New Nasdaq CEO to face skepticism

NEW YORK -- When Robert Greifeld becomes Nasdaq's CEO next month, he must answer a question that a few years ago, hardly anyone on Wall Street would have asked: Has the institution that once touted itself as "the stock market for the next 100 years" become an anachronism?

While stocks rocketed higher in the late 1990s, carrying the Nasdaq composite index past 5,000, few people knew that the Nasdaq Stock Market was falling behind its competitors. Now, market watchers wonder whether Wall Street even needs Nasdaq.

"The fact of the matter is, in today's world there is less need for a centralized marketplace," like Nasdaq, said Richard Rogalski, the George J. Records professor of investments at the Tuck School of Business at Dartmouth College. "All you need is access to the Web."

Since the technology bubble burst three years ago, Nasdaq has suffered declining profits and revenues, lost trading volume and shelved plans to go public.

Wall Street's overall malaise has contributed to those woes, but the bigger problem has been competition from other electronic networks that route trades on their own computer platforms, eroding Nasdaq's market share of trading volume and its revenue from trading fees.

Electronic communications networks, called ECNs for short, such as Instinet and Archipelago, have become as serious rivals to Nasdaq as the New York Stock Exchange. While Nasdaq must fight NYSE for stock listings, it has to fend off ECNs' attempts to steal trading volume share.

Because the NYSE has an auction-style trading floor where stock specialists match buyers and sellers, it doesn't compete with Nasdaq, which relies on electronic networks to handle transactions, when it comes to trading volume.

Technology, what Nasdaq has long boasted as its biggest asset, is what market experts say enabled ECNs to take market share during the bull market.

"The ECNs that entered the fray a few years ago had much more advanced technology than the Nasdaq. . . . Because traders were able to access ECNs with much more speed in the boom years, that attracted much of the order flow over to ECNs, because the markets were moving so fast," said Rob Hegarty, a securities markets specialist at the Tower Group, of Nasdaq.

ECNs claim about 45 percent of trades involving Nasdaq stocks, up from 12 percent in 1988, Hegarty said. Nasdaq thought it had the answer to lost market share when it launched a new trading platform, SuperMontage, in November, but so far, it hasn't brought volume back.

"It's funny their product (SuperMontage) isn't even the market leader," said Brian Pears, head equity trader at Victor Capital Management in Cleveland.

Just a few years ago, it seemed Nasdaq could do no wrong. Its high- profile composite index hit a stunning all-time high of 5,048.62 in March 2000. It was known as a hothouse for young companies.

Today, the index is trading about 72 percent below its high. And in a depressed stock market, few companies are going public, including Nasdaq itself.

The market value of Nasdaq stocks has fallen to $1.88 trillion on March 10, the three-year anniversary of its peak, from $6.71 trillion when the Nasdaq composite reached its high.

Greifeld, who earlier this month was named CEO and president, is faced with helping Nasdaq get its momentum back. If his career, steeped in electronic trading systems, is any indication, Nasdaq's focus is likely to be technology and stepping up its fight against ECNs.

"Volume is the name of the game," said Rogalski, the investments professor. "That has to be the focus of whoever next heads the Nasdaq."

Greifeld said he'd like to boost Nasdaq's share of trading volume to 90 percent, up from 70 percent by Nasdaq's own counting but up from about 55 percent according to Hegarty.

"It's my goal to get us there," Greifeld said in an interview.

Greifeld will resign as executive vice president of Sungard Data Systems, based in Wayne, Pa., which provides electronic processing and information technology services. He will also relinquish his spot on the board of Knight Securities, the largest Nasdaq market maker.

He replaces Hardwick "Wick" Simmons, who announced in December he would leave before his contract expired at the end of this year.

Greifeld said he intends to focus on what he called the basics, striving for a market that is fast, deep and liquid -- meaning there are plenty of buyers and sellers -- and low trading costs.

The trading volume forfeited by Nasdaq has resulted in its weaker revenue. According to Nasdaq's quarterly results, the market's transaction-services revenue in the fourth quarter fell to $78.83 million from $103.63 million, due to lower trading volume.

So far the reviews of SuperMontage have been mixed at best. ECNs that don't participate in SuperMontage say they get clients the cheapest available price even if it means routing orders through competitors. The problem, they said, is that Nasdaq doesn't do that.

Already, some ECNs have chosen to leave SuperMontage. Earlier this month, Archipelago's ArcaEx, a full-fledged stock exchange, switched entirely to its own platform, a move it says will save it $35 million a year in transaction fees and take away 10 percent of SuperMontage's volume.

Nasdaq seems to be hedging its bets that SuperMontage will be the answer to its survival in the marketplace. Published reports have said Nasdaq has been in talks with ArcaEx about a merger; neither side would confirm such reports when contacted by The Associated Press.

But Rogalski said a merger would be one of Nasdaq's best options, saying, "That is the direction Nasdaq is going to have to go in terms of creating a highly liquid marketplace, so people don't go elsewhere."

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