Liquidnet was now in a unique position—and not an enviable one. We went from everything we touched turning to gold to everything we touched turning to lead. It was a somewhat gradual fall from grace. And it was both extremely painful and very instructive.

Of course, this change from hot to not initially had a lot to do with the weakened economy and the frozen markets. The crisis was a lot worse and lasted a lot longer than anyone expected—and it hurt us much more than we anticipated.

Our revenues declined from our peak in 2008 through the aftermath of the financial crisis, until 2012. We didn’t stand still in these years. We continued to invest in new opportunities like algorithmic trading and Asia-Pac. We worked on our systems and our processes; we continued to train our people. But nothing we tried worked. It was incredibly frustrating and demoralizing. As a result, the leadership lost confidence in its own ability to manage out of the crisis, and so did many of the people who worked for us. We had to acknowledge, just as we had previously with the board, that the people who had gotten us to this point were not the right people to lead us out of our problems.

We needed new talent with new skills. We hired people with more management experience who had run or operated larger companies than those of us in Liquidnet’s leadership. We needed people who could guide us through this turbulent period, people who could turn the company around and get us back to growth mode. Unfortunately, we exacerbated our problems by making some senior hires that turned out to be less of the right fit than we had thought during the interview process. We had checked their references, which were stellar (who would provide the name of someone who would give a bad reference?)—but the references revealed no clues to the things that turned out to be critical gaps for us.

There have been many books, articles, studies, and metrics on the cost of bad hires. It takes time to find out the hire was a mistake, then it takes time to work with that hire to try to make it work, then it takes time to manage the person out. Throughout that time—depending on how bad that hire is—there is opportunity cost, there is cost of disruption to their department and firm, there are potential morale and disengagement issues of their coworkers, there’s loss of respect in the judgment of those who hired them, and there’s loss of productivity during training and getting new people up to speed. One estimate says that a poor hiring decision for a candidate earning $100,000 per year could cost, on average, $250,000.¹ No firm can afford to make many of those mistakes. The lesson here is that with senior hires, you need to make tough decisions quickly. And we were forced to make these tough choices.

It’s All About the People

Growth can mask many cracks in a foundation, but when growth stops or reverses, those cracks become very evident very quickly. The world had experienced a financial meltdown, and our revenues were declining in the aftermath.

U.S. revenue accounted for 80 percent of our global revenue, and none of the strategies we employed to reverse the revenue slide were working. I met with the finance folks responsible for this profit-and-loss statement (P&L) to get weekly updates. It soon became clear that the numbers were not lining up with what I was being told from the people in charge of the U.S. business. I didn’t feel like I was getting the straight facts. I started asking more questions and speaking with our sales team directly. Their answers furthered my suspicions. As I looked for information elsewhere in the organization, I soon found there was a serious disconnect between what I was learning from those at the top and what I was hearing from salespeople on the ground.

This example shows a key problem. You need to get consistent information from those at the top and those working with the clients day-to-day. I needed to correct this issue fast. This is another example of how tough decisions need to be made quickly. We needed to make a personnel change and we did. Another common problem is when a big revenue producer or business lead lacks the management skills you want for your leaders. We had a head of an extremely profitable region not exhibiting the right leadership skills. He was coming in conflict with his own people and leaders across the organization. As mentioned elsewhere in this book, at Liquidnet, culture is paramount, and the culture this was creating was not what we wanted. We had to make a difficult decision to part ways, despite the region doing well financially. Profitability cannot justify tolerating undue conflict or not staying true to your company’s core values.

One important lesson we learned as a result of these situations is that we did not have a logical successor in place to either of these roles—someone who we had identified, groomed, trained, and was experienced enough if and when it was necessary. It is an oversight that far too many organizations make yet one that is completely avoidable.

You Can’t Have It All

As revenues continued to decline, there was no visibility as to when the recession would end. It became clear that we were investing in too many projects that were draining money and we had to make difficult decisions. I have always said that I am not happy unless we are losing money somewhere. By this I mean that I constantly want to invest in new ideas, projects, and/or businesses. When our tree was growing to the sky, we could afford to invest in many projects at the same time. But when revenue is declining and you have to lay off people—you simply can’t do everything.

In our case, we had started building a program trading platform we called Liquidnet 4.0. This platform was designed to address a whole new customer segment within our existing customers, whose business was complimentary to our existing business.

Liquidnet began with a single-purpose application. It was a very small footprint that did one thing—it found liquidity and allowed our members to trade in large quantities. Finding institutional size liquidity solved the number one problem for asset managers, and the Liquidnet app did it better than any other human being or application in the world. We asked our members to place all their orders into the Liquidnet pool, and when there was a match, the app would inform them that there was an opportunity to trade in size. On average, we were able to match around 15 percent of the shares in our pool. We had gained a very valuable place on the trader’s desktop and those asset managers put billions of shares of orders every day into our pool. But for 85 percent of those shares, we had to tell our members to go elsewhere to execute them.

Our vision is to make markets more efficient, and our first milestone was to be best in the world at trading blocks. We were building unique institutional liquidity pools in every country in which we traded, and ultimately we had to provide our members the ability to execute all their orders any way they wanted. Now that we were a global broker, we had to expand our capabilities to become a full service broker and create an opportunity to execute the 85 percent of our member’s shares that we were turning away every day. We knew we could be the best in the world at executing any of our member’s orders if we could access both our own liquidity pool and the liquidity in the market available to every other brokerage firm. Execution quality is only as good as the liquidity one can access. With the unique liquidity in our pool we would have access to much more liquidity than our competitors, thus giving us a competitive advantage.

With the acquisition of Miletus in 2007, we brought on a group of very smart people who had built a very complementary business to ours. They had technology, expertise, and access to the rest of the market’s liquidity, all of which we lacked and all of which we needed to build out the next phase of our business. Liquidnet 4.0 provided a path to pull everything together, offer members the ability to execute all their orders, and grow our business with them.

We were still losing a considerable amount of money in Asia-Pacific. Our global strategy was important to our future goals, and we knew if we pulled out of the region, it would be twice as hard and twice as expensive to get back in. So we continued to invest in that region. We remained profitable in our other regions and overall as a company but our revenue and profits were declining just about every quarter. One of the people on our leadership team summed it up as constantly going up the down escalator.

We had been working on Liquidnet 4.0 for about two years. We talked about it all the time with great excitement and hope during this period. When just about all the news was bad in our monthly town hall meetings, I would point to Liquidnet 4.0 as an example of where we continued to invest and as a project that represented our bright future. It was a high-profile project, and I touted it hard.

Unfortunately, when we delivered the beta version to our beta customers, it became very clear we had badly missed the mark. What we needed was an updated application that was more extensible and scalable and provided a platform from which we could launch new revenue opportunities for Liquidnet. It had to accomplish all of that while being seen as just an upgrade for our members. Instead, Liquidnet 4.0 had a lot of missing pieces from our existing functionality and was heavily focused on program trading, which would have opened up new business opportunities but solved problems for only a small percentage of our current members. We could not provide it as an upgrade to our current platform because it was so different from the existing platform with additional functionality that most of our members didn’t need.

Had the beta gone moderately well with its targeted users of program traders, we could have and would have continued investing in the platform. But our beta program discovered architectural and functionality problems, and during the time it took to develop the product, the overall size of the market for program trading declined. We would have had to invest a lot more money to complete our product so we could fight the embedded incumbents for some market share of a declining market. We had invested roughly $10 million into its development up to that point. We had to make a very tough call. We decided to pull the plug.

As our business continued to decline due to the ongoing recession and many self-inflicted wounds, the one bright spot—the example I held up as us taking control of our future, of turning around our fortunes—had blown up spectacularly. Roughly 10 percent of our staff had spent two years of their lives working on the project, and it was the hope for our future. When we made the decision to close it down, it severely and understandably affected morale and my credibility. Employees started losing faith in our future and in my leadership. There had already been disenchantment with the leadership of the company that started with the recession and continued through some poor hiring decisions and declining bonuses. Now that we pulled the plug on our most exciting endeavor, our people saw Liquidnet as a sinking ship.

I quickly questioned the decision to pull Liquidnet 4.0 because of the dramatic impact on morale and the excruciating pain it caused throughout the company. Liquidnet employees’ resumes were now scattered all over the street. Some of our best people quit. The company no longer had the luxury of losing money across multiple fronts. We had to protect the franchise, protect our core, and make sure we could live to fight another day.

With the benefit of hindsight, I now understand what the decision to pull a potentially great project cost us in terms of morale, but like many other missteps, I see it as a learning exercise and part of our trajectory to create subsequent products that were better because of that failure.

When Even the Silver Lining Is Lead

Another adjacent, new business we were investing in, which I felt was ripe for disruption and I was very excited about, was equity capital markets. Equity capital markets refers to the issuance of new shares of a company’s stock either via an initial public offering (IPO) or, if the company is already public, when they issue additional shares through what is called a secondary offering. Liquidnet had established the first electronic global distribution platform by virtue of having desktop presence at all the world’s largest investors. I thought this could be an unfair competitive advantage.

There hadn’t been any innovation in the capital markets space since capital markets were invented. Everyone knew that IPOs were, if not rigged, highly inefficient, as was the whole way that companies issued securities after the IPO. We could do much better leveraging technology, our global customer base, and our liquidity pool. It would be great for the issuers, as they would tap into the world’s largest investors and it would be great for our members, as it would be a whole new source of liquidity. I was very bullish on this idea.

We did a deal partnering with the New York Stock Exchange. Again, like so much of what Liquidnet was built on, we found a way to use technology to create value propositions. We created a product called InfraRed that aggregated all our members’ buy and sell orders into what we called an “institutional sentiment index.”

It was pretty cool. With this offering we could go into a public company and tell them on an almost real-time basis what our membership (which constituted around 70 percent of the institutionally managed equity assets in the United States) were really thinking about their stock.³ In aggregate, are they buying it or are they selling it? We vetted the idea with our members first, as it was their data and the vast majority agreed to have their information included. With InfraRed, we were able to provide the New York Stock Exchange and public companies with information that no one else could give them, and it gave us entry into this new customer segment. We hired a team to market the product, and within two years we signed up more than 600 public companies.

We didn’t charge for InfraRed, but it had the potential to be a huge revenue generator. There were 600 public companies that had never heard of Liquidnet that now knew who we were and what we did. Within a very short time frame, we had 600 prospects for our capital markets business and growing. The expectation we set for using our software was when these public companies did a stock buyback or secondary offering, we would be included in it. And it was starting to work. But just as we started to win a small amount of business for the capital markets business, we received a subpoena from the Securities and Exchange Commission (SEC).

We as a firm pride ourselves as being above reproach. We aspire to set the example for honesty and integrity on Wall Street. There were no gray areas for us; there was either right or wrong. Receiving a subpoena shook us to our core.

Liquidnet is both a broker-dealer and an alternative trading system (ATS). The rules that apply to an ATS are different from those of a broker-dealer, especially when it comes to sharing data. We were always careful about protecting our members’ information as their trust in us was the core to our success, and loss of that trust would be the end of our business.

As the capital markets business got going, and we had more interaction with public companies, some of the folks in the capital markets group started taking more liberties with what data they shared with the companies. They came from traditional broker-dealers where that kind of information sharing was routine. For example, they would share descriptive characteristics, saying, “There was a large asset manager in the Midwest that bought your stock today or sold your stock today.” They didn’t think they were revealing too much—or doing anything wrong—because they weren’t giving out the names. And the capital market’s customers, the issuers, were appreciative of this information.

I found out about this in an alarming and unpleasant way—when the SEC came for a routine audit and uncovered it. The SEC also found that in the course of running and supporting the capital markets business, the capital markets salespeople had access to data that we had not properly disclosed to our members.

As an offense to be accused of, this came as a surprise to me. We had fully disclosed everything about InfraRed to our members. They had expressed that they were comfortable with it, and we had also given them the ability to opt out in case they were not. As we were building additional functionality for our capital markets team, we gave the team more and more access to information so that they could make better calls to our corporate prospects. We didn’t see a problem with sharing this information with them; it was the information they needed to help them know which prospects to pursue in order to bring the liquidity into our system that the members wanted.

That presented an unusual problem. We shared aggregated member information with some of our capital markets prospects that was broader than we had disclosed to our members, which we never should have done. From a regulatory perspective, according to our lawyers, we had not violated any regulatory policies by sharing information internally, but we did violate our internal policy.

Tell the Truth

SEC investigations are not made public, and every company facing this type of examination does its best to keep it a secret for as long as possible and preferably until either a fine is assessed or no action is taken.

We had a very different relationship with our customers, so while we did not have much information to share, we decided that we should tell our members that we had received a subpoena. It was highly unusual and our lawyers advised us against it, but given our commitment to honesty and transparency, we decided to self-disclose even before we had done our own investigation to gauge the severity of the problem.

Being honest and transparent includes being open and honest even when things go wrong—and especially when things go wrong. At every orientation I tell new employees, “Look, you’ve got to tell the truth. You’re not perfect. We’re not perfect. Get the bad news out there quickly.”

I had to follow my own advice and set the path forward for our company. This is when values really count, as making this disclosure at the very start of the investigation was a critical risk to the entire firm. There were no discoveries yet, there were no findings, and we could not tell our members how bad or benign we thought this would be.

We wrote a letter to our members alerting them to the investigation. Then I made a bunch of phone calls to members before the letter went out, to test their reaction to the letter. And then we shared it with the press—Bloomberg, the Wall Street Journal, the Financial Times, and others. We called a number of industry analysts to brief them on the situation, and made them aware that they were going to get calls. We invited members to come in for a visit. We said, “We welcome you to come to our office and see our operations and what we do.” We hosted them for a full day or a half-day and let them see how we protect their data.

The biggest question that we had to answer was, “Is there anything more?”

Our answer to that was the difficult truth: “We don’t know yet.” That only made them more concerned.

That was all that we could say. And that was hard for our members as it created additional potential risks to the confidentiality of their information and it put us in a very difficult position with them. We shared what we knew in the moment, and we assured them that we would keep them informed. We believed that disclosing the investigation ourselves was the right thing to do; it was in line with our core values and our relationships with our members.

While it was the right thing to do, it wasn’t the easy thing to do. We were embarrassed. We held ourselves up as the firm that is the ethical standard on Wall Street. This significantly damaged the trust our members had in us, which we had worked hard to build.

Our disclosure could have been the end of Liquidnet, and there was a period of time after the disclosure where we had to gauge whether Liquidnet would stay in business. The vast majority of our members understood and stuck by us, but there were about 30 firms—some small and some of the largest—that stopped doing business with us immediately. The disclosures and tough conversations took a toll on everyone in the firm, but especially those on the front lines, the salespeople and leadership. If our people thought the ship was sinking before this, this tore a huge gaping hole in our hull. We embarrassed our members who were loyal to us, we lost our status as squeaky clean, we lost business, and we opened the door for our competition. Those members who felt they didn’t need more than one institutional crossing network now felt a responsibility to not be beholden and rely solely on us. This was truly our brush with death.

We knew the risk of self-disclosing, but we had no idea how long it would take the SEC to finish their investigation and issue their report, so we had no idea how much it would ultimately cost the firm. It cost us dearly from a reputational and revenue perspective. The investigation took two years to complete. In that two years we lost about $20 million in revenue and spent around $6 million in legal fees, not to mention the countless hours spent in discovery and depositions. We were fined $2 million, and in the end the SEC admitted that no harm was done to any of our members.

So was self-disclosing the right thing to do? One hundred percent it was. Standing by your core values is not always easy, but I believe the tough times are when they are needed most. I firmly believe that because of the way we handled this life-or-death situation, our members will trust us to be completely honest with them in the future for all things good and bad.

When Nothing Will Ever Be the Same

It was a brutal time, a dire time. It was a constant onslaught of self-inflicted and market-related disasters. There was no light at the end of the tunnel, and it seemed the tunnel had no end. We were a firm that went from transforming the industry and having the Midas touch to a firm that could not get anything right. Even our members lost faith in us.

It was during this dark period, on January 31, 2014, that I was in a board meeting when my assistant came in and handed me a note. My wife, Anne, who was in Florida for the weekend competing in a horse jumping competition had fallen off her horse. Anne was a very competitive rider and had broken just about every bone in her body at some point. This kind of news was unfortunate but not uncommon. I got in touch with Anne’s parents, who were in Florida watching her compete, to see how bad it was. They were on their way to the hospital and said they would call when they got there.

About half an hour later, Anne’s father called, crying. Anne’s brain was swelling and the doctors had to remove part of her skull to relieve it. The doctor asked if Anne had a living will. It was only then that I left the board meeting to head to the airport. I told my father-in-law I would call before the plane took off. I called as I was boarding the plane, but it was neither my father-in-law nor mother-in-law who answered. An unfamiliar voice started talking, “Anne came in with severe head trauma; we did everything that we could . . .”

My beautiful wife, whom I met on the kibbutz the year after high school, my life partner, mother of my three kids, and my soul mate, had died on the operating table.

The Worst of Crises Can Fuel the Fight

At the time of the accident, Anne and I were talking about slowing down at work and spending more time together. Our kids were grown. She was going to transition the leadership of her philanthropic organization to someone else on the board, and I was going to delegate more to the other executives at Liquidnet. Together, we would follow the sun: to Florida, Israel, and Westchester.

That plan no longer made sense. Working hard no longer made any sense, either. Why do any of it if Anne wasn’t going to be here to help me enjoy the results of it? I had no anchor.

Everyone I knew called to take me to dinner. I dreaded every encounter and the kind of conversations we would have, but I dreaded being by myself even more. The one thing I didn’t want to be was alone.

I needed to go back to work in order to keep myself busy and keep my sanity. And I needed to turn the company around or I would be letting Anne down. Anne had been intimately involved at Liquidnet. A superstar lawyer by training and off-the-charts smart, we talked about every problem I faced or major decision I made. She created the philanthropic arm of Liquidnet, Liquidnet for Good, and ran our signature program, the Agahozo Shalom Youth Village (ASYV), a village in Rwanda for orphans, where many of our employees volunteered. She knew everyone at the company and everyone knew her. She played such a key role that we had talked about how if anything happened to me, she would step in as chairperson.

But now it was I who had to step up. This is the moment where I learned that you have no idea what is inside you, what you are capable of, how much you can bear until you actually have to do it. I threw myself into fixing the company with everything I had. I had to succeed for Anne and for my kids.

I dove in completely at work. For the next two years, I was on a plane just about every other day. I worked nonstop. I soon learned that all the clichés and platitudes about “what doesn’t kill you makes you stronger” or “it’s not how hard you fall, but how fast you get up” are incredibly unhelpful when the company is down for the count, but are incredibly true if you can pick yourself up and find the will and the energy to do what is necessary to turn the company around.

One of the toughest days immediately after the accident was when Liquidnet held a memorial service for Anne. It was the first time I had seen my coworkers since the accident, and I felt the profound shift from being “Seth the CEO” to “Seth who just lost his wife.” Many people got up and shared stories about Anne and they cried. I was crying in front of the company, even though I tried not to. But seeing how much everyone cared, and understanding how much I cared about them, made me grateful for the kind of company we had built. We were more than cogs in a wheel; we were a group of people who mattered to one another.

There were too many awesome people who devoted a good part of their waking lives to Liquidnet to stay down. In addition to a tremendous amount of skill and talent, we had strengths and advantages that we could build upon. We could have sold out, we could have taken on a strategic investor, both of which were discussed in board meetings, but both would have been admitting defeat. It was unbelievably tough to deal with everything that hit the company and me personally, but giving up felt like everything that had happened would have been for nothing. There would have been no meaning to any of it.

We got to work. We built an entirely new global technology framework that could harness our data, keep track of it, manage it, and provide safeguards of member information to prevent another SEC situation from occurring again. We reduced the number of priorities in the company to three: expand the core, grow our algorithmic business, and diversify our revenue base by expanding into fixed-income trading. We had specific tactics for each of the priorities, and we talked about these three priorities until everyone in the company could recite them. Everyone knew if they were not working on one of these priorities, they were working on the wrong things.

In order to grow our algorithmic business, we fired many of the people who ran the business and hired a whole new team of experienced quants and electronic trading executives to redo our entire algorithmic suite. We rebuilt our global trading technology, and to focus on our core, we promoted a young but brilliant person from the product team to run the product group to finish and deliver our new Liquidnet 5 platform. Then we acquired an electronic fixed-income brokerage firm to launch our fixed-income business. We had to get everything perfect from here. We simply could not afford any more mistakes. The only way we had a shot at coming back was to do just a few things and do them flawlessly.