Thank you, Joe. If they include combinatorial bids then it would be a much more complicated system. I think everything comes down to liquidity. If they have enough volume, then it will attract even more bidders because the bidders do not have to think too much about the "fair" price because they will always get the lowest successful price anyway. If there is small volume, then it will become harder for the bidders to decide on optimal bidding strategy. Personally I think this system will work because there are many speculators out there who want to play this kind of games.
 :-) 
-Chonawee

 -----Original Message-----
From: 	Hrgovcic, Joseph  
Sent:	Saturday, November 03, 2001 4:33 PM
To:	Supatgiat, Chonawee; Bharati, Rakesh; Shanbhogue, Vasant; Kaminski, Vince J
Subject:	RE: longitude

Chonawee,

	Good work. I'd like to add a few observations. Regarding your comment about not being able to buy straddles:  Longitude informed us that an upcoming implementation (that is actually in place now but has not been made available so as not to complicate the initial auctions). The new implementation allows packages of digital spreads to be bought and sold as one instrument, resulting in terraced payout functions that approximate true call and put (and presumably collar and straddle) payouts. Even so, the structures will remain largely digital in nature; therefore, they will be rather dirty hedges for traditional calls and puts regardless of how one packages them

	As far as getting a bad price, the auctions here are indeed Dutch auctions, but I believe that the limit orders address this issue -- they assure a given payout ratio. Certainly there is no guarantee that any of the amount laid down by a participant will be placed, which is another problem for hedgers. (Then again, a traditional hedger who asks too much for his offsetting transaction is also unlikely to meet with success.)

	Lastly, with regard to the last paragraph on publishing tentative prices, it is left up to to the discretion of market maker to decide how much of the auction's internal operations (including tentative prices) is posted, but remember that the auction is intended to last only a few hours at a time, yet again constraining the auction's suitability for hedging (admittedly, there would likely be several auctions throughout the life-cycle of the underlying index). 

Joe

 -----Original Message-----
From: 	Supatgiat, Chonawee  
Sent:	Friday, November 02, 2001 6:37 PM
To:	Bharati, Rakesh; Shanbhogue, Vasant; Kaminski, Vince J; Hrgovcic, Joseph
Subject:	longitude

I will be back on Wednesday night. You guys can reach me at my cell phone 713-320-5473.

Attached please find a paper I wrote earlier (before we discuss with them this afternoon) about the longitude. 
(Vince, I already gave you a hardcopy of it earlier.. in case you wants a softcopy)

As Vasant pointed out, it looks like they already did the real-time tentative prices posting in their system. So now hedgers can participate in the auctions. I still feel that the system will attract speculators more.

Thanks!
-chonawee
 << File: Analysis of Longitude.doc >>