Nasdaq CEO Greifeld Wrings Stock Gain as Traders Shudder
Nasdaq stock climbed 0.1 percent over the five days, including 1.2 percent yesterday that reduced the 3.4 percent loss suffered when Greifeld froze trading in thousands of securities for three hours, a decline he said was a buying opportunity. A day before the malfunction, Raymond James Financial Inc. analyst Patrick O’Shaughnessy raised Nasdaq to a “strong buy.”
Whatever damage the malfunction wrought on investor sentiment around the country, it has so far done little to shake confidence among people the 56-year-old Greifeld answers to: Nasdaq shareholders. That concerns equity traders, who say the profit motive of publicly traded exchanges, which used to be owned by their members, is one reason they break down.
“As a public company, Nasdaq has the primary responsibility to maximize shareholder wealth,” Joseph Saluzzi, partner and co-head of equity trading at Themis Trading LLC in Chatham, New Jersey, said in an e-mail. “We believe that for-profit exchanges have an inherent conflict of interest, which is why we believe exchanges should not be for profit.”
Since Greifeld became CEO on May 12, 2003, Nasdaq stock has risen almost 400 percent, compared with about 75 percent for the Standard & Poor’s 500 Index (SPX) and 170 percent for the Nasdaq 100 Index. Its market value has increased to $5.2 billion, a more than 10-fold increase during that time. Profits have soared, reaching $432 million last year versus $10.8 million in 2003.
Robert Madden, a Nasdaq spokesman, declined to comment for this story.
The company stumbled in the second quarter, as costs from acquisitions pushed earnings below analyst estimates. Shares declined 3 percent on July 24, the day of the announcement. Shrinking equity trading will limit earnings growth to 2 percent in 2013, down from an annual rate of 78 percent from 2004 to 2008, analyst estimates compiled by Bloomberg show.
“He’s a tough competitor, and he’s done a good job for that company,” said Thomas Caldwell, the chairman of Toronto-based Caldwell Securities Ltd., who owns Nasdaq shares. “The warnings about the potential for a near-term repetition of something like this remind me of a teacher wagging their finger at a child.”
Nasdaq called the halt to protect the integrity of markets as the malfunction left some investors without prices, Greifeld said yesterday. Trading was shut off to prevent “information asymmetry” after connectivity issues with a member exchange degraded quote processing, Greifeld, a New York University graduate who made $8.9 million in salary and bonuses last year, said in an interview with Bloomberg Television’s Betty Liu. He said he’s in favor of developing a backup data feed to prevent the mistake from happening again.
In the same interview, Greifeld, who came to Nasdaq from SunGard Data Systems Inc., noted his company’s success with its own stock. Nasdaq shares are rising for the fourth straight year and are on track for the biggest advance since 2007.
“When you look at the performance of Nasdaq the stock and Nasdaq the business, we’ve done quite well,” Greifeld said. “Our performance in the marketplace has really been superb. We’ve executed our business plan, in many ways we’re better positioned than we’ve ever been.”
Nasdaq has climbed 40 percent since mishandling the public debut of Facebook (FB) Inc. on May 18, 2012, compared with a 6 percent advance in Facebook and a 28 percent gain in the Standard & Poor’s 500 Index. Nasdaq agreed to pay $10 million to settle SEC charges related to the intial public offering as regulators cited “poor systems and decision-making.”
Nasdaq was owned by the National Association of Securities Dealers until 2000, when some shares were sold in a private placement offering. Traders who make markets on the exchange by buying and selling were among the biggest losers following the Facebook sale, with industry losses exceeding $500 million.
“Market participants suffered hundreds of millions of dollars of losses as a result of Nasdaq’s profit-driven conduct prior to and during the Facebook IPO,” Citigroup Inc. said in an August 2012 filing that opposed Nasdaq’s plan to pay $62 million to member firms who lost money on May 18.
The proposed plan was “inadequate to address the magnitude of Nasdaq’s unprecedented failures,” UBS AG told the Securities and Exchange Commission in a letter that month.
Nasdaq was shielded from having to make complete restitution because of rules dating to when exchanges were owned by the securities industry instead of the public.
In a letter to the SEC this month, the Securities Industry and Financial Markets Association, an oversight and trade group for brokers, said the self-regulatory model of organizations such as the New York Stock Exchange and Nasdaq is outdated.
The SRO status means “one group of businesses is empowered to oversee and regulate the business and activities of its competitors,” Theodore R. Lazo, associate general counsel at Sifma, wrote in the letter to the SEC. “Conflicts of interest in this model abound and only worsen as they are left unresolved.”
While Nasdaq’s closing kept brokers from executing client trades and raised fresh concerns about exchange fragility, investors praised the decision to stop activity before chaos snowballed.
“It’s a good thing to halt the data before the trades go crazy because it could have easily turned into a flash crash,” said James Angel, a finance professor at Georgetown University in Washington. “It certainly doesn’t make them look good when their market went down but they pulled the switch before the market went crazy.”
The disruption is the latest to signal unreliability in electronic markets just as individual investors who withdrew from stocks after the global economic crisis show signs of embracing equities. About $30 billion poured into exchange-traded funds that own U.S. shares in July, the most since 2008 and the second-highest ever, according to data compiled by Bloomberg since 2000.
“The problem with our electronic markets is that they have been built based on a philosophy of zero failure, an impossible goal,” Michael Schmanske, founder and chief executive officer of New York-based Glenshaw Capital Management LLC, said in an interview. “Rather than additional regulation or disallowing certain types of activity, consider borrowing the best aspect of the human-based market: its ability to self-regulate or heal rather than catastrophically fail.”
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