The One Man the NYSE Should Fear
By Shawn Tully

(FORTUNE Magazine) – Three years ago, a gangling, 6-foot 6-inch pioneer in electronic stock trading named Edward Nicoll began a lonely, quixotic crusade to overturn a then-obscure regulation called the "trade-through rule." To any SEC official who'd give him a hearing--the top brass wouldn't even see him--Nicoll argued passionately that trade-through shielded the antiquated New York Stock Exchange from competition from far faster, lower-cost ECNs and, by handing the Big Board's specialists a monopoly, fleeced America's investors. "I got a chilly reception," recalls Nicoll, now the CEO of Instinet, America's largest ECN. "I was tilting at windmills."

Now the SEC, the investor watchdog that once shunned Nicoll as a weak outsider, is picking up his lance and pointing the sharp tip at trade-through. Trade-through is a complex rule that forces investors to send their orders to the hoary floor of the NYSE. Stirred by an investigation that showed just what Nicoll claimed--that specialists exploit their position to bilk customers--the SEC in early March issued a historic proposal that could allow investors to freely buy and sell NYSE-listed stocks on ECNs. The biggest beneficiary would be Nicoll's Instinet. And the looming revolution elevates Nicoll from a voice in the wilderness to superstar status as the leading foe of Old Wall Street.

At age 50, Nicoll boasts a 25-year history of battling the Wall Street trading establishment. Nicoll's father left the family when Ed was a toddler; his mother raised the family on the edge of poverty in Passaic, N.J. In high school, Nicoll was a self-described "bona fide punk" who smoked lots of grass while accumulating C's and D's. Nicoll chucked his admission to a state college and moved to western Pennsylvania, where he spent two years running a sheep farm singlehandedly. To keep warm at night, he learned to shovel layers of coal into a furnace so the coal would burn gradually. "It was like living in another century," he says.

Though bored with birthing lambs, Nicoll loved livestock auctions. His obsession with markets led to a job as stockbroker in New York City, where he met his mentor and future partner, Larry Waterhouse. In early 1979, the two founded one of the first discount brokers, Waterhouse Investor Services, the predecessor to TD Waterhouse. Nicoll paid for his stake by charging $3,000 on his MasterCard, and he quickly made Waterhouse a rival to Quick & Reilly and Charles Schwab. In 1996, Waterhouse and Nicoll sold the firm to Toronto-Dominion Bank for $500 million.

By the time he sold Waterhouse, Nicoll had left Wall Street for a destination almost as surreal as a sheep farm: Yale Law School. "I called the dean and told him I had a brilliant 40-year-old candidate--with no college degree," recalls Saul Cohen, the renowned securities lawyer at Proskauer Rose. "The dean said, 'No college degree! We'll lose our accreditation!' " But Nicoll aced the LSAT and became possibly the only student in recent Yale history to gain admission without a college diploma. Though he liked the intellectual dueling, Nicoll decided he preferred business to law. Invoking his favorite verb, Nicoll says, "Yale disabused me of the value of public-interest law. I decided I could contribute a lot more lowering costs in the securities business."

In 1999, Nicoll made the ultimate gamble. He made a big investment in--and became CEO of--Datek Online, an Internet brokerage shop under investigation by the SEC for trading and lending violations. Nicoll cleaned up Datek's regulatory problems by recruiting French luxury goods czar Bernard Arnault and venture groups including Silver Lake Partners to buy out Datek's original shareholders, a group the SEC disapproved of. He shrewdly positioned Datek as the firm for sophisticated investors. When the markets crashed in 2000 and 2001, Joe Shareholder deserted firms like Ameritrade, but Datek's clients, unfazed by volatility, kept trading. "All of a sudden our customer list became incredibly valuable," says Nicoll. In 2001, Ameritrade merged with Datek in a deal valuing Datek at a remarkable $1.3 billion.

But Nicoll's pet project was Island, the tiny ECN that he and his investors kept when they made the deal with Ameritrade. While once-dominant Instinet was suffering from high costs and slow technology, Island was thriving. In 2002, Nicoll merged Island with Instinet and became CEO of the new company. Instinet now matches buyers and sellers on more than one-quarter of the trades in Nasdaq stocks. Now Nicoll is aiming at the NYSE. "We're not asking for anybody to destroy the Big Board," he says. "We just want to let people choose, and see who wins." The smart money's on Nicoll. --Shawn Tully