Editor’s note: this is the first in a series of profiles of stock markets around the world. Please note that it presents Nasdaq’s perspective and omits other, possibly conflicting, points of view.
Al Berkeley proudly refers to Nasdaq as a ‘status quo buster.’ He is the stock market’s vice chairman, and if there’s one thing of which he is certain, it’s Nasdaq’s place in history. In the gospel according to Al, three important things happened to the US economy in the 1970s: capital gains taxes were dropped; legislation created fertile ground for venture capitalism; and Nasdaq was born. The net result was a shot in arm for Uncle Sam’s entrepreneurial culture. Nasdaq provided a place where companies with nothing but a good idea could find funding, and where innovative investors could put their money to work.
‘Nasdaq gave people a chance to come into the game with nothing but their wits and their energy – and make it,’ Berkeley boasts in a slight southern drawl. ‘This was the market for outcasts, for companies that supposedly weren’t good enough to get on a traditional exchange, and for brokers and dealers who weren’t good enough to have a seat on a traditional bourse.’ Today those who want to participate in the broker-dealer market have to take a knowledge test and an ethics test, and to pay their $5,000 NASD membership fee.
Indeed, Berkeley has a lot to talk about right now. The exchange is on the cusp of launching its much-anticipated SuperMontage trading platform. It is unveiling a new Market Intelligence Center, which will allow corporate executives and Nasdaq directors to discuss market activity throughout the trading day. And it is introducing upgrades to Nasdaq Online, which Niri members voted the best online resource for market information.
These changes come not a moment too soon. The Nasdaq Stock Market, whose name was synonymous with 1990s economic growth, has suffered a stinging backlash by having been perhaps a little too closely associated with the dot-com bubble. Between 1996 and 2002 more than 1,500 companies – dot-com and otherwise – have delisted, merged, been acquired or jumped ship for a listing elsewhere. Nasdaq’s share of trading has been splintered by the proliferation of alternative trading systems (ATSs) and electronic communications networks (ECNs) like Instinet, Island and Archipelago. And despite Berkeley’s optimism, the real question remains: will Nasdaq’s forthcoming changes substantially improve the market for issuers?
Three words
The world’s largest electronic stock market is not limited to a physical trading location. Instead, trading is done through Nasdaq’s computer and telecommunications network, which transmits real-time quote and trade data to more than 1.3 mn users around the world.
‘You can tell the story in three words: liquidity, liquidity, liquidity,’ Berkeley asserts. ‘That’s all that really matters in a market. If you want to go down to the store to buy a can of peas, there’s two things you want. You want the door to the store to be open, and you want the peas to be on the shelf.’ In Nasdaq’s case, if you’re an investor who wants to trade shares in a company, you want access to the market and you want the other side of the trade to be available. ‘Having the other side of your trade is what markets are all about. It’s their raison d’être. It’s what all of the technological investments are for, it’s what all of the rules are geared towards and it’s what all of the promotional activities are about.’
Berkeley claims Nasdaq’s trading model consciously emulates that of the world’s most liquid market, forex. In the markets for dollars or euros, he observes, the spreads are razor thin, the depth of how much can be traded is enormous (50-60 times larger than the equity markets), and trading is open 24 hours-a-day. The currency market is global by nature. So, he says, is the Nasdaq model.
‘Our market structure and the currency market share the wonderful attributes of being fundamentally inclusive, whereas the traditional bourse model is fundamentally exclusive,’ Berkeley explains. ‘We allow an unlimited number of people to come in and trade any stock. Compare this to the American or New York Stock Exchange where they have a limited number of seats. You have to buy someone else out to get a place at the table. The world needs open access to the facilities of commerce, and Nasdaq provides open access.’
In fact, that’s what the Nasdaq market model is all about: creating competition for competition’s sake, which drives performance (in this case, the trading of stock) to a higher level of efficiency. Without size limitations or geographical boundaries, Nasdaq’s open architecture allows a virtually unlimited number of participants to trade in a company’s stock.
As Berkeley points out, Nasdaq’s open market fosters innovation – in both the investor and issuer communities. Since the barriers to entry are low, only those bringing something new to the marketplace can win market share. For example, Charles Schwab gained market share by leveraging the discount brokerage model. E-trade and Datek leveraged electronic trading over the web. Before them, Donaldson Lufkin & Jenrette and others competed on the basis of research in the 1960s, and the traditional Wall Street banks like Goldman Sachs and Morgan Stanley competed on the basis of capital. According to Berkeley’s logic, it’s only natural that the ECNs have built their success through the Nasdaq market.
Reclaiming the pool
After seeing liquidity siphoned off by other trading systems for years, Nasdaq is now poised to bail it all back with the introduction of SuperMontage in July. According to Nasdaq vice chairman David Weild, the new trading system will provide market participants with more information and a more efficient means to act on that information. SuperMontage will concentrate quotes and orders within a single computer architecture. Whereas traders now see only one price level on their screens, with SuperMontage they will see five. ‘Traders will have a higher level of confidence in their trades,’ Weild believes, ‘and they will be able to execute electronically, instantaneously, without having to worry that a human has to go to a trading floor and might miss it.’
SuperMontage will also provide anonymity, which is important to investors who want to keep their moves hidden, observes Sang Lee, an analyst with Celent Communications, a consulting and research firm. Lee believes anonymity was one of the advantages ECNs originally offered investors; however the introduction of SuperMontage may send most of the ECNs packing. ‘Their existence has been based on fast execution, anonymous trading and the ability to thrive on a fragmented market structure. If that disappears, the rationale for their existence really goes out the window,’ he surmises.
Already the Island ECN has announced it will join the SuperMontage system, and Lee believes others may have to follow suit if they want to survive. If they do join, SuperMontage could claim 60-70 percent of Nasdaq liquidity. ‘Nasdaq is also trying to have regional exchanges link up with SuperMontage,’ which would create a truly centralized marketplace, he says. ‘If you look at the NYSE, despite criticism, the fact remains: they own 80-85 percent of their own market share in terms of trading. Everything is centralized on the trading floor.’ SuperMontage could bring Nasdaq comparable proportions.
So what does SuperMontage mean for issuers? Obviously, more liquidity in a single market means more investors participate in that market, which in turn attracts more investors. Liquidity begets liquidity. ‘The bottom line is that if you can appeal to more investors, then the marginal buyers are the ones who are going to dictate where your stock trades,’ Weild says. ‘If you look at where we are today, Nasdaq’s execution costs are lower than the NYSE’s. Spreads are now tighter, too, particularly in the large-cap sector. This means the frictional cost to investors is lower. Speed of execution is significantly higher, which means you don’t have the risk of the stock price moving away from you while you try to purchase stock.’ Translation: SuperMontage is good for investors, and what’s good for them is good for the companies they invest in.
Intelligence upgrade
These days, Bob Power is all smiles. Not that he wasn’t often smiling before, but as Nasdaq’s senior VP, corporate client group, he is going to be heading up the new Market Intelligence Center, which he predicts will greatly aid Nasdaq companies.
Launching at the end of July with a beta group of about 100 companies, the center will have dozens of Nasdaq personnel who will communicate market activity to Nasdaq companies. This represents a new, proactive direction for Nasdaq’s issuer relations. ‘We will call a company if there is unusual activity in the stock or if we notice something that we think they would find interesting,’ Power explains. ‘It could be something in a particular sector, something in the overseas markets or anything coming out in the news that we will be privy to. We’ll call them up.’
In the past, if Nasdaq ever contacted a company to discuss trading activity, it usually signaled some kind of regulatory concerns, Power admits. ‘Now we’re going to be communicating much more information,’ he assures. ‘We almost look at ourselves as consultants. We want to convey what’s meaningful to a company and then help interpret that information.’
Before the end of the year, the Market Intelligence Center will be servicing all Nasdaq companies, and shortly thereafter, Power predicts, it will begin sending routine e-mails to companies with information about what goes on with their stock during the trading day. ‘What is really going to matter is that we make a difference in what [issuers] do. If we make their lives more informative then they get to make better business decisions.’
Power believes that just as Nasdaq Online became the benchmark product for online market information, the Market Intelligence Center will set the standard for serving CEOs and CFOs in a real-time environment. Corporate executives will have an 800 number, so if they find themselves on the road when something unusual happens they can call the center to get their questions answered. Of course Power hopes Nasdaq calls them first.
The center will also have a group devoted to its nearly 500 non-US companies. It will develop programs to help non-US companies meet with US investors and vice versa. These are baby steps toward its eventual goal – to link North American, European and Asia-Pacific markets.
Power believes these types of enhancements translate to higher issuer satisfaction, and he points to the numbers as proof. In 1997 there were 86 companies that left Nasdaq for a listing on the NYSE. Last year there were 32. In the first four months of this year there have been only eight. As for liquidity, Berkeley reckons Nasdaq will win out here, too, alleging liquidity is drying up at the NYSE and the old bourse markets, while at Nasdaq it is on the rise.
While the NYSE may boast that it gains more companies from Nasdaq than it loses, Berkeley says the NYSE has rules to keep companies from leaving, whereas his market does not. Nor does it want to. ‘You can’t get off the NYSE because in the fine print there’s Rule 500 that says you can’t leave without going through a lot of hoops that no CEO would go through.’
Rather than fight this out in the legal field, Berkeley says he’d prefer to fight in the marketplace, through performance. ‘Our attitude is, we’ll just keep making our market better. We have a sense of inevitability at Nasdaq. We will ultimately win this battle because we will continue to innovate, we will continue to invest, and we will continue to welcome all comers.’
Nasdaq evolution
1971 – On February 8, the NASD’s Nasdaq Stock Market launches.
1984 – Controversial small order execution system (Soes) is introduced to execute small orders automatically against the best quotations.
1990 – Online screen negotiation and execution service SelectNet debuts.
1994 – Nasdaq surpasses the New York Stock Exchange in annual share volume.
1997 – Implementation of order handling rules.
1998 – Nasdaq and the Hong Kong Stock Exchange partner to provide investors worldwide with information about their respective markets.
1999 – Nasdaq becomes the largest stock market in the US by dollar volume. In June, Nasdaq signs an agreement with Softbank Corporation to jointly capitalize a new company, Nasdaq Japan. This becomes the first leg in Nasdaq’s global strategy to link Asian markets with European and American markets.
2000 – NASD membership votes to spin off Nasdaq into a shareholder-owned, for-profit company. Nasdaq completes the first phase of its restructuring. Nasdaq formally opens its state-of-the-art MarketSite in New York’s Times Square.
2001 – Phase II of NASD’s private placement is completed. In April, Nasdaq acquires Easdaq and renames it Nasdaq Europe.
2002 – Nasdaq to launch SuperMontage and Market Intelligence Center in July.
