Island ECN grew quickly. It became the preferred platform of the wave of electronic traders entering the market in the midnineties. By the end of the decade, Island had established itself as a major player, and Levine’s reputation had grown along with it. Digital luminaries of the era, like Jerry Yang of Yahoo! fame, made the pilgrimage to his New York office to check out the system, and a highly talented technology team formed around Levine and his creation, including my future partner Chris Concannon. In 1999, a glowing article about him in Wired began: “Forget Nasdaq. Island ECN is tearing down Wall Street.”1
A few years later, in a strange and simple twist of fate, it was Levine’s carefully crafted and brilliantly simple ECN—now known as INET—that would help rescue Nasdaq from its doldrums. I could never have predicted such a turn of events at that original meeting, where Maschler, with his brawny intensity, was chewing on his cigar and barking orders at his youthful acolyte. Who knew then what market-changing genius was germinating in that basement office?
Perhaps, however, it’s not so surprising. Business leaders should always cultivate an attentive disposition toward outsiders, especially in industries impacted by technology. Always be on the lookout for new ideas, products, and technologies happening on the edges of your business ecosystem, where outsiders are developing a different picture of your future in apocryphal (and sometimes actual) garages and basements. Of course, you have to distinguish the mad from the madly creative, but it’s always wise to give some attention to what today’s outsiders are planning for tomorrow’s establishment—one day they might be right.
Today, Levine’s fingerprints can be found all over Wall Street’s trading systems. In 2017, when I took over as Chairman of Virtu Financial, a company whose computers are deeply embedded in Wall Street’s operations, I quizzed them about their IT systems. In a frank moment, one of the engineers told me, “Well, you know, it basically runs a lot like Nasdaq’s INET.” Moreover, Nasdaq still sells trading technology based on INET IP to more than one hundred exchanges all over the world. In other words, Levine’s handiwork is now ubiquitous in the world’s electronic markets—a quarter century after I first met him.
A Necessary Risk
In April 2005, Nasdaq bought Instinet, the company that owned INET. Of the forty-five acquisitions we made during my time as CEO, all were by choice, except this one—it was by necessity. This was the one we had to do. I felt we were at institutional risk otherwise. After all, if Nasdaq couldn’t call itself a worldwide leader in trading equities, what exactly was it? If we couldn’t command a premium share of the market for transactions in our own listed stocks, what were we doing in the listings business? If we weren’t leading the market in technology, how long would we continue to be the stock market of choice for the tech industry?
The acquisition wasn’t cheap. We had to take on $955 million in new debt, leaving Nasdaq highly leveraged. Our debt was actually junk-rated at the time. It was a calculated risk, but a risk nonetheless. If we’d hit the great recession in the months after the INET deal we could have been dead in the water. Luckily, we had time to get the company back on a sound financial footing.
The private equity firm Hellman and Friedman provided much of the funding for the deal, along with Silver Lake Partners. The deal wasn’t simple—Instinet included several subsidiaries, including an institutional brokerage business that we didn’t want and agreed to sell to Silver Lake, meaning that in effect we had to work through multiple deals at the same time. The marathon series of negotiations was led by Adena Friedman on the Nasdaq side. Adena worked incredibly hard on the deal and established her reputation as a persistent and smart negotiator, a role she would reprise again and again in future Nasdaq acquisitions.
Mike Bingle, the representative from Silver Lake, proved a tough counterpart. As he and Adena sparred over the various issues at stake in the deal, progress slowed to a crawl. Perhaps it was just that they were both smart, intense negotiators, but I began to worry that we weren’t moving fast enough. During negotiations like this, long hours and sleep deprivation don’t do any favors to clear thinking. People become less rational, more irritable. As I watched the time tick by and the energy of our team wane, I grew concerned that it was all going to fall apart.
Sometimes in dealmaking you need to stage a reboot. In a bid to get progress restarted, I called Glenn Hutchins, cofounder of Silver Lake Partners, and told him, “Glenn, you have to come in here or this isn’t getting done.” Hutchins showed up, well rested and ready to get things moving. He and I negotiated directly. Facing a second all-night session, I was exhausted but determined to get the deal across the finish line. As we went back and forth, trying to wrangle this complicated multistakeholder deal into submission, Hutchins and I got to know each other well. In fact, out of the chemistry we developed in the heat of the negotiating battle, a real friendship was formed. Hutchins would later serve on the Board of Nasdaq and we would eventually go into business together. In the last act of the drama, we sketched out the final series of agreements on a conference room napkin. After two days and two nights of nonstop dealmaking, everyone was happy (and exhausted), and Nasdaq had its prize.
A Balancing Act
Over the next year, we consolidated the SuperMontage matching engine, the BRUT matching engine, and the INET matching engine into an integrated system: one platform to rule them all. It was a herculean undertaking and involved significant new functionality. For example, we had to write new code to handle opening and closing auctions for the markets—technologically tricky processes to get right. This was not something that BRUT or Island had had to worry about in their pre-Nasdaq incarnations.
The team, who had come over from INET, had a distinct culture—rebellious and idealistic. After all, they had built Island ECN as a revolt against the Wall Street empire—to democratize access and let Main Street trade on equal footing. Now they had become part of that empire, but they had retained all of those anti-authority, antihierarchical, nonconformist leanings in their group culture. It was all jeans and sandals, not coats and ties. It was half corporate culture, half hacker culture. The team had real talent, without question, and the attitude to match it. They had the exuberance of youth, focused on what they could create, not on what could go wrong. They didn’t want to submit to any traditional, buttoned-up corporate oversight. Under normal circumstances, I believe in creating cultural consistency throughout the organization. But I decided the time wasn’t right to overly enforce this, so I made a calculated compromise. Sometimes you have to break your own rules.
It wasn’t long before that decision cost me my CIO. He clashed with the incoming group, and he probably knew that this culture was not right for him. I respected his decision, and he found a great opportunity elsewhere. I was reminded that the right person for one moment is not always the right person for another moment. So I promoted Anna Ewing to CIO and put one of our newly acquired engineers, Jonathan Ross, in charge of the development of the new exchange platform.
Jonathan was talented, had a remarkable understanding of the inner workings of the equities market, and, like many highly capable engineers, loved building things and writing great code. He had a bit of a cowboy attitude, but without question, he was the right person for the job. Anna used her considerable skills to negotiate all of the culture and personality clashes and became a trusted colleague who served Nasdaq as CIO for the next decade.
In the end, the culture clash wasn’t too problematic. After all, the INET people were doing great work. If they wanted to wear casual clothes to the office and resist certain operational structures, what the heck did I care? Were they producing? The answer was a resounding yes.
The team ran almost like a startup, meaning that we gave the engineers unusually free rein to remake our trading systems. They controlled most aspects of the process—functioning as their own quality assurance department, and deciding when code went into production. We ran without a lot of the checks and balances you would have in a mor
e conventional production environment. My remaking of Nasdaq IT from an old-style, mainframe-oriented, slow-adapting, reliable, nonprofit work culture into a fast-iterating, technology-first, trust-the-engineers, startup-like work culture was never as fully realized as it was during this period. In any IT organization, there is a trade-off between radical efficiency and careful oversight, between engineering and operations, between speed to market and quality control. In this production process, we erred to one side of those dichotomies. We calculated that the existential challenge Nasdaq was facing necessitated that kind of approach. We were trying to survive and play catch-up in the new universe of automated trading functionality. Every release cycle seemed like it could make or break us, and speed to market was critical.
Today, we hear a lot about the “fail fast” ethos of startup culture. Move fast and break things was Facebook’s unofficial motto in its early days. The idea is to not get bogged down in analysis paralysis, to get to market fast so you can get feedback, and then to iterate and change things on the fly as needed. For a startup, it makes sense. In that kind of environment, engineers rule. Operational oversight is minimal. Speed is everything. But for an established company with highly regulated legacy systems like Nasdaq, whose computers are central to the entire equities market, it’s not so simple. We had other responsibilities. We had to be reliable. Uptime had to be close to perfect. So while I was trying to remake our culture to be more nimble, innovate more quickly, and get to market faster, I also had to ensure we kept one foot in each world. We couldn’t abandon our conservative roots. It was like riding two horses at the same time without a harness to keep them going in the same direction. As time passed, we would rein our startup side back in, and reestablish a more conservative operational oversight. But for the moment, it was an unbalanced situation.
Looking back on it today, I’m still amazed by what the team accomplished. Their productivity was through the roof. In any normal production environment, integrating two independent matching engines would have taken at least two years. We did three in one year. The advancement they made on the IT front was unprecedented and might have rescued the company. By 2007, not only had we saved a great deal of money on synergies from the Instinet acquisition; we had built a trading platform that was industry leading. Frankly, it still is today. My conviction that INET had been the right technology to acquire was vindicated and then some. The buy-the-winners strategy had worked. Even the high cost of the acquisition and the leverage Nasdaq took on ended up being a small price to pay for the long-term boost to the business. After years of technological missteps, Nasdaq had finally got it right. We had a transactions platform that was best of breed and a technical team to match it.
The price of riding those two horses would be paid much later. In business, as in life, every decision comes with inevitable trade-offs. Context and timing is everything when it comes to strategy. We were in a desperate situation, and my hands-off approach to my touchy but talented engineering team was necessary for their success. And I don’t just mean the dress code. I let them keep the black box of their technological universe partially opaque and resistant to traditional forms of operational management. No doubt, that’s partly why they were superproductive. It also meant, however, that we didn’t have sufficient visibility on all the ramifications of the technology. We didn’t have fail-safe procedures to vet all of it in real-world situations. Their extraordinary work would deliver us great returns and power Nasdaq’s transactions platform for years to come. In 2007 it was all upside. The downside would come later. Unfortunately, it would reveal itself during one of the most publicized IPOs in history, that of another company famous for its unorthodox “hacker” culture—Facebook.
From the Basement to the Boardroom
Disruptive innovation often comes dressed in countercultural garb. The electronic trading revolution, like many rebellions, had started on the fringes—cultivated by outsiders, built by computer engineers, and indirectly financed by hordes of investors across the country who wanted a more direct pathway to sharing in the riches of the economic boom. The upstarts were ignored, resisted, feared, banished, and eventually embraced as allies. ECNs traveled from Wall Street’s basements to its most illustrious boardrooms in just a few years. Along the way, they dealt a mortal blow to the cloistered, insider clubs of Wall Street, where cigar-smoking men gathered in wood-paneled rooms filled with leather chairs to count their money over cognac and discuss the winners and losers of the day (at least in Hollywood legend). It was the end of an era.
I reflected on this unlikely journey when I sat down to lunch with Josh Levine at Nasdaq’s headquarters, shortly after our purchase of his creation. INET had come a long way in its short life. The once antiestablishment ECN was now integral to our establishment exchange, and we were beginning to assimilate our trading platform into its technology. Chris Concannon had invited Levine to connect and celebrate the acquisition. As young entrepreneurs and executives at Island, they had dreamed of the day when their ECN might actually vanquish Nasdaq, wresting control from the old-style market makers and remaking Wall Street trading in the image of their creation. In a sense, that day had arrived, though perhaps not in precisely the way they had envisioned.
Levine himself, dressed down in his usual T-shirt and jeans, was a pleasant dining companion. A private, unassuming person who always shunned the limelight, he had moved on to new horizons in alternative energy and lost interest in the markets. Perhaps he felt his contribution to the Wall Street technological revolution was complete.
A new elite was rising—the quants, coders, and engineers who were more likely to be found in chat rooms and data centers than in high-ceilinged men’s clubs. Wall Street was slowly being remade in the image of ones and zeros. As someone who watched the revolution unfold from its earliest days and helped coax the old guard into the new world, I was convinced the changes were mostly for the better, but like any innovation, they came with plenty of disruption and involved significant new dangers and regulatory challenges—as the years ahead would make clear.
LEADERSHIP LESSONS
• Buy the Winners. There’s no shame in using smart acquisitions to gain much-needed market share or technology, even if you pay a premium in the short term.
• Sometimes You Have to Break Your Own Rules. A good leader can be flexible as circumstances demand—even knowing there will be trade-offs involved, and what’s right today won’t be right tomorrow.
• Today’s Outsiders Are Tomorrow’s Establishment. Don’t ignore those on the fringes of your business ecosystem—they just might be creating your future.
Chapter Five
From Apple to Zillow
Six Big Board Stocks Join Nasdaq
CNN Money, January 12, 2004
In my entrepreneurial days at ASC, I did my time in sales (along with HR, accounting, product management, cooking, and bottle washing, as is the way in any small company). Back in the early nineties, as the public face of the company, I often found myself calling on potential customers, doing demonstrations, and making pitches. One particularly memorable sales call involved the hedge fund D. E. Shaw, then relatively new and focused on using cutting-edge computational technology. When I heard they were getting into the market-making business, I called up one of their executives and told him that I’d like to come over and demo our system. Despite being state-of-the-art at the time (twenty-inch cathode-ray technology), it still required a few decent-sized boxes, which I loaded into the elevator in a Midtown Manhattan building and wheeled up to the room where I was to give my presentation. I’d begun assembling my demo station, bumping into walls, tripping on cords, and struggling to set things up in this tiny, Spartan office, when my contact, some guy named Jeff, told me to stop.
“Just explain to me how it works. That’s all I need,” he said. I thought that would be a professional mistake. Customers generally needed to actually see our software in action. But he insisted, so I reluctantly agreed to do the demo verbally.
I started giving my best visual description of how the screen would appear and operate. Lost in my own efforts, it took me a few minutes to realize that my would-be customer had leaned back in his chair and closed his eyes. I hope he’s not falling asleep! I thought. For a brief moment, this sales call seemed to be breaking bad.
I soon realized, however, that he wasn’t sleeping. He was listening. He was completely focused—immersed in his own visualization. He was building, in some imaginal realm, the working demo I was describing verbally, envisioning our system in his own mental universe. As I went through the whole setup, he followed every word. By the time I was done, it was as if he had built it himself. He grasped the interface and intricacies better than most customers. In the end, I didn’t make the sale. But I learned an important lesson, nonetheless. Sometimes you don’t really know who you’re talking to—or rather, who they might become. That day, I made the acquaintance of Jeff Bezos. I can testify that he is a visionary—in the most literal sense of the word.
Market Mover Page 7