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March 9, 2009

Conflicting Interests

By Michael Scotti

Do what is best for the customer: take care of him, and he will take care of you. That was the mantra of an individual and his firm that helped to change the way stocks trade in the U.S. The man, Bernard L. Madoff, and his namesake firm, Bernard L. Madoff Investment Securities, might be the greatest enigma in the history of Wall Street. On the one hand, Madoff pushed for most every rule over the last 30-plus years that benefitted the retail investor. On the other, he scammed his own investors.

Over the years, Madoff's endorsement of a securities trading rule or proposal carried tremendous weight, not only with the regulators, but also with elected officials in Washington, D.C. He proved to be a valued sounding board-at the very least. As one long-time observer commented: "Bernie Madoff was gospel."

Madoff's firm was the fair-haired boy in the SEC's eyes for two reasons: computers and competition. It used technology to foster competition with the New York Stock Exchange, which the SEC viewed as a smokestack industry that had monopolistic protection. In the process, Madoff became the regulators' trusted adviser.

Other brokerage firms would also take their cues from Madoff, whose firm looked to grow its market share by investing in cutting-edge technology. One veteran explained that raising money from the Street for a trading-technology startup became much easier if firms knew that Madoff had taken a financial stake. His reputation was that stellar, "the gold standard," he said.

When the news broke last December that Bernard Madoff had been operating the largest Ponzi scheme in history, the trading industry fell into shock and disbelief. The books yet to be written will undoubtedly seek to figure out how a man so bent on giving the little guy a fair shake in the markets could have been, at the same time, stealing money from his money management clients.

This month's cover story, "Before the Fall," explores the timeline leading up to the firm's demise. The article offers a view of Madoff and his firm's role in helping to shape the current equities market. There's more to the story than what you see in this issue. You can read a longer version of Executive Editor Peter Chapman's fine article on our web site, The story draws on a wealth of sources and analyzes how brokers and exchanges evolved over the last few decades as they sought more order flow. That's still the name of the game: Get the flow. Enjoy the story and the issue.

Michael Scotti

Editorial Director

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