During a long career in government and private industry, Frank G. Zarb has been Mr. Fixit.
Now, however, one of his major repair jobs appears to have sprung leaks. The Nasdaq stock market, following a strategy that Zarb developed in the late 1990s to try to keep it from coming apart, has rapidly lost money and market share.
Amid a continued defection of customers to upstart electronic communications networks, or ECNs, Nasdaq's share of trades in its own listed stocks has fallen to 17 percent as of June from 18.7 percent in December, costing it fees.
Nearly half of all trades in Nasdaq-listed stocks done by broker-dealers who participate in the Nasdaq network are reported elsewhere, causing a further loss of revenue.
Faced with shrinking revenue, a new Nasdaq chief executive has cut some Zarb-inspired ventures and embarked on a major cost-cutting effort that includes layoffs and taking a hard look at the expenses involved in operating MarketSite, the glitzy TV backdrop and office building Zarb built in Times Square.
Nasdaq's plight has "tremendous" implications for investors and the marketplace, said Robert A. Schwartz, a professor of finance at Baruch College. "To have good stocks and good companies, you need well-functioning liquid markets."
It is an axiom of trading that the more orders that interact with each other in a market, the better prices will be for investors. Moreover, companies too small to list on the nation's largest market, the New York Stock Exchange, have long relied on Nasdaq, the second-largest, to help them raise capital.
Mark G. Heesen, president of the National Venture Capital Association, said Nasdaq's "imprimatur" is crucial for new companies, especially those seeking overseas investors.
"Nasdaq took a very long time to put together," Heeson said. "It's not something you can replicate overnight."
Some critics blame Nasdaq's problems on Zarb, 68, who retired from it and its parent, the National Association of Securities Dealers, in February 2002. They say he was too sure that the bull market global cachet of Nasdaq stocks would last and that he was too confident of getting key parts of his plans approved by market members and regulators.
Zarb, whose resume includes top-ranking positions at Smith Barney and at Alexander & Alexander in Baltimore, said his Nasdaq strategy was a good one when hatched, but that his successors weren't quick enough to "ratchet back" on growth when global markets turned down.
"I don't think I made mistakes," Zarb said in a recent interview. "You make a decision for the moment, then you re-evaluate it when things change. You always manage to the new reality."
Largely because of the cost of shrinking Nasdaq's operations and staff, the Nasdaq Stock Market Inc. lost $46.4 million in the first half of this year. Its earnings have declined steadily for the past three quarters and its stock, which trades thinly on the over-the-counter bulletin board, sells for less than half what it did a year ago.
Nasdaq's latest chief executive, Robert Greifeld, told investors this month that the company intends to become "the dominant U.S. equity market."
So far, he has closed all of the market's overseas operations; started to tinker with Nasdaq's trading mechanism, which was altered under pressure from members after Zarb first proposed it; and replaced a lot of top management.
Eighty jobs have been cut, and the company is scrutinizing other expenses.
Christopher R. Concannon, Nasdaq's strategist, said the review includes MarketSite, which people familiar with Nasdaq's operations said costs more than $20 million a year to maintain.
Greifeld declined requests for an interview, as did Hardwick Simmons, who took over Nasdaq's leadership from Zarb and stepped down in May under pressure from Nasdaq's board.
Market professionals say Nasdaq is at a crucial juncture.
"If they continue down the path they're going at the moment, Nasdaq will become less and less relevant," said Octavio Marenzi, chief executive of Celent Communications, a Boston financial services research and advisory firm. "I don't say they would disappear, but ... Nasdaq will [be transformed] from what was once an enormous, a tremendous brand name, into something of marginal significance."
The NASD created Nasdaq in 1971 to link broker-dealers trading in stocks not listed on national exchanges. An electronic network, it operates through computers in Connecticut and Maryland, rather than having a physical trading floor as does the New York Stock Exchange.
When Zarb became the NASD's head in 1997, Nasdaq was trying to recover from a dealer bid-rigging scandal that had tarnished its image with investors and it was threatened by new competitors that were eating into its trading business.
