Making sense of tech market mayhem

Nasdaq president Alfred Berkeley discusses how the trading landscape is evolving and what the exploding valuations for Internet companies is likely to wrought.

12 min read
CNET News.com Newsmakers
June 7, 1999, Alfred Berkeley
Making sense of tech market mayhem
By Sandeep Junnarkar
Staff Writer, CNET NEWS.COM

NEW YORK--Conjure the image of a market, from the New York Stock Exchange to a local flea market, and you think of people hawking their wares or jumping on the best deals.

But at the Nasdaq Stock Market, where most of the United States' biggest and hottest technology stocks trade--from Microsoft to Intel and Amazon.com to Yahoo--there is only a hushed silence bathed in an electric blue light.

"What we wanted was something that couldn't be a more stark contrast to the traders on the floor at the [ New York Stock Exchange]," said the Nasdaq's president, Alfred Berkeley. "We wanted absolutely no people and all electronics."

But the silence is deceptive. Nasdaq trading, carried out over computer networks crisscrossing the country and driven by a surge in technology stocks, has quietly become the country's largest market in terms of both You have a shift in investor interest from the older, less technical companies to the faster-growing, more technical companies. dollar and share volume in the last couple of months. And as the Internet extends its influence as a medium for information gathering, commerce, online trading, and entertainment, Berkeley hopes to prepare the Nasdaq to survive and even thrive as it faces the challenges and opportunities of the Internet deluge.

Just last week, the Nasdaq jumped on an opportunity presented by the Internet's influence on trading habits and announced it had given preliminary approval to extending trading hours. Starting sometime later this summer, individual and retail investors will be able to trade securities in the Nasdaq-100 Index after they return home from work. The decision was primarily motivated by the need to accommodate the growing number of retail investors jumping online and pursuing Nasdaq stocks.

But the challenges also are mounting. The NYSE is publicly trying to woo some of the larger bellwether technology firms away from the Nasdaq, which was founded in 1971 as the world's first electronic stock market. Individual investors and day traders--who have been jumping online in droves to trade--are a volatile mix, sending stocks surging or plunging on the slightest rumor or news. And the growing number of electronic-communications networks could break away to form their own trading exchanges, fragmenting the market and grabbing a piece of the Nasdaq pie.

Berkeley joined the Nasdaq in 1996 after about 20 years with Alex Brown's (now BT Alex Brown) High Technology Group, which he helped found in the 1970s. Berkeley was brought into the market to help push it to the next level of its electronic nature, befitting its corporate logo of a globe encased with circuits.

News.com's Sandeep Junnarkar sat down with Berkeley to talk about how the trading landscape is evolving and what the exploding valuations for Internet companies is likely to wrought.

News.com: What have been the biggest changes since you joined the Nasdaq?
Berkeley: Of the biggest things that have occurred, some of [them have been] inside the Nasdaq, some of [them] outside the Nasdaq. The important thing that has happened outside the Nasdaq is you have had this tremendous democratization of access to American markets, because the World Wide Web has become an order-gathering mechanism and an information dissemination mechanism.

You've got millions of people who weren't even interested in the market ten years ago who are now participating. A big piece of those are baby boomers who can count on their fingers and toes the number of working years they have left, and they are in save, save, save mode.

A number of other ones--and this is actually more interesting demographically--comprise the 25- to 35-year-old age group that is genuinely interested in the market in a way that people who are 20 years older than them were not when they were 20 years younger.

The Dow Jones Industrial Average is, of course, still important, with everyone breathlessly watching the benchmark break the historic 10,000 mark. But even within that index, the emphasis is no longer on the old industrial stocks but on the technology stocks. What does this mean for the Nasdaq?
What happens is that money follows growth. That is what equity investing is all about: following growth. So the growth in the American economy and indeed most of world economy is coming in more technological forms. So you have a shift in investor interest from the older, less technical companies to the faster-growing, more technical companies. And that is the big macro thing happening there--we happen to be the beneficiary of that because we are uniquely attractive to technology companies.

Why is the Nasdaq "uniquely attractive" to technology firms?
They get what we are doing; they understand all the basic philosophical concepts here. This is a market that is actually merit-based. We have relatively low listing standards with several different options for entry. You can be an entrepreneurial company with a great idea and get listed on the Nasdaq. Then we provide a link for investors to participate in your company.

You also have a very significant instinct in the technology community for distributive processing. There is no queuing up to go through a central mainframe processor. There's distributed processing capability in which multiple, similar processes occur simultaneously. It's a capability that the technology community appreciates.

But I don't want you to get hung up on those technical aspects. What I think is really much more important is that the technology community recognizes and remembers [pounding tabletop] and believes in a market that was there for them when no one else was. We don't believe we should interpose ourselves between the investors and the entrepreneur. That is why we have the vast majority of IPOs. And we have a history of fostering the various technology industries.

And that is what is so attractive, especially in the Western part of the United States, about the Nasdaq. We have distinctively different cultures in this country: East Coast vs. West Coast. The Nasdaq is a West Coast phenomenon that just happens to be in the vapor--it's just a big network.

Why are small companies so loyal to the Nasdaq?
These are large companies that used to be small companies. Why would they move? The question is, what do they want? What do we sell? Look at the difference in the way we market ourselves. We sell on the basis of performance, and what we are trying to do is change performance consistently through investments in two dimensions.

First we are trying to make it cheaper and cheaper to trade, and for our top 25 stocks we are much less expensive than the top 25 stocks on the New York. Take Dell and Compaq. You can buy Dell. I looked at some statistics recently, and the spread on Dell is 0.07 percent of principle value traded on Nasdaq, and the spread on Compaq is 0.21 percent, 3 times as expensive to trade Compaq on the New York as it is to trade Dell on the Nasdaq. Why in the world would Dell want to go to a different market?

Now, when you add the second dimension, which is making investments to provide genuinely significant information to investors through our Web site, we think those are the things that smart, sophisticated, self-confident CEOs know is the right way for us to be spending money on their behalf.

What we are not doing is selling prestige. We think that prestige comes from performance, not from saying how prestigious you are. And we will take our performance over time; we have now passed [the NYSE] in terms of dollar volume, we are the largest market in the United States, and over time, if our relative growth rates continue ten years from now, you won't have questions like this. We will have grounded out, slowly compounding our growth a little bit faster than they do. This is why [the NYSE] needs to come trade Nasdaq stock--they don't have any growth in their market, and their percentage of the available trades being done is decreasing and decreasing.

NEXT: Befriending the Net


Age: 54

University of Virginia, BA 1966
University of Pennsylvania, Wharton School, MBA 1968

Nonfiction read this year: Creating Strategic Leverage, by Milind Lele

Hobbies: Fly-fishing, American colonial history. Working on a project to save George Washington's childhood home, Ferry Farm, in Fredricksburg, Virginia.

Community organization member: Potomac Knowledge Way (regional economic development in the Greater Washington area).

Professional organization member: None.

CNET News.com Newsmakers
June 7, 1999, Alfred Berkeley
Befriending the Net

What are the challenges from the Internet?
Like any other technology, we can either treat the Internet as a friend or a foe, and we have elected to treat it as a friend. That to me is a tidal wave you don't want to be trying to swim against. So we want to swim with the Internet, and we are aggressively incorporating the Internet into every feature of our business. Take a look at our Web site. We are putting out information for investors on the Web that gets, on a busy day, 24 million hits a day. This is a very large financial Web site; most of it is for quotes. We have set up a mirrored site in the United Kingdom. We are getting 10 or 12 percent of our volume internationally and growing quickly. We think there are just enormous opportunities for us to use this new technology--first, to give more information, and second, to lower cost.

Is the Internet actually impacting the way trading is done on the Nasdaq?
Yes, it has. It certainly has because we've given people access to the Nasdaq market from their kitchen over the Internet. We have gotten a lot more traders coming into the market. Part of it is the demographics I was talking about earlier, but part of it is low-cost and convenient access through the electronic order-gathering firms like E*Trade or [Charles Schwab] who take the trading order on the Internet. They check to see it's a real customer, that they have the securities or the money, and that it's not an illegal short sale, and they fire right on into our intranet.

What has been the impact of day traders?
What happens in day trading?first of all you have to realize it is legal. We grant equal access to all market participants. Now what we worry about is people coming into the day trading environment not understanding the difference between investing, speculating, and gambling.

Investing basically is when you invest in a company and you are depending on the management of that company to grow the business and increase the Like any other technology, we can either treat the Internet as a friend or a foe, and we have elected to treat it as a friend. value, and you'll get some return from that later. Speculating is trying to figure if there is something going on in the market--like an interest change or what other investors are going to do. And gambling is sort of taking advantage of the random movement of stocks to see if you can get a profit out of your trade.

We think there is danger that there are a number of people coming in who think they are investing, but they are actually speculating, and, worse yet, they are gambling. And we think that is an educational challenge that the industry needs to undertake. We will undertake it, the firms are undertaking it, and the regulatory apparatus is working, to be sure.

That being said, we do get this swarming effect of people listening to chat rooms and basically saying, "Let's all go invest or buy X, Y, or Z." And you get this swarming of hundreds if not thousands of orders into a particular stock, which may or may not have any fundamental reason for moving its price, but the price certainly moves.

Now, if you look at overall measures of market volatility, you find that only a tiny handful of stocks are affected this way, but it is very disconcerting to investors who hold those stocks and don't understand why they are moving. It is also very irritating to the companies who see a new set of expectations created knowing full well that nothing fundamentally is different in the company. It is a function of having a very large market, with different classes of participants in it, all working with their own schemes and motives to make money.

How is the Nasdaq reacting to the growth of the Island trading networks? [Island trading networks commonly are known as electronic-communications networks (ECNs). They are the alternative trading systems used by the growing legions of Internet brokers. ]
Well, if we're smart we will make the Nasdaq attractive for them to be part of us. If we're not smart we risk them drifting off and trying to create their own markets.

That's a function of getting the technology right, getting the trading practices right, getting the pricing right.

So we face the opportunity to improve our market by making it attractive to these new entrants and the risk of the United States having a more fragmented market if we are not successful at doing that.

NEXT: Competition and the Net's "wow" factor

CNET News.com Newsmakers
June 7, 1999, Alfred Berkeley
Competition and the Net's "wow" factor

What do you think of the NYSE trading Nasdaq stocks?
Well, we have a standing challenge to the New York Stock Exchange: our quote montage is there, our technology is ready, and they're welcome to come into the Nasdaq and compete. And they can do it under the name New York Stock Exchange or they can do it under the name of their designated dealers.

There has been speculation that the NYSE might try to acquire the Nasdaq.
Well, you'd have to say who is taking who over, because we are now doing more dollar volume and more share volume than they are. We are the largest market in the United States in the last two months. And we think our model is set up to be inclusive, so we would be glad to have them be part of it. We have a standing offer to come out and trade to be part of it. We would be glad to extend our terminals right to the floor of the New York Stock Exchange and have them compete.

What do you make of these incredible valuations of Internet companies?
I think you have to take a little bit longer view of history to understand what is probably going on here. I don't for a minute pretend to comprehend the enthusiasm. This was reported to me by a friend who talked to a commercial banker who said that the cost to deal with a person at the  I happen to think that the Internet is probably the most important technology change in our lifetime. telecounter per transaction was $1.37. And the cost to deal with the same customer over the Web was less than a penny. That's what is going on. You are seeing an order of magnitude, two orders of magnitude, three orders of magnitude reduction in costs. And that said reciprocally, the other way, is a huge increase in productivity. So you are seeing people say there is something new and different going on that is very important.

I happen to think that the Internet is probably the most important technology change in our lifetime. It is every bit as important as Mr. Gutenberg's printing press, and so we need to understand the dimensions of that. It is useful to go back in history. I am sure when you were first on the Web, if you were like me, the minute you got it, you said, "Wow, this is neat." Well, think about that person who threw the first light switch: "Wow, this is neat." Or the first time they heard a radio: "Wow, this is neat." Or the first time they saw a television. Or a telephone. Or they got on a train in the 1840s and they went 40 miles in a day instead of walking. "Wow, this is neat."

And every time we have had these "wow" industries come in, we've had bursts of speculative investments and the industries have gone through expansion stages. The key thing from a national policy point of view is that we wound up with a wonderful railroad infrastructure, and a wonderful telephone infrastructure, and a wonderful TV infrastructure, and wonderful electric light infrastructure, and now we are investing in a wonderful Internet infrastructure.

That's my explanation on why there is so much interest and activity here. And that is all money that has been sucked out of trading older, more mundane stocks.

The [Internet] industry will then go through a consolidation phase in which consolidators will emerge victorious economically.

And that is what investors are betting on. They are using the growing accessibility of the American markets to hedge their bets by investing in different Internet players. Investors are hoping that by riding a number of players, they will be at least on one winning team when the various pieces consolidate.