Nasdaq Has High Hopes for New Trading System
During the height of the bull market, Nasdaq ran ads proclaiming itself the stock market for the next 100 years.
But the new century is off to a rough start for the No. 2 U.S. equity-trading venue.
Wall Street’s plunge since March 2000 has decimated the big technology stocks for which Nasdaq is best known. And its overseas ventures have suffered deep losses, forcing the planned closure of its once highly touted Japanese trading operation.
Now Nasdaq, under Chairman Hardwick Simmons and President Richard G. Ketchum, is pinning its hopes for growth in part on a revamped electronic trading system, known as SuperMontage, which is intended to lure business back from rival trading networks that have sprung up in recent years.
The Securities and Exchange Commission is expected to vote Wednesday on final approval for SuperMontage. Nasdaq plans to roll out the system almost immediately if the SEC gives its OK.
In an interview with The Times, Ketchum said SuperMontage is critical for the market’s long-term success.
Some observers say the early reviews that traders and investors give SuperMontage also could be critical in determining Nasdaq’s timetable for its long-planned initial public stock offering.
Nasdaq is spinning itself off from the National Assn. of Securities Dealers into a private, for-profit company and hopes one day to enjoy a glitzy IPO.
As a result of two private-placement stock sales, some Nasdaq shares recently began trading on the electronic Bulletin Board, a market considered a rung below the main Nasdaq market. Nasdaq officials frowned on the decision of the private-placement shareowners to trade the stock, fearing it could crimp the IPO plans.
The shares (ticker symbol: NDAQ) traded as high as $15.50 on July 10 but have since fallen to $10.87 as of Monday.
Ketchum, in the interview, discussed SuperMontage, the IPO plans and other issues facing Nasdaq. Excerpts:
Question: Do you think the image of Nasdaq, which was closely associated with the “new economy” and with tech stocks, has been damaged by the long decline in that market sector?
Answer: Undoubtedly, there will always be some impact when your index and many of your companies have lost a significant amount of their value over a period of time. But if I ever have to have a choice between being involved with a large percentage of companies that are redefining their sector or industry--whether that be technology, biotechnology or Starbucks--I’ll take bets on those companies.
I don’t feel there’s any less interest in Nasdaq, either in the U.S. or globally. People still believe in a lot of the major companies in our market. They may be wiser and may ask a lot more questions about valuation than they used to. But they still believe in them.
Q: What was the rationale for Nasdaq trying to establish a foothold in Japan?
A: We thought, as a number of analysts did three years ago, that Japan, which had performed well the year before, was finally moving out of a decade of recession and bad markets and was finally going to be an effective economic performer. We had started to see that with a run of IPOs that were coming out of Japan at that point.
Q: What happened?
A: We were wrong. The macroeconomic disaster that has been Japan has continued. That’s created an environment where the number of new companies able to come to the market and the return of retail investors that we counted on just haven’t happened. Beyond that, it is not an easy thing for a non-Japanese company, much less a non-Japanese market, to effectively enter into Japan.
Q: You still have trading ventures in Europe and Canada. Does the closure of Nasdaq-Japan mean you’re altering your global aspirations?
A: We are dead-bang focused domestically as the primary growth opportunity for Nasdaq. We haven’t given up our vision that markets will be global. But our future is in making sure we provide [needed services] in the U.S.
Q: What is your timetable for doing a Nasdaq IPO?
A: We’re not going to rush. It seems highly unlikely that we’ll do an IPO this year. From the first quarter of next year on, we’ll make the decision when the time seems right. We haven’t changed our view that we think [an IPO] is a good thing. It’s just a matter of timing. We don’t plan to be a Bulletin Board company forever. We expect to be a listed company.
Q: How important is the new SuperMontage trading system from a strategic standpoint?
A: Very important, for two reasons. One, it makes the market better, and we’re only going to succeed if we keep making the market better. SuperMontage opens a window onto the trading of securities that hasn’t been there before. It allows people to truly see what’s available to buy and sell in the market in a single glance, and that’s critical. Two, because it allows us to compete more effectively in the markets. It allows us to offer something that no other market at this point has to offer.
Q: Your expectations for SuperMontage are that the system itself will encourage more trading, thus boosting Nasdaq’s revenue and earnings. Is that realistic?
A: Any time you give investors more transparency, they’re more likely to trade. SuperMontage will create a more transparent, deeper, more liquid market that people can see more clearly and be confident is fair. And when you do those things, people will trade more. That will encourage more people to use Nasdaq systems.
SuperMontage will result in our systems being used a higher percentage of time than they are now. When Nasdaq systems use increases, we will benefit from that. We will grab market share. And we think investors will trade more because they’ll see more of the market picture.
The last piece is that SuperMontage will generate valuable information that’s never been available in the securities markets before, and we hope that will provide us valuable securities products to sell.
Q: Nasdaq recently proposed corporate governance rules that would require Nasdaq-listed companies to adopt reforms such as shareholder approval of stock option plans. But despite many calls for mandating the formal expensing of stock options, you have opposed that idea. Why?
A: We really do worry that the type of companies in California as a whole and Southern California in particular--companies that have challenged the old-line and created innovative products--are not sitting there with inexhaustible amounts of capital. And the way they’re able to compete and attract quality people is to use stock options as a way to have people give up short-term compensation for the opportunity of long-term gains. I think that’s worked pretty well for America.
Q: What about complaints that executives abuse the system?
A: It’s not to say there haven’t been instances of abuses. But the way you solve that is with disclosure and shareholder voting. We would prefer not to throw the baby out with the bathwater. We believe there needs to be greater controls, and that’s why we’ve got the shareholder vote [proposal].
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Bio: Richard Ketchum
Richard G. Ketchum was named president of the Nasdaq Stock Market in July 2000. He also serves as deputy chairman.
Before taking the No. 2 post at Nasdaq, Ketchum held several positions at the National Assn. of Securities Dealers, Nasdaq’s parent.
He joined NASD as executive vice president in 1991 and was named chief operating officer in 1993 and president in 1998. Before joining NASD, Ketchum was director of the division of market regulation at the Securities and Exchange Commission.
Ketchum, 52, has a bachelor’s degree from Tufts University and a law degree from New York University. He and his wife, Mary Beth, have three children and live in Alexandria, Va.
