Watch the full event
Speaker
Adena Friedman
Chair and Chief Executive Officer, Nasdaq
Moderator
David Westin
Anchor, Bloomberg Wall Street Week, Bloomberg Television
Event transcript
Uncorrected transcript: Check against delivery
DAVID WESTIN: Thank you so much. Thanks for doing this, Adena.
ADENA FRIEDMAN: Well, it’s a pleasure to be here. Thank you.
DAVID WESTIN: It’s great. So let’s start with the forum itself. It sort of resides at the intersection of geopolitics and finance or economics. You live your life in markets essential to economics and economic growth. Give us your sense of the state of markets right now, in the United States but you’re also global. Where are we in financial markets? And where are they headed?
ADENA FRIEDMAN: Yeah. It’s a great question. And you’re right about geopolitics impacting finance. Obviously, finance being the engine for the economy. And there is—there are a lot of impacts to that. So interestingly, I think you have to look at the US markets, Europe, and Asia in kind of different contexts. If we started in the United States, obviously the monetary policy in the United States has really been a huge driver in terms of the health of the markets, the direction of markets, and also the ability for companies to raise capital, which is the underpinning of markets. And the constrictive monetary environment that we’ve been living in the last two years has clearly had a huge impact on the ability for companies to raise capital, both private capital and public capital.
And now that we’re starting to see the rates come down, I think that’ll give investors more confidence in being able to deploy capital, assuming the economy stays strong. But what I do think you’re—it is interesting to note is, while geopolitics of course plays a role in understanding markets and looking at the future growth of a particular company or asset class, it has not had a huge impact on markets. You know, I think that there—the tail risks are not necessarily fully baked into market performance. But as the geopolitical environment shifts around, and certainly the domestic political environment shifts around, you know, that will definitely, I think, over time, have more of an impact here.
But around the world, I think you’re seeing more of that impacting markets. And you’re also having less engagement by retail investors, by investors in the markets around the world, which is making it even harder in other economies to raise capital, to have a vibrant innovation ecosystem, and to generate economic growth. And that’s an area where we spend a lot of time. We really do a lot of—a lot of work to try to understand, what are the underpinnings of a healthy market ecosystem, which then of course drives a healthy economy? And we’re spending a lot of time in Europe right now working with European regulators and government officials to really help them understand what it takes to be a successful market, and how is that going to drive certain policy decisions that they make going forward.
DAVID WESTIN: For those [who were] not involved in the markets day to day the way you are, there’s a sense they’re incredibly complicated, very complex, and getting worse. Is that overstated? Or is there some risk to the system itself in getting too complex?
ADENA FRIEDMAN: I have to say, we’ve been dealing in complexity in markets for as long as—when I started it, now, was like thirty years ago. It was a simpler time thirty years ago for markets, but it has become—you know, technology has come into the markets. I would actually say the financial services sector is one of the leading indicators of technological innovation, in many respects. And the markets themselves—you know, we’ve had—we’ve had the most incredible technology come into the market ecosystem over the last twenty years. And now we’re still seeing, you know, the leading edge of technology coming into markets.
So that does create both complexity but it also opens up accessibility, right? If you have the ability for billions of people to get access to real time information about markets and real time information about companies or asset classes, you have all these online platforms that give them access—direct access to markets, you then have a global investor base that kind of can come into your markets. I actually think that that’s a very good thing for overall economic growth and the health of the economy, the ability for individuals to control their destiny, to control their investments.
So all of that complexity actually carries a very big benefit. But it also does create a lot of—you know, some challenges too. So it is, you know, especially as more AI and automation comes into markets, comes into investment decisions, trading decisions, you know, you’ve got to make sure that the regulations keep up. You’ve got to make sure that the surveillance and the technologies keep up, what I’ll call the protective technologies keep up with what could come into markets in terms of those who do not have the right intent. And how do you make sure that you’re protecting the markets against bad actors, by using the most advanced technology available to—you know, into those protections?
And that’s an area that we actually play a big role in, because we provide the market surveillance technology to many of the markets around the world and most broker dealers as well. So it’s a big—it’s a big part of what we focus on, from a—as a technology company, is making sure that the technology is being used for the right purpose, we’re modernizing markets, and we’re making them, I would say, as efficient and effective as possible, even in—even in a complex state.
DAVID WESTIN: So financial markets are on the cutting edge of technological innovation. Is technology making it better or making it worse?
ADENA FRIEDMAN: Oh great question. I would have to say—let me put it this way. We can all have opinions about that but, no matter what, the technology is coming. So, you know, I always say technology is an unstoppable force. If you try to fight technological innovation, you are—you are fighting a losing battle. So instead of trying to fight it, you have to look at how can—how can we, as a market operator, use the same technology, that’s making the world, as complex as it is, to bring efficiency and effectiveness to markets? To bring more transparency and integrity into markets? To drive liquidity into markets?
That is literally what Nasdaq does for a living. It’s all about liquidity, transparency, and integrity. If we can use technological innovation—the cloud, AI, all the things—and, frankly, hyper low latency capabilities, global networked capabilities—to really drive the markets into a state of high liquidity, high integrity, and high transparency, then we will be able to combat those actors that are trying to take advantage of technology to do the wrong thing.
DAVID WESTIN: Technology, the last time I checked, costs money. And you have to have a lot of investment. We’re seeing that right now in AI, you mentioned, for example. Huge investments being made by the hyperscalers. Does that cost of technology affect the players in the financial markets? We hear a lot about the big banks, the big money center banks. They can afford all that. But when you get to some of the smaller regionals, much less community banks, they really can’t afford this.
ADENA FRIEDMAN: Yeah. So I think—actually, I think right now you do have some elements of scale in the financial system. And that’s global—you know, global elements of scale that comes into the financial system. And I think, frankly, you can see that in every single industry right now. And technology is going to make it so that, I think, the winners and the losers are going to—are going to be determined faster, right? So those who lean into technology and technological innovation are going to find themselves in the right position, and those who fight it or are slow in adopting it are going to kind of lose their market position faster than they used to.
However, I also think the hyperscalers are spending a lot of money, but our ability to use inference against those hyperscalers and to drive the cost of data—like, the cost of data, for us at least as we’ve gone more to cloud in managing our markets, has come down 80 percent in the last ten years. So it’s not—it’s not like—because there’s an enormous amount of economy of scale that comes from the partners you choose, too. You know, if we choose a hyperscaler as one—as a partner, we’re going to get the benefit of their scale as a player.
And so I think banks are—I think you’re right that you’ve got certain elements of the market system and the financial system that’s driven towards scale. What we are—what our job is to do is to try to balance that scale by creating efficiency in the market to make it—to lower the barrier to entries in the markets, to make the markets more accessible, and to actually create capabilities that allow the small to medium banks to compete more effectively.
So how do we, even in our own infrastructure, create the ability for them to do inference at the edge? Create the ability for them to have virtual servers instead of, you know, physical servers? Create the ability for them to have more engagement in the markets without as much capital investment? That’s actually, again, part of our role, is to try to figure out how to do that across the world. We provide technology to 130 markets around the world. So we’re not just a technology provider to our own markets. We really do try to drive that into emerging markets as well.
DAVID WESTIN: Yeah, glad you mentioned the 130 markets, because some of us in New York may be a little parochial. And we think of Nasdaq as New York. That’s what you are. But, I mean, you are active in Canada, the Nordic states, the Baltic states, and around the world, and then you provide services elsewhere. Do a compare and contrast what it is to run financial markets in those different environments.
ADENA FRIEDMAN: Yeah. Yeah, so we own and operate the markets here, of course, in the US, and also in Canada. And then we own and operate most of the markets in the Nordics. And so we have—and the Baltics. So we have an opportunity to really evaluate, how do markets need to evolve in order to have healthy ecosystems in very different economies? And we really do take a huge interest in trying to drive economic development into the Baltics and into the Nordic states. I have to say, the Nordics—if you look at the Nordics in the context of Europe, they are this beautiful, shining star of market—I would say, of the capital markets.
And it’s not just because of us. In fact, I would say that it has a lot to do with many, many other factors. But those factors are super important to understand. You know, in the Nordics, the government of the Nordics have—in the Nordic states have made concerted efforts to engage retail investors in markets. They have tax advantage accounts, and they have—and that’s an enormous—there’s enormous amount of capital going to these individual tax advantage accounts that allow investors to go and invest in any EU-listed company. Which, of course, drives capital into the markets. You’ve got the pensions, and they’re very strong market players in the Nordics. They’re consolidated. They’re strong. And they actually really do focus on domestic investment.
And then you also have a government who has a beautiful social safety net, but believes in capitalism. And so they really do do a good job of balancing the need for economic growth, the taxes—corporate taxes and other things, really driving innovation, and allowing small to medium companies to tap the public markets with a retail underpinning, with the pension underpinning. It’s actually—it’s an amazing ecosystem. Forty-seven percent of citizens in the Nordics own equities. That compares to about 52 percent in the United States, but 18 percent average across Europe. So that is a fundamental difference in what has been created in the Nordics versus the rest of Europe.
So we get to live in that. And then we provide our technology, our ecosystem, our know-how, our market participant engagement into those markets as well, the market structure advantages. And we do really think we’ve created something really special there. Now, as we go and then be a technology provider to other markets around the world, all across Asia, the Middle East, Europe, Latin America, we’re really trying to bring a lot of that modern thinking, but not just about technology. We do advise the exchanges and the governments on how do you engage more retail? How do you drive—how do you look at tax policy, bankruptcy policies? How do you make sure that your government is doing its part to drive an innovation ecosystem, and to engage citizens in the markets, and to make the markets more technologically advanced, but also safer? You know, we do a lot around surveillance, anti-financial crime. How do you bring all of those capabilities into the capital markets as well?
DAVID WESTIN: Well, one of the developments I think we’ve watched over the last several years in the United States when it comes to public policy is sort of almost a merging of a lot of national security, geopolitical issues with economic policy. They’re one of the same. Look at the Biden White House right now. You have both the National Security Council and the national economic advisor doing their work together. Do you see that in financial markets? Is there increasingly a blurring?
ADENA FRIEDMAN: Well, I would actually say I see it across the financial system. So kind of even broaden it out to look at the banking system and how the banking system kind of underpins economies. You know, some interesting stats. One of the areas of engagement and expansion that we’ve had in the last several years is we’ve bought a suite of technology capabilities, that we now deliver to about three thousand banks around the world, that focus on capital markets risk management. So, how do you manage your risk across asset classes, across your global participation in markets. Regulatory reporting, which means how do you make sure you’re complying with rules. And then also, anti-financial crime.
And that’s an area where you’ve got this incredible intersection of geopolitics and the economy, because—one interesting stat we just ran is just, in the United States alone, if we were to root out all fraud and we were to eliminate fraud across the banking system in the United States, our calculation is that the GDP of the United States would be fifty basis points higher than it is today, right? So, and that is—that drain is something like a 3 percent drain on the US economy. I mean, it’s—well, AML and fraud together, sorry, is essentially a 3 percent part of the GDP. It’s a huge issue.
Now, and the banks can’t do this alone. I mean, so the banks are put on the front line of trying to solve this problem, but they have to work very collaboratively with the public sector. And it’s—if you think about what kind of criminal activity they’re trying to get out of their system, you’ve got that—you know, you got the fraudsters—just people coming in and stealing your money. You’ve got—you’ve got criminal gangs. You’ve got child trafficking, human trafficking, and terrorist networks. I mean, these are geopolitical challenges facing the world. And the banks are there to try to figure out how to make sure that the money flows are choked off for these criminal actors.
Very, very difficult. Big data problem. Big, big, big data problem. Because if you think about it, the criminals, they use every bit of technology available to make—to perpetrate their crimes. And they go across the banking system. It’s a global problem. It’s not just a domestic issue. And so you also have to look at the fact that they’ll go across multiple banks. They’ll spread their activity across those banks.
And so one of the things that we really focus on in our technology, but also in talking to the regulators and the policymakers, is making sure that you develop data sharing capabilities across banks. And that—in the United States that already exists, which is excellent. But then also to have a feedback loop. Like, there’s a lot of activity traps right now in the regulation that exists in anti-financial crime. Just ticking a box and counting how many reports you submit, as opposed to, well, are those reports helpful? Do they actually root out criminals? Can we get some feedback to know whether or not that was an effective report or not?
Because if I could, if we could get that back, we can feed that back into these incredible engines that we have to make the engines smarter and smarter and smarter, using AI, to be able to make sure that when we are catching—you know, we’re looking at an alert, it’s very likely that alert is a criminal actor. It makes the banks more efficient and effective. It makes the regulators more efficient and effective. And it solves the problem more effectively. Those are all things that really have to we have to—we have to work together on to solve this, I would say, really endemic problem across the world.
I think some of us might be surprised, number one, at the size of financial crime. But, number two, when you say the financial system is on the cutting edge in technology, you’d sort of think technology should be able to take care of that problem. We should be able to address that problem. Is it that we don’t have the technology? The bad guys are ahead of us on the technology? Or are we’re not using the technology that’s available?
ADENA FRIEDMAN: Well, first of all, I do think that there’s a technological race in this space. There’s no doubt about it. So we have to make sure that—the criminal actors are going to use everything possible. And so therefore, the banks need to be able to use everything possible. And there are a lot of restrictions right now in how banks can use AI for certain purposes. What we are seeing is policymakers and regulators starting to realize that it’s not a one size fits all on how to look at banks and their use of technologies like AI. They have to look at it on a use case-by-use case basis. And for the purpose of crime management, it should be that we can really unleash the potential of this technology.
Today, Nasdaq is a—we provide this technology to 2,500 banks. We pool the data across those banks so that we can, in fact, look at transactions across banks. We use Bayesian models, computer vision, other things that really kind of drive and generate alerts. We have very structured topologies that are specific to different criminal behaviors. So we have all of that. But there are limitations in what we can use—how we can drive that AI, because the banks have a lot of restrictions on how—the explainability of models, and how they have to report to regulators.
I think that if we could kind of work with regulators to be more open minded around how this technology can be used, similar to how it’s used in law enforcement, national security, how do we use it in a way that really can drive better outcomes, and then get the feedback loops back so that we can drive those engines to be smarter. I think that there’s a lot of—a lot of opportunity there to be better at what we do.
DAVID WESTIN: So there are opportunities in making sure that banks can share information and make use of information across banks. What about across regulators?
ADENA FRIEDMAN: Yes.
DAVID WESTIN: Are regulators cooperating across, for example, the Atlantic?
ADENA FRIEDMAN: They talk to each other. No. I mean, I—so even within the European Union there are, you know, conflicting—there’s multiple layers of regulation, and, frankly, some conflict with each other. And up until now, there—and it really is a new phenomenon that they’re starting to work on—is they are working on policies and laws that will allow for the banks to bring data together across banks across the EU. That doesn’t even exist today. It doesn’t even exist in-country.
So a bank is sitting there only with their own data trying to figure out who the criminal actors are. There’s no way they’re going to be able to solve that problem. So, it’s both national legislation and regulation and then EU-level legislation and regulation that has to change in order to allow for the banks to collaborate, and then allow for the regulators to look at the layers of regulation to try to figure out how to have smart regulation. And that’s a big thing. I’m a huge believer in regulation in the financial industry, but really driving towards smart regulation, outcome-driven regulation.
What are you—what problems are you trying to solve? Does this regulation actually solve that problem? How are you—what are the—what’s the evidence? What are the KPIs that you’re using to determine its effectiveness? I think those are all things that every regulator can spend more time on. But I think as we’re looking at this criminal problem, this is such an important part of getting it right. And you’re right, even between, let’s say, the US and Canada, there’s some, but not a lot of collaboration. It’s more at the law enforcement level where there is. But at the regulator level, I think that they’re still—they’re still, you know, looking at the problem differently from one to another.
DAVID WESTIN: Pivot to a slightly different subject, but I think they’re related, but you’ll tell me whether they are. And that is the move toward private markets from public markets. I mean, certainly it’s been a big trend. We talk a lot here in New York, for example, private equity first, but then private credit, the growth of private credit. Explain to us what that means for the financial system because, I mean, back when I learned, you know, securities law, sort of 1933 Act, 1934 Act, it was all about public disclosure, public markets that will protect our system overall. Is there a risk in putting more and more businesses behind a private curtain?
ADENA FRIEDMAN: Well, I think the first thing we have to think about is if you choke off access to these great growth companies to the everyday citizen, then you are creating an economic distortion, I would say, in terms of the opportunities that everyday citizens have to drive wealth creation and plan for their future. So if companies don’t go public, then everyday citizens don’t have ready access to making those investments. And, therefore, they don’t get the benefit of the growth. Now they also—you know, you’d argue that it’s a risk-reward trade off, right? So there’s risk, of course, in bringing companies to public markets. Equity is a risk capital, and so is—even debt is a risk capital.
But there’s also the ability to drive enormous amounts of wealth creation across the country, if you give that access to more people. And one of the big risks of having more companies stay private is just that you don’t—you’re basically not creating that opportunity for the everyday citizen to have. I would say that’s number one. And that is an economic—I think that’s a real economic risk.
I think that the second, though, is that vibrant capital markets are the underpinning of economic growth. And if more of the companies stay private, and there are structural reasons why that’s happening and there’s cyclical reasons why that’s happening. You know, it flows. I mean, definitely there’s cyclical underpinnings to why companies are not going public—cost of capital, the inability for public investors to predict the future earnings of a company is very hard right now. So there’s a cyclical element.
But there’s a structural element too. I mean, the burden of being a public company is pretty extreme. And that’s not just here. That’s everywhere. I think that that—when I talk to great innovators, they say, I’ll go public when I have to, or when my VC investors have decided it’s time. But it’s not a—it’s not something where they say, I really want to be a public company. I want to have that—I want to have that imprimatur. I want to grow as a public company. That used to be what I would hear.
So I think we have to change the—we have to look at the regulatory apparatus and make sure, again, smart regulation. What are we doing to make sure we’re creating that right balance between private and public? I’m a huge believer in the balance. I just think that the balance gets skewed occasionally. And right now, it’s definitely skewed towards private.
DAVID WESTIN: Adena, it’s always great to talk to you. Thank you so for your time.
ADENA FRIEDMAN: Thank you.
Watch the full event
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Image: Nasdaq CEO Adena Friedman spoke at the Atlantic Council's Transatlantic Forum on GeoEconomics on September 26, 2024.