Madoff existed in a place where all the dealers, all the buyers and sellers could meet in the ether, in the computerised NASDAQ network, rather than in person.

In this new system, traders weren’t always regulated the same way.

Bernie Madoff didn’t need to be a crook. This was one of the things that most stunned Wall Street when the truth came to light.

The fraud was huge, by far the largest financial scam in history.

He had stolen billions of dollars from thousands of investors, and he had managed to keep it going for probably three or four decades.

The crime was spectacular in many, many ways, but nothing about it was more shocking than the fact that Bernie Madoff was the man who did it.

In the world of stockbrokers, Bernard Madoff was a real, legitimate big-league player.

He and his brother had built from scratch one of the most successful broker-dealer firms in New York.

The Madoffs helped create what is known as the “third market,” or the trading of stocks outside of the primary New York Stock Exchange and American Stock Exchange, by making trades faster and cheaper for other brokers and investors.

Their firm executed trades on millions of shares every day, receiving a commission on every one of them.

In addition, the firm had a highly successful — and profitable — operation making trades for its own accounts.

Ahead of his time

Madoff was a very astute businessman.

He had started out as a tiny operator in a tiny part of the market for public companies that didn’t qualify for trading on either of the established stock exchanges.

But, by recognising before many others the possibilities for computerised trading and by bold marketing, he was able to build Bernard L. Madoff Investment Securities into one of the largest stock traders on Wall Street.

He wasn’t a big-name retail broker like Merrill Lynch or Charles Schwab, and in fact very few people on Main Street, outside the world of investments, had ever heard of him.

But those in the business, those who needed fast, inexpensive stock trading, knew just where to go. Bernie Madoff was the man.

He grew to be rich and powerful and highly respected in many circles.

He didn’t need to resort to crime to be successful. So why did he do it?

Looking back, we can compare him to a World Series — winning baseball slugger taking steroids — he didn’t need to do it, but it helped.

Every business has a first big client who gives them credibility in the marketplace. For Madoff, this client was Carl Shapiro.

When Shapiro first came to Madoff in the 1960s, Madoff was a young stock trader with almost no reputation on Wall Street. Shapiro had made a fortune in the garment industry as the founder of Kay Windsor, a women’s dress design and manufacturing company.

Kay Windsor’s shares had been listed for public trading by 1961, and Shapiro had made even more money.

He came to Madoff via the same route as many other Madoff clients: through a friend.

Shapiro had money to put into the stockmarket and reportedly wanted to do some arbitrage trading, which required the ability to move in and out of positions quickly.

Madoff offered Shapiro a tempting proposition: He would clear Shapiro’s trades in just three days, which at the time was an unheard-of turnaround time on Wall Street.

Shapiro gave Madoff $100,000 to start an account.

By 1986, the magazine Financial World listed Bernie Madoff as one of the top one hundred best paid on Wall Street, estimating he had earned $6 million that year.

Aside from being very rich, he was a man ahead of his time.

Before most people on Wall Street had really grasped the power and speed of electronic stock trading, Madoff had automated his trades using computers.

At least a decade before the Internet made electronic commerce possible — before eBay, Amazon, online dating, Google, and Facebook — Madoff was creating an electronic commerce network for stocks.

Frank Christensen, a friend of his, remembers Madoff discussing his plans for the big technology purchase of IBM computers that would help his firm trade faster than other market makers on Wall Street.

What made Bernie Madoff so revolutionary?

Before he helped to create the third market, people who wanted to buy and sell stocks that were listed on either the AMEX or the NYSE had no other choice but to trade through the exchanges’ antiquated auction systems.

They had to call a person, a broker on the exchange trading floor, who, under exchange rules, was obligated to post a “bid,” or buying price, and an “offer,” or selling price. Once the floor trader had quoted his customer a bid and an offer, an auction took place.

What Madoff developed was completely different from the auction market.

He wasn’t a member of either the AMEX or the NYSE — nor did he want to be.

He wanted to help create a “dealer market,” a marketplace outside the confines of the old physical buildings — outside the AMEX on Trinity Place and the NYSE on Wall and Broad streets, both in lower Manhattan.

Madoff existed in a place where all the dealers, all the buyers and sellers could meet in the ether, in the computerised NASDAQ network, rather than in person.

In this new system, traders weren’t always regulated the same way.

“We all knew Bernie, because he was running a third market,” said Dale Carlson, a former Pacific Stock Exchange executive. Essentially, Madoff had built his own alternative exchange, with the SEC’s blessing. “He was running an exchange without being an exchange,” Carlson added.

By the 1990s, the NASDAQ was completely electronic, and regulators could barely keep up with the changes.