When Alfred R Berkeley III got the first phone call last fall, asking if he would like to be considered for the presidency of the Nasdaq Stock Market, the then 50-year-old investment banker had a few more urgent matters on his mind. He had just been diagnosed as having early-stage prostate cancer and surgery was imminent.
Fast forward to June 1 of this year, when the now 51-year-old Berkeley, having had the cancer successfully removed, took up his new post as the top executive at the world’s second largest – and recently most controversial – stock market.
One hurdle down, a universe more of them to go.
Berkeley left his post as a managing director at Baltimore-based investment bank Alex Brown & Sons to take the top Nasdaq job. He has now found himself settling into the screen-based market’s Washington DC headquarters at a particularly momentous time in its 25-year history.
Reeling from what The Economist described as a ‘year of public relations disasters’, the giant electronic trading system has seen its image as the robust, go-go financial home for many of America’s emerging technological and entrepreneurial superstars tarnished. Perceptions abound that the playing field has been tilted in favour of large members at the expense of small investment firms and individual investors.
Certainly the stakes are high: Nasdaq has an average of 600 mn shares of 5,300 or so listed companies traded daily by some 540 market makers linked to each other through computer and phone ties. From the giant Microsoft itself to thousands of Bill Gates wannabes, Nasdaq has become the market of choice for technology-based issuing companies, and many more besides.
The background to the bad press is a bit complicated, involving the interplay between large and small Nasdaq market makers and a series of steps the market took in the aftermath of the 1987 crash. Back then, small investors complained that market makers were ignoring them. In response, the NASD (the National Association of Securities Dealers, until recently Nasdaq’s parent) forced market makers to use its SOES (Small Order Execution System) to push along small trades.
But in yet another example of how the introduction of new technologies can have wildly unexpected consequences, some dealers at small market maker firms – dubbed SOES bandits by the media – figured out how to profit from a discrepancy between quotes on different screens. That, in turn, led to a series of NASD regulatory moves that ultimately prompted claims that Nasdaq was biased towards its bigger members.
Those charges were given new life in a 1994 academic study that alleged share price manipulation; and they were taken seriously enough to prompt the Securities and Exchange Commission and Department of Justice to launch investigations. The NASD, in what has been reported as an attempt to preempt new government regulation, launched its own review panel, headed by respected former Senator Warren Rudman.
Then last September the Rudman report was released. Among its recommendations was that Nasdaq be spun off from the NASD, with its own chief executive reporting to an independent board drawn from a wider range of broker-dealer, issuer, buy-side and public interest representatives. The Rudman Commission also recommended that the regulatory and oversight duties previously housed with the NASD be turned over to an autonomous group with its own board and chief executive.
The Rudman proposals were accepted, which in turn sparked the search for a new CEO to head the now reorganised Nasdaq. That Berkeley should be tapped for, and then have accepted, the job seems to bode well for Nasdaq’s ability to rebound and prosper. Courtly and gracious, he no doubt will be a calming influence in the still fractious balancing of interests among investors, market makers and listed companies.
Berkeley’s short-term charge is to deal with those brush fires that smoulder, including ongoing government probes and lawsuits by Nasdaq investors against a handful of market makers, that are still inching their way through courts. (Nasdaq itself is not a defendant in the investor litigation.)
Another concern is to lure more market makers back to manage trading in more companies (some have been scared off by the price quoting differences and resulting threats to orderly market making). That is critical to maintaining liquidity and creating a flow of information and analysis that keeps investors confident.
‘There has been a tendency to point to conspiracies among the large players here and perhaps for the casual observer to perceive that the market is coming apart,’ Berkeley says. ‘I have seen absolutely no evidence of that. What we have seen is the result of different levels of investment in technology by our members, and the impact those differentials have had on the market’s ability to function properly. The essence of the tugs and pulls at Nasdaq comes from changes in technology.’
‘Faster systems being employed at varying rates across the Nasdaq network have really been the key issue here,’ says Berkeley. ‘We’re seeing more volume, more complexity, and that can only cause some unpredicted stresses to develop. Clearly, a new paradigm is emerging and it’s our job to apply our experiences to see if we can see now what that paradigm will look like.’
Berkeley now takes on the job of introducing Nasdaq’s new NAqcess trading system, which proponents say will go a long way towards levelling the playing field between large and small participants.
‘In some respects, Nasdaq is a shared-development community, and we must work to make sure that the technology is being implemented at a similar pace,’ he says. Longer-term, Berkeley sees tremendous opportunity for Nasdaq investors through the Internet’s World Wide Web.
‘One key job for me is to address the discrepancy of information available to individuals. We’re looking now at ways to harness the Web as an information dissemination medium,’ Berkeley says. ‘My mission is to put the interests of the individual investors first, and technology can be a catalyst to accomplishing that. We’ll be moving quickly on this front.’
Will we ever see the day when individual investors can make direct Nasdaq trades through the Internet? ‘If the transaction processing does indeed get more secure as predicted, then yes, we most likely will,’ he says.
But while technology will continue to be an impetus for change at Nasdaq and other financial markets, Berkeley cautions not to read too much into its ability to spark a fast revolution. ‘Technology may well cause some dramatic changes, such as perhaps the unbundling of research from execution. But the Internet in and of itself will not cause the overnight upheaval some people predict. Markets today represent the anvil of experience, and every rule came about because of some excess. All the problems inherent in any financial market will exist, whether the communications platform becomes the World Wide Web or not.’
Still, technology will remain a major theme in Nasdaq’s future, according to Berkeley. ‘We think we have the right technology model in place to bring the market to the people. Technology will help us ensure fairness.’
In Europe, Nasdaq will continue to support the planned roll-out later this year of the Brussels-based Easdaq, a screen-based market being launched by the European Association of Securities Dealers. Nasdaq holds a small equity stake in the venture.
‘We see our investment in Easdaq as making the whole pie bigger for all of us, not in helping to fund a new competitor,’ Berkeley says. ‘Entrepreneurship and innovation have been the engines of growth in the US and they could be in Europe. Easdaq will go a long way to keep the European venture community growing.’
Berkeley comes to his belief in technology through his track record as a highly successful investment banker at Alex Brown. Joining as a research analyst in the early 1970s after a stint in the Air Force, where he worked on the US military’s giant Univac systems, the University of Virginia graduate and Wharton MBA rose up through the Alex Brown ranks. In 1975, when fixed commissions were abolished, Berkeley and others designed a game plan for the firm to focus on vertical markets, most notably the then embryonic software industry.
The move paid off, for Alex Brown and for Berkeley. Since the mid-70s, the firm has grown from just $15 mn in revenue to an $800 mn-a-year powerhouse, well known for its expertise in financing technology companies and then managing the wealth of successful entrepreneurs. The firm has used revenues from the software and related industries to finance moves into healthcare and other vertical niches.
Berkeley declines to discuss his own financial success, other than to say that he has been ‘very lucky in my career’, but according to The New York Times he is taking a ‘substantial’ pay cut to join Nasdaq.
Friends who know Berkeley in his off hours describe a sincere man who is low key and unassuming. Among his passions is a routine of mile-long late afternoon swims at a private lake community in northeastern Pennsylvania where he and his wife maintain a weekend and summer home for themselves and their three daughters.
In picking Berkeley, Nasdaq’s board no doubt was intrigued by his research and technology background, and by his perspective as both a manager and an investment buyer. But why does a successful investment banker at the pinnacle of a lucrative career now seek the public scrutiny of running a very visible financial market?
‘I know this might sound corny, but I saw this as a way to give something back. I’ve learned a lot about what technology can do if it is used correctly, and now I think there’s a great chance to apply it as a means of lowering the cost of capital,’ he says. ‘There are big challenges ahead for the US and other countries to keep evolving out of the industrial age. Efficient capital markets will be indispensable in that process. If during my watch I can make some progress in giving more individual investors their chance for success, well, then the move will have been totally worth it.’
