Jun 1, 1998 12:00 PM

Market Maker

By Julie Greenberg

| NEW ECONOMY

| Market Maker

Homepage Ecommerce

Managing on (Internet) Time

Consultbot Ernie Comes of Age

Blind Faith

The Wired Interactive Technology Fund (TWIT$)

Out-of-the-Box Thinking

Poor Man's Bloomberg Out for Respect

Raw Data

<h4>#### Mark, the latest electronic trading system from Bill Lupien, goes live this summer. Spot, options, and futures markets may never be the same.</h4 BLupien is at it again. The former CEO of Instinet and champion of the world's first automated trading system will launch his latest innovation, OptiMark, on the Pacific Exchange (PCX) this summer, with the Chicago Board Options Exchange and Nasdaq likely to follow. A few industry analysts already claim the state-of-the-art electronic trading system is "the biggest threat the NYSE has ever faced."

Len has contended with similar fears before. In 1969, he helped wire the PCX and watched bemusedly as an old-timer wielding a pair of oversize cutting shears clipped the wires to his trading booth and declared, amidst applause, "No computer is going to commit my principal capital." Likewise, when Lupien urged Instinet to move into Nasdaq in 1983, his senior staff resisted. Lupien pulled rank and, he says, "the rest is history."

Feen years later, however, institutional investors routinely withhold capital from the market because leaks about their intentions (especially for large trades) adversely impact prices and trading costs. To draw this capital into the market, Lupien and his partner, Terry Rickard, developed a system that affords complete anonymity, nondisclosure, and the ability to express "degrees of willingness" to trade over a range of prices and volume. Using a supercomputer and fuzzy-logic algorithms, OptiMark conducts an exhaustive search of all possible trades in its network, completing up to several billion calculations per stock in one or two seconds. And rather than simply match buyers and sellers, OptiMark discovers the "sweet spot," or best possible price.

Wsolid financial backing and more than 175 institutional investors and brokerage firms signed on to use the system, Colorado-based OptiMark Technologies is off to a great start, but still faces resistance. Some traders argue that OptiMark will unfairly reduce their profit share and create a "hidden market." Lupien disagrees, saying all market players – including the NYSE – can benefit.

Mwhile, as the exchanges adapt, Lupien's pressing forward. His spin-off High Performance Markets will license the OptiMark patent to spot, options, or futures markets in other industries. "It could be insurance, energy, travel, diamonds, entertainment, or bandwidth," he suggests. "Wherever you have supply and demand, OptiMark will transform the way transactions are created."

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In miarch, the free Web-site company GeoCities announced it would end a long-standing no-commerce policy for its members and begin offering ecommerce hosting packages, dubbed GeoShops, aimed at small businesses. Meanwhile, Tripod, WhoWhere?, and The Globe have all announced competing packages to their combined membership of nearly 3 million.

himing finally right for cottage industries on the Web? Perhaps the experience of Viaweb best clarifies the potential for GeoCities et alia. A Web-site hosting company that targets small businesses nationwide, Viaweb had drawn only 760 clients to its service over 25 months, but is now adding, on average, 110 new clients a month.

fprofessor Kathleen Eisenhardt (pictured) and McKinsey consultant Shona Brown's Compg on the Edge: Strategy as Structural Chaos (Hd Business School Press) is about the rarely mastered science of becoming and remaining a market leader when your market's a moving target. Moore's Law, they remind us, began as an Intel business objective.

ois "time pacing"? "Most managers practice 'event pacing.' When something happens, then they do something. Time pacing is about setting a pace or rhythm of your own, whether it's a new product every six months or 100 new stores a year. It's like basketball. It's a fast, fluid game, and you win by taking control of the pace of the game, playing it at the right pace for your team." How do you set that pace? "Start by asking, 'What pace am I at, and is it a sensible pace?' Then ask, 'What pace are my customers at? What rhythm are my complementers and suppliers on?' And, of course, look at the pace of the competition. A great example is Netscape. When Netscape started out, everyone was on a 12-month product cycle, so they chose a six-month cycle and basically created Internet Time." What about the five-year plan? "Five-year plan??? For managers who get it, it's more like a five-week schedule inside a five-month plan inside of a 15-month intuition."</strong

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most mising up-and-coming consultant at Ernst & Young is Ernie, a Conan O'Brien look-alike whose résumé boasts hundreds of degrees and thousands of years of experience. Ernie is the online avatar for Ernst & Young's Web-based consultancy. Targeted at companies whose annual revenues range from US$20 million to $250 million, Ernie extends the business of business advice not only to the Web – where he's been a work-in-progress for two years – but to the self-service realm. For a fraction of the cost of a full engagement with one of the Big Six, the consultbot offers media reports, trend analysis, access to a database of previous answers, and, uniquely, tailored opinions from live field reps. "There is no direct competitor," asserts Brian Baum, an Ernst & Young market development director. Othe

gx companies are stretching powerful intranets into extranets and charging a few hundred dollars annually for access to proprietary information. Arthur Andersen publishes "best practices" and offers autofitted advice in specialty areas for wholesale distribution, internal audit, and, soon, telecommunications. Coopers & Lybrand pushes industry-specific programming through PointCast. Deloite & Touche's PeerScape prepares clients to make the most of live consultants. But

tservice uses a Web interface like Ernie to direct questions to actual advisers for custom answers. Will Ernie emerge as the Web consulting model? His first performance review was completed in May by Duke University's Fuqua School of Business. Potential rivals, meanwhile, are watching closely and are happy to dis Ernie's broad-based promise. "We have elected to be community focused," says Ellen Knapp, CIO of Coopers & Lybrand, "rather than have a general-purpose mechanism that would attract random individuals like a Wal-Mart."

oood (<a href="httix.com</a>) is thehor of Wall Street and editor of the Left Business Observer. <p

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rket v#### tions of major corporations and any number of high tech start-ups are sky-high. Are today's soaring markets rewriting history – or doomed to repeat it? By Doug Henwood</h4> Technol new work organization have kicked the economy to a new level of productivity, driving the market to new highs and forcing rewrites of all the classic economic texts. Or so goes the argument familiar to anyone who follows the financial scene or reads this magazine (see "The New Blue Chips," page 164). Never mind that the roaring 1920s ended tragically or that the go-go 1960s petered out in the 1970s; this time will be different. Today's bull run will last well into the 21st century, and Wall Street's generous market caps aren't a symptom of excess, but auguries of a wondrous future! As I wri

Pter & Gamble is valued at 33 times its annual earnings, a number that used to be reserved for growth stocks. Next to that, Microsoft, at 88, or Cisco, at 69, don't look too expensive. Richard Smith, senior managing director at NationsBanc Montgomery Securities, says he isn't troubled by high price-to-earnings (P/E) ratios. These days, says Smith, "the market does the valuation work for you." Sure, he concedes, there are short-term irrationalities, but over the long term, its valuations are the best measure around. People vote with their money every minute of the trading day. This is a Street version of high-efficiency market theory, which holds that market prices embody the best wisdom available, and that any mispricing is quickly corrected. This theory doesn't have the prestige that it once had, as lots of empirical evidence has been assembled showing markets capable of extended periods of over- and undervaluation. But it's always comforting to invoke market efficiency theories when P/Es are high. In fact,

shot stocks have no earnings, so their P/Es are infinite. Some see this as a blessing, enthuses Paul Cook, portfolio manager for the tiny (US$6 million) Munder NetNet Fund, which invests in Internet-related stocks. Cook's universe is rich with companies with no earnings, making them, in the eyes of some traders, safe harbors. Without earnings, you can't run conventional valuation measures, and a company with no earnings can't disappoint by missing its target. In a <em

lreet nal op-ed, McK consultant Lowell Bryan argued that high valuations are OK today because what matters now is intangible assets – "people, patents, brands, software." But P/E ratios use profits, not Bryan's beloved intangible assets, as the basis against which stocks are priced, and profits are what the business is ostensibly all about. The seco

aof Bryan's argument, however, is more compelling. With the baby boomers saving and firms spending less on tangible assets, immense amounts of surplus capital are sloshing about the system. For the last several years, profits have exceeded capital expenditures, which is one of the reasons that firms have bought back at least $522 billion of their own stock since 1984. Bryan argues that this happy relationship – "money chasing money," as they say on the Street – can continue for 10 or 12 more years. There is only one problem with this thesis: The US savings rate in 1997 was the lowest for any year since 1939, continuing a long downtrend that began in 1974. Boomers aren't saving more; they're just shifting money out of banks and into stocks. Whatever

ltion you buy for the market's rise and valuations (Silicon Valley venture capitalist Bill Gurley points to today's fund managers who equate "not investing" with "not doing their job"), if Federal Reserve chair Alan Greenspan were to raise interest rates by any more than a trivial amount, today's no-earnings safe harbors could turn out to be mined. In February, Greenspan counseled the House Banking Committee that "12 or 18 months hence, some of the securities purchased on the market could be looked upon with some regret by investors." So long

rspan confines his hostile gestures to words, however, the market should continue to soar. In the 15 months following his rhetorical question about the market's "irrational exuberance" at the end of 1996, the Dow rose 37 percent. A poll by Montgomery Asset Management showed mutual-fund investors expecting a 34 percent annual return for the next 10 years, four times its historical average, which would bring the Dow to 140,000 by 2007. If the m

tright – and we know it is! – there's nothing to worry about. By J

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klusteains of less than 1 percent in the last 30 days, TWIT$ continues to beat the major indices. (Shorting Yahoo! too early wiped out much of the portfolio's other gains.) Meanwhile, w

ing profits in Aware, one of two vendors the Microsoft/Intel/Compaq consortium has selected to speed data transmission on the Net. Aware's up 43 percent since we bought in. BioChem Pharma still awaits approval from China and Latin America on its exciting Hepatitis-B drug. When the nod comes, the stock should appreciate nicely. Feeling pres

perform, we're adding two drug companies: Pfizer and Dura Pharmaceuticals. Pfizer's gaining momentum due to approval of Viagra, its impotence drug. Dura looks good to rebound from its US$23 share price (down from $53) on the strength of its acquisition strategy and its forthcoming asthma drug, Albuterol Spiros. Finally, it'

mo get back into semiconductor equipment. Hence our buy of KLA-Tencor. After the company announced an earnings miss April 1, we watched its stock go up. I read that as a good signal that this excellent sector play has bottomed and could have tremendous upside from here. Company Pri

iness Symbol Shares Close 4/1 Since Purchase Action | ArQule |

reuticals | ARQL | 8,000 | 20 5/8 | – 5% | hold | Aware |

ohw/sw | AWRE | 14,000 | 15 | + 43% | sell | BioChem

mPharmaceuticals | BCHE | 8,000 | 26 | + 23% | hold | CellPro

e| medical dev | CPRO | 30,000 | 3 9/16 | – 2% | hold | Cisco Sy

sNetwork hw/sw | CSCO | 3,000 | 69 5/16 | + 15% | hold | Dataware

oare | DWTI | 30,000 | 3 7/16 | – 24% | hold | Forte So

rSoftware | FRTE | 15,000 | 7 1/2 | – 41% | hold | Fusion M

aMedical eqpt | FSON | 45,000 | 4 3/8 | + 0% | hold | Intel |

ops | INTC | 2,000 | 77 1/2 | +123% | hold | Oracle |

ae sw | ORCL | 5,000 | 31 3/8 | + 37% | hold | Sprint |

e| FON | 2,750 | 67 | + 1% | hold | Yahoo! |

et sw | YHOO | -3,000 | 97 13/16 | – 33% | cover 1,500 New Holding

pp> | Dura Pha

ecals | Pharmaceuticals | DURA | 4,000 | 23 13/16 | buy | KLA-Tenc

iconductor eqpt | KLAC | 3,500 | 41 1/16 | buy | Pfizer |

reuticals | PFE | 1,500 | 98 13/16 | buy Cash Holdin

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darted with US$1 million on December 1, 1994. We are trading on a monthly basis, so profits and losses will be reflected monthly, with profits reinvested in the fund or in new stocks. TWIT$ is a model established by Wired, not fficiaraded portfolio. Jeffery Wardell is a senior vice president executive financial services representative for Hambrecht & Quist LLC and may have a personal interest in stocks listed in TWIT$. The opinions expressed herein are those of the author and not necessarily those of H&Q's research department. H&Q has not verified the information contained in this article and does not make any representations to its accuracy and completeness. Wired readeho uss information for investment decisions do so at their own risk. By Mark

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ar, Apcofounder and current un-CEO Steve Jobs forbade Macintosh hardware cloners from selling machines with its speedy new G3 chip built in. This prompted UMAX Computer Corporation, maker of the Supermac, to think different, exploit a contract loophole, and offer its S900 Mac clone with an uninstalled G3 chip-on-a-card that can be snapped in place by the user. If you missed your opportunity to build an Apple from a kit back in '76, now is your chance. By Spencer E

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castinorporation emerged from the ashes of the bankrupt Financial News Network in 1992, nobody paid much attention. But through a series of focused acquisitions and investments, DBC has become the leading provider of real-time financial information to individual investors and has begun targeting investors outside the niche it dominates. For roughly US$500 per month, DBC's president Mark Imperiale boasts, "we can give you 80 percent of what Bloomberg offers at one-sixth the price." In fact, the only thing holding DBC back has been its stubborn stock price. The solution to its

ipains? First, CBS MarketWatch, a joint venture with CBS News that reaches 250,000 users (compared with DBC's 37,000 subscribers). Second, take CBS MarketWatch public, as soon as this fall. That way, Imperiale says, as the online investment market consolidates, he can use the IPO funds to create a financial "supersite" that will expand DBC's market share. "In the short run, spending money on Internet delivery reduces our earnings, and we've been penalized for that, while pure Internet companies are rewarded," explains Imperiale. "We get no credit for what we're building in the hopper." The number of US mil

as is growing roughly 20 times faster than the nation's population as a whole, with 4.8 million households worth more than US$1 million in 1996, up 188 percent from 1992 (Marketing Tools) … Three bilpide live on less than $2 per day (World Bank) … The annuatde generates about $400 billion, or 8 percent of the value of global trade (UN World Drug Report) …The total rs and acquisitions in 1997 was $908 billion, up almost 50 percent from 1996 (Securities Data) … Eighty-twtmpanies with $10 billion or more in annual revenues have a formal competitive intelligence network (The Futures Group) … By 2002, fe classified ads should reach $1.5 billion (Forrester Research)