by Matt Villano

Stock Exchange CEO Expects Dividends from IT

Nov 15, 20069 mins
IT Leadership

The CEO of the nationu2019s oldest stock exchange expects competitive dividends from his IT.

Meyer (Sandy) Frucher, CEO of the Philadelphia Stock Exchange (PHLX), loves a good story. He tells them easily, like one might tell a friend or spouse about the day at work. Even when he’s pressed for time, he weaves a juicy plot and leaves listeners begging for the conclusion. With this in mind, it seems only natural that Frucher relies on an anecdote to explain the importance of IT in his organization.

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His story begins last year, when Richard Baker, chairman of the U.S. House of Representatives Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, came to Philadelphia and requested a tour of the exchange. Baker’s schedule was tight, so he asked to see only the most important aspects of the market. Without missing a beat, Frucher took him straight to the Operations Command Center, the epicenter of technology for the entire company. “He was simply blown away,” Frucher remembers. “He said, ’You are the first exchange I’ve visited that has shown me technology as an identification of what things are all about.’ I’d say that about says it all.”

It certainly says a lot. As CEO, Frucher has engineered and overseen the biggest technology transformation in the 216-year history of the nation’s oldest exchange. Today, the exchange trades equities, options and foreign currency options and provides equity clearing services. In years past, however, the portfolio was less diverse. The transformation began in 1998—when transactions were still being processed largely on paper and the PHLX was hemorrhaging money. The Securities and Exchange Commission hired Frucher to turn the company around and merge the PHLX into the American Stock Exchange (AMEX). The merger never materialized, but Frucher worked together with CIO Bill Morgan (who has held the position since 1995) to develop and execute the technology modernization. In a highly competitive marketplace, the PHLX needed the new technology to attract trading volume from other exchanges. Then last year, Frucher sold 90 percent of the company to six Wall Street firms—Citadel Group, Citigroup, Credit Suisse, Merrill Lynch, Morgan Stanley and UBS—in exchange for those companies’ options business. The deal helped the PHLX rebound from a $13.9 million loss in 2005 to an estimated $30 million in earnings this year.

Re-architecting the PHLX’s systems wasn’t easy. To get things started, Frucher borrowed $20 million from local banks. With help from former Philadelphia Mayor Ed Rendell, Frucher also championed a capital fee to be imposed on owners to help fund the new systems. Then came the technology itself. Frucher took a hands-on role working with Morgan to devise the systems that chart trades. He also backed the use of handheld and laptop technology that help make all of the trading electronic. The process practically eliminated the traditional (and less efficient) open outcry system, in which brokers shout out their offers for trades. Paper transactions are nearly history. Today, the PHLX is the third-largest of six exchanges in the United States, executing as many as 380 million quotes a day. “Everything we do runs on technology,” Frucher says. “We couldn’t exist without it.”

Now technology is driving the PHLX into the next decade. In September, the organization relaunched the Philadelphia Board of Trade as an all-electronic futures trading platform and unveiled a new line of business providing data center hosting services to local companies.

Meanwhile, behind the scenes, the PHLX is putting the finishing touches on its new Technology Center in the Philadelphia Navy Yard, at which point it will become the third U.S.-based exchange to house its IT and business continuity operations offsite (the others are the New York Stock Exchange and Nasdaq).

Frucher spoke with CIO about technology’s role at the PHLX, his expectations of IT and how the exchange budgets for technology.

CIO: Considering that so much of the business revolves around IT, what are your top expectations for the department?

Sandy Frucher: The future of our business is staying ahead of the technology curve. This is a business where volume continues to expand exponentially. Because of this, IT must guarantee that we have the capacity to go with this expanding traffic. Secondly, I want them to be strategic and be able to respond to [the other exchanges that are] our competition. The last objective I’m looking for is to have them integrate our options, equity and futures products technologically so we have things running on a common platform. We’re working on a slogan that is something like, “One Technology, Three Markets.” We need IT to support that.

With all of these projects under way, how do you build alignment with IT?

IT can’t ever go wanting. I need to make sure their part of the business is adequately funded. We made that mistake once before I arrived, and we’re not going to make it again. Bill and his whole operation go through the same rigorous budget process as everybody else, but they generally get what they need because that’s the heart of the business. The other thing is that we’ve put Bill in charge of operations. Once you determine that IT is the business, it’s silly to separate it. We consider IT “the business,” so it runs the business operation.

You mention the budget process. How do you decide whether to fund a new technology investment?

We have to ensure the integrity of our markets. When we look at new technologies and competitive technologies, we need to make sure the systems do what we need them to do and that they’re cost-effective. We ask ourselves, Does it make sense? Can we save money with it? Then we put it through business analysis and make determinations accordingly. Part of that cost-benefit analysis is the opportunity cost associated with how we deploy our IT manpower. It’s not a question of straight dollars. It’s a trade-off of one system versus another system, because we’ve learned that you can’t do it all at once.

Is there anything that you wish you’d never funded?

No. In a business, you have to be prepared to fail in order to succeed. There are many times that you’re going to make investments where the investment itself doesn’t pay off in a bottom-line kind of way but is a necessary interlude at a particular moment in time.

CIO Bill Morgan reports to you. Why do you think that’s important as opposed to him reporting to somebody else?

The CEO of a business has to do two things: He has to have adequate information to run the business and has to be sure that he does not have too many direct reports. With too many of those, you are limiting your capacity to manage. You have too much information coming at you, too many people that you have to interact with on a regular basis. [But] this is a business that’s conducted from 9:30 a.m. to 4 p.m., and frequently there are disruptions in the process that are critical to the whole market structure of the United States. If we can’t conduct business, under the law, I’m required to call a meeting of a committee that makes the determination as to whether or not to send the order flow to another exchange. So I need to have direct contact with Bill 24/7.

How do you communicate so regularly?

One is by e-mail, and we are all tethered with BlackBerrys, which operate across the world. The other is telephone, whether it’s by cell or landline. When I have gone on Outward Bound trips, which I try to do every year, Bill can reach me via satellite phone. Interestingly, we actually don’t see each other in person that much. My main office is in Philadelphia, but I’m not there more than two or three days a week. I spend a lot of time talking to the customer base, the regulators, lawyers, accountants and bankers.

Overall, what would you say are the biggest lessons you’ve learned about working with IT?

The biggest lesson is never to underfund it because it’s much harder to catch up. Number two is do not rely on anything you build to be a long-term solution, because the world will change and there are forces that will make you change your strategies and your technologies to comply on a moment’s notice. The third lesson is what makes the other two lessons so important: The world is changing at speeds much greater than anybody could ever have anticipated, and therefore, you can never rest on your laurels. The expression that people frequently use is, If only I could get there, but “there” just keeps moving, so you need to be prepared.

If you could change one thing about IT at the exchange, what would it be?

I would want to have triple redundancy instead of double redundancy. I’m always amazed when you have a problem with something that’s so off the wall there’s no way to anticipate it, and as soon as you go out and fix it, something else goes wrong. That’s just the way systems are. This is one reason we decided to make the investment to build the standalone technology center—to have backups to our backups. You can’t build in enough safeguards in our kind of business. All you can do is prepare for problems and be flexible enough to solve them quickly and continue moving forward.

Matt Villano is a freelance writer and editor based in Half Moon Bay, Calif. He can be reached at