Shortly before Alfred R. Berkeley III was named president of the Nasdaq Stock Market Inc., a joke circulated among the investment community: "Did you hear the one about the new Nasdaq ad slogan?" it began. "Nasdaq, the stock market for the next 100 years with 25 years off for good behavior."
It wasn't funny to the executives of the world's second largest stock market, who felt as if they were staring into both barrels of a shotgun.
The Justice Department was probing a group of companies that buy and sell Nasdaq-listed stocks to see if they had colluded to fix prices. And the Securities and Exchange Commission was looking not only into whether brokerage firms cheated investors, but whether executives at Nasdaq's parent company, the National Association of Securities Dealers Inc., knew about the problems and ignored them.
Nasdaq's credibility with investors was in jeopardy, and Berkeley had plenty to lose if he took the job and changes that were promised weren't made.
He had a superb reputation as a managing director at Baltimore-based Alex. Brown Inc., plenty of money, and a spacious home in Roland Park. And he had just undergone surgery to remove a cancerous prostate.
So why would he risk all that for Nasdaq?
His wife, Muriel, answered the question best. "You have gotten a second chance," she told her husband. "The industry has been very good to you. Why don't you give something back?"
Berkeley, then 51, went for the job, beating out 136 candidates to become Nasdaq's first president since the electronic market began trading stocks in 1971.
A tall, athletic man, Berkeley hit the place like a tidal wave, bringing new life and ideas to the bruised company, employees and observers say.
Since joining Nasdaq, he has pushed to make it a friendlier stock market to small investors. He has helped patch strained relations with the SEC. And he has backed major investment programs with the hopes of becoming the biggest stock market in the world, and surpassing the New York Stock Exchange.
"If you had to dial Central Casting for somebody who would be perfect for the Nasdaq stock market, you couldn't have picked a better person," said Gordon S. Macklin, president of the NASD from 1970 to 1987. "He is a wonderful combination of businessman and dreamer."
William G. Christie, a longtime Nasdaq critic and an associate professor of finance at Vanderbilt University in Nashville, Tenn., says under Berkeley, Nasdaq has been willing to help small investors. "That is very much a change in philosophy from the old Nasdaq," hesaid. "I think he is very appropriately taking much more of a customer view."
If anything, Berkeley has brought a sense of humor and humility to Nasdaq.
He is a businessman, a computer nerd and a thinker fused into one. He dresses neatly in business suits, but lugs around canvas bags jammed with reports and papers. At his home, his dining room table is overwhelmed by papers and documents. And his Washington office is small and unpretentious, crowded with books, papers and boxes brimming with materials.
He punches at a computer on his desk and munches Altoids mints, to which he claims to be addicted. On a bookshelf behind his desk are figurines of black and white Holstein cows, which friends sent him after learning about a bizarre prank Berkeley pulled in college.
The mood at the office today is vastly different from what it was on May 9, 1996, when Berkeley first set foot on the 11th floor of Nasdaq.
The company was frantically trying to rebuild its image and mend its frayed relationship with regulators and critics, who were calling for sweeping changes.
In February 1996, Mary L. Schapiro became president of a new unit called NASD Regulation, which was created to police more than 500,000 brokers and 5,500 firms that buy and sell Nasdaq stocks.
Berkeley was appointed to run Nasdaq three months later, and in January 1997, Frank G. Zarb, the former chairman of Alexander & Alexander Services Inc., became chairman and chief executive of NASD.
He replaced Joseph R. Hardiman, another former Alex. Brown executive, whose distinguished 10-year career at the NASD was tarnished by Nasdaq's problems.
"We needed to staff up the whole organization in a fairly significant way," said Michael W. Brown, Nasdaq's chairman and the former chief financial officer of Microsoft.
But just three months after Berkeley arrived, the SEC dropped a bomb -- a massive report that concluded that NASD officials turned their heads while brokerage firms cheated investors.
There was a list of charges ranging from stock manipulation to brokers ripping off small investors by keeping the spread on stocks wide so they could pocket more money.
"They were under siege when I came in," Berkeley said.
It took time for morale to improve and the clouds to lift, but Berkeley says progress has been made. Spreads on stocks have narrowed dramatically so investors get better deals on the shares they buy and sell. And he believes that brokers are making better prices available to large and small investors.
But he is not entirely satisfied. At least once a week he receives a message about a broker or firm abusing an investor. And it's clear Berkeley feels passionately about stamping out bad brokers.
"I'll crush those bastards," Berkeley said. "I hate it [cheating brokers]. I hated it long before I came here. Anytime one of these scummy cheaters ruin the reputation of the whole industry, I just hated it because it was a reflection on me."
Berkeley now is concentrating on expanding Nasdaq. His goals are to make the exchange faster, cheaper and bigger.
Nasdaq has pumped $35 million into a state-of-the-art technology center in Trumbull, Conn., which officially opened last month. The center processes more than 760 million shares a day, and tracks the prices of more than 5,500 companies listed on the exchange, as well as about 20,000 smaller companies. By June 1999, the center will be able to handle 4 billion shares a day.
In anticipation of heavier trading volumes, Nasdaq plans to spend $600 million over the next six years to upgrade its network, with the hopes of avoiding glitches.
In March, NASD shocked Wall Street when it announced that it was in negotiations to buy the beleaguered American Stock Exchange. The deal, which has been postponed once, is expected to close late in June.
Amex would add $13 million in net income, 771 companies and, most important, a robust options market that Nasdaq doesn't have.
Options, also known as derivatives, are complex securities used by investors to hedge investments or to speculate on whether a market, a currency or stock will move up or down. The options are "where the growth and the profits have been, but we also think we can dramatically improve their equity business," Berkeley said.
Amex trades an average of 25 million shares a day, and Berkeley thinks the volume can eventually be quadrupled.
But Berkeley doesn't see the Amex deal as a direct attack on the New York Stock Exchange, the largest in the world.
"It's more part of going down our own path of modernizing the market and increasing our size," Berkeley said. "We really have our own vision of what the world needs to have."
In Berkeley's scheme, though, size is important because it will help Nasdaq cut prices so investors get a better deal.
"If you start with trying to be the lowest-cost market for investors, then you need the most market share," he said. "So, we would want to be the largest because we could convert that size into lower per-trade costs."
Of course, Nasdaq has a way to go before it can hope to top the New York Stock Exchange. While more companies are listed on Nasdaq and more shares are traded on average each day, the Big Board dwarfs the electronic stock market in market capitalization with $11.8 trillion, compared with Nasdaq's $1.8 trillion. And over the years, the Big Board has angered Nasdaq executives by stealing its most precious commodity -- companies that are listed in its market. America Online Inc., Bay Networks Inc. and American Greetings Corp. have all recently defected.
"We have to innovate," Berkeley said. "The current wave of innovation is over the Internet."
Berkeley has created sites on the World Wide Web that take investors by the hand and walk them through the basics: What is Nasdaq? How do you find a broker? How can I check to make sure my broker has a good reputation? How can I find out more about companies I want to invest in?
Nasdaq will spend $14 million on the sites this year, about twice as much as it invested last year. The sites have been a smashing success, with 10 million to 12 million people using it each day, Berkeley said.
Although technology is key, there is no substitute for hopping on a plane and meeting with the people who make up Nasdaq, the companies that list on the exchange, market makers who buy and sell the stock, and investors. Berkeley travels about 50 percent of the time, and it gives him a chance to listen to their ideas and concerns.
Some say Berkeley was the perfect choice to run the Nasdaq because of his love for technology, and his vision of what could be.
"I'm the kind of guy who looks to the horizon, but Al Berkeley is so far over the horizon," said Patrick Campbell, who heads trading and market services at Nasdaq and reports to Berkeley. "We scramble to stay up with his ideas."
Even as a child Berkeley brimmed with big thoughts. When he was 11 he designed a light-weight, waterproof tent because he was tired of lugging around the heavy, smelly World War II pup tents on hikes with the Boy Scouts. In his basement, the young Berkeley manufactured about 30 tents and sold them to other Scouts.
But Berkeley has a mischievous side, too.
While attending the University of Virginia, he pulled off a prank that remained a mystery for more than 30 years. Late one night in 1965, he and some friends schemed to put a cow on the dome of the university's rotunda, 50 feet above the ground.
At an alumni dinner in 1996, Berkeley, for the first time, admitted publicly that he was behind the stunt.
"It was a great prank," he said with a grin. "Everyone wondered at school how it had happened. We laid low for 32 years."
Berkeley graduated in 1966, then earned a master's degree in business at the University of Pennsylvania's Wharton School.
In 1968, Berkeley was married and commissioned into the U.S. Air Force as a captain at McGuire Air Force Base in New Jersey. The base transported troops and supplies to Vietnam. It also used computers with massive amounts of memory to track 60,000 different items, ranging from missiles to radar equipment to T-shirts.
Berkeley fell in love with the computers. On weekends he could be found "hacking around" on them, trying to see if they could do more for the military than just track supplies.
That passion and curiosity would serve him well. In 1972, Berkeley left the Air Force to become a research analyst at Alex. Brown. His first years at the company were "undistinguished," said William Paternotte, who headed the research department for a time during the 1970s, and today is a managing director at BT Alex. Brown.
But "he started playing around with computers at a time when none of the rest of us really knew what they were," Paternotte said. "That turned out to be very visionary."
Leap into software
Berkeley teamed up with investment banker Richard Franyo and the two concluded that software was going to become a huge business.
"We said, why don't we do software?" said Franyo, who is head of the principal coverage group. "People thought it was lingerie."
The two traveled the country uncovering one gem after another, and the company's software business took off.
The efforts helped bring in clients that would become huge players in the industry: Microsoft Corp., Oracle Corp. and Computer Associates International Inc., to name a few.
Berkeley was so fluent in the software business that he ran Alex. Brown's internal information services and technology operations. He also helped develop the company's technology practice, and was later named managing director and senior investment banker in the corporate finance department.
Now, Nasdaq executives hope Berkeley will have just as much success in Washington as he had in Baltimore. They say he is off to a good start.
"Al was a real bingo for us," said Nasdaq Chairman Brown. "We have made an incredible amount of progress here in the last couple of years. We are thrilled with his work."
Pub Date: 5/10/98