In the years since Robert Greifeld assumed the role of CEO of Nasdaq OMX in 2003, the exchange has overseen the adoption of new technologies, domestic and international economic turmoil, and the Sarbanes-Oxley and Dodd-Frank Acts. Greifeld spoke with NACD Directorship’s Jeffrey M. Cunningham at this year’s NACD Directorship 100 Forum.
Jeff Cunningham (left) and Robert Greifeld (photo by David Nicholas/Longview)
As Nasdaq OMX celebrates its 40th anniversary, what aspect of the global financial markets concerns you most?
When you’re looking at the markets around the world, they have routinely done a very good job with large companies. With the advent of electronic trading, with fair access standards, which Nasdaq pioneered back in 1971, you see the actively traded cycles treated very well. Where we have issues on a global basis is the SMEs, the smaller companies. We have not yet solved what is the proper market structure and what is the proper ecosystem to make sure those companies have truly the best capital markets experience possible.
What is the upside of all the exchange merger activity, cost synergies or revenue enhancement?
When exchanges went to electronic markets, they became dictated by the laws of the transaction-processing business. With the technology I built in our data center in New Jersey I have enough computer power today to process every single equity transaction in the world. So obviously, as we put more volume against that relatively fixed cost platform, the marginal revenue tends to drop to the bottom. There are fairly valid reasons for exchanges to want to come together. What has not worked with exchange transactions in any noticeable fashion are revenue synergies. Our transaction in the Nordics happened four years ago, and we’re only now seeing some real revenue synergies from that. So revenue synergy is somewhat uncertain; expense synergies are fairly straightforward.
After your attempted takeover of the New York Stock Exchange, what did you discover about the way our antitrust laws work?
With our approach to the New York Stock Exchange, we certainly went into it with our eyes wide open—it was opportunistic. Working with the antitrust process—and it wasn’t my first time through—you realize there is typically more art than science. At the end of the day, especially in the U.S., there is one person who has the vote. Depending on who that person is, there are different ways to take a look at the elephant.
The credit crisis was an opportunity to lay blame at the feet of many constituents. Do you have any advice for directors whose role is to reduce risk?
What you see evolving is the concept of risk being managed on a holistic basis. We at Nasdaq OMX have clearly evolved in the last two to three years, and we have our clearinghouse risk, but then we also have business risk. We produce a report to our audit committees and our directors. If we come out with a new product, we put it through a risk filter today, and a lot of these projects are not things you intuitively think about from a risk point of view, but every activity has the opportunity to introduce a new incremental risk into the organization, so you have to have that kind of discipline. When you look at our product release schedule, the risk component of it is as important to us as the product management. I think you’ll see that as an emerging best practice. It’s up to directors to insist upon that. It’s another area of frustration for line management because they feel like they are giving up some autonomy with a risk committee. Like anything else, the risk committee has to be balanced in their viewpoints. It’s the same thing with information security—that’s its own topic right now, and we’ve got our own army of people trying to protect everything we do so the overall risk committee doesn’t have to spend a lot of time on that. It’s about finding pockets of latent risks that people have not thought about before.
As a clearinghouse, you do take on some of your customers’ risks? How do you manage that less transparent aspect of the equation?
We’re at a certain tension with our customers. The clearinghouse services we think of as a fundamental reduction of risks that takes the notional and gets it down to a net number. It demands margin— there’s just no way around that. So when you look at the large over-the-counter market that exists in the world today, the large banks have increased their notional risk by 50 or 60 percent on these over-the-counter derivatives. The question is what percentage of those are actually margin, because a lot of times they are done in the context of an overall relationship. So we’re self-interested when we say that we believe the financial players are misadvised to be having this type of off-balance-sheet risk. For us who run a clearinghouse, we’ve obviously had some interesting calls as we went through 2008. It’s about managing the margin properly by taking signals from the market. As we’ve just had the MF Global situation, we’ve assessed our margin that we had against that, and that margin was, in a sense, assessed against how liquid and deep the market was for us to liquidate positions. We said, “Okay we’re fine.” So clearinghouses bring that discipline all day, every day.
To what extent is the U.S over-regulated relative to the rest of the world?
I’m a little different than most on this. I’m calling for some changes to Sarbanes-Oxley, but a lot of that is about the perception and not the reality. My personal view is that Sarbanes-Oxley has been a net benefit to our corporate governance standards. Boards are more fruitfully engaged. When you look at the developed markets around the planet, they have all basically followed our lead with Sarbanes- Oxley. The notable exception is Section 404. I certainly believe that if we were to have Section 404 for those companies that have successfully negotiated in the past be an every two-year requirement, just the publicity around that would address the perception issue. I think it’s a proper modification of the 404. We called for 404 [to exempt] companies below the $700 million market cap, and I think we’d be happy to see that the presidential commission’s even thinking about a billion dollars. Clearly, the European folks back in the day were using that against us, and that’s fine enough, but that wasn’t really where our international market was. We’ve done particularly well in Israel and China. Those markets were not as developed, and they’re anxious to come to the U.S., and I never heard of SOX being an item of substance against us.
Will China create a robust, regulated and reliable domestic market?
I’d say China and Hong Kong have tougher listing standards than we do. It comes back to when I claimed Nasdaq invented the modern IPO. What we meant by that is we were successful in letting companies that had an unproven business model come to market, but the absolute requirement was that they had solid accounting and governance behind them. We believe investors should be able to make an investment on the success of the next Apple or Groupon. That investor cannot be making a bet on whether the numbers and accounting are good, and the management honest and ethical. When we look at the Chinese companies, concentrated in one province and in reverse mergers, then obviously they violated that sacred trust, so we had to make sure that we had that much more rigor to the process. We’ve put a seasoning requirement that doesn’t just apply to Chinese companies because we don’t want to be profiling, and it’s a good improvement for all of our companies.