Nextwave Finance

NASDAQ’s Tech Driven Trading Model Outsmarts the Competition

December 30th, 2008 | by admin |

Financially, 2008 was a year defined by the plummeting stock market, but Forbes Magazine still thought that no company was more impressive over the four quarters than market mogul NASDAQ OMX. The financial magazine’s Daniel Fisher praised the New York-headquartered company for adapting to recently introduced methods of new business better than competitors.

It was CEO Robert Greifeld that caught Forbes‘ attention with his ability to transform the company from a typical trading floor institution into a company that’s completely technology driven. It’s helped NASDAQ to succeed while the rest of the financial world struggles and led to NASDAQ OMX receiving the distinction of being Forbes’ “Company of the Year.”

NASDAQ’s successful transformation process is simple on the surface. As the company’s assets have gotten greater, the company’s size has gotten smaller, therefore reducing overhead costs and increasing their level of organization. Once operating out of one of the most hectic headquarters in the entire country, NASDAQ’s control room is now run by a single technician who works in front of 8 computers in a room above the World Trade Center’s construction site.

The 70,000 orders, cancelations and trades NASDAQ processes per second are managed on a server in a rented data center in New Jersey. As Fisher notes, the company’s “entire trading floor [has been] crammed into a suitcase-sized computer.”  It’s worlds away from the hectic scene many Americans associate with trading.

This transformation is occurring at a time when NASDAQ has begun taking on a much greater number of trades per day. A decade ago, the United States alone saw 1.5 billion trades a day. In 2006, the number jumped to 4.2 billion per day. Currently, combined U.S. trading is set at 10.6 billion exchanges. Of those billions, NASDAQ has been able to hold 33% of U.S. equities through 2,500 employees, but Greifeld plans to hold a far greater percentage in the future without increasing his workforce.

That’s been the difference recently between NASDAQ’s business model and that of other financial institutions, and Fisher suggests cost-effectiveness has been the company’s forte since Greifeld took over as CEO in 2003.  In our current economic downfall, being able to fiscally manage their business smarter has given them even more of an edge.

Here’s how Greifeld has been able to expand NASDAQ’s assets without increasing their number of employees:
·    2005: Greifeld acquires Instinet Group for $935 million. Instinet, one of the largest electronic exchange operators in the world, gives NASDAQ access to the Island trading engine. These servers allowed Greifeld to cut NASDAQ’s use of the expensive Tandem computers in a Connecticut data center.
·    2007: NASDAQ buys out OMX, which managed 7 Nordic and Baltic stock exchanges, fires 11% of the company’s 1400 employees to cut spending by $100 million per year, and suffers no financial backlash.
·    2007: NASDAQ buys the Philadelphia Stock Exchange and announces plans to cut $50 million out of the market’s exchange cost.
·    Fisher writes that Joseph Ratterman, NASDAQ’s chief executive, operates now out of Kansas City, MO, where rent is $18.50 per square foot, as opposed to New York City, where rent is $150-$200 per square foot.

Because NASDAQ’s been able to outsource all of its data centers, the company hasn’t inherited a costly overhead package. More importantly, the data centers have given NASDAQ the opportunity to acquire companies without taking on their costs and expenses. It’s a set precedent for using technology and innovative management that is sure to be followed by many trading companies in the coming years.