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April 1, 2003

Nasdaq's Crisis Of Confidence Could the Next Nasdaq Chairman Be the Last?

By Gregory Bresiger

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  • Nasdaq's Crisis Of Confidence Could the Next Nasdaq Chairman Be the Last?
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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.