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Nasdaq’s Knight

Edward Knight keeps the world’s largest exchange company transparent

Published in Corporate Counsel Edition - January 2010 magazine

Edward Knight, general counsel and chief regulatory officer for Nasdaq OMX Group, is a seasoned responder to financial crises. Before assuming his post in 2000, he served as chief legal officer to Nasdaq’s former parent company, the National Association of Securities Dealers, and prior to that, general counsel to the U.S. Treasury Department under then-Secretary Robert Rubin. Early in his career, he was a legislative aide to Sen. Lloyd Bentsen, who, upon becoming treasury secretary, hired Knight as senior adviser. Here, the Texas native talks with Super Lawyers about how he made his way to Washington and Wall Street.

 

When did you decide to become a lawyer?

My mother had a habit of giving my sisters and me books at Easter, and she gave me a book titled Nine Famous Trials, by John Evarts Tracy. The book described important events in history, such as the trial of Mary, Queen of Scots and the impeachment of Andrew Johnson. It fired my imagination from the age of 12.

 

How did you go from the University of Texas to the U.S. Treasury Department?

I had some great mentors. [Sen.] Lloyd Bentsen gave me my first job out of law school. I was very fortunate to go right from law school to the floor of the United States Senate as his legislative assistant. I was responsible for defense and energy policy, and for Texas that was a very big issue—this was the 1970s, and we were in an energy crisis. 

Then I went to work for Bob Strauss, another University of Texas alumnus and a legendary lawyer who founded a firm [Akin, Gump & Strauss] in Dallas. I worked in the firm’s Washington office. Bob had a big influence on me. The third mentor is Bob Rubin, whom I worked with at the Treasury. He helped me a lot and I learned a lot from him.

 

Is Robert Rubin the greatest secretary of the Treasury since Alexander Hamilton?

The longest period of sustained economic growth in the history of the U.S. occurred while Rubin was secretary of the Treasury. Looking at the balancing of the budget, the job creation and the overall economic security that people felt during that period, you have to give him credit for that leadership.

 

Is our economy heading in that direction again?

I’d like to believe so. We’ve seen a dramatic increase of initial public offerings. Places like China have been very dynamic sources of new listings for us. There are many other places with thriving capital markets. That’s helped global economic growth.

 

What do you do as general counsel and chief regulatory officer of Nasdaq?

Job No. 1 is making sure the market is run with very high compliance with the obligations we have and according to the highest legal standards. That is the most important aspect of this business—the confidence that investors must have in our facilities. We work very hard on getting that right.

During the financial crisis when many of the credit markets froze, the cash equities markets continued to move. We were operating in the red lines in terms of the volumes we were handling—trading was in the range of 250,000 transactions per second. Those speeds had only been tested in our labs. It tested the capabilities of our systems.

The SEC played a huge role in developing the rules and the processes that resulted in that performance. There are a lot of details around compliance, around surveillance of the market to make sure we’re policing it correctly and enforcing our rules and that people can have confidence that they are being treated fairly.

 

Why is short selling beneficial for the U.S. economy?

Probably the best evidence of that is, for a period of time, in the midst of the financial crisis, along with the SEC and NYSE, we banned short selling in several financial stocks. And the spreads—the price differentials between buyers and sellers—widened, which means the quality of the market deteriorated. We think the deterioration of the markets was largely due to the inability of people who were making markets to short sell and hedge their risks.

 

What did you do as a part of President Barack Obama’s transition team?

I wasn’t making policy. I was doing due diligence and collecting information from the professional staff at the Treasury Department about the status of programs and providing a body of information for the new officials to hit the ground running so there wasn’t a huge education gap.

 

What were some high points while serving as counsel to the Treasury Department?

Working on two things were probably the most dramatic and successful. The 1994 Mexican financial crisis, and the debt limit crisis [of 1995 and 1996], where the government shut down and we had to find a way to fund and preserve the good name of the U.S. government in the credit market without compromising the Clinton administration’s principles in terms of reducing the budget deficit.

The job of the legal team was to find a way to replenish the coffers of the U.S. government when they had largely run down. We came up with some creative management of certain funds that freed up the ability of the government to raise additional money and keep funding needed for operations. It was in a very hostile environment in which Congress was threatening to impeach Bob Rubin for the actions he was taking. It was up to my team to ensure the actions he was taking were consistent with the law and not subject to attack.

 

What’s your biggest challenge as counsel to Nasdaq?

We have gone from operating one equities market in the United States to operating in 22 markets around the world. This includes the Nordic markets in Europe. We now support the operations of 70 stock exchanges. So managing that transition and ensuring that we don’t increase our legal risk profile.

 

What have you done to protect Nasdaq’s legal risk profile?

We’ve put into place a global compliance program, including an ethics program, educating employees about their obligations in terms of the different jurisdictions that we operate in. There’s quite a bit of complexity that we’ve got to encourage people to get into so that they fully understand the depth, the breadth of the obligations we have.

 

What is the future of major exchanges worldwide?

I’m very optimistic. I think the financial crisis, if it’s done anything, has highlighted to policy makers that it is much better for the financial markets to operate in a well-lit, well-regulated environment. And that markets that operate lightly regulated and in the dark can really cause a high degree of damage.

Nasdaq was the pioneer in lighting up markets and taking them away from a closed floor, away from trading over the telephone. We brought all the information to a screen with technology that was very reliable and very fast so that there was no difference in the information you were looking at in San Francisco or New York City.

 

What’s the biggest misconception about Nasdaq?

There’s often a sense that the Dow Jones is not Nasdaq. Some people haven’t seen what’s happened to our markets in the last 10 years—where companies like Vodafone and DreamWorks Animation have joined Nasdaq. We are much more than just technology companies. The Dow Jones is made up of Intel and Microsoft and Google. The market is a global market. It is a market where there are many Chinese companies, many Israeli companies, many industrial companies, oil and gas companies, as well as software companies listed on our exchange. So it’s not your father’s Nasdaq. 

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