BEST EXECUTION

Optimark's gearing up to go live as a facility of Nasdaq this month after nine months of preparation.

Nasdaq's not just one of Optimark Technologies' primary shareholders anymore. In fact, Optimark's slated to go live this month as a facility of the Nasdaq exchange, allowing members to submit trading profiles directly into the Optimark matching engine.

In addition to the profiles users enter directly, Optimark will also include certain system-generated profiles, called Nasdaq Quote Montage Profiles. These will reflect the national best bid and offer quotes from the Nasdaq market makers, ECNs and unlisted trading privilege exchange specialists. This will allow Optimark to incorporate all the orders input directly into the system, as well as all the publicly-displayed quotes and orders.

Nasdaq member firms will access Optimark via the Nasdaq network and "through a user interface that launches off our workstation," says Nasdaq CIO Gregor Bailar. Optimark won't be fully integrated with the Nasdaq Workstation II user interface on day one, however, but will run as a separate application on the same desktop.

Though Nasdaq plans to offer a fully integrated version, there's no date yet for when that will happen, or the extent to which Optimark functionality will ultimately be included. "We've been working with Optimark in terms of what would be a way to integrate those capabilities more fluidly," Bailar says.

Meanwhile, Optimark's been going full bore to get its system ready for launch. Over 150 technology and operations people from Optimark have been working on the project for the better part of nine months, says William Adiletta, who's heading up the effort from Optimark's offices in Harborside, New Jersey.

But that's how it should be, says Bailar. "This is mostly an Optimark effort in terms of technology because developing the system, the API and even deployment and integration is largely in their space."

Nasdaq, meanwhile, "has a relatively small amount of resources dedicated to its launch;" less than 10 people, according to Bailar. They do everything from oversee integration, to testing, to "making changes to our software on the network delivery side."

That's not to say Nasdaq doesn't "have a significant interest in Optimark's success." The fact is, Nasdaq owned roughly 18 percent pre-dilution, "and it's not too far from that now," says Bailar.

And while Nasdaq probably could have built a matching engine itself, it, too, is cottoning to the advantages of buying as opposed to building. "Our strategic philosophy is not bent on having everything 100 percent Nasdaq-grown," says Bailar. He says the exchange will pursue partnership arrangements if it can reduce time to market and cost and still remain reliable.

For Optimark, winning access to the 5,400 issues traded on Nasdaq was the primary goal. As such, it's been priority number one since the system went live in March. It's also been something of a challenge. In fact, Adiletta says it required some re-engineering, including some proprietary middleware that replaced the onsite servers that Optimark provided to first generation users.

That software, which also required recovery and rollback features as well as "fast and consistent" message throughput, will "glue messages from the front to the back end," Adiletta told Waters earlier this year. The middleware was written in C++ and conforms to the CORBA framework. When Optimark goes live with Nasdaq, "we'll only be software."

That doesn't mean Optimark won't have servers onsite; Optimark's got several Tandem computers that host its books and records as well as its matching engine at Nasdaq's data center in Trumbull, Connecticut. It has to. "We go through their network and are integrated with their application," says Adiletta.

Meanwhile, Optimark recently went back to the well for more cash. This time it tapped Softbank Capital Partners, which agreed to invest up to $100 million. Softbank joins a long list of investors, which includes Nasdaq, Goldman Sachs, American Century (see American Century Up Close, page 44), Everen Securities, General Atlantic Partners, Dow Jones (though it has gone public with its intentions to divest), JC Bradford, Aon Insurance, Merrill Lynch, Bankers Trust, PaineWebber and CSFB.

Optimark's already gearing up to go live next year as a facility of the Osaka exchange in conjunction with Nikkei and Quick. And it won't end there. Optimark still has its eye on options and other instruments.

But liquidity remains the overriding issue for Optimark in the wake of its launch last March, sources who use the system say. In addition, its front end, which allows participants to enter very sophisticated profiles of interest, has not been widely embraced on the trading desk. In fact, a number of traders have just sidestepped it altogether.

Bailar says he's not surprised. "When people go from one paradigm to the Optimark paradigm, they tend to settle into the comfort zone, and the comfort zone is a two-dimensional trading model. I have no doubt that that's something we'll see here too."

And though neither Bailar or Adiletta want to project trading volume, Bailar says he ultimately expects the Optimark front end to match "in the double digit percentages of Nasdaq market volume. It wouldn't make sense doing it otherwise," he notes. Of course, "how quickly it will ramp up is another question."

"It's tough to compare Optimark in another market to Optimark in the Nasdaq market. People in the Nasdaq arena tend to be more familiar with electronic trading and screen-based parametrics," says Bailar.

Even so, "from our history working with electronic systems, the first iteration is generally a learning experience." Of course, there's been a massive effort to get that learning curve out of the way early. The ramp-up to launch has included a flurry of training forums and onsite tests. Over 2,000 people went through Nasdaq's educational program, Adiletta says. There's even a Web-based training course.

When it does turn on, there will already be a community of Optimark users. But for Nasdaq members it will all be very new. And while matching isn't hard to understand, the computer algorithm that measures and ranks all relevant trading interest for a particular stock is pretty sophisticated. That match, which takes no longer than three seconds, actually takes place in two separate stages. In the first stage, or aggregation, the matching module processes only buy and sell coordinates with the highest interest. Smaller-sized coordinates may be aggregated to build sufficient size to be matched with larger-sized coordinates to generate orders in accordance with the following rules of priority in descending order: price aggressiveness, standing, class, time of entry and size.

After the aggregation phase, the matching module will consider the potential matches between buy and sell coordinates where one or both parties have slightly reduced interests. In this stage, only those buy and sell coordinates with the same associated price and size will be matched to generate orders in accordance with the following rules of priority in descending order: mutual satisfaction values, standing, class, time of entry and size.

That matching engine will conduct matching cycles on a periodic basis (at least every two minutes) from 9:45 am to 3:45 pm (the exact frequency will be determined by Nasdaq).

Orders that result from an Optimark match between two users will be instantly executed, and the trade will be automatically transmitted through Nasdaq's Automated Confirmation Service for trading reporting and clearing.

Orders generated from an Optimark match with a Nasdaq quote montage profile will be delivered to the participants via Selectnet. As such, market makers will be obliged under the firm quote rule to execute orders delivered from Optimark through Selectnet.

Final trades will be forwarded to the National Securities Clearing Corp. and will clear and settle just like any other Nasdaq transaction.