A Growing Reputation (dec 1, 1970 – dec 1, 1980)

Description:

Bernard Madoff, a renowned Wall Street trader, initiates a scheme to defraud his investment clients. He eventually accepts billions of dollars from individual investors, charitable organizations, pension funds, hedge funds, and others. He claims that his sophisticated trading and hedging strategy will produce investment gains in all market conditions, though securities regulators later say he never traded any shares for client accounts.

Over these decades, Madoff's trading business skyrockets. Through a controversial but legal practice known as "pay for order flow," he can profit on the large spread -- 12.5 cents -- between the buy and sell price on each trade. Madoff would pay brokerage firms, such as Charles Schwab, a penny or two per share for sending orders through his firm, but he more than made up in volume for the few cents he was paying out.

The practice earns the wrath of the stock exchanges -- but Madoff isn't done. "In about 1971, computers showed up and were being used," he recalled in 2007. "So we saw -- meaning my brother and myself -- that there was an opportunity to bring automation into the over-the-counter marketplace and create some visibility and transparency in the marketplace."

"He could see the way electronics were going to change things," explains Diana Henriques. "… He continued to push for automated ways of trading. And regulators heard that message … because automated trading was cheaper not just for you and me as retail customers but also for big pension funds for institutional investors responsible for government money and institutional money. They were paying a lot for this face-to-face trading infrastructure that had existed for centuries, and this electronic trading promised a cheaper way to trade."

Over the years, Madoff often portrays himself as one of the Nasdaq exchange founders -- a claim that has been called into question by several press reports. However, as Henriques explains, "He worked assiduously for the notion of an automated stock exchange," and pushed regulators on the idea.

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