Market Mover

by Robert Greifeld

  • Where can I stop the bleeding? Which business lines are failing so dramatically that they need to be shut down before they waste any more resources?

  • Which business lines are in decent health and can survive for now without significant new investment?

  • Where might immediate care and attention make the biggest difference in helping the business survive and grow?

  • Is any given project or initiative essential to our core business at this moment, or is it peripheral?

  • Which proposed projects would be crazy to even start, with low odds of succeeding?

  It’s easy to shut down projects or initiatives that are failing outright. The tricky ones are those that limp along, with a handful of loyal customers that embrace the product or service. As I often like to say, the only thing worse than no customers is one customer. You’ll upset them if you shut it down. Plus, over time, certain people within a company will get invested in those projects and protect them, despite their unprofitability. It’s important to be clear-eyed about what constitutes a success and what doesn’t.

  Some of the most challenging decisions I faced involved projects that were promising but peripheral. A case in point was a project that Adena Friedman was leading: Nasdaq’s first exchange for smaller, “micro cap” companies, known as BBX. It had real potential; it was a valid concept that would serve investors. It was also going to take years to come to fruition, consuming resources and time in the process—most notably, the time of one of my most talented executives. But she was committed to it, and she argued passionately against my suggestion that we shut it down. I respected her all the more for this position, but that didn’t change my ultimate decision. It was simply the wrong time for that kind of project.

  Six weeks after my arrival, Nasdaq wrote off $100 million in underperforming assets. This was a consequence of cutting through the confusion and analyzing the actual performance of the business. Nasdaq’s money pits were no longer buried, vague, or unknown. Thanks to Chris, David, Adena, and others’ hard work, we’d identified the problem areas and already taken major steps toward their resolution. My plan was beginning to take effect. I’d focused on people first because the right people leverage everything else in a business. I’d begun the essential process of reducing bureaucracy. Now we were embracing fiscal discipline.

  How Healthy Is Your Core Business?

  In a turnaround, fiscal discipline is critical. You need to weigh, measure, and count everything that can possibly be weighed, measured, and counted. But it’s important to understand that you can’t save your way to success. Cutting costs and becoming a leaner operation helps slow cash burn, but there is a lot more to getting your fiscal house in order than reducing head count or closing unprofitable lines of business. You can’t cut your way to prosperity.

  At some point, you have to find a way to increase revenue and start bringing more customers in through the proverbial door. A new leader needs to quickly wrap his or her head around the company’s various sources of revenue and ask the question: How healthy is my core business?

  Nasdaq revenue in 2003 was derived from three main pipelines. First, the data and indexing business. That includes, for example, the data that everyone sees scrolling across the screen on financial networks such as CNBC, Yahoo Finance, and Bloomberg. We also licensed financial products derived from Nasdaq listings, like the Nasdaq 100 index. As Exchange Traded Funds (ETFs) and index funds became more and more popular in the overall markets, this business was robust and growing—a godsend during the turbulent period from 2003 to 2005. It wasn’t our core business, but it was important. Without this revenue, Nasdaq wouldn’t have made it. I quickly ascertained that this business was healthy and didn’t require too much time and attention. I was free to focus on more urgent matters.

  Nasdaq’s second source of revenue was its listings business. Companies pay to be publicly listed on Nasdaq. In addition to their yearly fees, there is also a onetime fee associated with the initial public offering (IPO) of shares in the company. It was not the largest source of revenue, but those yearly fees were steady and predictable, and investors loved that consistency. It was also our public face, our flagship business. Indeed, from a branding perspective, the listings business is Nasdaq. It wasn’t just about money; it was critical for our global brand. Stop anyone on the street and ask them what they know about Nasdaq, and they are not going to wax poetic about trading volume or exchange technology. They are going to talk about Google and Facebook and Microsoft. They are going to tell you about tech companies, opening bells, CNBC’s Squawk Box, or the latest, greatest tech IPO. Nasdaq is an attractive brand. And part of that was winning the best new IPOs every year, and keeping our existing companies happy with Nasdaq’s service and image.

  Unfortunately, following the dot-com bust, the listings business was seriously impaired. There were very few IPOs in 2003. Moreover, our longtime rival, NYSE, was competing aggressively for our existing listings. I had confidence that given time, this business line would naturally recover its former health, but time was something we didn’t have. The listings business demanded immediate attention; in fact, it felt like an infinite consumer of resources, and I chafed against spending my time on it. It was the very opposite of the type of high-leverage activity that is critical during a turnaround. Listings is a good business, but it doesn’t have a very high ratio of revenue output to degree of energy input. A listings victory represents a single account. It doesn’t scale well, and it’s people intensive. It’s what I call an “arms and legs business.” In time, however, I would gain a deeper appreciation for the importance of listings to our global brand, but for now, I had more pressing priorities.

  The third revenue stream, and the one that was truly our core business, was transactions. Nasdaq charges a transaction rate per share of stock traded on its systems. From an income perspective, this is the most important revenue stream, representing 40 percent of our overall revenue at the time. And it was in trouble. Our revenue from transactions dropped by 20 percent in 2003.

  This business was on life support, but I knew what medicine was needed. I knew the industry intimately, and a significant part of the reason I’d been hired was to change Nasdaq’s fortunes in this mission-critical area. I arrived with a clear mandate: Invest in technology, focus on the future. While I couldn’t control trading trends in the overall market, I certainly intended to regain our footing in the battle for market share in electronic trading. We needed to innovate, compete, and serve our customers better. Transactions was the area where I could get the greatest leverage.

  Every business is in a relationship with its competitors but also with the market as a whole. When assessing why a business line is struggling, it’s important to consider:

  • Is the market as a whole depressed?

  • Is the business struggling because we’re failing to compete?

  • Is the market going through a significant transition?

  In the case of Nasdaq’s transactions business, the answer to these questions was yes, yes, and yes. There was no doubt that the market as a whole was still struggling to recover from the dot-com bust. In 2003, industry-wide trading volume was down, and revenue along with it. Adding insult to injury, we were rapidly losing market share to competing ECNs, so we were also receiving a decreasing portion of that shrinking industry revenue. But by far the most important thing we were up against was a significant market transition: a sea change in equities trading. In the end, our success or failure would depend on how we met that challenge. As John Chambers, former CEO of Cisco and a longtime Nasdaq customer, reflects, ultimately “you compete against market transitions, not against other companies. If you don’t stay focused on figuring out what’s happening in the market, it doesn’t matter if you win a few battles here or there… Disruption can quickly lead to self-destruction if you misread the market and end up fighting the current.”2 Of course, as any leader of a public company who has to report quarterly earnings knows, you h
ave to compete effectively in the short term as well. But from a macro perspective Chambers is right: Market trends can make or break a business. And when they involve technological innovation, there’s no sense in pretending it’s all going to go away and things will go back to how they were.

  A Market in Transition

  As in many industries, technology was radically disrupting how trading was done on Wall Street. Every exchange was impacted, or would be soon enough. Like many businesses that find themselves under the unexpected assault of a marketplace in technological transition, Nasdaq had been slow to respond to its changing environment. It had initially been cautious in embracing the emerging world of electronic trading, trying to keep one foot in the old dealer-dominated universe while cautiously embracing the digital future. The company had tried to listen to its customers, and that’s important, but sometimes, your existing customers want you to stay the same. In a market that is being disrupted, your customer base can be in flux, and it’s all too easy to follow your legacy customers off a cliff. Sometimes it’s necessary to forge a more independent path. As Henry Ford allegedly said, “If I had asked people what they wanted, they would have said faster horses.” With my arrival, the time had come for a different approach.

  In order to contextualize the steps I took to get Nasdaq on track, and the lessons I learned in the process, let me briefly explain the market transition that was occurring, and the changing customer demands that were driving it. A few years before my arrival, Nasdaq essentially had 100 percent market share in Nasdaq-listed stocks, which meant that trades in Nasdaq-listed stocks were entirely controlled by Nasdaq-sanctioned dealers and processed through Nasdaq systems. By the time I arrived, Nasdaq’s market share for matching buys and sells in our listed stocks had fallen to 13 or 14 percent. That was how profoundly the electronic revolution was impacting our business. ECNs offered customers alternative venues for trading Nasdaq stocks. So although these stocks were still listed on the Nasdaq marketplace, we had less and less influence over the trading that was happening in that marketplace.

  Why was Nasdaq falling short? It was failing to provide two of the critical things any stock market needs—speed and liquidity. Liquidity, simply put, is the ability to buy and sell relatively easily, usually due to the high volume of shares being traded. Liquidity is the lifeblood of any stock market. In trading stock, price is important, but so is the certainty that you can get the deal done. It’s Human Nature 101. When we make a decision that we want something, we demand instant gratification. Imagine that you, as a consumer, have spent hours agonizing over the decision to buy Microsoft—weighing up the pros and cons; poring over the research, the business model, the track record, the market conditions, the management team. Finally, you make up your mind: I’m going to do it. Getting a good price matters, but it’s not your only concern. The last thing you want, at that moment, is to wait for that order to get filled. You want it now! So you will tend to process your order with a trading firm that can assure you it has sufficient order flow to get the deal done fast. It’s just like buying produce at the grocery store. You are more likely to go to a busy market that consistently has ample supply, offering you the certainty that you can get what you want.

  In the trading business, the phrase that describes this dynamic is “liquidity attracts liquidity.” If a particular firm has enough buying and selling activity, then there is usually going to be someone on the other side of any given trade in any particular stock. Naturally, that creates a network effect that attracts more people to want to trade stocks with that firm.

  Waiting brings uncertainty. A delay in getting orders filled can cost money as the market continues to fluctuate. Customers were looking for speed, which means certainty, so they were increasingly choosing ECNs. We were losing market share and liquidity, and that was, in turn, causing us to lose more of both. If liquidity attracts liquidity, the opposite is true as well. Compared to NYSE, we might have been faster and more electronically oriented, but when it came to what all our customers wanted, we were slow-footed and a generation behind.

  Remember, Nasdaq had pioneered the electronic market all the way back in 1971, providing a central, up-to-date quotation system for stocks of small companies. However, it didn’t eliminate the human element altogether. You could see the quotes on the computer screen—close enough to kiss—but you still had to pick up the phone and call a Nasdaq-sanctioned dealer in order to consummate the trade. ECNs automated that final step. They could match your bid with an offer in the blink of an eye. The traditional role of the middleman, the market maker, the broker-dealer, was being bypassed.* ECNs harnessed the latest technology to meet customer demands for speed and certainty. Nasdaq tried to compete with ECNs by building its own version of an electronic order-matching system, known as SuperMontage. It was a step forward, but by trying to include features both for dealers and for new electronic players, the final product ended up pleasing neither. It was a horse designed by committee, and the resulting camel didn’t help Nasdaq’s position in the market. By the time it was released, in 2002, the market had already moved on. As in any established business being disrupted by innovation, Nasdaq struggled to balance the interests of its legacy dealer network and its customers’ new demands for the latest technologies.

  By the time I arrived in 2003, the dramatic loss of market share had created more than a decline in revenue—it also contained an existential risk. Some on Wall Street were beginning to openly question whether Nasdaq would survive. Without liquidity, the exchange couldn’t perform one of its critical functions accurately: price discovery.* The more buyers and sellers come together in any one trading venue, the more accurate will be the price of the stock that is being bought or sold. Without volume, all kinds of distortions are possible.

  If other venues with more activity were providing the function of price discovery in Nasdaq-listed stocks more accurately than Nasdaq, what advantage did we have in the listings business? After all, wouldn’t it be more appropriate for those stocks to be listed on the exchange where price discovery was actually happening? If Nasdaq just became a sort of electronic posting service, showing the “last sale” prices of stock primarily being traded in other electronic venues, the fundamental relevance of the business would start to be called into question. I was deeply concerned that the decline in market share, if steep enough, could become a slippery slope that accelerated our troubles in the listings business—at least that was the scenario that occasionally woke me up in the middle of the night. In my mind, I could hear CEOs of would-be public companies asking, Why would I list with you, if you are not trading my stock?

  Overhauling our transactions business was a major task, and I knew I couldn’t do it overnight. I also knew that I needed to move immediately to increase our market share and stop the bleeding. We did have some competitive advantages, including our size, our talent, our lack of any real debt, and a reasonable amount of cash on our balance sheet. That cash certainly wasn’t doing us any favors by slowly burning up in unprofitable operations. The short-term solution, I decided, was to employ these assets and buy some market share, in the form of an ECN. And so it was that approximately one year after my first day at Nasdaq, we purchased BRUT ECN from SunGard Data Systems, my former employer.

  I have no doubt that several eyebrows were raised at a new CEO proposing to acquire the technology he’d built at a previous company. One very significant Board member, however, was more outspoken in his reservations. Pat Healy had replaced Warren Hellman, of the private equity firm Hellman and Friedman, who owned a fairly large percentage of Nasdaq at the time. Over time, Healy would become a highly valued advisor and someone with whom I would often consult on Nasdaq’s strategy. But for the moment, we were on opposite sides of this critical decision. I listened to his reasonable strategic concerns, but decided to proceed anyway. Overriding his objections regarding my first major acquisition was an early test of my leadership mettle.

  BRUT was the first major acquisit
ion on my watch. It wouldn’t be the last. We needed its market share—it was that simple. Our trading platforms needed it. Our listings business needed it. Our IPO business needed it. Our brand needed it. And frankly, our mojo needed it.

  With the acquisition, Nasdaq also received an infusion of new technology, though it still wasn’t adequate to address the IT challenges we faced. BRUT was a good system, and it allowed us to level up on the technology front, but it wasn’t a foundation upon which we could build Nasdaq’s future. Like many ECNs, it was a bit rickety. But it was a step. A small step, perhaps, but my strategy was just getting going, and I knew the next one would be bigger.

  From Defense to Offense

  As I grappled with how to upgrade our technology and get Nasdaq on the right side of an industry in transition, our fortunes were helped somewhat by an improving economy. In 2004, the IPO market began to pick up. We launched a number of new public companies, twenty-five of which were international, including ten from China. Most notably, Google successfully launched their landmark IPO, trading 22 million shares on the first day. Few knew at the time just how massive an impact Google would have on the global economy, but already it was a tech company with a $27 billion valuation and extraordinary potential. Moreover, it was the first big IPO in the post-dot-com era, and the competition for Google’s favor had been intense.

  Our victory in winning the listing was a group effort. Bruce, Adena, and I were the team that spent time courting Google’s young founders, Sergey Brin and Larry Page, and its CEO, Eric Schmidt. I was excited and more than a bit relieved when we got the good news that they’d chosen Nasdaq.

  The Google IPO was a milestone, not just for Nasdaq but for the technology sector as a whole. After the dot-com bust, Silicon Valley had suffered through a particularly grueling period of retrenchment. But it felt like winter was finally receding, and the green shoots of spring were all around. As Larry Page led us on a tour of the Googleplex in Mountain View, California, the troubles of just a few years ago seemed to be fading into memory. A new generation of innovators, unencumbered by the failures of the past, was showing the way forward.