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After Mishaps, Nasdaq Loses Standing to Rivals

August 24, 2013 in public


Nasdaq was once the upstart of the financial world, set to take over the American stock market. Now, the company is looking more like a vulnerable also-ran.

The reputation of the market operator has been dented by a number of recent mishaps, the biggest and most prominent coming on Thursday, when a technical problem shut down all trading in Nasdaq stocks for three hours. That was just a few weeks after prosecutors announced that hackers had managed to break into and remain in Nasdaq’s computer systems for two years.

Even before its technical problems, Nasdaq has been losing its commanding position in stock trading as younger rivals steal its business. Two of those rivals — BATS Global Markets and Direct Edge — are in talks to merge, according to a person briefed on the matter. That combination would make it bigger than Nasdaq and close to the New York Stock Exchange in terms of trading volume. The deal talks are showcasing the rise of two markets built to favor computerized high-speed trading.

The N.Y.S.E., the longtime archival of Nasdaq, has dealt with these competitive pressures by selling itself to another young, fast-growing exchange in a deal that recently received approval from regulators. But Nasdaq has failed in its two notable efforts to buy other exchanges. And the acquisitions it has recently made have often been far from the stock trading business. All of which has left a big question mark hanging over its future.

“They’ve got a real problem,” said David B. Weiss, an exchange analyst at Aite Group. “They need to do something to get the pull they used to have.”

A number of industry participants have complained that Nasdaq’s response to the trading halt on Thursday showed many of the same flaws that have caused the company problems in other circumstances; most of all, poor communication with other members of the industry.

“This draws into question a lot of the issues surrounding Nasdaq, and the general leadership of the exchange,” said Christopher Nagy, the founder of Kor Trading.

The leader of the Nasdaq is Robert Greifeld, who has been chief executive since 2003. He is known for his intensity and somewhat quixotic interests, including marathon running and the turtle pond in his New Jersey back yard.

It was Mr. Greifeld who was seen as the driving force behind Nasdaq’s failed efforts to buy the London Stock Exchange in 2007 and the N.Y.S.E. in 2011.

He has had a tempestuous relationship with both his regulators and customers. In the middle of the bidding for the London exchange, the founder of the large trading firm Tradebot, Dave Cummings, wrote a letter to other industry participants in which he called Mr. Greifeld a “bully.”

“A number of people have recounted sales meetings in which Bob led with the slogan ‘our customers are our hostages,’ ” Mr. Cummings’ letter said.

Nasdaq has said his letter was not worthy of a response.

For the broader market, the biggest lingering sore spot before this week was Nasdaq’s handling of the Facebook initial public offering in May 2012. Mr. Greifeld stood next to Facebook’s founder, Mark Zuckerberg, to ring the opening bell, but when Nasdaq’s technology went haywire as Facebook’s stock began trading, Mr. Greifeld got on a plane back to New York and was out of touch for hours while the market was in chaos.

The Facebook debacle lost Nasdaq some credibility with the company’s main regulator, the Securities and Exchange Commission, where some officials have been frustrated with Nasdaq’s lack of communication — and at times, lack of contrition. The agency’s enforcement unit ultimately fined the exchange $10 million for its role in the botched I.P.O. As the S.E.C. investigated the I.P.O., people briefed on the matter said, Nasdaq played down the problem and questioned whether regulators were overreacting.

Mr. Nagy said he was “appalled” to see many of the same issues of communication coming up after this week’s incident.

On Thursday, the exchange did not immediately notify the S.E.C. when the problem surfaced, the people briefed on the matter said. As a courtesy, other exchanges typically alert the agency to serious threats. Nasdaq did open a phone call with their employees and with employees from other exchanges soon after the problem was detected.

But in the conference call with regulators and other exchanges, which lasted through the entire shutdown, Nasdaq provided few details on what had happened and what they were doing to deal with the problem, according to one person on the call who did not want to be named. Some S.E.C. officials also privately said that Nasdaq could have better updated the broader marketplace as the issue developed.

“They are very consistent in how they handle problems,” the person said. “They go into silence mode, then they go into defense mode. They never go into accountability mode.”

The agency’s enforcement unit is also scrutinizing the mishap, the people said. The inquiry, which is preliminary and routine in the wake of a technological error like this one, will raise questions about whether Nasdaq had sufficient controls and procedures in place to prevent such a problem from arising.

On Friday, Mr. Greifeld defended Nasdaq’s handling of the problems on Thursday, saying that Nasdaq “communicated with our constituents as well as we possibly could have.”

The chief executive said that the breakdown on Thursday had been set off by another participant in the market, not something within Nasdaq’s control.

“We had an external environment happen,” he said.

While the technology system that ultimately broke down is operated by Nasdaq, Mr. Greifeld said that it did not point to any larger flaw in the company’s technology.

“People recognize the superior nature of our technology,” he said. “We recognize that we need to get better at what I’m calling defensive driving.”

Before and after the incident, Mr. Greifeld has pointed to the company’s financial success, even as its core stock trading business has struggled. One source of profits, somewhat unexpectedly given this week’s events, has been Nasdaq’s trading platform technology, which the company has sold to other exchanges around the world. In a very different direction, Nasdaq recently finished the purchase of a company, eSpeed, that facilitates the trading of government bonds.

“We do a lot of different things and we intend to do more things in the future,” Mr. Greifeld said in an interview earlier this year.

While Nasdaq’s stock dropped sharply after the eSpeed deal was first announced, it has generally been rising over the course of the year, thanks in large part to aggressive cost-cutting by Mr. Greifeld. After falling 3.4 percent in the immediate aftermath of Thursday’s shutdown, the stock rose 1.2 percent on Friday.

“They’ve done a good job of diversifying the model,” said Richard Repetto, an analyst at Sandler O’Neill. “The issues are whether the eSpeed acquisition works and whether there are any long-term ramifications from this week’s events.”

Ben Protess and Michael J. de la Merced contributed reporting

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