Last updated: April 6, 2014 6:48 pm

Nasdaq setbacks test shareholder patience

Seven months after an embarrassing outage on Nasdaq ground US stock markets to an unprecedented three-hour halt, Robert Greifeld and his executive team stood confidently in front of shareholders at the company’s annual investor day.

His management team rattled off an impressive set of achievements for Nasdaq OMX, its parent company, at the event two weeks ago, such as last year’s record revenues and earnings, a 60 per cent climb in its share price and ambitious leaps into new markets and services.

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The pitch nearly had the effect of wiping away the searing memory of the August meltdown. That was until an unfortunate glitch with PowerPoint forced executives to suspend their presentation and call an early coffee break. The irony was not lost on the audience.

For the past two years Nasdaq has struggled to repair a public image that has been damaged by hiccups such as the August breakdown and the botched Facebook IPO in 2012. Now, an investigation by Eric Schneiderman, the New York Attorney General, over the relationship between US stock exchanges and high-frequency trading firms threatens to be its latest hitch.

The setbacks have proved a distraction for Mr Greifeld, who is in his 11th year as chief executive. Setting aside the company’s reputational damage he has tried to convince investors that Nasdaq is less reliant on a stock transactions business whose industry volumes are in structural decline.

Mr Greifeld has emphasised a realignment of Nasdaq into four units in an effort to demonstrate that almost three-quarters of the company’s $1.9bn annual turnover comes from recurring services.

“You could argue they are no longer an exchange because of their revenue mix but some investors see them as a pioneer in electronic markets and therefore they are the most exposed,” says one analyst.

Since Mr Schneiderman announced his inquiry on March 18, Nasdaq shares have dropped by almost 9 per cent. Analysts estimate that as much as $190m of Nasdaq’s annual turnover comes from services to high-frequency trading companies that are now in the crosshairs of both regulators and the investing public.

While Mr Greifeld dismisses the likelihood of any serious consequences from the scrutiny, the inquiry has served as yet another reason for him to draw attention to his latest endeavours.

The exchange’s boldest push has been into the US Treasury market with the purchase of the eSpeed bond trading platform for $750m from BGC Partners last year. But investor concerns that Nasdaq had overpaid knocked its shares at first, and resistance from powerful banks and broker-dealers have since kept Nasdaq from meeting its target of raising eSpeed’s market share.

Steering Nasdaq

Robert Greifeld, chief executive officer of Nasdaq OMX Group Inc., stands for a photo outside the Nasdaq Marketsite following the closing bell ceremony in New York, U.S., on Thursday, Oct. 7, 2010. Members of the National Italian American Foundation (NIAF) were invited to ring the closing bell to celebrate October as National Italian-American Heritage Month. Photographer: Ramin Talaie/Bloomberg *** Local Caption *** Robert Greifeld

Robert Greifeld has narrowed the group’s focus and in the process developed a reputation as an aggressive cost cutter

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A $390m purchase of Thomson Reuters’ investor relations unit and the launch of a London-based interest rate futures platform, NLX, have fared slightly better. But a highly-touted partnership with Amazon to offer back-office services foundered and a new market to attract share trading in companies before they go public remains in its infancy.

The mixed results help explain why investors at the annual meeting paid close attention to the company’s comments on its plans to return capital to them. “Shareholders want to see the debt paid down, stock repurchases to resume and more revenue growth,” says Rich Repetto, analyst at Sandler O’Neill. “I think investors also want to see an improvement in their share price multiple because it is trading at the lowest of any of the US exchanges.”

Nasdaq’s chief executive still has the support of board members. That includes directors such as Glenn Hutchins, the co-founder of Silver Lake Partners, and Börje Ekholm, the Investor AB chief executive who chairs Nasdaq’s board.

He also has the support of some of the company’s largest investors. One says: “The stock is cheap because investors are not focusing on the very strong free cash flow, they are not focusing on the diversification progress and they are overly concerned about management’s dealmaking prospects.”

I think investors also want to see an improvement in their share price multiple because it is trading at the lowest of any of the US exchanges

- Rich Repetto, Sandler O’Neill

Earlier this year the company bid unsuccessfully for the index business of Russell Investments, the asset manager, according to people familiar with the matter. Nasdaq declined to comment.

Mr Greifeld insists that Nasdaq is focused on initiatives it has already announced rather than on any new ventures: “We’ve done our acquisitions, and now we have a lot of work to do on them. Right now, it’s about execution.”

Mr Greifeld will have to accomplish that without the benefit of several of his former top lieutenants. A string of senior executive departures over the past five years include Adena Friedman, now Carlyle Group’s chief financial officer, and Magnus Böcker, now CEO of Singapore Exchange.

Current and former insiders say those and other exits are the result of a working environment where employees are expected “to squeeze blood from rocks”.

The executive turnover has further entrenched Mr Greifeld’s position. But as the technology failures over the past two years have shown, such strain can lead to incidents that end up drowning out his message.

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