Market Mover | Some trading lessons from the past

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January 12, 2020 12:26 AM

According to the author, the lessons learned are that the leader has to take the heat and not hide back, which is what several of them do when there is failure.

In course it won the confidence of companies as well as traders. In course it won the confidence of companies as well as traders.

All of us are aware of Nasdaq being the IT exchange where tech firms get listed, and the health of the IT sector is caught quite appropriately by the relevant indices. What we are less aware of is the crisis that the exchange went through when the bubble burst when the IT firms, which had earlier rushed to Nasdaq for listing, were just not seen.

This is when Bob Greifeld took over as the CEO and chairman of Nasdaq to bring about a radical transformation from 2003 to 2016. His book is a part autobiography, as the story narrated in Market Mover is about Greifeld’s tenure on the exchange. The business of an exchange is quite unique. First, there is limited but tough competition. Second, income comes from having more companies listed on the exchange, traders paying their fees and the sale of data.

Therefore, it is all about volumes and if they slow down, the exchange would be in trouble. If one looks at Indian stock or commodity exchanges, the reason for natural monopolies to emerge is that others could not get enough trading done on their platforms. Nasdaq benefited from the IT sector as it came in handy to these small companies, which were not of interest to New York Stock Exchange (NYSE).

Greifeld goes on to narrate how the exchange was taken from the brink to re-emerge as a strong player, with several merger attempts made along the way. In course it won the confidence of companies as well as traders. The more fascinating parts of the book are the various management lessons that are reinforced by the author. Greifeld talks of five important tenets to keep in mind for success. The first is to get the right people on board. Here he shows how he managed to get the staff involved to bring about the transformation. Though, on the flip side, several people were asked to leave. This is something he believes has to be done when the new challenges require new hands and the existing staff, due to age and mindsets, cannot easily adapt.

Third is to reduce bureaucracy, which is a standard lesson taught in the classroom where delegation is of essence as people should feel empowered, which makes them responsible too. The idea is that a company is run by the employees and only guided by the CEO, who gives directions and takes responsibility for the action taken. The fourth important tenet is to pay attention to fiscal discipline, which again holds for all companies. Cost control is important because a business like trading will have ups and downs, and it is in the latter phases that costs matter when the top line does not increase. Fifth, he talks of overhauling technology, which is the way to go. In fact becoming fully online was Nasdaq’s winning edge brought about by Greifeld. Last, even in a business like stock trading platform, the quest to race ahead must be there and one should never be satisfied by being the Number 2.

This calls for innovation and has been the case with Nasdaq, which involved several strategies, including acquisitions to build scale. He talks a lot about how important the customer is and how the marketing team went all out to get companies to opt for dual listing because a list with big names automatically brought in other companies. This technique became a kind of trend setter, which was Nasdaq’s forte.

Mergers and acquisitions is another area that Greifeld has spoken of at length, and there were successful ones like OMX and unsuccessful ones like the London Stock Exchange (LSE) or even NYSE. But he has tips for CEOs on the different risks involved that have to be evaluated. Core business risk is the most important one. If the targeted one is away from the core activity, the quantum of risk increases. Next is geography. If the targeted company is geographically distant from the acquirer, the risk magnifies. This means tapping into a new set of customers, which, though a great opportunity, has to be understood right, or else the deal can back fire. Cultural differences can be a major stumbling block once the merger takes place and integration plans are necessary before signing the deal. Finally, the head count and the matching of skills carry a risk that may be difficult to gauge when going in for the deal.

He also takes us through the major blunders that Nasdaq was involved with when e-technology was challenged like during the Lehman crisis, where the volumes caused by panic pressurised the system. The same held for the Facebook IPO, where the glitch was severe and a blow to the reputation more than anything else.

According to the author, the lessons learned are that the leader has to take the heat and not hide back, which is what several of them do when there is failure. This can happen only if one takes success and failure in the same stride.

Innovation, innovation and innovation is the mantra for success, and one should never be complacent. This is an important lesson because often one falls into the comfort zone. When the blow comes, it takes the company unawares. The author believes that failure is an experience and what is more important is not the slope but the trend; and the job of the CEO is to be on this path. It makes a lot of sense and good reading. In the last chapter he also gives a hint to all CEOs who do not want to relinquish their jobs. Everyone has a time when value is added and at some point they need to move on.

Madan Sabnavis is chief economist, CARE Ratings

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