Can a programmer change the financial market? — review of the book “Market Mover: Lessons from a Decade of Change at Nasdaq”
I was invited by the publisher of the book "Market Mover: Lessons from a Decade of Change at Nasdaq" (Chinese edition) to write a review, and below is the English translation of the review. Hope you like it.
He has very ordinary family background. His father, working at post office, had to do a second job to feed the five children.
He has very ordinary educational background. His graduated with bachelor degree from a university that is ranked more than 500th in US.
He has very ordinary working experience in his early-stage career. He was just a programmer, commonly known as farmer on keyboards.
Despite his ordinary background and lack of shinning achievements, he managed to rescue a giant financial institution with thousands of employees from near collapsing.
During the 14 years of his leadership, the company safely sailed through the 2008 financial crisis, acquired 45 companies, increased the market cap by 24 times reaching over 11 billion USD.
The company not only broke the 50 year old monopoly in the market, pushed regulatory reforms, but also managed to take up over 40% of global market share. The company helped numerous companies to realize their dreams, by bringing them into the global capital market, i.e. IPO.
He is the ex-CEO of Nasdaq, Robert Greifeld.
He is a very low-key person, and seldom took part in high-profile public business activities, but had been pushing for a revolutionary change to the financial market from behind the scene.
Only after he left Nasdaq and joined a quantitative hedge fund, he decided to write down his experiences at Nasdaq into an autobiography “Market Mover: Lessons from a Decade of Change at Nasdaq”, to tell the world all the stories of how technology changed the financial market.
Big financial market changes always seems to happen after big events. For example, the Bretton Woods System was set up after World War II.
In 2003, the internet bubble busted, and Nasdaq was losing 250K USD everyday on average, hardly surviving.
Greifeld started his career as a software developer, and was then partner in a financial software company. As an outsider, he was chosen by the Nasdaq board of directors, to become the CEO.
The most important factor in financial market is always the people. Only the right people, at the right time, do the right thing, can make a difference to the entire industry.
The first thing Greifeld did after he became the CEO was to reorganize the team.
On the first day in Nasdaq, he fired three of the executive team before 8:30 am. In his first year at Nasdaq, he fired one quarter of the entire work force. Since then, the company had a faster pace, higher stake, higher pressure, and more “high-frequency”, at the same time, listened to comments and suggestions more than ever before.
Next, Greifeld made big revolutionary changes to the operational side of Nasdaq.
The financial market is no longer a small private club of elites. The traditional dealer-centered trading system is becoming less relevant in the modern world, to satisfy the need for speed, certainty, liquidity, etc. Only technology can help.
On the one hand, he tried to reduce the operational cost at Nasdaq. On the other hand, he adopted the growth strategy through merger and acquisition. Nasdaq acquired Greifeld’s ex-company BRUT ECN. Within very short of time, he stopped the erosion of market share at Nasdaq.
This series of strategic actions paid off, as the economy recovered in 2004, in particular, Google’s IPO gave Nasdaq a big boost in confidence.
From then now, Nasdaq turned from defense into offense.
Financial market, computers and networking technology are bound to be integrated, and nothing can stop it from happening.
Typically, it was a few geeks who lead the revolutionary changes in technology at the beginning.
In order to push Nasdaq’s technology to become the industrial standard, Greifeld acquired the best regarded technology star company in this area: INET, run by a group of genius programmers.
Since then, Nasdaq embarked on a “technical aircraft-carrier” development route, that laid the foundation for its global expansion later on.
Like many other markets, the financial market has Matthew effect.
Market leaders who want to make revolutionary changes, must be able to cover multiple asset classes, multiple regions, multiple culture, and multiple countries.
Nasdaq was no longer contented with just the technology sector, but a more general market player like NYSE.
Soon, companies from all kinds of sectors, such as pharmacy chain company, asset management firms, financial services companies etc all came to Nasdaq to get listed.
Companies in markets outside US, such as China’s technology companies, also soon joined Nasdaq’s platform.
Any financial market reforms will inevitably involve regulatory issues and politics.
As Nasdaq grew its business, it inevitably faced all kinds of regulatory issues and political challenges or even barriers.
Greifeld critically pointed out: “Regulations could make markets work better, or they could do the complete opposite.”
“The SEC has a triple mandate — to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation”.
The SEC’s negligence in monitoring the health and stability of financial institutions, is one of the main causes of the 2008 financial crisis.
“The SEC is more like a Justice Department and less like the Treasury Department. The SEC has room full of lawyers, not economists.”
All the processes that led to the SEC’s Reg NMS (Regulation of the National Market System) “rule change involved economists, traders, brokers, institutions, bankers, academics, exchange experts, and many others, there was one significant group missing from the deliberations — engineers and the people responsible for day-to-day operations”. This indirectly left holes in the system that allowed the flash crash in US stock market in 2010 to happen.
Deciding moments for Nasdaq
The financial industry has natural monopoly property. If one could take significant shares in several key markets in the world, its dominant status will be untouchable.
With the competitive advantage in technology, Nasdaq needed to quickly establish its status in the global exchange landscape.
The most direct way of gaining market position is to acquire competitors. Nasdaq was facing a very rough path to expand internationally, and had paid a big price for the experience.
First stop: London Stock Exchange (LSE).
At the end of 2006, Nasdaq accumulated 30 percent stake of LSE from open market and a couple of LSE’s largest institutional shareholders, using its own cash.
But, there was still a gap towards the 50% mark required for a controlling stake in LSE.
Then, two hedge funds, Paulson and Heyman, who had absolutely no long-term interest in the company, joined into the game, like sharks smelled blood, and they hunt in packs also.
They had the amount of shares Nasdaq needed to make the acquisition, and tried to convince Nasdaq to “think of the long term” and not worry about paying a premium for their shares.
Finally, due to the fact that the price had exceeded the maximum that Nasdaq was willing to pay, Greifeld decided to drop the bid. Nonetheless, Nasdaq sold the LSE stake for a significant profit — almost $432 million!
Greifeld joked with his executive team that “We were probably the most successful hedge fund in US in 2007”.
Second stop: Nordic exchange OMX.
Despite the experience Nasdaq gained in the attempt to acquire LSE, the acquisition of OMX was not a smooth ride at all.
Borse Dubai (government-controlled exchange operator in the United Arab of Emirates) took advantage of the internal family rivalry in OMX, raised the bid price to 14% higher than Nasdaq’s, and forced Nasdaq to make a three-way deal with compromises on the equity, technology, etc.
Further, another middle east investor, the Qatar group, jumped into the bidding war. Faced with all sorts of pressure, Nasdaq had to make a deal with a major shareholder of OMX, to force Qatar group to retreat. Finally, this $3.7billion acquisition deal reached its finishing line, and Nasdaq became a global player.
In 2007, Nasdaq again acquired the Philadelphia Stock Exchange (Phil-Ex) for $652million. Phil-Ex was the third largest stock option exchange in US, and Nasdaq expanded its product line through this acquisition.
For most people, financial crisis is a disaster, but for those who wants to change the financial landscape, this is actually an opportunity.
In March 2008, Bear Stern, the fifth largest investment bank in US, went bankrupt, and was acquired by J.P. Morgan. In September, Lehman Brothers went down, and this triggered a huge financial crisis.
The market turned from being too hot, to freezing cold. Credit was broken, and cost for capital rose sharply. Most companies found their operation very difficult to sustain, and even faced bankruptcy. The world’s financial system was on the brink of collapsing.
At that time, Nasdaq was at the eye of the storm.
Nasdaq’s operations during this period was very smooth, and it actually stood out of all its competitors. Thanks to its strong technical capabilities with the right management, Nasdaq perfectly reacted to the increasing volatility and trading volume during the crisis, and made handsome profits out of it.
Further, Nasdaq got enough spare resources and attention to take on a more dominate role in the aftermath of the financial crisis, as the SEC took on new measures to deal with the issues raised during the crisis. Nasdaq became by far the most important player in the industry.
For example, Nasdaq took away the clearing business for derivatives from J.P. Morgan, which was worth about $5billion profit a year.
This may look like just a new SEC regulation, but it was closely related to Nasdaq’s push from behind the scene. This caused the CEO of J.P. Morgan to call Greifeld and threw a stream of F-bomb words to him.
On the other hand, a time bomb that the ex-CEO of Nasdaq left behind — Nasdaq’s ex-chairman Bernie Madoff’s contract with Nasdaq, really made Greifeld very worried.
As early as 1999, some whistleblowers had already reported to SEC about Madoff’s Ponzi scheme.
During this period, SEC never announced this case until the end of 2008.
Fortunately, Greifeld “reluctantly” settled a contract with Madoff for more than he thought Nasdaq would have paid. The contract details were never released to the public, but Greifeld described it as a horrible contract for Nasdaq.
This ended Nasdaq’s dealings with Madoff and the biggest Ponzi scheme ever.
All these cases may look ordinary like daily routines, but in fact, what Greifeld did was quite remarkable.
Regrets at Nasdaq
The revolutionary changes technology brings to the financial market had reached the ceiling.
Due to the failure to keep up with Nasdaq’s pace of development, New York Stock Exchange (NYSE) lost IPO clients, trading volume dropped dramatically, and it was just a matter of time for NYSE to become an acquisition target for other exchanges.
At the beginning of 2011, Deutsche Börse announced its plan to use $9.53billion to acquire 60% of the equity of NYSE.
This sparked a huge wave of bidding war for NYSE.
Nasdaq immediately acted and announced a bid for NYSE with a 19% premium, i.e. $11.3billion.
Politics, national dignity, regulators, antitrust division etc all involved, even Donald Trump messaged Greifeld: “Do it!”.
Unfortunately, the antitrust division rejected Nasdaq’s bid. Greifeld regarded this as one of his great regrets in life.
Nasdaq had made great contribution in using technology to transform the financial industry, but it still needs to held finance in awe.
On 18th May 2012, the biggest IPO ever then, Facebook got listed in Nasdaq.
This day was bound to be a special day in history.
It was a huge celebration before the IPO bell ring, but to everybody’s surprise, Facebook didn’t have an opening price!
Technology was Nasdaq’s proudest strength, but it was the technical problem that caused the exchange system to malfunction at the most important moment. The only things that can do then was to suspend trading, modify the code, update the system, and get the opening price again.
Everything went bad.
Facebook’s stock price was going down and down, and lost almost half of its IPO value in about three months.
“To a significant degree, I saw the culture created in my Nasdaq engineering team as being responsible for the troubles we ran into with the IPO. Indeed, my übertalented development team had decided to make the perfect the enemy of the good. But that didn’t mean that there was a natural person to let go.”
Lost money, lost face, and the apology was too late.
Whatever made you succeed, made you fail!
Leave a legacy at Nasdaq
To make big changes to the industry, a company should focus on not just the business side, but also its internal incentive mechanism for management.
Nasdaq made reorganization considering its internal culture among all its subsidiary companies across the world. It established incentive mechanism focusing on
- individual performance
- company performance
- corporate goal
- equity ownership
- employee satisfaction
Only when innovation becomes a tradition, can a company achieve continuous and sustainable growth.
Nasdaq had set up an internal Venture Capital department, called the “Gift Council”. This council aimed to support internal innovation with the necessary funding and resources. For example, the Nasdaq Private Markets (NPM) tried to form a “secondary market” for stock options of unicorn company employees.
As early as 2015, Nasdaq internal team had already used the blockchain technology to develop a system for clearing and settlement.
Unfortunately, these projects hardly had any chance to be shown to the public or to be used in live business activities, and very few outsiders knew about them.
Even when the bestseller book “Flash Boys” (published in 2014) wrongly reported Nasdaq’s trading volume with respect to high frequency trading, no one officially or unofficially responded, until Greifeld briefly mentioned it in his book released in 2019.
Every party in the financial world will end, but it will actually resume in another way.
Nasdaq had arranged the next CEO to succeed Greifeld.
At the beginning of 2017, Greifeld completed his 14 years’ services in transforming Nasdaq, changing the US financial industry, and influencing the world’s financial market using technology.
He joined a high-frequency trading hedge fund, Virtu. He still maintained collaboration with Nasdaq. For example, they were planning an acquisition of BCG, i.e. Knight Capital and Getco.
Greifeld’s story continues.
When you are reading this book, the US stock market seems to be at a level that is similar to the internet bubble period before Greifeld join Nasdaq.
Market may inevitably crash and the bubble will burst.
So who will lead the next generation Nasdaq that will revolutionarily change the world? Satoshi Nakamoto?