a higher price than the VWAP; buyers do well when they get a lower price than the VWAP.
Beating the VWAP, however, is tough. Around 80 percent of institutional trading fails to do it, according to Elkins/McSherry LLC, a provider of trading-cost consulting services. That's why Ashton thinks it can make money by guaranteeing institutional investors the VWAP value for their trades.
From June through Sept. 11 last year, Ashton was performing VWAP trades for institutional investors through an arrangement with the Philadelphia Stock Exchange. But although its business grew over that time, it lacked the money and technology to become a big VWAP trader.
"We actually had to turn away customers because we weren't capitalized strongly enough," said Fred Weingard, Ashton's chief technology officer.
Ashton had other problems, too. The number of stocks in which it could trade was relatively small. And it tried to give customers the VWAP price by having traders place orders throughout the day. As a result, when its business tumbled after Sept. 11, Ashton couldn't recoup.
Now, in addition to cash and technology, the deal with OptiMark has brought Ashton a largely new management team. Weingard is a holdover, but acting Chief Executive Officer Robert Warshaw, Chief Operating Officer Trevor Price and Chief Financial Officer James Pak all helped turn around OptiMark.
Former Ashton CEO Fredric W. Rittereiser was bought out of his employment agreement for $150,000 in cash over a year and 4 million shares of Ashton stock.
The deal left OptiMark holding 80 percent of Ashton's stock, which now goes for around 25 cents per share. In addition to the intellectual property, OptiMark provided Ashton with $10 million in cash, around $7.3 million of which was an equity investment and the rest of which was a loan.
Ashton faces some well-known competition in the VWAP trading market, including Bloomberg Tradebook LLC, Investment Technology Group Inc. and Hull Trading Co., which is owned by The Goldman Sachs Group Inc.
But Warshaw thinks the technology and money that Ashton obtained from OptiMark will enable the company to succeed as a provider of VWAP trading services for the following reasons:
The trades it needs to make the VWAP now are calculated and executed by computers, not people, as was the case;
the trades are executed in small volumes throughout the day, so market watchers can't see whether a large block of stock is changing hands and don't know if its customers are buying, selling or holding;
the number of stocks in which it can offer VWAP trades has increased to include the S&P 500, the Russell 1000 and the Nasdaq 100;
it can take orders in half-hour increments from 9:30 a.m. to 2 p.m., instead of just at 9:30 a.m, and;
it now can make money by charging 2.25 cents per traded share, down from 3 to 5 cents.
Warshaw also thinks OptiMark and Ashton are a good fit.
"Both companies," he said, "were technology companies who were looking for a market for their technology."
Now, he said, they have a market and they think they can use their technology to succeed in it.
Peter Key can be reached at firstname.lastname@example.org.