Nasdaq battles back

Nasdaq’s no-nonsense CEO, Robert Greifeld, has fixed much of what was broken at the beleaguered stock market. But can he go the distance?

One night a week during this past spring and summer, Robert Greifeld shed his suit and tie, pulled on some running shorts and rushed to the Chelsea Piers athletic complex on Manhattan’s West Side. There the 47-year-old Nasdaq Stock Market CEO, a high-school-sprinter-turned-marathon-aficionado, put himself through a grueling workout, reeling off a skein of 60-meter dashes over the course of an hour to build his speed.

His efforts to shave his best time were paying off, until one morning in September, when Greifeld woke with a swollen knee and found he could barely walk, the result of having combined his speed drills with interval training and a long-distance run the previous weekend. Soon he was under the surgeon’s knife.

“I got a little excited,” says Greifeld, who today is beset by arthritis and reduced to riding a bicycle. “I guess I didn’t realize it at the time, but it was just too much.”

Greifeld, who has been driving Nasdaq nearly as hard as he has himself, had better hope that the 33-year-old electronic market doesn’t also come up lame.

When Greifeld took over in May of last year, Nasdaq was badly in need of a jolt. The hub of the 1990s boom, Nasdaq had flourished along with the fledgling technology companies it had been listing since the 1970s, including Cisco Systems, Intel Corp. and Microsoft Corp. But as the new millennium dawned, the term “Nasdaq stock” took on a different meaning. After the stock bubble burst in 2000, Nasdaq lost more than 1,000 of its 4,700 listings, and its trading volume plunged by 35 percent.

Yet, like a stubborn dot-com entrepreneur suffering delusions of grandeur, Nasdaq clung to its bubble-era strategy of building a 24-7 market worldwide. It even planned an IPO for itself, as if the Nasdaq composite index had not plummeted 77 percent in 30 months. Meanwhile, nimble upstarts with exotic names like Archipelago and Island ECN had begun taking relentless bites out of the market’s trading business. After years of gaining ground on its old adversary, the New York Stock Exchange, Nasdaq found itself fighting for its very existence. The over-the-counter market -- largely owned by NASD, the self-regulatory organization that founded it, and the NASD member firms that trade on it -- lost $105 million in 2003.

Greifeld, a former financial technology executive, acted quickly to stanch the worst bleeding. Hard-nosed and results-oriented, he cleaned house in the executive suite, cut costs everywhere, pulled the plug on overseas boondoggles and brought Nasdaq’s trading systems out of the dark ages. He also has tried to play offense, persuading seven Big Board companies, including Charles Schwab Corp. and Hewlett-Packard Co., to also list on Nasdaq for a one-year trial period. And, operating on Wall Street’s venerable if-you-can’t-beat-'em-buy-'em theory, he purchased electronic rival Brut for $190 million in September.

“Bob’s done a great job,” says Ross Stevens, chief operating officer for equities at Banc of America Securities, a big Nasdaq customer. “He has brought an energetic and entrepreneurial approach to a company that needed a change in direction.”

Greifeld hasn’t stopped at correcting the mistakes and shortcomings of his predecessors. He also has started Nasdaq on a flat-out sprint to outrun the competition by making a series of aggressive, high-stakes strategic gambles that could either pay big dividends -- and make him look brilliant -- or leave Nasdaq with the corporate equivalent of a busted knee.

The centerpiece of his strategy is a series of massive -- skeptics say unsustainable -- price cuts in Nasdaq’s trade execution business. The exchange now takes a mere two-hundredths of a penny per share from its best customers, well below what competitors charge. Although the cuts are no doubt hurting rivals, they’re also damaging Nasdaq’s finances. Transaction revenues dropped from $191 million in the first nine months of 2003 to $148 million this year, despite higher overall trading volumes and slight market-share gains from the Brut acquisition.

The sidewalk sale doesn’t stop there. Greifeld has hiked rebates to market-data clients, causing that revenue stream to drop by 34 percent, to $70 million, during the first nine months of 2004. He also intends to roll back -- absent any competitive threat -- the up-front fees for Nasdaq’s most popular data by as much as 75 percent, from $20 per month to as little as $5. That will whack more millions off the top line. With all this, the company is barely breaking even. Net income for the first three quarters of 2004 was $3.9 million on

$372.4 million in revenue -- a dismal 1 percent profit margin.

What could Greifeld be thinking? He says years of experience in the technology industry have taught him to set prices not by determining what the market will bear but by figuring out the cost of delivering a product or service under the most efficient operating conditions possible, then adding a “reasonable” profit margin. Nasdaq may not yet be running at that optimal efficiency level, but Greifeld’s pricing policy effectively forces the company to get there to survive. “It puts pressure on us to be the low-cost provider,” he says. “But I think that pressure is a positive.”

In essence, Greifeld is making what looks a lot like a winner-take-all bet that Nasdaq has the brand strength and product breadth to survive in a new, leaner trading environment -- and that many of its competitors, like the electronic trade-matching systems run by Archipelago Holdings and Instinet Group, don’t. If that happens, Nasdaq will emerge with a far stronger franchise and go back to chasing the NYSE.

“Picture a bunch of people in a lifeboat,” says Matthew Andresen, head of hedge fund Citadel Investment Group’s derivatives market-making unit and a onetime candidate to head Nasdaq. “What Nasdaq is doing is like the fat guy throwing all the food overboard and saying, ‘I may starve, but you will too, and you’ll die quicker.’”

Nasdaq, with 891 employees, down from 1,284 after several rounds of layoffs under Greifeld (an additional 80 are scheduled to be cut before year-end), certainly isn’t nearly as lean as its competitors. Archipelago, which went public in a $127 million IPO in August, has a workforce of less than 350 -- and, with a growing 27 percent market share in Nasdaq trading, no

intention of conveniently wasting away. “Their price cuts have had no effect on our market share,” says Archipelago CEO Gerald Putnam. “Their strategy is a little bit like saying, ‘I’m going to cut my hand off, but my competitors have to cut their arms off.’ I wouldn’t want to do either one of those things, and you shouldn’t expect us to ever pursue a strategy that cannibalizes our revenue.”

That Greifeld would so aggressively take on the electronic communications networks suggests how much they have reshaped the competitive landscape. For Nasdaq, this is partly a self-inflicted wound. In 1997, after a scandal in which firms making markets in Nasdaq stocks were accused of fixing prices, the Securities and Exchange Commission opened competition in Nasdaq stocks to the cheap, speedy ECNs. They caught on so fast that today the handful that survived the bubble handle the majority of trading in Nasdaq stocks. Analysts estimate that Nasdaq controls roughly one quarter of the trading in its own stocks. (It stopped disclosing this figure last year.) Greifeld’s goal: to regain a majority market share.

Nasdaq is still beset by regulatory concerns. Greifeld has had no better luck than his predecessors did at getting the SEC to approve the market’s four-year-old application to become a registered securities exchange. That designation would allow it to finally split from its parent, NASD, and, among other benefits, drastically reduce costs associated with regulating itself. And the agency is adding another level of uncertainty to Nasdaq’s business model with its newly unveiled Regulation NMS, for “national market system” -- a proposal to overhaul the U.S. equity markets top to bottom (see story, page 77). Nasdaq could come out a big winner if controversial portions of NMS are approved that would lift restrictions on trading NYSE shares off-board. But other parts of the proposal could hurt its market-data revenue and limit the flexibility that Nasdaq traders have to access quotes that are slightly inferior to the best bid and offer in the market.

Perhaps the best measure of Nasdaq’s troubles is its failure to capitalize on the unprecedented disarray that has gripped its downtown rival, the NYSE. It has been a very rough couple of years for the Big Board, beginning with a federal investigation into alleged trading misconduct that eventually led five big specialist firms to pay $240 million in fines in March and, of course, the controversy over ousted chairman Richard Grasso’s extravagant retirement package. (Grasso and the NYSE are still squabbling over the money.) The floor trading scandal presented a perfect opportunity for Nasdaq to hold out its technologically advanced market as superior to the NYSE’s 212-year-old, face-to-face auction. But Greifeld’s best offensive move -- the dual-listings program -- brings in no revenue. Worse, Nasdaq actually has lost market share in the program’s seven pilot stocks, having handled only 14.5 percent of the volume in those names since the effort began, versus 15.2 percent in the three months before it started, according to the NYSE.

“It was a good public relations initiative,” says NYSE senior vice president Robert McSweeney, “but it really had no practical impact on the quality of the markets.” Now the Big Board is regrouping under new CEO John Thain, a former Goldman, Sachs & Co. president who is trying to drag the exchange into the information age by partially automating.

BOB GREIFELD APPEARS TO HAVE BEEN CUSTOM-built to run the Nasdaq Stock Market. An ambitious kid born to a blue-collar family in the New York City borough of Queens, he learned his work ethic from his father, a postman who toiled at side jobs to provide for his five children. Young Bob helped out early, delivering newspapers at age nine after the family moved to the Long Island suburbs. Later he helped his father mow lawns and trim hedges. Then came the decision to quit his beloved high-school track team to work at the local Waldbaum’s supermarket and save money for college.

“It was one of my disappointments in life,” he says of quitting track. “But it was the first truly mature decision I had to make.”

After graduating from Iona College in New Rochelle, New York, in 1979, he became a computer salesman for Burroughs Corp. Even then he often worked a second or third job to bring in an extra buck. To purchase an engagement ring for his wife, Julia -- the two were college sweethearts and have been married for 23 years -- Greifeld moonlighted in a FedEx warehouse. Now he tries to pass on his appreciation for the value of a dollar to his 11-year-old daughter and two teenage boys. One of Greifeld’s sons sells shoes at the local sporting-goods store, even though Dad takes home a cool $2.2 million a year. The family owns a modest home in suburban Westfield, New Jersey, about 25 miles from Manhattan.

Unlike Nasdaq’s previous chiefs, Greifeld is an unquestioned expert in the mechanics of how the market works. His immediate predecessors, former Prudential Securities CEO Hardwick Simmons and exSmith Barney chairman Frank Zarb, had greater name recognition and knew the brokerage business, but neither approached Greifeld’s mastery of the technical minutiae that underpins Nasdaq’s operations. He has been involved with the over-the-counter market for more than two decades. At Burroughs in the early 1980s, he sold the computers that replaced the paper order tickets, conveyor belts and pneumatic tubes that Wall Street firms then used for Nasdaq trading. For his thesis at New York University’s Stern School of Business, where he got an MBA, in 1986, Greifeld wrote about automation’s impact on the OTC market.

“I had to spend a lot of time on trading desks to understand what they did and to be able to build the specs for these systems,” Greifeld recalls of his 12 years with Burroughs and its successor firm, Unisys Corp. “It was the first time I got to know about Nasdaq and the details of how it operated. It just fascinated me.”

In 1991, Greifeld joined Automated Securities Clearance in Jersey City, New Jersey, and built from scratch a business that created software to automate market-making desks, most of which were still using the creaky paper ticketconveyor belt system. ASC’s Brokerage Realtime Application System Software, or Brass, would become the industry standard. Greifeld became president of the company in 1993. When the SEC passed rules three years later that helped ECNs compete with Nasdaq, Greifeld started ASC’s own ECN, Brut (short for “Brass utility”). This gave users of ASC’s Brass order management system a way to execute orders cheaply and efficiently -- and allowed ASC to extract a little more revenue from its clients.

Brass’s success caught the attention of financial tech giant SunGard Data Systems, which bought ACS in February 1999. Greifeld was promptly promoted to group CEO of SunGard Brokerage Systems, where he had authority over 25 different operating companies within the unit.

In his time at ASC and SunGard, Greifeld became known as an intense businessman with a voracious appetite for data. He also developed a reputation as a tough customer at the negotiating table. Industry veterans say he wasn’t afraid to exploit Brass’s virtual monopoly to wrest the best terms when renewing customers’ licenses. Ironically, some critics say his strong-arm tactics may have benefited upstart order management vendors, such as Lava Trading, Nyfix and Royalblue Group, which have taken a big chunk of Brass’s market share in recent years.

“I don’t think anyone who’s done business with him has come away happy with the result,” says a competitor. “And I mean that as a compliment.” Adds Instinet CEO Edward Nicoll: “He’s a very tough negotiator. I’ve tried to do deals with him in the past, and it was very difficult. But I like Bob a lot. He’s a friend and a good executive. We should try to work with each other instead of against each other.”

In two decades of dealing with Nasdaq and its customers, Greifeld often found himself second-guessing its strategy. “Bob always had vision, and he continually showed that he could out-Nasdaq Nasdaq,” says exBrut CEO Richard Schenkman.

Over the next few years, while Greifeld made his mark at SunGard, Nasdaq fell on hard times, and board members got anxious about its performance. Particularly worried was former Lehman Brothers president F. Warren Hellman, whose private equity firm had invested $240 million in the exchange in May 2001. That deal was part of a partial spin-off of Nasdaq from NASD in preparation for an IPO. San Franciscobased Hellman & Friedman’s investment was structured as a note paying 4 percent interest and convertible into stock if Nasdaq shares reached $18 each. (Nasdaq stock trades on the OTC Bulletin Board as a result of the partial spin-off; volume is very thin at less than 20,000 shares daily.) But once Nasdaq’s IPO plans hit a wall and its finances deteriorated -- shares currently change hands for about $7 -- Hellman realized that the upside on his investment had all but vanished. Seeking to protect his principal, which Nasdaq must repay by May 2006, he began to exert greater influence over the board, which traditionally had been composed of Wall Streeters who viewed Nasdaq directorships as somewhat akin to honorary positions. Hellman pushed then-CEO Simmons to rein in his global ambitions and cut costs, but Simmons remained committed to his original strategy. He announced in December 2002 that he would step down once the board found a successor.

Greifeld wasn’t the first person most people thought of when that search began. Other choices included Nasdaq deputy chairman Richard Ket-chum, an SEC veteran who maintained friendships at the agency, and well-known trading executives like Andresen, who had grown Island into an overnight powerhouse. But Hellman, who didn’t respond to requests for comment, persuaded the board that the hands-on, no-nonsense Greifeld was the perfect selection.

“This was probably the only opportunity that would get me to leave what I was doing at SunGard,” says Greifeld. “I had my own set of views about what Nasdaq should be doing. And it certainly was appealing to think that I’d be able to actually implement them.”

Adds SunGard CEO Cristóbal Conde, Grei-feld’s old boss: “It was patently obvious that he had wanted this job for a long time. And he’s been a perfect fit. He’s an expert in this industry and always has been. It has been both his livelihood and his intellectual passion.”

NASDAQ WAS IN URGENT NEED OF AN overhaul. The market had long been thought of -- and thought of itself -- as a quasigovernmental utility. Until it moved to Manhattan’s financial district in 2001, Nasdaq had been based in Washington. Its majority owner, the NASD, traditionally installed a well-known Wall Street figure as CEO.

The threat of the ECNs forced Nasdaq to adapt. Under Zarb in the late 1990s and then Simmons, the bourse strove to shed its civil-service legacy and become a for-profit business. It turned out, however, to be easier to take Nasdaq out of Washington than to take Washington out of Nasdaq.

The conversion process needed a boost -- and that’s where Greifeld came in. “I’m here to be the instigator of a cultural change,” he declares. “In the past there was a lack of direct accountability here. Each and every action we undertake has to be evaluated in detail. We have to quantify how much things will cost and how the potential returns compare with other activities we might undertake.”

No sooner did Greifeld settle into his spacious, modern office at Nasdaq’s headquarters on the 50th floor of One Liberty Plaza than he initiated a strategic review of everything the market did. That’s standard procedure for a fresh chief, but Greifeld took a novel approach. For a week in early May 2003, he gathered senior executives in a conference room and paired them off like law students in a mock trial to debate Nasdaq’s products, services and strategy. Everything was on the docket. Each exec was assigned a pro or a con position to argue, and colleagues piped in from the sidelines. The debates were intense as Greifeld peppered his charges with questions: How good is that product, really? What are its costs versus its long-term benefits? What’s the strategic fit with other businesses?

“It never got personal, but it got animated,” recalls Adena Friedman, Nasdaq’s executive vice president of corporate strategy and data products. Greifeld, she says, “didn’t come in thinking that he had all the right answers. He wanted us to challenge him and make sure we made the right decisions for the company.”

Greifeld and his team emerged with a consensus on what to keep and what to junk. Among the casualties: Nasdaq Europe, which former chairman Zarb had envisioned as part of a 24-hour global bourse (with those in the U.S. and Japan); Nasdaq Deutschland, a German retail market; Nasdaq Liffe Markets, a single-stock futures trading venture with the London International Financial Futures and Options Exchange; the BBX Exchange, which would have automated trading and raised listings standards for companies on Nasdaq’s OTC Bulletin Board; and Nasdaq’s own IPO plans. The cuts led to charges of $143.5 million against last year’s earnings, but they brought renewed strategic focus and financial discipline for the future.

Greifeld’s seminar on Business Administration 101 did not make any allow-

ances for social promotions, either, as he brought in a raft of younger, forward-looking subordinates and outsiders. Departing: veterans like deputy chairman Ketchum, who now heads regulation at the NYSE; David Weild, who had followed Simmons from Pru to head the listings business; Dean Furbush, who had overseen transaction services; international chief John Hilley; Denise Benou Stires, architect of Nasdaq’s award-winning advertising campaign featuring the CEOs and founders of listed companies; and William Harts, whom Simmons had hired as strategy chief from Salomon Smith Barney in 2002. Vice chairman Alfred Berkeley III left in autumn 2003 after clashing with Greifeld over strategy, say people familiar with the situation.

Bruce Aust, 40, who as head of the market’s West Coast office had managed critical relationships with Silicon Valley companies, succeeded Weild as listings chief. Replacing Furbush was Glen Wolyner, ex-CEO of trading technology provider FlexTrade Systems. Wolyner would oversee critical improvements in the technology that customers use to connect to Nasdaq’s trading system before leaving in October 2003.

As head of strategy, Greifeld brought in Christopher Concannon, who had run Instinet’s clearing division. Concannon had been an American Stock Exchange lobbyist and an SEC attorney before taking over business development at Island and overseeing the ECN’s integration into Instinet after their merger.

“I felt like I knew Nasdaq better than Nasdaq knew Nasdaq,” says Concannon, a genial 37-year-old. “After competing with them for so many years, anticipating their every move and studying them, I felt like I was in a pretty good position to come into Nasdaq and make it work.”

In October 2003, Greifeld tapped Concannon to replace Wolyner as head of transaction services -- the source of 42.6 percent of the market’s revenues in the latest quarter -- figuring that Concannon’s legal background equipped him to deal with whatever new regulations the SEC will throw at Nasdaq as part of the agency’s impending revamping of equity trading rules. Market-data chief Friedman, 35, added Concannon’s strategy role to her brief.

GREIFELD’S DIRECT MANAGEment style gave Nasdaq a needed jolt, but it also caused disquiet. Exstrategy chief Harts, for instance, told friends that Greifeld cast him aside without bothering to talk to him about how he might be useful to the company. Exvice chairman Berkeley’s exit came right after he told Greifeld that aggressively pursuing NYSE-listed companies would never work. “Bob decided right then and there that he didn’t want Al on the team,” says one person familiar with the situation. Neither Harts, currently working as an independent consultant, nor Berkeley, now CEO of electronic block-trading firm Pipeline Trading Systems, will talk about his departure.

Says Greifeld: “We had a management structure at Nasdaq that was built for a time and a place that no longer existed, and there were decisions that had to be made with respect to the proper numbers of managers in the firm. Some of those decisions had to be made irrespective of their particular ability. They were caught in a numbers game, just as any number of other Nasdaq people have been.”

Some say Greifeld has a tendency to micromanage, born of his years building a business at ASC. At Nasdaq he’ll call managers, along with rank-and-file staff, into his office to cross-examine them about projects, insiders say. “He’s not an easy person to work for,” acknowledges a former deputy. “He demands a level of granularity from two or three levels down in the organization that most CEOs don’t concern themselves with. It feels a lot like second-guessing.”

Even Greifeld’s friends say that he can come across as severe, especially to those who don’t earn his respect with their intellect or work ethic. “Bob doesn’t suffer fools,” says SunGard’s Conde. “Someone who doesn’t have command of facts and arguments is going to have a very difficult time with him, because he has the uncanny ability to sniff out whether someone really knows what they’re talking about.”

Greifeld responds: “I would certainly plead guilty to those charges. But I don’t think it’s a bad thing to hold people accountable for results and to question details.”

Mindful that change often breeds anxiety, Greifeld has made an effort to reach out to employees. After Nasdaq announces quarterly earnings, he conducts town hall meetings with staffers around the country to present the results and field questions. Each month the CEO also invites a randomly chosen group of employees from all levels to a get-acquainted lunch.

“Before I started, I assumed there would be a tremendous amount of resis-

tance to fairly dramatic changes in our mission and our operating style,” he says. “But I’ve found that people recognize that it was time to go in a different direction, and that’s been a pleasant surprise.”

Following his strategic review, Greifeld settled on two priorities: refocusing Nasdaq on its core businesses and restoring profits through cost cuts to put the bourse in a stronger position to fend off competition from the ECNs.

Greifeld’s 30 percent slashing of Nasdaq’s workforce has come pretty much across the board. He has reduced overall expenses by 27 percent, from $585.2 million in 2002 to $427.6 million on an annualized basis in 2004. The deepest cuts have come in professional and contract services (63 percent), marketing and advertising (55 percent) and computer operations and data communications (21 percent). In the good old days, Nasdaq promoted itself aggressively as “the stock market for the next 100 years,” sponsoring football telecasts and halftime shows. Under Greifeld it has kept a much lower -- and less pricey -- profile. At one point Greifeld considered scrapping the office suite that he and his top deputies occupy in favor of start-up-esque cubicles. He decided the move would be too disruptive for now, but it remains a goal: “This oversized, corner office is not my style.”

Still, analysts say, and some Nasdaq executives acknowledge, the market’s overhead remains bloated. One area ripe for the knife: Nasdaq’s massive infrastructure. It has identical data centers in Trumbull, Connecticut, and Rockville, Maryland, to back up its systems if there’s an outage. (Each has four immense diesel generators and rooms full of battery power.) In the event of a catastrophe, Nasdaq could handle trading not only in all of its stocks but also in all NYSE stocks. Some technology experts say the market could safely do away with one of the centers and cut back the other. That would mean many millions in savings in real estate, personnel and other operating expenses.

After aggressively cutting costs, Grei-feld embarked on an overdue technological overhaul. Most crucially, Nasdaq upgraded the outmoded connections to its quoting and trade execution system. Brokers and other customers can now use Financial Information Exchange, or FIX, protocol, which gives them greater flexibility to integrate their order management systems with Nasdaq’s execution platform. The result: greater efficiency and lower costs for customers.

The bourse’s transaction services group, meanwhile, developed technology that lets institutional traders use advanced tactics such as “pegging” and “discretion.” Pegging continually adjusts customer quotes for the pieces of a large order so that they are never worse than the best available prices in the market and thus have a better chance of being matched. Discretion allows a customer with a large sell order, for example, to offer a small number of the shares at one price while also setting a “discretion price” at which an additional part of the order can be executed if a corresponding buy order comes in within the price range. These so-called order types help traders hide their intentions and thus reduce their costs. Archipelago and Instinet have offered them for years.

In March, Nasdaq introduced a single trading system to handle orders for both its own and NYSE stocks. By combining two systems -- SuperMontage for Nasdaq stocks and Nasdaq InterMarket for NYSE-listed shares -- the exchange simplified trading for customers and shifted to a common technology platform that costs less to maintain.

Greifeld’s team also has brought order to Nasdaq’s chaotic openings and closings, which both traders and regulators have long complained about. Under the bourse’s decentralized structure, stock prices are set by each brokerage firm posting its own buy and sell quotes. This free-for-all has often led to confusion and extreme volatility at the start and finish of each session -- the busiest trading times. Standard & Poor’s got so fed up that it announced in October 2003 that it would no longer use Nasdaq closing prices in calculating the S&P 500 index. Instead, S&P began relying on closing prices at the American Stock Exchange, which started trading Nasdaq stocks in 2002. This was more than an insult; it threatened Nasdaq’s franchise. The Amex accounted for less than 1 percent of Nasdaq volume but hoped S&P’s decision would help it attract more flow.

Greifeld made improving the open and close a top priority. Staffers under Friedman and Concannon devised a system that allows Nasdaq to conduct these events like an auction: The market’s computers gauge supply and demand and set prices that permit the maximum number of shares to “cross,” while minimizing volatility. In July, S&P went back to using Nasdaq’s closing prices to calculate its index values.

Greifeld has been so preoccupied with protecting Nasdaq’s territory that he has had little time to go on the offensive. But, like his predecessors, he has sought to expand the licensing of Nasdaq’s proprietary indexes for structuring exchange-traded funds. The most popular of these, the Nasdaq 100 Trust, known by its QQQ ticker symbol, lets investors trade a basket of the 100 largest Nasdaq companies like a single stock. The QQQ is the world’s most actively traded security, with an average daily volume of nearly 100 million shares. Greifeld has introduced a new ETF named the OneQ, which tracks the entire Nasdaq composite index, and rolled out versions of QQQ in Israel, Japan and Mexico. Although the ETF business, called Nasdaq Financial Products, represents only about 8 percent of revenues ($9.4 million in the third quarter), it’s growing at a decent 6 percent or so a year. The top lines for Nasdaq’s other segments -- transactions (43 percent of overall revenue), listings (33 percent) and data (16 percent) -- are declining.

“We haven’t even come close to exhausting all the possibilities for our index products,” says John Jacobs, the 21-year Nasdaq veteran who heads the ETF business.

Greifeld’s bid to attract NYSE-listed companies to Nasdaq has been less than a triumph. True, cajoling Big Board companies to take a test-drive in Nasdaq’s dual-listing program was no small accomplishment: No company has ever voluntarily switched from the Big Board to the OTC market. Yet Greifeld can claim only a symbolic victory.

Not only has trading in the pilot-program stocks not migrated to Nasdaq, it’s increasingly unclear whether, come January, any of the original six companies up for renewal in January -- Apache Corp., Cadence Design Systems, Country-wide Financial Corp., Hewlett-Packard, Schwab and Walgreen Co. -- will stay and start paying listing fees. (These companies either declined comment on their plans or didn’t respond to inquiries about the program.) Consider also that Nasdaq didn’t exactly have a tough sell when approaching at least two of the companies. HP sold Nasdaq much of the hardware it used for the SuperMontage trading system it rolled out in 2002 -- a deal that apparently didn’t sit too well with Michael Dell, whose Nasdaq-listed company had competed for the contract. And Schwab had an executive -- institutional trading chief Lon Gorman -- on Nasdaq’s board at the time it decided to join the pilot program.

“We know that companies are reluctant to change a listing that has been in place for 60 or 70 years,” acknowledges Nasdaq listings chief Aust. “We said at the beginning that dual listing is going to be a long-term program, and over time we think it will evolve and be a major benefit to those companies.”

Nasdaq, with its looser listing requirements, does have an edge over the NYSE in attracting initial public offerings. IPOs have rebounded from their postbubble nadir -- Nasdaq had listed 111 this year through September, compared with only 19 during the same period in 2003. But that’s still not a rapid enough clip to compensate for the companies that Nasdaq has been losing to delisting and transfers to the NYSE. Its total of listed companies has declined from 3,367 on September 30, 2003, to 3,287 on that date this year. Listings revenue, at $41.3 million, is flat so far in 2004.

Greifeld’s biggest move has been the Brut acquisition, which has increased its trading market share slightly. (Nasdaq won’t say by how much; it stopped disclosing this figure last year.) Brut provides Nasdaq with much-needed technology to route orders to other market centers, a capability it had been missing but which many competitors have. As a registered broker-dealer, Brut also gives Nasdaq the ability to solicit orders directly from institutional investors rather than rely solely on market makers. But even though Instinet and Archipelago have gained market share by pursuing such a strategy, Nasdaq won’t follow suit. Instead, it will attempt to reap more business from market makers by highlighting that it is not competing with them for buy-side orders.

“We’re a neutral platform that doesn’t compete with customers for institutional order flow,” says Concannon. “We still believe in the broker-dealer intermediary.”

Market makers differ as to whether such a strategy can work. One second-tier firm executive says, “I like the fact that they’re neutral.” But a trading chief for a major New York brokerage notes: “I have to get best execution for my clients. I’m going to go where the liquidity is, regardless of whether that ECN or that market center is taking orders directly from the buy side or not.”

The fact that Nasdaq wound up buying Brut rather than a larger competitor like Archipelago also illustrates the potential downside to Greifeld’s tough negotiating approach. About one year ago, before Archipelago registered with the SEC to go public, it raised a final round of private financing from venture capital firm General Atlantic Partners. The $125 million investment valued the Chicago-based exchange at more than $500 million. About a week earlier, sources say, Greifeld had called CEO Putnam with a bid of less than $300 million. Put off, Putnam ended their chat abruptly. (Neither man will comment on the conversation.)

Buying Archipelago might have been a far better move for Nasdaq than swallowing Brut. Archipelago has more than twice Brut’s market share in Nasdaq stocks and is already an SEC-registered exchange by dint of its alliance with the San Franciscobased Pacific Exchange. (The combined entity is called ArcaEx.)

CAN NASDAQ EVER HOPE TO regain a majority share of the trading in its listed-company stocks? That appears far-fetched. When Greifeld took over Nasdaq, its once-dominant share had been whittled to 18 percent. Trustworthy sources say Greifeld has upped that proportion by a few percentage points though price cuts, technology upgrades and the Brut acquisition. But the share is likely still in the low 20s.

Tripling or even doubling it would be nearly impossible. Investors and brokers have adapted to fragmented liquidity by approaching transactions in a whole new way. Rather than pining for a centralized market, they are taking advantage of sophisticated technology that lets them parcel block orders into scores or even hundreds of tinier orders and then routes these among scattered venues -- Nasdaq, Archipelago, Instinet’s ECN (called INET), individual market-making firms and still tinier electronic networks. Traders have grown so accustomed to this market structure, and so appreciate the competition, that they aren’t likely to start sending all their orders to any one place again.

“The fact that liquidity is spread between Arca, INET and Nasdaq isn’t that troubling to us,” says Duncan Niederauer, CEO of Goldman, Sachs & Co.'s Spear, Leeds & Kellogg unit, which operates a popular algorithmic trading engine, Rediplus. “Nasdaq’s challenge is to try to get back some market share that they’ve lost. But there’s hardly any room to compete on price anymore, and the market is pretty satisfied with the liquidity being divided among these different venues.”

Nasdaq will have a tough time consolidating trading for another reason. The bourse’s primary customer base -- the market-making desks of giant Wall Street brokerages -- is not particularly price-sensitive: They trade as much or as little as required to fill their customers’ orders. That may be one of the reasons Greifeld’s huge price cuts have had a relatively small effect on Nasdaq’s market share.

Greifeld is determined to defy these odds and has forcibly subjected Nasdaq to wrenching change to set it on a new course. Now he needs investors, brokers, competitors and Nasdaq staffers to go along. “If Bob has a weakness,” says SunGard CEO Conde, “it’s that he can underestimate how long it can take for a new vision to permeate a large organization -- for people several layers under him to absorb a change in strategy.” Time is running out -- even for a sprinter.