Makeover artist: Face to Face with Sandy Frucher

Meyer “Sandy” Frucher came to the Philadelphia Stock Exchange in June 1998 with a mission at which he quickly failed: close down the oldest U.S. exchange, which was mired in financial difficulties.

Arthur Levitt, then-chairman of the Securities and Exchange Commission, had asked Mr. Frucher to arrange for an orderly close of the marketplace and to avoid bankruptcy. But, as it became impossible to reach an agreement with creditors or potential buyers, Mr. Frucher had no option but to save the market where Revolutionary War bonds that financed the young United States of America first traded in 1790. Mr. Frucher transformed the stock and options market through technology and demutualization to attract outside investors. In 2005, Mr. Frucher sealed strategic alliances with six Wall Street firms, which provided the order flow necessary to propel the PHLX to the No. 3 spot among seven U.S. options exchanges. Last November, he negotiated the acquisition of the PHLX by Nasdaq OMX Group Inc., New York. The deal, valued at more than $652 million, is expected to close this month.

You saved the Philadelphia Stock Exchange 10 years ago but now it's going to be part of a much larger group. Any sense of nostalgia? Yes, of course. But in today's world, there's only Pac-Man and the dots. If you don't have the resources to be Pac-Man, it's important to ally yourself with the right partner for the benefit of your shareholders and constituencies. So, we've survived and we are becoming global, as part of the Nasdaq OMX Group. There is nothing new about this trend. In the old days, there was a huge consolidation among the U.S. regional exchanges, well over 100 of them at one point, as we moved into a national economy and a national market system. Today, we are in a global economy and global markets.

People have been talking about global markets for a long time, but it really happened only very recently. When did you realize that trend was really unfolding? It became clear two years ago when (then-NYSE Group CEO) John Thain started moving on Euronext and Nasdaq tried to acquire the London Stock Exchange. When NYSE bought Arca and went electronic and Nasdaq bought the Inet ECN, the exchange world was no longer about buildings and geography, but about technology and ideas.

The evolution of markets is profound because it's no longer just a place where people come and trade. Markets must bring many new services because liquidity can be anywhere in the world. Exchanges are no longer limited by geography and the matching of a trade. You can trade from the top of a mountain in Nepal or the top of a mountain in Montana, depending on your sleeping habits.

Technology has been the driver of that evolution. Now, what's the next step? No one can sustain a technology advantage eternally. You need to put together a whole package, and that's what Nasdaq brings, with its diversified revenue stream and multiple services. If we wanted to survive over time, we needed to be part of a much larger entity, like the International Securities Exchange did with Eurex/ Deutsche Boerse.

How do you envision markets a few years from now? OMX already provides trading technology for 70 exchanges in 55 countries that, when linked, will create a federation of exchanges. Whether small or large, those markets can keep their national flags and trade through Nasdaq OMX and now PHLX. Exchanges outside of the U.S. are essentially monopolies in their own products. In many countries, people who want to trade outside of their market must go through a broker-dealer to access Nasdaq or Deutsche Boerse. Sooner rather than later, they'll be able to trade through the same point of access all over the world. You'll see whole linkages of major markets. The technology barriers have fallen and the regulatory moats are filling in.

With the major exchange groups getting only bigger, there is a concern about monopolies wielding too much control over global trading. Will competition still play a role? When I came to the PHLX in 1998, Arthur Levitt had given me six months to deal with the situation. We were in negotiations with Nasdaq, which already owned the American Stock Exchange and the idea was to fold the PHLX's options business into Amex's but the Amex seat owners were opposed to this. Our only asset was our exclusive listing of Dell options. There also was some concern that the exclusive trading of options would soon end, and it did in 1999, opening up competition. Competition saved the PHLX because we could trade options listed on other markets, thanks to our XL technology, and grow our volume. Options volumes have exploded for the entire industry since competition was introduced in 1999, and there'll always be new ideas, new technologies and new players.

How did you manage to develop technology at an exchange that had no money and a lot of debt? Philadelphia Mayor Ed Rendell (now Pennsylvania's governor) introduced us to bankers who agreed to extend us a $30 million line of credit secured by a revenue stream, which we created by taxing the seat owners for the use of our technology. It was the first time any exchange had taxed seat owners. Philly also became the first floor exchange to demutualize and get an independent board.

It seemed that you had to develop the art of the deal long before your peers got into it. How did you do that? Rethinking what an exchange is was a new frontier. My background in real estate and government made me understand how to develop assets that can become collateral for loans that permitted us to adopt a new strategy. The situation screamed for demutualization to create a currency to trade. Technology was the first part, demutualization was the second and the third and most important part was our strategic alliances that gave us order flow that created external value.

We understood that the value of an exchange was its order flow and its technology.

Historically, exchanges got their volume through two different sources, the specialists and the brokers, but that's the old paradigm of the floor. While it still has some value, it is not enough. The 2005 agreement with the Wall Street firms that became shareholders and liquidity providers was extremely important because we were better positioned to compete.

What do you see ahead for the PHLX under the Nasdaq OMX Group's umbrella? Nasdaq OMX is a world-class, multiasset global enterprise. The combination puts the Philadelphia market front and center in a global market where equities and derivatives have converged.

When Philadelphia merchants created the exchange in the 18th century, their aim was to make capital flow across networks of credit, commodities and investors. They saw prosperity as something to be gained by reaching out to other institutions and other markets. With Nasdaq OMX, we'll be taking the dynamic of capital markets to more places — perhaps most significantly to many developing countries in Asia, Africa and South America.

Contact Isabelle Clary at iclary@pionline.com