Nasdaq, which was still trying to find new leadership as Traders Magazine went to press, is at a crossroads.
Does it need a politician or a business executive to direct its fortunes? Does it need a politician, whose skills are in dealing with regulators, or a business executive, who has the experience of running a trading operation?
"Whomever the person is, that person must have a deep and clear understanding of markets," said John Giesea, president of the Security Traders Association. And that, elementary as it may seem, is not what many previous Nasdaq leaders have had, several trading executives privately told Traders Magazine.
Too often Nasdaq chairmen have been lawyers or financial executives with little understanding of how to build a trading business, they have complained.
"The last two chairmen have been the types not to get their hands dirty with the business; people with little experience in trading. It's time to go in another direction," said one high-placed trading executive.
Giesea, who will not comment on this, emphasizes that the STA has not endorsed any one candidate. But whoever takes over the post, Giesea says, the next chairman and CEO of Nasdaq must be someone who will not need on the job training.
Indeed, the next Nasdaq leader, or leaders, will be inheriting an organization that has gone through hard times. Bear market aside, Nasdaq has watched trading volume in its own stocks siphoned away by ECNs and other market centers. The much anticipated SuperMontage was supposed to reverse the flow.
However, according to Nasdaq numbers, the SuperMontage system now only handles some 20 percent of Nasdaq's own trading. SuperMontage volume has inched upped slightly since the launch, but the latest number raises fears among Nasdaq officials.
The biggest fear, according to analysts, is that Nasdaq could lose a grip on its lucrative cash cow: its print and transaction revenue franchise. That fear was compounded when Archipelago decided to activate its own exchange, moving its OTC roster to the Archipelago Exchange. If other ECNs pursue that course, it could spell disaster for Nasdaq.
Salad Days
Therefore, the selection of the next leader will be a critical decision for Nasdaq, an automated market that goes back to the early 1970s. Back in the salad days of the last decade, Nasdaq revenues were booming, its index was at 5,000 (recently it was below 1,400) and its unique kind of trading seemed a natural to become the nation's number one exchange. So it was no surprise when Nasdaq officials announced that the organization was going to become a for-profit exchange.
Over-the-counter trading was, in the late 1990s, a lay-up, or appeared to be for several years. Market making business was much in demand. But then things started to go bad. Margins and market makers both collapsed, in large part because of the order handling rules and decimal pricing. The bear market aggravated the problems.
The Nasdaq leadership, which went through its own crisis with regulators in the 1990s because of the price-fixing scandal – a scandal that led to the order handling rules – was under attack by the latter part of the decade.
The Nasdaq board recently decided to part ways with its current chairman and chief executive officer, Hardwick "Wick" Simmons. He will leave the regulator/ exchange with a huge unfinished agenda.
That means the next Nasdaq leader, or leaders, has an almost endless things to-do list: Find a strategy to reverse its losing ground to competitors, recover the billions of dollars of lost equity of the past few years, do something about its application with the SEC to become an exchange (now years behind its scheduled approval), and make the transition from regulator to a for-profit business. And it must settle the controversy over its new trading platform, SuperMontage.
"This doesn't sound like it's going to be a particularly attractive job," said Benn Steil, a scholar who studies market structure with the Council on Foreign Relations.
Giesea, the STA head, said that new Nasdaq chairmen have traditionally enjoyed a one year or so honeymoon period. Not this time, he warned.
"This individual must have a precise mission and it must be launched immediately," Giesea said.
Many of Giesea's market making members are facing a battle for survival and need regulatory and SuperMontage changes right now.
"If they make the wrong choice, then I really think they're doomed," said Arthur Pacheco, a veteran Bear Stearns trading official and a self-declared candidate to become the successor to Wick Simmons.
Pacheco has gone public with criticisms that many in the trading industry will only privately voice. "They keep choosing the wrong people for the chairman post. They keep selecting people who have had no experience with trading," Pacheco complained.
Simmons, whose contract officially expires in February 2004, ran into some problems when he made public comments about several issues that Nasdaq officials privately said were not cleared with them.
Pacheco, a trader who is popular among members of the dealer community, said he would stem the bleeding on SuperMontage in several ways. For one, he proposes the introduction of an agency acronym. For another, he's organized an ad hoc group of trading technology executives to develop a blueprint for the future.
Bigger Problems
Nonetheless, Nasdaq has bigger problems than just finding new leadership. Nasdaq officials, for example, have privately said several times that they have been disappointed that their SEC application for exchange status still has not been approved.
Some SuperMontage fees and bureaucracies are driving users away at a time that Nasdaq is losing market share to up-and-coming electronic trading systems.
Nasdaq, in response, has lowered some fees. But that's an uncertain strategy that could backfire, according to some trading executives. Nasdaq net income, revenue and transaction service numbers have all slumped in the last year.
"Nasdaq found 2002 to be a difficult year. Economic conditions, regulatory delays and fundamental changes in the complexion of our market all posed challenges for us," Simmons said in recently reviewing last year's disappointing results.
Electronic competitors, which are finding new ways to print OTC trades through regional exchanges, seemed to be stealing a march on Nasdaq with the tacit approval of regulators.
An example of the latter is Island/Instinet, a giant ECN that refuses to use SuperMontage. It is nosily exercising its independence from SuperMontage, pirating away business and printing trades at the Cincinnati Stock Exchange.
Unfair Practices
This trend has so worried Nasdaq officials that they have had conversations with the SEC about Island/Instinet's supposedly unfair practices. The next Nasdaq leader is going to have to do something about this and fast.
Nasdaq declined to comment on the candidate review process.
"We'll choose someone from the financial services industry," a spokeswoman would only say of the process.
As of recently, Pacheco said the Nasdaq board had not interviewed him. But Pacheco has support. An electronic poll on the Traders Magazine Website (tradersmagazine.com), which received 4,282 individual votes as of March 31, had Pacheco coming in second, behind former Nasdaq executive Patrick Campbell.
Besides trading expertise, it is also likely that Nasdaq is going to need someone who can wheel and deal with Washington. That next chairman is going to need the skills to expedite the exchange application with the SEC and help take Nasdaq public.
Several trading executives also privately said Simmons' successor will also have to outmaneuver the Big Board.
The NYSE will likely be watching this application process very closely and trying to impose impossible conditions as a requirement of approval, they said.
"The next chairman," said Steil, "will need to know when to compromise and when to fight."
But having these political skills and the ability to understand how to build a profitable business could force the Nasdaq board to make some hard choices. Two of the most prominent candidates before the board are men of very different backgrounds.
Richard Ketchum, a 52-year old lawyer and former SEC official, represents the Washington insider wing of candidates. He is seen by some as the veteran who the Nasdaq bureaucracy would like, a man who could work with the SEC.
Matt Andresen, former CEO of Island ECN and now head of global trading at Sanford C. Bernstein, is the candidate of those who want someone with a proven track record of running business and knowing how to make trading profitable, even at a time that margins are small or, in some cases, non-existent. He is the candidate of the outsiders, said one trading executive.
"Matt is the best candidate because he has been Nasdaq's worst enemy. He has taken tons of business from them," said one trading industry executive who
declined to be quoted by name.
Other candidates under consideration by the board were said to include Robert McCann, a former Merrill Lynch trading executive; and Sungard Data Systems' Robert Greifeld.
Whoever is chosen will have to respond to the other common complaint against Nasdaq: The SuperMontage plan was badly framed. It was put together by officials who didn't think through the economics of the platform.
"This was more an exercise in diplomacy than in figuring out if various fees made sense. I don't think Nasdaq now has anyone who really understands spreadsheets and how to run a business," Steil complained.
A Hard Choice
But Steil's critique underlines another dilemma that Nasdaq faces: Does it want a diplomat, someone who is used to dealing with regulators, or does it want a business person, someone who understands a trading operation because he or she has made one successful? Maybe it should find both.
Whichever course the Nasdaq board takes, it will be making a hard choice. One trading executive privately told Traders Magazine, "They had better get it right this time. We can't afford another chairman who can't get it done. Otherwise a lot of us will go this time and we may take Nasdaq with us."
