BookWatch: Ex-Nasdaq CEO: There’s a hidden cost to free stock-market trading

This post was originally published on this site

Bob Greifeld’s stab at retirement didn’t last long.

By the end of the day that he announced he was stepping down as Nasdaq’s CEO, he was already talking about his next project.

“There needs to be a better word for retirement,” he now says. He has become chairman of Virtu Financial VIRT, +0.80%, a $3.1 billion financial-services firm and market maker and a member of several other boards. “As CEO, the schedule controls you, and I want to control the schedule. At times the schedule could be as busy as it was then, but you control it.”

Most recently, the schedule of this college English major has included writing “Market Mover,” a memoir reflecting on the 13 years he led Nasdaq NDAQ, -0.22% transforming it from a money-loser to a more diversified and highly profitable international exchange operator and the low point of the chaotic start of trade for the Facebook IPO and subsequent settlement over Nasdaq’s system malfunction that cost the exchange tens of millions of dollars.

The next challenge for financial markets, he says, will be to shrink the time to complete a stock-market trade, now known as T+2, or the two additional business days needed to make sure securities and money change hands. Greifeld spoke with MarketWatch about the impact of commission-free trades, his skepticism about the new mission of business, per the influential CEOs behind the Business Roundtable — and what he’s doing after two knee replacements ended his running life.

Question: How will markets change in the next few years in ways that small investors will see?

Answer: You’ve just witnessed a major move with Charles Schwab SCHW, -0.62%  reducing commissions to zero. Behind the scenes in the plumbing, the question is are investors going to be giving up some price improvement on their orders in order to get zero commissions.

Q.: What do you think?

A: I don’t know. If I had to guess, I would say that there would be some cost to price improvement, but I don’t have any facts to back that up.

Q: MarketWatch has had some people tell us that this could make investors move away from buy and hold because there’s no cost to trading. Do you buy that?

A.: No I don’t. I would hope that doesn’t happen. But let’s not forget the commission was $5, not $500. When people are paying for $4 for a cup of coffee, I don’t think this will have any material impact on their behaviors.

Q: What other changes could be coming? Does settlement get sped up so it’s no longer T+2?

A: T+2 is an embarrassment in 2019. We should be going toward continuous settlement. There’s nothing good that happens between the execution of the trade and the clearance of the trade. So to the extent we can make that simultaneous, it would be a good thing. You certainly take credit risk out of the market. It’s remarkable that it hasn’t happened.

Q: Anything else?

A: What I see happening is you’ve had a massive move to passive investing, and I think we’re going to enter an age of a resurgent active management. To the extent that we’re a market of stocks as opposed to a stock market, the active guys will do well. Passive in many situations has to act in a dumb manner in respect to their portfolio. So if I was to look forward, I would see a rise of more successful active management.

Q: What do you mean passive has to act in a dumb manner?

A.: Because they have to rebalance. If I’m following the S&P 500 SPX, -0.45%  , a company goes in or out and I have to rebalance according to my preset rules. It’s not always the smartest thing. The most dramatic is when you do the Russell rebalance in June, then you just have forced buying or selling.

Q: Yet active managers just consistently struggle to beat the stock market. Why do you think they’ll do better?

A: Because in a way they have less competition. If passive rises and is 50% of the market and active is 20% or 30%, then the active guys have less competition. If they come up with an investment thesis — Apple, Amazon, xyz biotech — it’s not likely to be a crowded trade.

Q: Tell me more about blockchain. I feel like we hear so often that the dentralized ledger that blockchain creates can change the world and yet there are very few examples of people doing something real with it. And Nasdaq is one.

Q: We were inventing Nasdaq Private Markets [to trade stock in private growth companies], and we got to design it the way we wanted it. [It uses blockchain to execute, clear and settle a trade in 10 minutes.].

The adoption of blockchain is held back by the need to integrate into existing infrastructure. It will happen; it will just be slower than people think. If I’m trying to remake the U.S. equity market, you’ve got a lot of players that need to buy into it.

Q: And this is the way to get to real-time settlement?

A: I believe so.

Grand Central Publishing

Q: The Business Roundtable and big CEOs recently said that companies should be more than about maximizing profits. More recently, Salesforce CEO Marc Benioff said old-style capitalism is dead. Do you see this as a real shift in the way CEOs are thinking or is it more about optics?

Read: Salesforce’s Marc Benioff urges fellow CEOs to be activists

A: Optically it’s the right message for these times. But I would definitely caution people to actually read what Milton Friedman said. There are two phrases afterward. He did say the role of the corporation is to seek profit, and that’s what people focus on. But then there are two phrases afterward: do it according to the laws and the social mores of the time, of the society. To me it’s just enlightened self-interest. If you’re a CEO and you don’t think you need the employees coming to work with passion, you’re not going to be a CEO for long. If you don’t think you have to fit within the society you live in and be a good contributor, you’re not going to be a CEO for very long.

I just want people to read Milton Friedman the right way and not say he’s just all about profits. And I never want to hear a CEO getting on a quarterly call and saying well, we missed our numbers but we hit our ESG scores for the quarter.

Read: This big fund manager backs the Business Roundtable in redefining a company’s purpose

Also read Joseph Stiglitz: Do CEOs really mean it when they say they’ll consider more than just profits?

Q: What career advice do you give most frequently?

A: I have people wanting to know the secret of how you climb the corporate ladder. I never had a career plan. I never tried to climb a corporate ladder. But I was always in a position to have the opportunity to do jobs I either liked or loved. If you’re in that kind of position, then you will do that job well and that passion will get recognized. And then good things will happen.

When I say I say love, that doesn’t say at 6 a.m. Monday morning you say I can’t wait to get to work but in general you like what you’re doing. I remember Monday morning I’d say this is bad and by Friday afternoon I’d say I can’t believe the week is over so soon.

Life is short. If you’re going to spend three months, six months, a year or three years doing a job you don’t like but think is a stepping stone, the cost is immeasurable. Get something you like doing and other things take care of itself.

Q: What do you mind not spending money on?

A: In retirement, I believe in the go-go years. I see my parents now. When you’re in your 80s and 90s you’re not going to spend any money except for health care because your world is narrower. I’m 62 and now’s the time to spend money and do things. I want to ski as much as I can until I can’t kind of thing.

Q: What’s the last great thing you’ve purchased?

A: My bike is by far my favorite possession. I just love it, I really do. I bought a Trek Domane. This is the one with shock absorbers in the front and the back. It was a lot of money, and it’s worth every penny to me. It’s actually helped me a lot because it does reduce road vibration, and it makes me a better biker than I am because it just wants to go. I bought that two years ago.

My golf clubs are interchangeable. I don’t get emotional about them, but I get emotional about my bike.

Q: How’s the golf game?

A: I’m probably a 7 or 8, maybe a little better than that. I like keeping it around there because I can win money. But I like playing with golfers who are better than me, because I think it’s how you get better.