Nasdaq Makes First Share Trade Using Blockchain Technology
Telegraph, December 31, 2015
How do you wake up every day with fresh eyes, ready to pursue change, growth, and innovation? It doesn’t matter what company or what industry you work in; this is an ongoing challenge of leadership. A mantra I would often repeat in the halls of Nasdaq was this: Once you achieve competency, you must battle complacency.
Ironically, this particular challenge can be easier when times are hard. If competitors are breathing down your neck, it’s not difficult to feel the urgency of change. When the business is under existential threat from market forces, the motivation to improve comes naturally. The imperative to evolve is taken care of, we might say, by selection pressures within the market ecosystem. But once you have achieved a significant level of competency in your business, the internal cultural dynamics shift. Success is undoubtedly a wonderful thing, but it comes with new business realities that good leaders must appreciate. Finding the right mixture of consistency and change, institutional stability and constant improvement, efficiency and innovation, is always a critical goal of enterprise leaders.
At Nasdaq, my aim was that we should always be reorganizing a little bit every day. Change, I believe, should be part of a healthy organizational culture. Obviously, there are certain times in the life cycle of a company when larger and more dramatic shifts are needed. My early tenure at Nasdaq was one of those times. But change should not be reserved for moments of crisis and increased market pressure. In fact, when I read about companies undergoing massive reorganizations, I think that more often than not it is the result of a miscarriage of leadership. Dramatic, one-off reorgs are really an admission that management hasn’t been doing the hard work of continuously improving the business in little ways, all the time, so now they have to compensate by doing it all at once. Large reorgs are blunt instruments that inevitably cause collateral damage. They are like a massive hammer blow, when a carefully wielded scalpel does the job much more effectively and without the organizational trauma. Indeed, high-functioning organizations are endlessly building on their success; purposefully and actively looking at all the ways that things can be better, smarter, and more efficient; paying attention to their competitors; thinking about the future; and exploring new pathways of innovation.
This was the kind of organization I wanted Nasdaq to be as we moved into the second decade of the new millennium. Up till then, the industry-wide move to electronic markets, internal culture changes, SEC rule changes, a spate of transformative acquisitions, and the great recession had combined to provide a naturally shifting landscape that kept us all on our toes. But now we were entering smoother waters. The financial crisis was a few years in our rearview mirror, and while the economy was still recovering, the markets were generally healthy or moving in that direction. Nasdaq was beginning to reap the benefits of good strategic decisions made in the previous business cycle, and as the economy improved, we started to feel the wind at our backs. That’s not to say everything was easy; we were continually pressed by circumstance.
In some respects, in fact, the financial crisis and the ensuing struggles in the economy had just temporarily obscured the success story that Nasdaq had built over the previous decade. The investments we had made and the strategic acquisitions we had pulled off, including the purchase of OMX, positioned us well to ride the emerging economic tailwinds. It can be difficult to know who is strategically well positioned when an economic downturn is depressing everyone’s prospects. But as things picked up in the broader economy, our fundamental strength was beginning to show.
There were, of course, plenty of moments of drama in those years—the Flash Crash, Hurricane Sandy, new acquisitions, changing markets. Each of them presented challenges that our team had to rally and respond to. But none compromised the fundamental trajectory of well-functioning markets, expanding business opportunities, growing revenues, and a successful equities franchise. Quarter after quarter passed with larger profits, good margins, and a stock price headed up. Little by little, the IPO market was recovering from the downturn. We continued to win new listings, bringing new tech companies into the fold even as we convinced older technology franchises to switch and join the Nasdaq family.
Our team was also maturing and flourishing. By 2013, Nasdaq had a new Corporate Communications Chief and a new CIO, and our young executives were growing into highly effective leaders. Many of the OMX team had not only adapted to Nasdaq’s culture but embraced it enthusiastically and enhanced it. Their abilities boosted Nasdaq’s talent pool significantly.
This was a time in which billions of dollars poured into biotech companies and their IPOs, in some cases raising money for promising drugs that were many years away from passing key trials, gaining regulatory approval, and making it to market. Such long-term time horizons are an important function of public markets—to provide that belief and long runway that allow time for a medical breakthrough (and business plan) to come to market. As I watched immunotherapy startups gather investors and capital for their moonshot efforts to improve cancer treatment, I was especially proud of the role Nasdaq played in helping them.
Building a Technology Franchise
In my previous incarnation as an entrepreneur, I had always loved software businesses with recurring revenue. That was what we had built at ASC, and I truly think it’s one of the best business models out there. At Nasdaq, in addition to our transactions business, I worked to build our software and services franchise. This was enabled by the purchase of OMX and their exchange technology business. As emerging markets grew stronger, demand was growing all around the world for customized solutions to power market exchanges. Over time, we expanded on the basic order-matching technology of the business and built or acquired significant new functionality.
The 2010 Flash Crash, and subsequent issues, had taught us a number of things about the new world of electronic markets. As markets became more automated, it became more important that the inputs into those massive order-matching engines were carefully reviewed on the front and the back ends of the trade to avoid potential pitfalls. Knight Capital had provided a dramatic example of what can go wrong without that careful analysis, when a software glitch cost them several hundred million dollars of errant trades, forcing their sale to Getco in late 2012.
The existential fear of such disasters helped drive interest in our new suite of tools and spurred us to make them more robust. We developed new surveillance technologies, adding a level of heightened security to our exchange offerings and expanding the reach of our market. We initiated development efforts to integrate machine learning, AI, and big data into Nasdaq’s suite of products. Electronic markets were not going away; quite the opposite. But now that they’d been around a few years, and some of their dangers and downsides had been revealed, I wanted Nasdaq to be the best at providing much-needed security and protections. By 2013, our market technology business served over seventy exchanges, clearinghouses, and depositories in fifty countries. It generated nearly $200 million in revenue and was growing quickly.
Consistent, recurring revenue is always a boon for a business, and it protects against the highs and lows of onetime sales or individual deals. As a public company, of course, every quarter you have to disclose your financials. In that sense, running a public company is an endless series of quarters. Many are concerned today that such short reporting periods incentivize companies to focus on short-term returns at the expense of long-term strategic thinking. There is no doubt that as a leader of a public company, one has to quickly adapt to the unique rhythm of quarterly reporting. But in my case, it didn’t constrain my focus. In fact, knowing I was going to have to constantly report earnings every quarter helped me concentrate on the longer-term trend line of our earnings. It made me less concerned about the specifics of any single quarter and more concerned about the direction we were headed in.
“Worry about the trend line, not the slope,” I would tell my team. Real change takes time. I was always much more concerned about ensuring that change was happening, that we were really moving forward, than I was about the speed at which we were moving. Too often, change is a mirage. The most important thing is to make sure it is real. When you can actually measure organizational change over time, then you know it’s happening. The same applies to any kind of change process: losing weight, becoming a faster runner, learning a new skill. Measurable, consistent results, however small, give everyone confidence. Then you can worry less about exactly how fast it’s going from day to day or month to month, or quarter to quarter.
I never wanted us to deliver something unnatural in any given quarter. If we were straining too hard to make our numbers, it was a bad sign. It would only compromise the future. Are we improving? Are we headed in a positive direction? Is our competitive standing strong and improving, relative to the market? Are we meeting our customer needs? Those were the more critical issues to pay attention to.
Quarterly numbers should reflect the organic progress of the business. There is a lot of pressure in the markets to have a huge success each quarter, which will boost the near-term stock price, but good CEOs avoid getting caught up in that loser’s game. Recurring revenue and the software and services business helped Nasdaq operate on more consistent terms.
In addition to market technology, the other new business line we built around recurring revenue was Corporate Solutions. The ever-complexifying rules and reporting requirements necessary to list on the public markets created a new business opportunity to assist companies in meeting the regulatory demands. This was a natural extension of Nasdaq’s expertise. We built Investor Relations websites for companies; offered a press release distribution business; developed a suite of tools for Investor Relations teams; and bought a company called Directors Desk, which helped provide software to administer Board-level meetings with easy-to-use and secure applications. Running exchanges for equities trading in the United States and Europe was still our bread and butter, but little by little, Nasdaq was becoming a larger and broader company.
The Gift Council
Nasdaq expanded through acquisition, but we also grew through internal development and innovation. From day one, I had instituted a high degree of fiscal discipline at Nasdaq, what I called a weigh-measure-and-count organizational culture, and I made sure everyone bought into that way of thinking, from my executive team to the troops on the ground. But even as I saw the success of that approach, I also knew I needed to balance the cost-conscious culture with an emphasis on longer-term innovation. Nasdaq ran lean and we ran efficiently. But efficiency and innovation are not generally in the same operational family. They are distant cousins at best, feuding rivals at worst. How to make both feel comfortable under the same roof? Indeed, we needed to find ways to institutionalize an innovative mind-set without compromising our operational mojo.
In order to achieve this, I decided to take a page out of John Chambers’s playbook and create a space for innovation that was decoupled from people’s regular operational budgets. At Cisco, Chambers set up internal business councils to evaluate new business ideas. I sat through a presentation about Cisco’s approach and loved it. So I did something similar at Nasdaq, adapting it for our context. We called it the Gift Council, and it basically functioned like an investment committee at a VC firm. Individuals would present to the council on interesting, innovative opportunities, and if an idea was deemed promising and approved for funding, the money Nasdaq invested in that project would not count against the budget in the operational area of the individual who had proposed it. In exchange, the Gift Council required that that person give up some sovereignty over the project and submit to it being closely tracked by the council through its startup-like phase.
That may sound simple, but for a large company wedded to fiscal discipline, it was like trying to engage another side of the brain. The metrics for Gift Council projects had to be entirely different from our normal operational metrics; otherwise, the fiscal discipline of our culture would eat those nascent projects alive before they could show their true potential. We hoped that this approach would provide a way to be respectful of short-term fiscal discipline and cost control while still priming the pump of longer-term innovation.
Some companies create an entirely separate research-and-development structure to nurture new initiatives. On the upside, this can solve the problem of creativity being killed by the thresher of financial discipline, but it has its own built-in problems. Even if you successfully create a highly innovative operation, it’s easy for it to become organizationally bureaucratic itself and cut off from the rest of the business. The famous Xerox PARC, the R&D arm of Xerox, was a highly creative organization and the fount of many world-changing ideas (like the laser printer and the graphical user interface), most of which were never taken advantage of by Xerox! With the Gift Council, I was trying to have the best of both worlds, providing a place for business units to protect and nurture innovative ideas while keeping them close to the business and subject to the right kind of discipline and oversight. By the end of 2012, new business ideas that were nurtured under the auspices of the Gift Council had generated $134 million in revenue. And that number was growing quickly.
One of the most interesting projects to emerge from the Gift Council was an initiative called Nasdaq Private Markets (NPM). The development of NPM is a unique story of how Silicon Valley, venture capital, cryptocurrency, and Nasdaq all came together in a happy marriage.
Blockchain and the Rise of the Unicorns
As the economy recovered after the financial crisis, Silicon Valley led the way. By the end of the 2000s, Nasdaq’s favorite business corridor was thriving as never before, and money was pouring into the coffers of venture capitalists looking to provide growth capital to the next great startup. It was a boom that resembled in intensity and scale the boom of the late nineties, but the funding model was entirely different. At the beginning of the internet era, it had largely been Nasdaq’s marketplace providing public funding to hundreds of early-stage startups, most of whom had few alternative sources of capital. Venture capital provided seed funding in the range of maybe $5 or $10 million, but beyond that, companies needed the public markets. In a sense, we were the primary game in town if you needed significant amounts of money. But by the end of the 2000s, the game had changed dramatically. Billions of dollars were flowing into venture capital, and young companies didn’t need to tap the public markets until much later in their evolution. Moreover, regulatory changes and the demands of being a publicly traded company further incentivized growing companies to remain private for longer. Startups postponed their IPOs and raised additional capital, even as they grew into companies worth hundreds of millions, and in some cases well over $1 billion. The number of these so-called unicorns (private startups exceeding billion-dollar valuations) was growing every year.
In some cases, these startups were bought up by bigger technology firms—like Google, Cisco, Microsoft, and others—who were using the growing startup ecosystem almost as a replacement for R&D. Cisco, for example, was a serial acquirer of companies that once upon a time would have gone public and joined the Nasdaq ecosystem. The same is now true of Google, Apple, Microsoft, and many other large technology companies. In addition, many firms launched large venture capital arms of their own, adding bigger and bigger pools of available money to the technology ecosystem.
The advent of these well-capitalized, privately funded teenage companies—like Uber, Lyft, Stripe, Airbnb, and many others—created a conundrum. Employees in those firms naturally had much of their own wealth tied up in relatively illiquid stock options. It’s one thing for an employee to hold those options for a few years before they become liquid with an IPO. But now, that time horizon was getting longer and longer. Inevitably, people needed access to their money—to buy houses, pay medical bills, or send kids to college. If they couldn’t count on the company going public, they needed ways to cash in those options in some other kind of a liquidity event.
Initially, certain law firms in Silicon Valley would facilitate trading of pre-IPO private-company shares of stock, but as the need increased, so did the opportunity for a new “second market” or “private market”—a venue to facilitate trading in those options. Two new companies, SharesPost and SecondMarket, formed to serve this need. For Nasdaq, this was a call to arms: If a new, semiprivate trading market was forming in startup options, why should we cede the business to upstarts? It was a natural extension of our strengths, and soon we decided to get in on the game as well.
In 2013, using Gift Council funding, we developed Nasdaq Private Markets in collaboration with SharesPost, a new venture designed to bring some order, efficiency, and liquidity to the trading of stock in private growth companies. It also proved to be an important way to develop and deepen our network of relationships with new talent in the Bay Area’s significant stable of young companies. A couple of years later, we bought SecondMarket and consolidated this new trading venue around Nasdaq’s brand.
It is often said that innovation happens on the boundaries of the establishment, where new ideas can take root without being squashed by the conventional order of things. As an incumbent player in the financial ecosystem, Nasdaq needed to cultivate an awareness of what was going on outside our ecosystem that might be disruptive in the future. And once we had identified those technologies, we needed to figure out how to bring them inside our walls, so to speak, and embrace them, showing a pathway to their adoption without overly compromising existing technological infrastructure.
In this spirit, Brad Peterson, Nasdaq’s CIO, started a series of internal conversations among a few leaders about new disruptive technologies that might be coming down the road. During one off-site strategy session in May 2014, we did a session on quantum computing and an interesting new technology called cryptocurrency—including something called Bitcoin, which few people had heard of back then.
As we explored the ins and outs of this exotic new financial instrument, it was hard to ascertain its significance for Nasdaq, if any. It just didn’t seem to have any immediate relevance. But at a certain point, we realized that the jewel of Bitcoin wasn’t its use as a currency; it was the technology that underlies it—blockchain. Blockchain is the unique database technology upon which many cryptocurrencies depend.
Blockchain is a powerful, decentralized, distributed ledger system that is highly secure. For a company like Nasdaq, it’s a technology that is right in our wheelhouse—after all, we are experts at facilitating trading and transactions, and blockchain is aimed at transforming the way we conduct digital transactions. Brad and I and much of the executive team spent hours discussing this technology—how it worked, how it might be used, how it would change financial markets, and how Nasdaq might pioneer that endeavor. We became early experts on blockchain and its application potential.
Transactions technology in the public market is so well established that it was hard to imagine trying to take this entirely foreign technology and throw it immediately into the mix with the existing networks of banks, clearinghouses, and exchanges. But what if we were to start from scratch in a market that we controlled, one that was not already burdened with so much existing legacy technology? Nasdaq Private Markets began to look like the perfect opportunity to test out this interesting new technology.
In 2015, we launched a service on NPM using blockchain technology that was able to execute, settle, and clear a given trade and then move the money in ten minutes—a fraction of the time it takes in other markets. If you make a trade today in the public equity markets, it takes two days to settle and clear. Rarely has there been a more dramatic example of the future staring us in the face. There is a lot of work to be done to integrate this technology into our financial systems, but I genuinely believe it has tremendous promise. Blockchain is not yet ready for the microsecond, superfast world of equity trading. I believe its real strength, at least for the immediate future, is in settlement and clearing—on the back end of trading, so to speak. That’s where its initial impact is likely to be felt. I was thrilled to have Nasdaq be early to market with an application demonstrating its potential. As an established player, Nasdaq needed to embrace the technology, affirm its relevance, and show the evolutionary path to its adoption in the industry. Blockchain has great potential, though the scale of its impact is yet to be seen.
Flash Boys and the Need for Speed
Toward the end of my time at Nasdaq, we received some pointed reminders that stock markets must continue to guard against complacency, and be on the lookout for new forms of inefficiency and new avenues for innovation. In 2014, a particularly public (though overblown) alarm was sounded: According to a new book by best-selling author Michael Lewis, an army of unscrupulous “high frequency traders” (HFTs) were operating in the microsecond gaps between buyers and sellers and profiting from their superior speed at the expense of investors. Furthermore, he claimed, these “flash boys” were enabled by the established Wall Street players.
To understand the HFT phenomenon and separate the facts from the hype, it’s important to understand that the search for speed in financial markets is hardly novel. From the fastest horse to the telegraph to the rotary phone to a quick-dialing handset to satellite dishes to fiber optics to point-to-point microwave to the quickest algorithm, traders have always used technology to gain information advantages and outpace competitors. The Rothschilds famously used carrier pigeons in the early nineteenth century to gain an information advantage that would allow them to profit in London’s financial markets. And when I was at ASC in the mid-1990s, one of my business lines was selling new wireless communications equipment that would allow individuals standing on the exchange floor to quickly send information up to a trading booth, giving them a brief time advantage over those relying on the less-than-athletic runners.
Later, I was fortunate to be part of a collection of outsiders—motivated by high ideals and armed with ones and zeros—who stormed the castle of old-style, floor-based Wall Street trading, breached the walls, and remade the place in their image. We eradicated inefficiencies and expedited trading, eventually breaking apart what the Wall Street Journal in 2003 had bluntly described as a “monopoly” on the part of NYSE, which had “failed to adapt to a world of new technology that allows for faster… electronic trades.”
Within a few years of my arrival at Nasdaq, much of the Wall Street infrastructure had radically changed, swept aside by the electronic wave of the future. My own motives in being part of the revolution were more about effective business practices than high ideals. But I certainly shared the Journal’s perspective that we were doing the global markets a great service by breaking the hold of floor-based specialists, with their thirty-second time advantage. We changed it to microseconds, and dramatically reduced the friction and inefficiencies of the previous market-making system.
In many respects, we succeeded beyond what I could ever have imagined. In so many ways—ease of access, price of service, capacity for speed, quality of execution, diversity of products, dynamics of competition, transparency of fees—stock exchanges today serve their function far better than they ever have in history. But conquerors inevitably have a tendency to get complacent. And today’s revolutionaries have a tendency to become tomorrow’s establishment.
As the markets became more and more electronic, the need for speed moved into the virtual domain with an increasing emphasis on lightning-fast trades made in milliseconds, and even microseconds. Indeed, part of the evolution of markets in my early days at Nasdaq centered on an issue called price-time trading. Simply put, it means that if several orders arrive to an exchange at the exact same price, there naturally has to be some way of deciding which order to execute first. What’s the best method for deciding that question? The fair way—and the way the market currently works—is to privilege the order that arrives first. First in, first out. In such a world, speed matters—when price is equal, time is the most democratic differentiator. With that market reality came the need for speed—giving rise to a new kind of high frequency trading operation that bought and sold stocks in the blink of an eye, profiting on microdifferences in the price between two markets or exchanges, measured in pennies, or less. The physical trading floor had been replaced with a virtual “floor”—a series of exchanges competing to offer the best price, and superfast trading operations exploiting the differences between them.
At our data-center headquarters in Secaucus, New Jersey, where the hardware of this virtual world resided, we were developing a new type of business. We decided to sell real estate in our data center. This wasn’t just about offering customers greater execution speed; it was also about reliability. If you wanted to ensure continuous, reliable service—avoid nasty interruptions and costly downtime—it’s much safer to have a computer in the Nasdaq data center than to rely on some data connection from many miles away. We offered the safe and secure connection of a Local Area Network (LAN) rather than the unpredictability of a Wide Area Network (WAN). The service was available to everyone—big banks, investment banks, HFTs, brokers and dealers, and new trading outfits. In fact, HFTs were a minority of customers. And the critical part was that no one had a speed advantage. Some customers tried. They asked us if their computers could be a few feet closer to the matching engine servers—just as back in the day, traders on the NYSE floor wanted to be a few feet closer to the trading posts. But we built a unique “coil” that slowed down closer connections, making sure there was no time advantage to be gained by the particular positioning of any company’s computers. It was a new, cloud-based business, like Amazon Web Services or Microsoft Azure. In fact, many new trading outfits found this was the quickest and most inexpensive way to start initial operations. As with just about everything we did at Nasdaq, we did it all under the close supervision of the SEC.
After the publication of Michael Lewis’s Flash Boys in the spring of 2014, the furor in the financial media was intense and immediate. Once again, Wall Street was under attack. Lewis has a unique ability to spin an enticing narrative, and he loves to tell lionizing stories of outsider warriors fighting for an enigmatic truth against a blind or corrupt establishment. In this case, the role of “outsider” was played by a small group of individuals looking to understand the role of HFT in markets and build an alternative exchange. The role of “corrupt establishment” was played by all of us who worked at the major banks, exchanges, and trading firms.
Lewis made little mention of how markets had evolved and improved over the previous decades, thanks to the efforts of many of those people he was criticizing. No compliments were forthcoming for the efforts that so many made in the previous era to open up markets, democratize access, reduce costs, and create more efficient markets. Considering that Lewis had talked to almost no significant figures in the industry before publication, you can imagine how my colleagues and I felt about his analysis, or lack thereof.
I understand that Flash Boys was not meant to be a fully researched report, weighing the pros and cons of how contemporary financial markets are structured, but many took it as exactly that. In the wake of the financial crisis, it’s all too easy to convince the average American of hyperbolic statements like “the stock market is rigged” and “Wall Street is corrupt.” I know it’s fashionable to look at Wall Street and proclaim, “There be the demons of greed!” In a post–financial crisis world, such claims appeal to our society’s natural suspicions.
Of course, if by greed you mean the motivation to be smarter, work harder, compete better, and make money doing it, well, that’s not hard to find on Wall Street. But when it comes to protecting and analyzing markets, I don’t believe that is the primary issue of concern. The more important question is: Are the players on Wall Street following the rules established by the SEC? And if so, do those rules and regulations need to be updated to protect investors? And finally, do American equity markets compare favorably to alternative markets in the world, and to the financial markets in our own history?
For the most part, Lewis said little directly about Nasdaq in Flash Boys, which isn’t surprising given that he spoke to no one at the exchange except a former employee who had been terminated a few years before. But he did make a dramatically false claim nonetheless—stating that fully two-thirds of our entire revenue was driven by HFT. I have absolutely no idea where he might have generated such a number, but it is certainly untrue. Again, he never checked that number with us. In fact, after the publication of Flash Boys there was such concern about that number that many investors worried Nasdaq transactions revenue might collapse if the HFT industry was regulated differently. We did an internal analysis and concluded that the actual number was well under 10 percent.
Perhaps the most egregious oversight in Flash Boys was Lewis’s portrayal of the role of the SEC. They come off as minor players in his book, absentee landlords always looking the other way. I found this characterization not only inaccurate but misleading. I could hardly make a change to a line of code in Nasdaq’s order-matching computers without approval by the SEC. Our entire business model as an exchange was overseen in great detail. And much of this oversight is not something that happens away from public scrutiny. Significant rule changes at the SEC go through a painstakingly thorough, transparent, and public process. It is carefully orchestrated and open for comment. Smaller rule changes may not have the same level of public scrutiny, but again, every little change that Nasdaq makes in relationship to its exchange is being carefully reviewed and approved by the agency.
Is the SEC perfect? No, of course not. But they are hardly without teeth. They are the cops on the beat, the referees on the field, making sure the rules are enforced and followed, and updating them as needed. In the world portrayed in Flash Boys, it often seemed like the SEC was hardly involved—a mistaken impression that may have served the story of rogue foxes rummaging through the henhouse—but it simply is not the case. The SEC is a towering presence throughout the equities industry. But Lewis bypassed this point in favor of making the banks and exchanges the villains.
The book ignored the SEC, but the SEC did not ignore the book. “The markets are not rigged,” declared SEC Chairwoman Mary Jo White to a House panel in 2014, soon after the publication of Flash Boys. “The U.S. markets are the strongest and most reliable in the world.” I agree with her assessment. That does not deny that there is room for improvement. White herself spent considerable effort beefing up the SEC’s oversight of HFT firms and their practices.
I would add one thought to White’s statement. I also think that today’s market is stronger and more robust than any in history. Behind the drama of Flash Boys is an unspoken idea that perhaps things were better off before computers came to Wall Street. I think such an impression is wishful thinking.
In the last decades, almost all of the transaction cost has been eliminated from trading in equity markets. One study found that institutional costs for large cap trading fell by more than 20 percent in just the years between 2010 and 2015.1 Lewis complains that this trend of falling costs has slowed, but that is not surprising. Encroaching upon the small percentage of costs that remain is inevitably going to be more difficult. There is always going to be some friction cost to trading.
With such facts at hand, I don’t romanticize Wall Street’s past. I try to be frank and fair-minded about its present, and I hope that it will continue to evolve in a better direction in the future. No doubt that evolution will involve some bumps and bruises along the way. But that does not mean apocalypse is imminent. One gets the impression, in the pages of Flash Boys, that our current system is on the brink of implosion under the nefarious behavior of the HFT industry, and that massive instability in the market is just around the corner. None of this is true, nor have these warnings played out as he suggested they would. Since the publication of the book, markets are more resilient than ever. What has indeed proved to be true is that progress in the real world is not about moving from black to white, from bad to good, from corrupt to perfect, but rather, from one system with problems to a much better system that solves old problems and usually creates some new ones as well.
To their credit, the protagonists of Flash Boys did try to come up with an alternative approach, building an exchange with features designed to curtail HFT behavior. The “speed bump” they developed to foil the industry was innovative, but it is already being replicated and improved upon by others. To paraphrase the words of Oracle CEO Larry Ellison during the dot-com era, I suspect they have created a feature, not a business. Regardless, the market will decide, according to the rules set down by the SEC—as it should be. And a new generation of idealistic young entrepreneurs will seek once again to innovate, improve markets, and overthrow the existing elite to install a better solution. Such is the evolution of business, of markets, and of life.
The Known and the Unknown
In my early days at Nasdaq, I used to have dreams that I was jumping off a cliff, or in some cases falling off a cliff, and tumbling through the air not knowing how or if I was going to land. Sometimes that image would spontaneously come to mind even in daylight. It was a perfect metaphor for how I actually felt during that period. Being CEO of Nasdaq was an experiential leap in all kind of ways. Massive reorganizations, new technologies, global acquisitions, dealing with Washington—all of it was a thrilling adventure, a leap forward into the unknown.
But as a decade passed, that sensation was fading. The job was engaging and consuming. I was deeply gratified by Nasdaq’s growth and success. I found satisfaction in working on and solving big problems and watching the ongoing maturation of the business. But that fundamental excitement, that sense of adventure, had diminished. When you can’t see the ground beneath you, the thrill of the unknown is real. But now I could see, in some fundamental way, how the future would play out. I was familiar with the terrain. I thought I knew how we were all going to land.
To some extent, I dealt with my own need for new challenges by focusing on the future, digging into the technologies and ideas that would inform the next decade of Nasdaq’s growth—blockchain, NPM, Nasdaq Futures Market, and so on. The relative stability of the business also allowed me to make upgrades in otherwise neglected areas of the organization that might not be experiencing noticeable problems but weren’t performing to my satisfaction. One of my stock phrases during those years became: If something is not right, it’s wrong. A good leader should always be looking to upgrade people, processes, and technology.
All of these activities required my full engagement and expertise, but as the novelty and drama of the early days faded, I began to consider my post-Nasdaq life. Watching Nasdaq flourish was its own reward, but the more Nasdaq became a consistent machine, firing on all cylinders, the more I began to recognize that my time at the company was finite. At the very least, it was time to start thinking seriously about who would fill my chair when I was gone.
LEADERSHIP LESSONS
• Once You Achieve Competency, You Must Battle Complacency. When the business is under threat from market forces, the motivation to improve comes naturally. When the threats are vanquished, you need to find new ways to encourage change and innovation.
• Don’t Worry About the Slope; Worry About the Trend Line. Significant change takes time. As long as you’re headed in the right direction, it’s less important how fast you are going.
• Carve Out a Safe Space for Innovation. In a cost-conscious culture, it’s hard for innovation to take root. Make sure there’s a dedicated space in the culture, the budget, and the institutional structure for new ideas to germinate and grow.