AZX, Former Wunsch System Opens for Business In Arizona, Mulls Link With Jefferies

AZX Inc., the renamed Wunsch Auction Systems Inc. (WASI), last week opened the Arizona Stock Exchange using WASI's Single Price Auction Network trading system. More than 70 institutional investors participated in the reopening of the system, which was shut down in late December after eight months of operation.

AZX now provides an after-hours alternative to continuous trading on the New York and other stock exchanges. Unlike crossing networks, which derive their price from the continuous market's closing price, the SPAworks system "discovers" its own price based on limit orders that have been placed in the system.

For its debut as AZX, the Wunsch system was enhanced in several ways. For one thing, AZX is making use of a reserve book that allows customers to search for a match in the system without necessarily having to expose their orders to other participants. Additionally, AZX is developing a series software bridges that will allow customers to shift orders between its automated trading system and those operated by third parties.

AZX's system runs on a Sun Microsystems Inc. SPARCserver. Auction participants dial into the system through a bank of 64 modems connected to the Sun via an asynchronous line multiplexer.

WASI wasn't successful in generating a critical mass of trading flow during its previous incarnation. It has been estimated that the successful Crossing Network, operated by Reuters Holdings PLC's Instinet Corp. unit, reached critical mass with about 25 participants per session. During its 1991 run, about seven customers used the AZX system per session, though over 50 were signed up to use the system.

But the system did allow customers to generate exceptional liquidity from time to time. On June 3, SPAworks matched almost 20 percent of the orders placed in the system, some 178,000 shares on about 1.9 million buy and sell orders.

The appearance of occasional large orders on the system meant that active as well as passive traders were using the system. Passive traders, who adjust their portfolios to conform to some specific index, tend to use crossing networks to cross small amounts of many groups of stock. Active traders, on the other hand, prefer to unload large blocks of stock in a smaller number of instruments.

The system's new reserve book is aimed at encouraging more activity through the use of what AZX president Steve Wunsch calls "voluntary sunshine." Until now, users of the system have had to place orders with the knowledge of other buyers and sellers. Through the reserve book, users will be able to place orders without exposing them to other buyers and sellers. They will see the orders only at the end of the auction if they've been filled.

Once an AZX Auction has been held, residuals of unexecuted orders are returned to customers, who are notified seconds after the auction that their orders were unfilled. Although they can build provisions for re-directing those orders to other markets, the burden shifts back to the customer to find a secondary market for the order.

Recently, AZX has tried to help its customers redirect order flow left unfilled from its auction. Many of AZX's clients also use Reuters' Crossing Network and Instinet automated execution system. AZX has written a software package called the Instinet Editor that makes it possible for a customer to format residuals into Instinet file orders.

Additionally, executives at AZX and Jefferies & Co.'s Investment Technology Group (ITG) confirm the two are talking about a link. ITG operates the Posit crossing network as well as the QUANTitative EXecution (Quantex) order-routing system.

Says Wunsch: "It's our desire to make it as convenient as possible for our customers to have orders migrate from [our] system to [other] system. We're exploring what needs to be done." Wunsch says its premature to talk about how a linkage with ITG's systems would actually work because the talks haven't yet advanced to specifics.

Wunsch says that AZX is exploring connections with other electronic routing systems, including Morgan Stanley & Co.'s MatchPlus system. He declined to comment further.

Morgan Stanley was recently rebuffed by Instinet in its quest to place its system on a Reuters platform (IMT, March 6). But Wunsch is optimistic that sooner or later many electronic exchanges will begin to link up--effectively rebutting the argument that such facilities are fragmenting the market.

Since SPAworks' shutdown in mid-December, Wunsch has moved the system's data center from Minneapolis to Phoenix. Wunsch remains the sole owner of the exchange.

The deal to bring Wunsch to Arizona was finalized at the end of last year by the Arizona Corporation Commission and the Commerce and Economic Development Commission. Because Wunsch already had SEC approval to operate as an exchange exempt from registration, the exchange only needed approval for the name and headquarters change.

Arizona has committed $700,000 to support the exchange, with a further $2 million on the way. AZX is receiving the money in $50,000 monthly increments that will run through 1994.