Over the past 18 months, the revolving door of corporate scandal has exposed white-collar executives to the public’s prurient glare as individual investors got fleeced in the implosions of Enron, WorldCom and Adelphia. Recently, another broadside has been fired across Wall Street’s bow, this time aimed at the New York Stock Exchange and a 211-year-old trading model that uses the 450 specialists on the floor to execute trades at the best listed price. A battle is being waged to undo the provision, known as the “trade-through rule,” which mandates that brokers must trade stocks at the best listed price, and which has given the NYSE a lock on 80 percent of the 1.5 billion shares that change hands on the exchange each day. Opponents claim the regulation guarantees a de facto monopoly for the NYSE. On Thursday, April 1, the S.E.C. will hold a public hearing about whether to uphold the trade-through rule.
If the S.E.C. rescinds the rule, Edward Nicoll will be a happy man. Mr. Nicoll is the 50-year-old chief executive of Instinet Group, the country’s largest electronic institutional brokerage, with $1 billion in revenue. As the C.E.O. of Instinet Group, Mr. Nicoll oversees the brokerage division and INET, the electronic exchange. In February, Mr. Nicoll testified in front of the House Subcommittee on Capital Markets and derided the continuance of the trade-through rule. Competing electronic marketplaces such as Mr. Nicoll’s Instinet, NASDAQ and Chicago-based Archipelago have been shut out of trading NYSE-listed shares if they can’t match the prices posted on the Big Board. Last year, Instinet posted a net loss of $74 million, and since 2001 has jettisoned 873 employees as it navigated the sharky waters of electronic trading while effectively being blocked from the world’s largest capital market.
“We’re not saying people have to come to Instinet; we’re not saying people should get worse prices on Instinet than they do on the floor,” said Mr. Nicoll. “We’re saying, let’s have the electronic markets published in one place, and have the other markets published in another place, and let traders choose how they want to execute their orders.”
Mr. Nicoll was speaking in a glass-walled conference room at Instinet’s Times Square offices in the gleaming Reuters Building (Reuters owns 62 percent of Instinet’s stock). He was wearing a prim blue blazer and tie on his gaunt frame. He’d limped in on a pair of crutches, the result of a bicycle-racing accident. “Oh, it was just the pelvis bone-just a couple of little stress fractures,” he said. “When you get older and you still continue to play foolish boys’ games, there’s consequences .”
Mr. Nicoll contends that the prices posted on the NYSE often aren’t delivered, and trades that would have guaranteed a comparable price on Instinet now go unfilled. Furthermore, he says, his company offers superior technology that can fill orders in seconds, beating the specialists on the floor. Currently, Instinet handles one out of four trades on NASDAQ, yet because of the trade-through rule, only one out of 100 on the NYSE.
Mr. Nicoll’s opponents dismiss his claims, saying that the NYSE posts the best price more than 90 percent of the time, has invested more than $2.3 billion in trading technology over the past 10 years, and that its specialists execute trades in an average of 11 seconds. And they point to the increased transparency of the NYSE board in the wake of the Dick Grasso flap. But Mr. Nicoll dismisses the changes as posturing by an organization that remains the province of Wall Street insiders.
When Mr. Nicoll testified in front of the House subcommittee, he was flanked by Robert Greifeld, the chief executive of NASDAQ, and Gerald Putnam, the chief executive of Archipelago. The troika sparred with John Thain, the newly appointed NYSE chief executive. Things got pretty nasty: At one point, Mr. Nicoll called Mr. Thain-a former president and chief operating officer of Goldman Sachs who accrued more than $300 million in Goldman stock-a “bureaucrat.”
“Institutional investors have been complaining about [the trade-through rule], people like Calpers and Fidelity, that this regime ends up screwing them, that this regime creates incentives for people to play games with their orders,” Mr. Nicoll told The Observer . “And they feel as if they’re being manipulated. And what they want, and we had asked for, from the regulators, is to give our markets an opportunity to compete side by side with the NYSE without this artificial barrier to competition.”
Officials at the NYSE are not swayed. “The exchange is continuing to evolve and place investors’ interests first. We’re demonstrating with our actions that we’re expanding access to automated trading,” said NYSE spokesman Ray Pellecchia.
“I think it’s a good idea to enforce the trade-through rule,” said Yakov Amihud, a professor of entrepreneurial finance at N.Y.U.’s Stern School of Business. “The rule says I can’t execute an order anywhere else at a price which is worse than the best price. I think any improprieties with specialists can be easily regulated. A quote can be a firm quote; if you don’t honor the quote, you’ll lose your seat. It can be solved with regulation. I don’t trust the broker to do the best job for the investor by choosing where to trade; I want the broker to be directed to execute at the best price.”
Mr. Nicoll responds to such arguments with a blast of free-market faith: “The dynamic of markets has totally changed” because of the communications revolution, he said. “Today, we can have competing marketplaces and everyone can see them! And they can see them instantly! Today, we can bring all those competing marketplaces into one transparent super-marketplace through communications and technology …. We ought to know, after all the experience we’ve had over the past five years, that the only way to keep people honest is not through regulation and not through more government fiat, but through good old honest competition . People competing for their own self-interest-you know, the old invisible hand.”
The NYSE could benefit from competition as it tries to overhaul its corporate governance. The most recent headline to rock the exchange came on March 30, when regulators announced that five specialist floor-trading firms agreed to pay $241.8 million to settle charges of exploiting their position to trade for their own firms before public customers, effectively giving investors inferior prices while they profited.
Mr. Nicoll, who lives in Montclair, N.J., with his wife and two daughters, begins his days with pre-dawn bike rides (after Lance Armstrong’s Tour de France victory in 2002, he dined with the champion at the Musée D’Orsay in Paris). Politically, he leans to the right: He’s contributed money to George W. Bush and is a trustee at the neoconservative Manhattan Institute.
He grew up in lower-middle-class Patterson and Passaic, N.J. His father left when he was a child; his mother eventually shuttled his sister off to Columbia and his brother to the University of Rochester, but Mr. Nicoll headed to rural Pennsylvania, where he worked on a sheep farm.
“I didn’t go to college-I was in a hurry to make money and experience life,” he said. At 21, he took a job in Pittsburgh as a stockbroker. Several years later he was back in New York, where he and Larry Waterhouse launched Waterhouse Securities in 1979. The discount-brokerage boom was going into full swing.
“I remember when we opened our doors, there were 16 ads in The Wall Street Journal for various discount brokers. And we were brand-new and only one of 16,” he said. By 1995, when Toronto Dominion Bank bought them out in a $600 million deal, they had 2,000 employees and 80 offices.
Already a millionaire, in 1994 Mr. Nicoll cajoled his way into Yale Law School by acing the LSAT and snooping out a provision that allowed students without a college degree to pass through the gates of Yale’s New Haven campus.
“Every year at Yale, there is one sort of oddball at the law school,” he said. “The year after me, there was a dyslexic student who couldn’t read. He unfortunately didn’t make it. A couple of years before me, there was a celebrated case of a schizophrenic-I think he ended up killing his girlfriend. I’ve been the most successful of the oddball entrants.”
“It’s certainly quite unusual for us to admit someone without a college degree,” said Tony Kronman, dean of Yale Law School. “We have no formal requirement that applicants have a college degree, and in all but the rarest of occasions, applicants would have been to college. And Ed is a fiercely independent-minded man in all things, including business. He does not simply accept the conventional piety or views about how things are or ought to be.”
“At Yale, he didn’t fit into any one group,” said classmate Cory Booker. “Many times he’d commute back home to his wife and kids, while most of us were in our 20’s. Yet he ran circles around all of us.” Later, Mr. Nicoll helped Mr. Booker raise $120,000 to get elected to the Newark City Council.
In 1999, in the waning years of the Internet frenzy, Mr. Nicoll returned to Wall Street and invested $4 million in Datek, then a struggling day-trading firm being investigated by the S.E.C. He pooled more than $900 million from private-equity investors, including Bernard Arnault and LVMH, to buy out the owners and revamp the firm as a full-service online brokerage. The gamble paid off, and in 2002 Datek merged with Ameritrade in a $1.3 billion deal.
In his current battle, Mr. Nicoll is also jousting with some of the New York political establishment, from Senator Charles Schumer to Attorney General Eliot Spitzer and the state’s Representatives in Congress, who say opening up the market will erode the NYSE’s position as the economic engine of the city.
“From a New Yorker’s perspective, this industry represents a great deal for the city, and any whittling of that, I have concerns with,” said Representative Joseph Crowley (D-N.Y.), who sits on the House Subcommittee on Capital Markets. “Wall Street supports many other industries in this city. And people have generally more confidence that human decision-making is going into a trade and it’s not just a computer.”
Mr. Nicoll is skeptical of the political muscle behind the NYSE.
“They’re a very powerful institution with a large lobbying arm down in Washington that has an enormous amount of influence,” he said. “They have the New York delegation behind them. We think that trying to prop up an old trading model is not the kind of public policy that’s good for the markets or, in the end, very good for New York. What you’ll end up doing, you’ll end up migrating that volume away from the State of New York to other marketplaces.”