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July 31, 2003

Can Nasdaq Make a Comeback? Layoffs and a new corporate culture are a sign of the hard times at Nas

By Desmond MacRae

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  • Can Nasdaq Make a Comeback? Layoffs and a new corporate culture are a sign of the hard times at Nas
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Whither Nasdaq? Embattled Nasdaq is at a critical point. Its application for exchange status has been pending with the Securities and Exchange Commission for some two years. Rumors abound that the application is in trouble and that Nasdaq has a fallback position: That, upon rejection, it would transform itself into a giant ECN, leaving its market maker client base to fend for itself.

Nasdaq's much celebrated SuperMontage platform has had many problems, with the biggest ECNs, Nasdaq's largest potential customers, refusing to use it.

Some of Nasdaq's foreign operations have been shut. Customers worry whether this one time utility will have the entrepreneurial skill to battle nimble electronic competitors.

"The past three years have been the perfect storm for Nasdaq," said Marty Cunningham, who is president of Security Traders Association of New York.

Wrong Direction

Earlier this year, Nasdaq's board had enough of the controversies. It didn't like the direction of the organization. The financials were going in the wrong direction. That's while some 1.6 billion shares were traded daily on Nasdaq with its roster of 3,600 listed companies. Net income for the first quarter

was $2.6 million. Although Nasdaq officials tried to put a good spin on the numbers -noting that they were a $2.3 million improvement over the fourth quarter of 2002 - the comparison with the first quarter of 2002 was awful. Net income in the first quarter of 2002 was $21.3 million. This means net income, on a year to year, first quarter of 2002 to first quarter of 2003 basis, had dramatically declined. So the board removed Hardwick Simmons and recruited Robert Greifeld to replace him as president and chief executive officer.

Greifeld, in a long interview with Traders Magazine, addressed some of the difficult issues faced by Nasdaq. For starters, Nasdaq's once large revenue sources have dried up or have been growing at a slow rate. That has led to red ink and substantial layoffs as Nasdaq has been paying for the mistakes of the 1990s and the bear market of the last three years.

"Nasdaq has struggled for solid, strategic direction," said analyst Robert Hegarty, head of TowerGroup's securities and investment practice in Needham, Massachusetts.

Nasdaq was blindsided by order handling rule changes that came in 1997, he added.

Nasdaq's SuperMontage platform also attracted both praise and criticism. "SuperMontage may not be totally wonderful yet," said Jaime Atwell, head trader for mutual fund giant Nicholas Applegate Capital Management in San Diego, California. "We do prefer trading in the Nasdaq environment over the floor exchange environment given what has happened over the last couple of years."

Nevertheless Atwell, along with many other traders, has turned away from SuperMontage.

"Through ECNs, we are now getting better executions, better transparency, a lack of front-running, and what is key for us, anonymity," Atwell said.

Besides SuperMontage problems, Nasdaq has also been said by many trading executives to be losing the regulatory wars, beginning with order handling rules that stymied many of its market making constituents.