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Oct. 19, 2019, 10:56 a.m. EDT

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

The time it takes to settle trade ‘is an embarrassment in 2019,’ says Bob Greifeld

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By Silvia Ascarelli, MarketWatch


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Then-Nasdaq CEO Bob Greifeld, clapping right, at one of many Nasdaq trading debuts he experienced.

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 /zigman2/quotes/204693277/composite VIRT +0.31% , 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 /zigman2/quotes/205547889/composite NDAQ +0.62% 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.

This interview has been edited for length and clarity.

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 /zigman2/quotes/201281754/composite SCHW -1.82%  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.

Read: Fidelity cuts fees to $0 as it jumps on zero-commission bandwagon

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 /zigman2/quotes/210599714/realtime SPX -0.06%  , 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.

/zigman2/quotes/204693277/composite
US : U.S.: Nasdaq
$ 16.27
+0.05 +0.31%
Volume: 337,090
Nov. 13, 2019 2:35p
P/E Ratio
44.34
Dividend Yield
5.90%
Market Cap
$1.92 billion
Rev. per Employee
$3.89M
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/zigman2/quotes/205547889/composite
US : U.S.: Nasdaq
$ 103.09
+0.64 +0.62%
Volume: 377,925
Nov. 13, 2019 2:34p
P/E Ratio
32.75
Dividend Yield
1.82%
Market Cap
$16.81 billion
Rev. per Employee
$1.07M
loading...
/zigman2/quotes/201281754/composite
US : U.S.: NYSE
$ 42.69
-0.79 -1.82%
Volume: 2.70M
Nov. 13, 2019 2:36p
P/E Ratio
15.80
Dividend Yield
1.59%
Market Cap
$55.43 billion
Rev. per Employee
$563,538
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
3,090.11
-1.73 -0.06%
Volume: 1.01B
Nov. 13, 2019 2:36p
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