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William O'Brien, Direct Edge

Direct Edge CEO William O'Brien Plans to Go Global

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William O’Brien, who once rejected his exchange roots, took over a tiny ECN and grew it into one of the biggest equity exchanges in the world. Now he’s looking at new markets for Direct Edge. By Jake Thomases

To understand the job that William O’Brien was offered in the summer of 2007, blow the dust off your globe and spin it to the map of Russia.

Over in the western part of the country is Moscow, home to 11 million people and an historic and economic center of Europe. Let’s call that the New York Stock Exchange (NYSE). Trace your finger north until you g et to St. Petersburg, a culture-rich city of 5 million. Call that Nasdaq.

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“We really shouldn’t exist. We’ve been able to take some pretty significant market share in the last few years from some competent competitors who have many more resources in terms of capital and brand and history than we do.”

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From there, move your finger east. No, keep going. About 3,000 miles in, on the banks of the Lena River, sits a small city called Yakutsk. Now, Yakutsk is not the worst place in the world. It is a global diamond hub and a regional capital of 260,000 or so people. But Yakutsk is far away from everything, and temperatures dip to a nippy minus-40 degrees Fahrenheit in January.

Yakutsk, in the summer of 2007, was Direct Edge. The company that came courting O’Brien was as far from the major players as Yakutsk is from Moscow. It had a staff of 19 and no independent infrastructure, having just spun out from Knight Capital. Market share hovered around 1 percent. It was on the fringes of both the market structure and the physical market, with its headquarters across the Hudson River in New Jersey.  “It effectively didn’t even exist yet,” O’Brien says.

Then in his mid-30s, O’Brien was enjoying a stable position as senior vice president of listings at Nasdaq. Departing for Direct Edge, even to be a CEO, required a leap of faith.

Less than five years later, the exchange boasts a 10 percent market share, headcount has grown to 120, and Direct Edge is pushing its way into international markets. While O’Brien can’t claim all the credit for its success, at the very least, he’s glad he got in when he did.

“CEOs are defined as much by what they choose not to do as what they choose to do,” he says. “From the outset at Direct Edge, if you ask what the mission is, it’s not about market share or how much money you make, it’s to build a company that can endure. Increased market share and profitability will help get you there, but that’s not the mission in and of itself.”

Born Into It
An exchange man by birth, it took O’Brien a long time to realize his destiny. His father, a member of the New York Stock Exchange, was a technology man in the days before the market went electronic. He would sit at his desk in their Long Island home entering data into yellow legal pads. But the son was more interested in law than finance. He attended the University of Notre Dame and then the University of Pennsylvania Law School with the goal of becoming a corporate lawyer, without an idea of what that actually meant.

During the summer after his second year at Penn, O’Brien landed an internship at the law firm Orrick, Herrington and Sutcliffe, where he met a partner named Sam Miller. Miller, a former general counsel at Paine Webber, specialized in broker-dealer and securities market structure regulation, a subject he introduced to the young intern. O’Brien immediately felt an affinity.

Upon O’Brien’s graduation in 1995, Orrick offered him a job in Miller’s department. For three years he was schooled in market structure, enough that Goldman Sachs hired him away in 1998 as an assistant general counsel. There he handled prime brokerage, margin finance, and stock loans. In 2000, he moved on again, this time as general counsel to Brut, one of an early group of ECNs that included Archipelago and Instinet.

In 2002, in a charge led by SunGard executive vice president Robert Greifeld, minority owner SunGard purchased the remaining shares of the ECN for $100 million. The subsequent management reshuffle led to O’Brien being named COO. It was his first official foray into the business side of an enterprise. “It’s not unusual to see recovering lawyers in this business,” he says.

Greifeld left SunGard to become CEO of Nasdaq, but couldn’t keep his hands off Brut. He bought the network again in 2004, bringing O’Brien under the umbrella of the world’s second-largest exchange. For 15 months he was in charge of Nasdaq’s market data distribution and aided in the creation of new data products. He was then moved to the listings department, where he led the push to attract IPOs and exchange switches. There he stayed until Direct Edge came knocking.

Established under the name Attain ECN, it was bought by Knight in 2005 and rebranded as Direct Edge. Two years later, Knight sold the majority of its share to Goldman Sachs and Citadel Securities, and the three continue to own equal stakes today. Brought on shortly after the divestiture, O’Brien came in ready to shake things up.

“I assumed, well, I’m the old Brut guy, I know how to run an ECN, I’ll walk in there and figure it out and then tell everybody what to do,” the 41-year-old recalls. “Much to my fortunate surprise when I got here, I found out that the strategy they had was exactly the right one. All I needed to do was help provide the resources that would allow the company to scale and get the right team in place to facilitate that, and then brand it and sell it independent of Knight and communicate the value proposition there.”

The Rise
From Direct Edge’s perspective, NYSE and Nasdaq were too concerned with international acquisitions, leaving an opportunity for small competitors to steal market share through innovation. When O’Brien arrived, Direct Edge boasted dual equity platforms, EDGX and EDGA. EDGX employs a traditional maker/taker fee and rebate structure for those adding or removing liquidity. EDGA is free to those taking liquidity but provides no rebates.

“Everybody else at the time was collapsing all their platforms into one big mega-über system, principally to save money,” he says. “When you do that, you limit yourself to one value proposition. Our competitors were focusing almost exclusively on certain segments of the high-frequency trading (HFT) community. If you only have one product, that makes a lot of sense. But we saw that a lot of other segments of the trading community were being underserved. Having two platforms allowed us to be more things to more people.”

At the same time, the architecture of both platforms was similar enough to be operated by the same IT team.

Not a technologist by background, O’Brien participated in major projects like Brut’s 2002 upgrade to accommodate the growing wave of HFT. He appreciates the challenges faced by Direct Edge CIO Saro Jahani and former CTO Steve Bonnano—himself a veteran of Brut and Nasdaq, who stepped down last year—as they struggled to achieve ever-lower latency. “I know just enough to be dangerous and just enough to be sympathetic to the technologists here,” he says.

The day O’Brien arrived in 2007, Direct Edge traded 300 million shares. Eighteen months later, he says, it traded 2 billion shares. He feared that the legacy technology he’d acquired from Knight wouldn’t support that kind of growth. It had to be replaced, but doing so while continuing to lure customers onto the legacy platform was a tricky proposition.

A savior arrived in August of 2008 in the form of the International Securities Exchange (ISE). Direct Edge took over its benefactor’s ISE Stock Exchange subsidiary, and in return, ISE acquired a 31.5 percent ownership in the ECN. The purpose of the deal was twofold: It dropped the ownership stakes of Knight, Goldman Sachs, and Citadel to 19.9 percent each to comply with Securities and Exchange Commission (SEC) rules—broker-dealers cannot own more than 20 percent of an equity exchange, which Direct Edge was applying to become—and it infused Direct Edge with advanced technology and infrastructure.

As it was building its new platforms, volumes continued to rise. It surpassed more than 10 billion shares per day soon after the merger, becoming the third-largest US equities market. It continues to vie with Bats Exchange for that distinction today. In March of 2010, Direct Edge’s exchange application was granted by the SEC, and four months later it made the conversion, simultaneously debuting its new end-to-end technology. It also moved its servers from Knight’s datacenter to Equinix’s NY4 center in Secaucus, New Jersey.

ConnectEdge and EdgeLink, two connectivity options for accessing market data and sending orders, were unveiled in November of 2010. They leveraged low-latency connections built during the platform upgrade and allowed customers to capture data from other venues through Direct Edge’s connections.

That year, Ernst and Young named O’Brien the New Jersey entrepreneur of the year in financial services.

At home in his simple sixth floor office, the young executive is polished and prepared. He has told his company’s story before. He appears aware of every issue but passionate about few, and worried about less. “I sleep pretty well, when my kids let me,” he says. He has three—ages nine, five, and one—with another due in April.

When he’s not ferrying his kids to shop or to church, O’Brien relaxes by skiing, playing golf and basketball. He is a fan of Notre Dame football, of course, and the New York Mets baseball team. He likes the New York Jets football team, too, although the signed helmet atop his cabinet belongs to Eli Manning, quarterback of the rival New York Giants.

If anything shakes him it is the growing backlash against technological innovation in the capital markets. In every other aspect of society, the digital age is regarded as a near-universal positive; he doesn’t understand why stock markets should be the exception. Educating the public would go a long way, he says.

What’s New
O’Brien’s focus these days is on bringing Direct Edge’s newest initiatives to fruition. One is EdgeBook Cloud, an on-demand historical data service that launched last month. Developed with web services data vendor Xignite, it will provide multiple tiers of access to historical data from EDGX and EDGA. Firms that want to build and back-test trading strategies can run detailed queries against the exchange’s book data and receive search results in a delimited text file.

Another is a planned expansion to Brazil in the fourth quarter of this year. Brazil is considered a market ripe for exchange competition because of its size, positive growth trend, telecommunications infrastructure, and respected regulatory environment, yet BM&FBovespa has enjoyed a near-monopoly on equities and derivatives trading.

O’Brien thinks Direct Edge can make a successful entry by “tropicalizing” what it does well. The biggest hurdle is clearing. The Brazilian Clearing and Depository Corp., the country’s only equity clearinghouse, is operated by BM&FBovespa. The Brazilian exchange’s CEO Edemir Pinto declared in November that it was off limits to competitors. O’Brien is exploring other options, but still holds out hope that an agreement can be reached, as it was in Australia between the Australian Securities Exchange and Chi-X Australia.

One looming problem O’Brien no longer has to worry about is ownership. There was a chance that ISE would have to sell its stake in exchange for regulatory blessing of the NYSE Euronext–Deutsche Börse merger. Because that deal collapsed, ISE’s ownership is no longer at issue.

Should the Brazil adventure be successful, O’Brien will have shepherded a growth that began on the market fringes and ended in Rio, and maybe beyond.

“We really shouldn’t exist. We’ve been able to take some pretty significant market share in the last few years from some competent competitors who have many more resources in terms of capital and brand and history than we do.”

Not bad for a guy who never saw himself walking his father’s path.  It’s a long way from Yakutsk.

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