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New Stock Auction System Takes on Big Board

March 31, 1991

NEW YORK (AP) _ Is the big, bad New York Stock Exchange really scared of a stock trading system conceived by a rock climber and driven by personal computers?

In an era of rapidly proliferating market competition, R. Steven Wunsch’s electronic stock auction, slated to begin trading Monday, is indeed considered the biggest challenge yet to the behemoth NYSE.

While other private trading systems have cropped up recently, Wunsch’s network is different because it will actually set stock prices, a process that has made the Big Board the nation’s main marketplace for nearly 200 years.

In simplest terms, the system brings together potential buyers and sellers of stock without any intermediaries to do the trading. A computer calculates an equilibrium price satisfying the most trades possible and then executes them in an electronic ″auction.″

″It’s nice. It works well. It’s an economist’s dream,″ said Hans Stoll, head of financial markets research at Vanderbilt University.

The main attraction of the auction devised by Wunsch, a former Kidder, Peabody & Co. trader who spent 10 years scaling walls of sheer rock, is that it bypasses exchange floors.

The system also offers anonymity desired by many large traders, such as money management firms, insurance companies and pension funds. It is not intended for individual investors.

Participants are linked via personal computers, on which they can watch new orders enter the system, pushing the equilibrium price up or down. A timer shows the countdown to the auction, when bids and offers are crunched together and trades are executed.

Wunsch plans to hold auctions three times a week, either before or after the NYSE close, but he hopes demand quickly will require daily trading. About 115 institutions have received the software for the system, known as SPAworks, for free.

Peter Lert, an investment analyst with Batterymarch Financial Management in Boston, said the firm with about $6 billion in assets under management was ″very enthusiastic″ about using the Wunsch system.

″We seldom need instantaneous trades,″ he said. ″If we can do our deals with other participants who are similarly patient without needing the instant liquidity then we all can save money.″

The possibility that Wunsch could siphon away trades - and commission payouts - has created considerable anxiety among the nation’s stock exchanges.

The NYSE has called the Wunsch system a ″serious competitive concern.″ In letters to the Securities and Exchange Commission, the Big Board said the auction threatened to split trading by institutions from trading by individual investors.

The American, Pacific and Philadelphia stock exchanges, and the National Association of Securities Dealers, where over-the-counter stocks are traded electronically by brokers, also opposed the Wunsch auction.

In approving the system in February, the SEC exempted Wunsch from costly regulations governing exchanges. But if volume on the system reaches the level of the Cincinnati Stock Exchange - about 1.2 million shares daily - its status will be reconsidered.

Wunsch, 44, appears an unlikely candidate to challenge the Big Board. Soft- spoken and articulate, Wunsch, however, has an inner drive represented by years of free rock climbing in the Grand Tetons, the Alps, the Rockies and the Shawangunks in upstate New York, where he climbs occasionally these days.

Wunsch Auction Systems Inc. has no office and only a handful of employees. Wunsch has been running the operation from his lower Manhattan apartment, ironically located just three blocks from the New York Stock Exchange.

″We’re just providing an alternative,″ Wunsch said. ″If customers discover that it actually does centralize for them, that it does produce a reliable likelihood of finding a counter-party, they will use it.″

″Competition will very quickly determine what is the right place and way and time to trade,″ he said. ″If our exchange is not used, it will die.″

Wunsch, a Princeton graduate, came to Wall Street in 1979. After taking a free course in commodities trading, Wunsch went to work swapping interest-rate futures and certificates of deposit. He was hired by Kidder by a fellow rock climber, Max C. Chapman, now chairman of Nomura Securities International Inc.

Wunsch began developing the auction system while at Kidder, and even took the idea to stock exchanges. ″They all listened very politely, but there’s a custom over the years of dancing away from ideas that would make their markets more efficient,″ he said.

As an NYSE member firm, Kidder was reluctant to give Wunsch financial backing. Wunsch left Kidder in February 1990, and has used his own money, corporate backing and donations of computers and time from participants. He won’t estimate the cost of the project, but said Kidder once placed it at $7 million to $10 million to develop.

Wunsch charges customers only when a trade is executed. He said the expected commission rate will average 1 cent to 2 cents per share, compared with 3 cents to 7 cents on an exchange floor. To discourage bluffing, canceled orders are hit with a double commission.

The system will begin by listing 33 major stocks, but Wunsch hopes to increase to more than 3,000 by late summer. Trading will be scrutinized by the SEC.

One threat to Wunsch is that the Big Board could adopt a similar auction, which is known as a call market. The process of bunching trades together in a single auction was used by the NYSE for much of the 19th century, long before computers. The exchange already has proposed after-hours trading to compete with private networks that match up willing traders.

In addition, it is unclear how Wunsch’s system will interact with the Big Board, which is where traders are likely to look for base prices. Finally, Wunsch will need active participants.

Regardless, Wunsch’s effort typifies the increasingly competitive nature of stock trading. The NYSE has criticized such ″fragmentation″ - even while proposing alternative systems - as a long-term threat to market stability.

But other observers see competition as the natural selection process in a sophisticated age, and Wunsch as its entrepreneurial embodiment.

″They’re scared of Wunsch because he represents Mr. Clean. He’s the guy in the white hat with the silver bullets saying, ’I represent the customers,‴ said Junius W. Peake, a financial markets consultant.

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