How Evolving Business Strategies Are Changing the Nasdaq CIO’s Role

On the average business day last year, $14.4 trillion worth of trades pulsed through Nasdaq OMX markets globally. The company matches buyers and sellers using technology so fast that trades are time-stamped to the nanosecond. And it wouldn’t take much longer than that for the world to find out if that technology ever failed.

Big as it is, however, Nasdaq OMX is fighting new competition in financial markets that makes managing trades less profitable every year. Mindful of creating new sales and profit streams, the exchange is trying to build a business by selling software, IT and advisory services to other financial organizations around the world.

These conditions make the world’s biggest exchange perhaps the world’s best laboratory in which to observe the CIO of the future: an executive who can manage the relentless pressure to perfect IT operations and who also has a killer instinct for making money.

In this laboratory, Executive Vice President and CIO Anna Ewing is under the microscope. She doesn’t sit still much, though, shuttling frequently between Nasdaq OMX’s New York headquarters, its Shelton, Conn., data center and the cities around the world where she helps to sell the exchange’s IT products and services. Ewing reports to CEO Bob Greifeld, and as the top technology leader of one of the most powerful organizations in the world, she also ranks as one of the highest-paid CIOs among the Fortune 1000. She earned $2.8 million in 2008, the latest year for which data is available.

Other top CIOs are paid more and have less at stake. Nasdaq OMX is a critical part of the United States’ economic infrastructure. In less than 10 years, it has weathered the 9/11 terrorist attacks, gone public and changed business models. It has digested acquisitions designed to make it compete more effectively with other trading venues. And it launched a for-profit IT venture, called Market Technology. At each turn, Nasdaq’s CIO had to adapt to the turmoil while forging new paths.

Ewing, who became CIO in 2005, runs Market Technology, making her one of the few CIOs with direct responsibility for turning a profit. However, she says, incorporating profit-and-loss thinking into IT leadership is the way forward for all CIOs. “CIOs are more attuned to P&L now,” she says. “We’re having to be more engaged in growing the business and not so operational.”

Business Upheaval

Nasdaq OMX spent the better part of the last decade in upheaval. It started 2000 as simply Nasdaq, the king of U.S. stock exchanges, with more companies listed on it than on any other, including its biggest rival, the New York Stock Exchange. Then came the 9/11 terrorist attacks. During the few years after that, the Securities and Exchange Commission changed its trading regulations, which allowed Nasdaq and the NYSE to go public. Both exchanges transformed from quasi-private, government-protected entities to businesses whose fortunes depend on quarterly returns. Nasdaq went public in 2002 and now faces several dozen competitors grabbing for its investment firm customers. Amid the recession, trading volumes zigzag daily, which makes them hard to predict and plan for.

Although new top executives have arrived during these years of tumult, including Greifeld in 2003, the CIO has been promoted from within. That continuity has provided stability, says Tom Jordan, CEO of Jordan and Jordan, a technology consultancy that specializes in the financial services industry. A new CEO sometimes brings in a new senior executive team to deal with the challenges he or she was hired to tackle, Jordan says. But Nasdaq kept its IT leaders because they “understood all the background of the company and platforms.”

Yet the CIO role at Nasdaq OMX is vastly different from what it was. Gregor Bailar, the Nasdaq CIO from 1997 to 2001, planted the seeds for a succession of IT leaders that in many ways mirrors the evolution of the role across industries. In 2000, Bailar hired Steve Randich from the Chicago Stock Exchange to be CTO and, a few months later, tapped Anna Ewing from CIBC World Markets as senior vice president of application services. When Bailar left in late 2001, after seeing Nasdaq through the terrorist attacks, Randich took over as CIO. Ewing took Randich’s place when he left for Citigroup in 2005. What Ewing stepped up to, however, was unlike the Nasdaq of the past.

Conventional wisdom holds that a financial organization is its technology. Banking and finance companies spend 8.6 percent of their revenue on IT, according to CIO research—a higher proportion than nearly any other sector. In finance, business strategy equates to IT strategy. Still, Bailar’s job was heavy on operations—defined, he says, by projects to revamp technology to accommodate growth in members and trading volume.

At the time, in the late ’90s, Nasdaq traded about 500 million shares per day. But volume was increasing and, Bailar recalls, he had to upgrade the trading systems to keep up. ­Nasdaq then ran on Unisys technology built in the 1960s. The company had already started to build a replacement when Bailar arrived, but he put the project on hold in order to make Y2K fixes to the Unisys systems. After that, he scratched the original replacement project, starting over with goals that would sustain much higher trading volumes; the original plan would not have kept pace with the growth in transaction volume and the need for speed, he says.

“The big challenge for me was dealing with bread and butter: making that market open when it should and stay open with no issues,” he says. “You’re making the shop smooth and clean every day, while at same time you have a whole crew working on changing it.”

When Randich became CIO, he continued Bailar’s work, overseeing several organizationwide system upgrades and enhancements. Randich also worked with the federal government to help formulate homeland security safeguards and developed plans with other financial companies, such as Lava Trading, for building resiliency into their systems.

Under Randich, the buds of for-profit thinking began to blossom in the IT group. Nasdaq began renting space and IT equipment in its data centers to clients such as Trillium Trading for a monthly fee. The pitch: Customers could trade faster by plugging their machines into Nasdaq’s network, avoiding even the tiny delay of having data travel through outside communications networks. Now big investment houses, including Merrill Lynch and Goldman Sachs, collocate servers at both Nasdaq OMX and the NYSE.

Also during Randich’s watch, Nasdaq had gone public and was digesting several acquisitions made to add ever-faster technology to its portfolio. Ewing, who then reported to Randich, focused on software development, including integrating the acquired technologies. With these changes, the IT mandate Bailar and Randich had known changed, too. When Ewing became CIO, she retained her role as leader of software development. She also added a third hat: head of Nasdaq OMX’s two-year-old Market Technology group, the business unit that sells software and services to financial marketplaces around the world.

Today, 500 million shares change hands in a few hours, rather than a day. And Ewing must ensure that Nasdaq OMX’s systems process these transactions as fast as possible—not to mention faster and more accurately than competitors. What’s more, she’s under instructions from the CEO to please shareholders by cutting IT costs. And she must make technology a source of profits. In other words, although she’s still a CIO, she has to think like a CEO about customers, costs and making money.

IT-Based Strategy

To understand why the Nasdaq OMX CIO is more than an IT leader, you have to understand the importance of technology to its business.

Unlike the NYSE, Nasdaq OMX has no trading floor crowded with loud, finger-waving traders. The chaos is distilled to binary code, and transactions are conducted over Nasdaq OMX’s proprietary electronic trading system, called Inet. Inet can handle 1 million messages per second, Ewing says. Super speed matters, she notes, because humans no longer do the bulk of the trading. Machines race machines.

A trader’s servers can immediately detect latency in an exchange’s servers, seek out a comparable price for any transaction at a different exchange and reroute the transaction. When machines talk to each other, there’s no loyalty, says Sang Lee, a managing partner at Aite Group, a consultancy for the financial services industry. “You can’t be fast enough.” One way an exchange can offer the best price on a given financial instrument, and thus get paid for making the deal, is to turn trades around faster than anyone else.

However, although Nasdaq OMX can conduct business in microseconds, traders also choose exchanges based on how much transactions cost them. Good old market forces have pushed the profits down for executing trades. Traders now have more than 40 venues through which to trade stocks. Some of these venues, such as Liquidnet, are smaller and may be less expensive to use. There are also private “dark pools,” such as Direct Edge, whose members trade among themselves and don’t make their deals public in real time.

Ten years ago, Nasdaq and the NYSE accounted for 90 percent of all trading. Today, it’s about 45 percent, Lee says.

Nasdaq wasn’t set up for that kind of competition, even when it went public in 2002. “This put pressure on the exchange technologically, to improve overall infrastructure,” Lee continues. “And they had to think about how much they could really make providing transaction services.”

Nasdaq OMX needs new sources of profitability. As Jordan puts it, “Going public is one jolt, one time. But competitive pressure is ongoing.”

A New Business Model

Pivotal to future profits is the 2007 acquisition of OMX, a Stockholm-based owner of Nordic exchanges with a business model that Nasdaq imagined for itself: 35 percent of OMX’s revenues at the time came from selling IT and services to other exchanges, says Adena Friedman, the CFO of Nasdaq OMX since last August. She’s been at Nasdaq since 1993 and, as executive vice president of corporate strategy and global data products, led the $3.7 billion OMX deal. When Bailar was CIO, selling technology wasn’t a separate business. Instead, Nasdaq focused on global expansion, creating subsidiaries in other countries. It set up Nasdaq Japan, for example, and Nasdaq Europe. But that idea didn’t take off. The European subsidiary listed 48 companies in 2001, dropped to 40 in 2002 and was dissolved in 2003. The Japanese entity listed 82 companies in 2001 and ceased operations the following year.

With the OMX acquisition, the company switched gears, deciding instead to sell to other countries the software and services needed to set up exchanges. The NYSE has a similar business. Increasingly, exchanges define themselves not simply as a place to trade but also as technology providers, says Dushyant Shahrawat, a senior research director at TowerGroup, a consultancy for the financial services industry.

Friedman and Ewing worked together closely on the OMX deal, starting with spending two days in Amsterdam poring over OMX’s IT code base to identify how and how well Nasdaq would be able to integrate the two companies’ technologies. “We’re a technology company,” Friedman says. “If you don’t have that [CIO] partner with you making a key business decision, you could make a terrible mistake.” OMX had a long history of selling very fast technology, Lee says, making the acquisition a good fit. Ewing says the two companies saved $150 million in operating costs that they would have borne had they remained separate.

Inet was merged with OMX’s trading platform to create a system called Genium Inet, which Nasdaq OMX sells through the Market Technology division Ewing heads. Technology from Nasdaq OMX, including Genium and some standalone versions of Inet, runs 70 exchanges in 50 countries, accounting for one in 10 transactions completed worldwide, Ewing says. Of Nasdaq OMX’s 2,200 employees, 40 percent—about 900 people—work for Ewing, either in IT or Market Technology. And as leader of Market Technology, she also manages internal marketing, sales and consulting staffs.

It’s unusual to have such employees reporting to the top technologist, Ewing acknowledges. However, she adds, “I’m not there to improve the status quo but to change the status quo.” Profit-and-loss responsibility is new to Ewing, but at Merrill Lynch, she managed development of client-facing applications, such as a revenue-producing service that provided analytical investment data to international clients. At CIBC World Markets, just before joining Nasdaq, she was managing director of e-commerce.

Changing the status quo means that Ewing shares responsibility for appealing to new customers. After launching a free iPhone application, QFolio, last October, Nasdaq OMX added new features in January. The app now lets consumers set up watch lists to get real-time stock quotes and performance charts for both U.S. and Nordic companies, and to calculate conversions in five currencies. Although no firm plans have been announced, Ewing says that QFolio may eventually bring in revenue, perhaps via subscriptions to market data. Ewing has also expanded Nasdaq OMX’s collocation business to more than 100 customers.

Such IT-enabled products and services mean that “the traditional view of what an exchange is has been thrown out the window,” says Lee of Aite Group.

Tomorrow’s IT Department

Ewing knew that to fulfill her business mandate, she needed to instill a new profit-minded view in the IT group. But she didn’t want to mess too much with the structure of a team that worked so well operationally. Nasdaq CIOs have always assigned some IT staff to support specific business units, and Ewing continued that practice. But she also began to tie the performance goals of her people not just to IT-related results but also to sales, operations and compliance. For example, IT people are now held accountable for sales and profit goals for certain financial products used by customers they support, Ewing says.

It was uncomfortable at first, Ewing admits, for people in the IT group to have their paychecks depend on the performance of another department. However, she says, doing so forces both sides to address, rather than ignore, problems with a given project in order to achieve its goals. “When you’re so closely aligning those goals together, between technology and business teams, you’re relying on one another to see it through,” she says. “You don’t do this unless you have mutual trust.”

Other staff rotate through different lines of business so they can learn about various ways the company generates revenue. Under Bailar, more of the IT staff stayed put, specializing in specific financial products or IT realms to make each the most efficient that it could be. “They were scientists of particular areas,” Bailar says. That structure, which continued under Randich, produced reliable expertise in proprietary, specialized systems that had to handle trading volumes that doubled every 14 months, Bailar adds.

Under Ewing, the IT staff retains expertise in Nasdaq’s trading systems. But rotations give team members broader knowledge that, she hopes, helps them make connections they wouldn’t otherwise make, which could lead to ideas for new products. Ewing says technologists are more valuable to her when they not only understand their business unit but also can come up with new concepts. Technology staff who deal directly with customers—say, to solve technical issues with Nasdaq OMX systems—also pick up tidbits about new services customers wish for, she says. “We bring that to the sales team.”

At the same time, Ewing, like Bailar and Randich before her, must give appropriate attention to the mainstays of IT. To cut costs, she is experimenting with cloud computing. For example, Nasdaq OMX data that is used for a service that lets customers replay a day’s trades now runs on Amazon’s S3 storage cloud, at a savings she declines to specify.

What’s Next

Crucial to making it all work, Ewing says, is earning respect. Ewing quickly dispenses with the argument that CIOs need a seat at the table. That’s old news. Rather, she views herself and her top managers as consultants, she says—like doctors, not peers or hired hands. “We provide technology, yes, but we are full partners” with business units, she says. Friedman relies on Ewing to help vet potential acquisitions, for example. “She is a part of the strategy group, as we look at how to carry our business forward,” Friedman says.

Ewing is able to assume this role partly because of her proven technical prowess and her cool head; she has earned “immense” respect from her colleagues and staff, according to Bailar. During her years at Nasdaq, she was in charge of key systems development efforts and helped the exchange recover from 9/11, he adds.

“She has worked across many constituencies and is always raising her capabilities to match the growing needs of the company,” Bailar says. “But more critically, she made sure that her team was adapting their capabilities to keep in step or ahead of company needs.”

The transformation at Nasdaq OMX isn’t done. Nor is that of the CIO role there. The Market Technology group cleared its first profit last year, making proceeds of $14 million from $145 million in revenue, according to the company’s latest annual report. But Ewing will have to turn a profit consistently to prove that a CIO can be just as market-driven as any CEO.

The Nasdaq OMX model won’t work at every company—a manufacturer or a retailer, say, doesn’t have the same opportunities to sell its IT. But the CIO at any company can influence the top line by thinking in a customer-oriented way. In this way, Ewing’s work may blaze a path for the CIO profession, Bailar adds.

“An innovative CIO like Anna can impact what goes on from here,” he says. “She can demonstrate what’s possible.”