CEO • NYFIX
“Where you come from does not necessarily determine who you are today, but your personal values are something which you get only from your upbringing,” says Howard Edelstein, a Stanford-trained electrical engineer who grew up in the Bronx. Though he describes himself as a “poor kid,” his family could obviously draw on a rich heritage in terms of values. “I learned early on from my father the importance of persistence, and plain old hard work,” says Edelstein. Even on the days he went to school, Edelstein worked behind the delicatessen counter of a Bronx supermarket. “I was learning how to slice smoked salmon when I was 14 years old,” he says. “So I had a skill. Just in case. So I could always work somewhere.” Thirty-odd years on, that combination of pragmatism and determination can be seen as the driving force behind a remarkably successful career, but one which has always spurned the conventional approach in favor of taking on the assignments that others regard as impossible. “I like turning technology into commercial opportunity,” says Edelstein. “But my real passion is for taking on challenges others view as too daunting, too complex, or simply too far gone.”
A serial entrepreneur and (in recent years) turn-around artist who has now spent a quarter of a century on the frontier where computer technology and telecommunications meet the information and information-sharing needs generated by the securities industry, Howard Edelstein is unsurpassed in his mastery of that particular territory. But to understand the passion he brings to endeavors easily disparaged as dull, it is necessary first to understand the man. Though he is always ready with a rapid-fire sense of humor that draws deeply on the richest comic tradition in the world-that of the Jewish immigrant community of New York-nobody who has worked for Howard Edelstein would describe the experience as easy, for his sense of commitment and powers of endurance are formidable. But neither would anyone question his strong intelligence, his deep-rooted integrity, nor his essential kind-heartedness. “We never had a lot of money growing up, but my father always found some way to give to charity,” Edelstein remembers. “If somebody came to the door, or approached him on the street, he could never turn them down. It is the kind of thing you remember when you are 4, 5, 6 or 7 years old.”
Today, both Edelstein and his wife are involved in organizing educational events and fundraisers for the Simon Wiesenthal Center, an international Human Rights organization. His wife Lisa co-founded Generations Against Genocide, which Edelstein describes as “an outreach program for the next generation of 20-30 year old ‘kids’ to get actively involved in programs to educate and prevent future atrocities against those who cannot defend themselves.” Many are benefiting from the program already-from the provision of solar cookers for women in developing countries, chiefly because it helps to insulate them from abuse, to the orphans of the genocide in Rwanda.
Edelstein himself is an active member of the Israel Venture Network, a non-profit network of technology entrepreneurs from the US and Israel that invests in education, budding entrepreneurs, and social programs in Israel. The support for Jewish causes is deep-rooted: Edelstein’s father, originally from Poland, spent the German occupation of 1939-45 oscillating between the partisans and a Polish family who concealed him. “People were trying to kill him,” Edelstein recounts. “He was hiding in a barn with two of his brothers, when they were discovered. One brother was killed immediately, but the other two escaped by jumping off a bridge into a river. They were washed downstream separately, and never saw each other again. My father ended up hiding in the wheelhouse of a water mill for two weeks while they hunted him with dogs. All told, he lived for three years on his own in the woods, until he was rescued by a Russian army captain in 1944.” In 2002 Edelstein took his children to Poland to retrace the footsteps of his father. Forty years of Communism having frozen life in much of rural Poland, he was able to visit the very watermill where his father had hidden after being discovered by the Germans. The owner turned out to be the daughter of a former next-door-neighbor of his father. “When she heard the story, and that it was the birthday of my son, she ordered pizza, and we had a little pizza party in the mill,” says Edelstein. “So there we were, 60 years later, eating pizza in the mill where my father had hidden in order to survive. It was an eerie but truly moving experience for all of us.”
By such fragile threads does posterity hang. In 1973, less than thirty years after that Russian army captain rescued his father, Howard Edelstein entered City University in Manhattan. Though young for his class, he earned a Bachelor of Engineering degree in electrical engineering, followed by a Masters of Science in the same subject at Stanford. On final graduation in 1977, Edelstein went to work for a company run by Lee Iacocca, the legendary president of the Ford Motor Company and later the savior of the Chrysler Corporation in the 1980s. “It conceptualized and designed electronic gadgetry for motor cars that had not yet seen electronics,” recalls Edelstein. “It had little to do with cars, except that you could see one day there would be electronics in cars.”
Among the then-futuristic products Edelstein worked on were semiconductors and speech recognition software. “You could not put ordinary sensors on car engines because they would melt, so we were trying to use semiconductors, which could withstand the temperatures and still be reliable and cheap,” he explains. “In the late 1970s, it was cutting edge stuff.” But after two years, Edelstein had had enough of living in Michigan. He joined an Israeli telecommunications company, and worked for a time in both Israel and the United States, chiefly on compressing data to make more efficient use of bandwidth-which was then an expensive commodity. One of the projects Edelstein worked on was the construction of a touch screen order entry and confirmation system for a commodities brokerage. It was a proprietary application that ran, in those pre-personal computer days, on proprietary hardware as well. “It was my introduction to the financial markets, and how you could apply information technology and telecommunications to them,” explains Edelstein. “I found it interesting, so I took a job with a start-up financial information company funded by the publishers Knight-Ridder, which wanted to create an electronic news, analytics and price quotation business for the fixed-income markets.”
The company managed exactly that, and was eventually sold, at which point Edelstein took a job doing much the same with Telerate, but on a global scale. It was the right move, but Telerate eventually squandered its pioneering stature and early lead in electronic price and news dissemination, and was gradually acquired by Dow Jones in a series of transactions during the 1980s. Edelstein eventually left to blaze trails elsewhere. In 1990 he was recruited by Thomson, where he gained his first exposure to the equity markets.
“Thomson was an amazingly cool organization,” says Edelstein. “Coming from a fixed- income background, I could see immediately that equity processing was still in the Dark Ages.” Thomson then owned a miscellany of equity processing businesses aimed at the buy side. They were led by an optimist and visionary called Keith Jarrett, who evangelized ceaselessly about the coming age of paperless securities trading. “We called the paperless trading solutions we thought up ‘the paperless p,’ because Keith loved that chart we designed showing all the different stages in the lifecycle of a trade, and it looked like a big ‘P,'” recalls Edelstein. “Only later did it become known as straight-through processing.”
The challenge was to turn an idea into a business, and Edelstein acknowledges that the entrepreneurially minded senior management at Thomson were forgiving of a number of false starts. Despite increasing the company’s revenues more than ten-fold during his tenure, the success which Edelstein still recalls with most pride was his near-decade-long crusade-symbolically reminiscent, perhaps, of his father’s years in the forest-to overturn the New York Stock Exchange rule that precluded commercial entities such as Thomson from offering trade confirmation services in the United States. But in the securities services industry Edelstein is still best known for orchestrating the merger between the trade confirmation businesses of Thomson and the Depository Trust and Clearing Corporation (DTCC) that created Omgeo. That triumph began innocuously enough in London, where Edelstein helped to persuade a group of London fund managers, appalled by their own exclusion from the SWIFT banking cooperative, to sponsor an equity order matching service supplied by Thomson.
It is more than significant that Chris Smith, the Fidelity operations chief who was the main driver behind the so-called Industry User Group (IUG) that led that electronic trade confirmation project in London, later joined Edelstein at Thomson, and then chose to work for him again at NYFIX-the electronic trading platform, brokerage and messaging company where Edelstein was CEO until the company was sold to NYSE Euronext in late August of this year. Thanks in large part to the tsunami that swept through the financial services sector a year ago, the deal did not generate shareholder value on the scale he initially anticipated, but Edelstein points to the fact that “we built a community business of over 10,000 buy-side to sell-side relationships.”
And building “communities” of users is the leitmotiv of the career of Howard Edelstein since the formation of the IUG in the early 1990s. The IUG was the origin of a hugely profitable equity order matching and allocations business Edelstein and his colleagues dubbed the Thomson Electronic Settlements Group (Thomson ESG). In a typically daring instance of the impossible deal, Thomson ESG even managed to buy Sequal, the trade matching service supplied by the London Stock Exchange, after a preposterous plan hatched by the exchange to build an “inter-vendor link” to hook up all providers of trade confirmation services ended in predictable failure. “There is some symmetry in the fact that the then very young Stanley Young who sold me that Sequal business in the 1990s is actually the buyer of NYFIX today,” jokes Edelstein. Stanley Young was then a consultant at Accenture, and a more than interested observer of efforts to use trade matching as the key to settlement on T+1.
Edelstein knew this too. But when he tried to spin Thomson ESG off to the users of the service, he was rebuffed by them in favor of the Global Straight Through Processing As- sociation (GSTPA). It was the expensive failure of the GSTPA that eventually made possible that merger of Thomson ESG with the TradeMatch business of DTCC to create Omgeo. “You have to thank the GSTPA for making the Thomson-DTCC deal that created Omgeo happen,” says Edelstein. In fact, he still treasures an article in the Financial Times, published at the time of the IUG, predicting that a commercial vendor could never succeed in the field of trade matching, and that the role would have to be assumed by an industry utility that made it mandatory.
“We had a passionate mission to make this work, mainly because people said it would not work, not technically, but because nobody would change their habits without being forced to do so by an industry utility,” says Edelstein. “If you deliver efficiency and provide value, there is no reason why you cannot make money doing it. The whole notion that it can only be done by a not-for-profit has been disproved again and again. We know now that not-for-profit does not mean not-for-cost. Those guys spend money just the same as anyone else. To build a sustainable and enduring business, you need to solve a real problem and create real value with a real business model.”
Edelstein would say that Thomson ESG and Omgeo had that “real business model.” So, he would doubtless add, did NYFIX and the business he chose to lead immediately after Omgeo came into being: turning the ailing telecommunications network provider Radianz into a business BT was prepared to pay handsomely to acquire in 2005. For Edelstein, Radianz was a case of creating a for-profit “community,” just as Thomson ESG and Omgeo were. Indeed, the irony of the fact that Omgeo now succeeds for the same reason that the GSTPA failed is certainly not lost on Edelstein.
“Once people master the work flow, and the technology works, there is really not a lot of incentive to change,” he says. “But once it gets going, it really gets going. It is a community or network business that follows Metcalfe’s Law: the value of a telecommunications network is proportional to the square of the number of connected users of the system. Every client gains from every other client that is on it. Every client that joins adds value to the whole community. You could argue that stock exchanges are community-based, but in fact they are much more commoditized, and they are very transaction-oriented. In the boring part of the securities processing chain, the post-trade stuff is much more complicated and requires more data. The old joke is that it only takes four data points to make a trade-how much, how many, who you are doing it with and what it is-but you need 40 to 50 data points to settle the trade. The complexity with those data points, because they are not all in one place, is pretty big. I know it sounds boring, but some of the best businesses are like that. Look at Cisco. Technically, it is a boring business. Who could get excited about riding packets from one place to another? But think about what you can accomplish by riding packets from one place to another. It is a very similar business to what Omgeo does at the client application level, as opposed to the network level. There are very few companies that build community-type business, but it is an exceptionally valuable model.”
Edelstein applauds Tom Glocer, then-Reuters CEO and now running the combined Thomson Reuters group, for his prescience in recognizing that the chief asset of Reuters was not the networks, which cost a fortune to maintain and upgrade, but the content and analytics carried across them.
“Glocer understood the value of what we think of as ‘content’ these days,” says Edelstein. “The whole notion in the old days-that you needed to have a proprietary network-became a liability. Glocer recognized that. He did a partnership with Equant to build a network that could be shared with other data vendors. It could not have been done without someone like Reuters, because you need an anchor tenant to generate enough business to get it going, but Reuters itself did not generate enough business to keep it going. By selling the network services to other parties, Glocer turned a liability costing several hundred million dollars into an asset.” Edelstein takes no credit for conceiving what became Radianz, but he is proud of turning prospect into reality and making it commercially successful. But it fell to him, after a year battling with the Justice Department and the SEC to get the Omgeo deal done, and then a second year as entrepreneur-in-residence at Warburg Pincus, to turn the joint venture between Reuters and Equant from loss to profit, ultimately selling it in 2005 to BT for an amount considerably in excess of the $175 million reported at the time. “We took a brilliant idea about sharing infrastructure, and turned it into a viable business,” says Edelstein. “It was a great deal for Reuters, which got out of the costly network business, but could still ‘charge for content’ and have a reliable delivery platform, and a great deal for BT, which gained a premier, blue-chip client base in financial services.”
He adds that in the weakened markets of today the notion of outsourcing infrastructure makes even better sense for market intermediaries in 2009 than it did back in 2005. “Imagine going in to your boss today and saying, ‘I am going to connect those clients that you asked about. I just need to buy 100 routers and a bunch of air-conditioned data space.’ Your boss is going to say, ‘You’re fired.’ If you could come in and say, ‘For a few hundred bucks a month, I could get us the new clients overnight, and if you do not like a particular client I could disconnect them tomorrow,’ you may get a promotion instead. That is a much better model for the economy of today. Why would you want to build a proprietary network-or any kind of infrastructure model-today if you have someone who knows how to deal with your market niche?” No one can accuse Edelstein of not following his own advice. One of his first steps on being appointed CEO of NYFIX in 2006 was to outsource the technical network. “NYFIX clients did not care what wires they were on so long as it was ultra-reliable,” he explains.
“What they cared about is the service layer NYFIX provided on top of it. They cared about FIX messaging and the FIX workflow, but they did not care about the network so long as it never went down.” The faith of Howard Edelstein in the value of the “community business” operated by NYFIX was tested by the dire market conditions of 2008-09 but, as he points out, NYSE Euronext still agreed to purchase the company at a 95% premium to its quoted stock market value. At NYSE, NYFIX will operate as a stand-alone unit within the growing NYSE Technologies division.
On this form, it cannot be long before Edelstein persuades at least one of the major banks that their back and middle office and those of their competitors could also be turned into a “community” led by Howard Edelstein. After all, anyone looking back over the Edelstein eras at Omgeo, Radianz and NYFIX cannot fail to be struck by the common thread that unites them. “I am in love with community-based businesses,” he says. “I am in love with solving client problems. There are many, many things that we treat as application-specific issues that really belong to a community construct for resolution. Omgeo, Radianz and NYFIX each provide technological solutions to real and practical problems based on a community construct. The whole notion of on-net services, of selling software as a service, providing clients with solutions as a service where they can vary their cost structure so they are not investing capital in needless things, those are the kind of things that get me juiced up. On top of that, you can sell information as well. Even in the Thomson ESG days, we sold information on how counterparties were dealing with one another. Smart brokers used that information as a customer service tool for fund managers. Others used it for best execution calculations. Some fund managers used it to talk to their brokers about improving their efficiency and reducing their commission rates. Once you have a community-based business, and you start selling information on top of workflow, you have a very powerful solution. It is much better than selling a pure software application or a broad, horizontal communications network. I love technology. I love financial services. But I believe the techniques we have developed can be applied to other verticals. The common theme is solving industry-wide problems on a common basis.”
Not much in life or business is certain, but only the bravest prognosticator would claim that NYFIX will be the last piece of the securities industry to benefit from the passionate embrace of Howard Edelstein. Here is a man who not only has that elusive “vision thing” but a proven ability to lead industries into forms of change their denizens assume are impossible, using means that are (contrary to his reputation among some of those that have worked for him) soft as well as hard. Who else would have thought a merger between DTCC and Thomson was even possible, let alone pulled it off? But then Edelstein is fond of quoting the Colin Powell nostrum that “leadership is doing what the science of management says is impossible.” There are still plenty of impossible places left in the securities industry. –Dominic Hobson