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Ashton Technology Group

Today's financial markets are so volatile that it has become necessary to implement information strategies to mitigate the inherent risks in trading, particularly where large blocks of stocks are involved. Anonymity and security remain paramount as information on who is trading how much and at what price may have significant market impact, and precipitate movement in the market that is not attributable to real economic drivers. The Philadelphia Stock Exchange (PHLX), the first organized stock exchange in the United States, is living up to its reputation as being a leader in the development and introduction of innovative products and services. It has launched a new trading product developed to address just these issues and more. On show #706 ("eVWAP - Electronic Trading Technology"), World Business Review takes an in-depth look at this technology, visiting with the company that delivered this revolutionary trading system that has a tremendous value premise for buffering against undulating extremes in stock prices.

The eVWAPT trading system, developed by Ashton Technology Group, Inc. (ATGT), through its subsidiary, Universal Trading Technologies Corporation (UTTCT), has been adopted by the Philadelphia Stock Exchange and heralded by industry magnates. eVWAP offers volume weighted pricing to stock traders. Simply put, it matches orders at the beginning of the day, then calculates the volume weighted average price of all the stocks incrementally as trades are made throughout the day. Toward the end of the day, the pre-approved trades are executed at the volume weighted average price. The company targets large institutional traders, such as pension funds, money managers and mutual funds, that might need to move large blocks of stock without impacting the market.

This special edition of World Business Review is devoted entirely to eVWAP, and features executives from Ashton Technologies Group: Frederic Rittereiser, chairman and CEO; Art Bacci, president; Bill Uchimoto, executive vice president and general counsel; and Fred Weingard, executive vice president and chief technology officer. The episode is interspersed with a field report from the Philadelphia Stock Exchange, which features Rittereiser and Barry Nobel, an executive at the Philadelphia Stock Exchange. Joining the panel discussion as industry expert is senior vice president of MCI WorldCom and Internet pioneer, Vinton Cerf.

In the animated discussion, panelists discuss Ashton's arrangement with the Philadelphia Stock Exchange (PHLX), the concept of anonymity and the benefits of "no market impact," which eVWAP offers the investor. Ashton panelists also explain how the standard calculation plus execution are performed in its pre-market opening session, and how this helps investors avoid the risk associated with "time slicing" orders. "eVWAP is an online program that allows brokerage firms to submit a purchase of large quantities of stock--5,000 shares or more--at the beginning of the trading day, and pay the final average price of the stock that appears at the end of the trading day, said Weingard,

eVWAP was designed to handle large trading volumes. Rettereiser says that when institutions are looking to move large blocks of stock, they seek channels of liquidity, and although volume weighted average pricing has been in existence since 1985, Ashton's electronic solution is a new, more reliable system. "We turn our match engine on from 9:30 [a.m.] to 4:15 [p.m.], but we calculate the volume weighted average price of every stock that's bought or sold in our system, and we deliver their price at 4:20 p.m., electronically," Rittereiser explains. "The key is, again, this is all electronic. No human is in the loop. The system has the capacity and the reliability to handle two/three billion shared trading days and large order flow in our system," he continues.

Cerf, the panel expert, says the reason that this type of transactional functionality is possible is the enormously high speed and capability of today's computers. "That's why you couldn't do this even back in '85 when they invented the concept. You couldn't actually implement it until now," states Cerf . He then outlines the primary characteristics of the ideal system. "The obvious [requirements] are low delay and high reliability for any system that involves securities trading, but the eVWAP concept, from my point of view, represents the triumph for modern computing and communication," he says.

Ashton was founded in 1994 with a primary objective of creating an online transaction system to be used on the Internet, but, as Weingard points out, it was the volatility of the market that led to the development of eVWAP. "Paying the day's average price allows brokerage firms to avoid dealing with the hourly volatility of stock prices, but the real advantage for brokers and bankers when they use eVWAP is the ability to make trades within their own offices and do so with complete anonymity," says Weingard.

eVWAP is especially attractive to consumers, not only because it reduces--if not eliminates--the market impact of large trades, but because the system is transparent. Trading institutions do not have to reconfigure or purchase new hardware in order to take advantage of eVWAP because it may be adapted to their existing platforms. Weingard alludes to the advantage of complete anonymity, which the system offers. "If a customer wants to buy 20,000 of XYZ, and there are no sellers, then it is very important that he gets his order back with the assurance that no human knows he's in the market for 20,000, because he did not get a match," he illustrates.

After examining studies conducted over the last 15 years, Ashton has determined that trading techniques similar to that provided by eVWAP have quadrupled, accounting for "approximately ten percent of the marketplace today," says Bacci. "We expect that to double over the next year or two so that they are about 20 percent of the overall marketplace," he further states. "We have standardized the eVWAP calculation, and now we are really starting to market and develop the client base that will come now and use this system as a substitute for the old-fashioned ways of doing it. We're getting a [great deal of] interest from the pension funds," Bacci goes on to say.

Ashton is building an electronic crossing network, and what Rettereiser describes as "a central limit autobook for any kind of security." Rettereiser said that the company is also planning to build an "electronic auction system, which, in effect, takes technology and allows the culture--the way they buy and sell securities today." The system also complements other trading tools and sustains existing brokerage and clearing relationships, including the ability to designate one or more brokers to meet existing commitments.

Depending on the need, the eVWAP trading system may be added as an icon on a trading terminal or provided through the PC. "We ultimately believe that we will be able to retail, so to speak, or distribute securities into ... PC's all over the world, based on some standard of an international security. So, we're working on those type of things," Rettereiser reveals. He also expounds on the anonymity and related security factors. "A critical part of our VWAP system is ... anonymity, such that the customer is assured that nobody knows what he's doing. Part of [this] anonymity is having a secure [interface] from that customer to our system, which would be firewall technology, encryption, and authentication of the user and the firm he comes from," says Rittereiser.

Traditional trading methods will apparently remain with us for some time, welcome news for those wary of making the headlong transition to electronic alternatives. Uchimoto says the imminent strategy will combine the benefits of the old bricks and mortars with today's available technology to lower cost and "focus more of your time on the harder trades--the value-added services--that still need the human intervention, if you will." He goes on to say, "You'll see more of an integration, where you have customers that have need to access the market in the traditional format, and you'll have institutions and customers, such as on line traders, ... that want to access the electronic mechanisms."

eVWAP has been approved by the Securities and Exchange Commission (SEC), and protects not only identities, but orders, transactions and residuals, if any, through T+3 trade settlement. This degree of electronic end-to-end anonymity is unrivaled at this time.