Maybe auction needs to be used for IPOs,stock trades

The Insider

Your Money

August 29, 2004|By BILL BARNHART

At least one bidder in Google Inc.M-Fs initial public offering of shares was a bit miffed.

M-tWhere are my three shares?M-v asked Steven Wunsch, former chief of the now-defunct Arizona Stock Exchange.

M-tI bid $140 [each] for 10 shares, and the price came out at $85 and I got seven. ThatM-Fs not the way an auction works.M-v

WunschM-Fs critique matters. He belongs to a small but dedicated band of innovators who want open auctions used for all IPOs and in everyday stock trading.

Jim Ross, a champion of auction markets at Burlington Capital Markets, says if you want to understand whatM-Fs at stake, read James SurowieckiM-Fs book, The Wisdom of Crowds.

Briefly put, you need to re-examine the value of experts and gatekeepers in the investment business who make a living peddling skills and information people already possess.

In a typical IPO, investment bankers working for a company issuing shares set the initial price based on their presumed expertise and, weM-Fve learned from recent scandals, their desire to enrich their friends.

The Google IPO set its price based on direct electronic bids from thousands of individual and institutional investors.

Similarly, a market maker in the Nasdaq system or a specialist at a stock exchange determine prices in the secondary market.

An alternative, which eliminates the middleman, is to conduct electronic auctions at preset times during the trading day.

The price of shares is determined automatically from batches of buy and sell orders at a M-tcall auction.M-v

Securities dealers and exchange specialists who make markets have little interest in stepping aside, even for a few seconds, as buyers and sellers meet directly via the Internet.

But things could be changing.

Next month, the Nasdaq stock market will introduce an auction- like process for determining the single price of shares at the opening of trading.

Archipelago Holding, an electronic exchange, already stages an opening auction.

Since April, Nasdaq has conducted an auction-like process to determine a single closing price of shares each day.

Many investors, from mutual funds with long-term objectives to futures and options traders facing monthly expirations of contracts, are not driven primarily by a brokerM-Fs hot tip.

M-tWhen youM-Fre trading for noninformational purposes, you can wind up with that needM-v simply to get the best execution, said Robert Schwartz, a professor of finance at Baruch College in New York.

Schwartz would like to see an electronic auction at midday, as well as at the open and close.

M-tInternally, there is a great deal of interest in looking into this,M-v said Frank Hatheway, chief economist for Nasdaq.

M-tWhat an auction can do in the middle of the day is serve as a focal point for people who want to trade in a way that allows big transactions to be done seamlessly.M-v

Securities dealers saw their deal-making profits shrink after U.S. exchanges began trading stocks in increments of a penny. They need a new business.

Open auctions, with all bids to buy and sell displayed, M-tincrease the dealerM-Fs value as an agent in bringing the buyer and seller together,M-v Hatheway said.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoneytribune. com.

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