A Nuanced View of the Markets


NewCo Shift Dialogs, in partnership with Work Market

A conversation with Adena Friedman, the new CEO of Nasdaq

Adena Friedman, CEO of Nasdaq

Just one month into her tenure as the new CEO of Nasdaq, Adena Friedman stopped by NewCo Shift Forum to talk about politics, regulation, fintech competition, and the prospects for technology-related IPOs.

The first woman to ever run a major stock exchange, Friedman demonstrated a nuanced and politic touch, traits that will serve her well in the uncertain times of an early Trump administration. Watch the entire interview below, or read the transcript below, which has been edited for clarity.

John Battelle: Congratulations on the new role. You’re in it three months?

Adena Friedman: Three weeks… Actually, four weeks now.

It was announced a few months ago, but became effective just recently. This wasn’t how I was going to start but…on November 9th, people were predicting that the market would collapse. You are one of the largest exchanges in the world … and it didn’t. The futures weren’t looking good, but then it was business as usual. What’s the scuttlebutt in the world you live in about this extraordinary time we live in?

The first thing, just on that night itself, because I was watching the news as much as you all were, I think that the outcome of the election was early enough that people pivoted successfully, and investors pivoted. It’s not that anyone, frankly, predicted that outcome, but I’m sure they talked about it a lot ahead of time to know, “If this were to happen, what industries would benefit? What industries might not?”

They were able to go from, I would say, a moment of panic to, “Let’s actually think rationally about this,” and they entered into the market in a much more rational way in the morning.

I thought that was great. I think it was good to see the markets respond the way they did. I think that since then, we’ve obviously seen certain industries have a great run …

Including yours.

The financial industry certainly has had some benefits from it. What’s interesting as we’ve gone in to is that the markets continue to be moving around a bit, but volatility, if you look at the volatility index, it remains extremely low.

Volumes have come out of the markets in the last couple of weeks. We obviously think that that’ll reintroduce themselves, but we’re definitely seeing investors sitting out a little bit and watching and wondering exactly how they should play in the new market, in the new way.

Trading volumes are down?

Trading volumes are down.

How do you read that? Doesn’t that mean people are uncertain?

Generally speaking, when we see volatility low and trading volumes down, it’s because investors either don’t see a lot of opportunity or they just don’t know exactly how to engage with the market. I would argue that it’s probably the latter, at the moment.

What would make you feel confident, or feel like there was a motion towards a foundation where certainty could come back into the market? Would it be taking away Trump’s Android phone?

I think that as we watch the legislative process start to unfold as we go through the year, there’s going to be a lot that he’s put on the table. It’s a matter of what ultimately goes through the legislative process, and has success, in terms of reforms that he’s looking at from a regulatory perspective, from a tax perspective, from a trade perspective.

I think until people really understand what’s really going to survive the legislative process, it’s hard to predict what the outcome will be. As I said, as we got into the year, it’s really a ‘show‑me’ year for the new administration, overall, to understand exactly where they are prioritizing — and that’s certainly coming out early — and then what will actually get through the process.

Do you feel like this new administration is a friend to your industry, a foe, or an unknown?

The markets have indicated that they think it’s a friend of the industry. I think that generally speaking, Republican administrations tend to be relatively pro‑business, and that’s generally good for the financial industry. When we do our jobs right, we are the fuel to business.

We provide the fuel that allows business to grow, and allows companies to expand their operations, and raise capital, and create jobs. I think that when the industry is managed the way that it should be managed, it definitely provides great value.

I think that if you think about the administration being very much a ‘pro‑growth’ administration, they’re going to want the financial industry to be able to serve their role to help businesses grow.

This will be my last question about this … because I don’t think people really understand how expansive Nasdaq is. Let me ask you this. Dodd‑Frank. We went through a very tough time, and there was a regulatory response to that, which now is certainly under fire. Have you developed a position on whether or not you think the lifting of it is great, or you’re a little cautious about that?

I think that we first have to recognize the fact that there was activity that occurred during the mid 00’s that caused a lot of issues, and we have to address those issues.

We also have to make sure that our banking system is safe and secure, and that savers can feel confident in putting their money into the banks, and banks feel confident in being able to provide their services to the economy in general.

We have to remember all of that, and we have to understand what was the purpose of Dodd‑Frank to begin with — to make sure that we create more security into the banking system, and to make sure that we put some protections in, to ensure that the types of activities that led to 2008–9 don’t recur.

At the same time, Dodd‑Frank has over 300 rules that were created off of it. The political pendulum always tends to swing pretty far, and so the question is, are there elements of Dodd‑Frank that have not been effective, [that] are particularly onerous and not having the impact that you would expect them to have? Or, are frankly harming the ability for banks to do their legitimate role in serving the economy?

In that particular case, it’s worthwhile to take a look at that. Eight years out, we now have a chance of understanding what was impacted, what was implemented successfully, and where do we think that there might have been some areas where we need to reform the rules. I think that’s a healthy process, eight years into the regulation, and I’m hoping that that’s the process that we undergo.

I think most notably, things like the Volcker Rule will be discussed. The Volcker Rule essentially makes it so that banks can’t trade proprietarily for their own account without client orders standing behind it. They have other rules related to small company lending, and the capital requirements they put on community banks and things like that that might be creating some friction in the system that’s not as healthy as it should right be.

That was a nuanced answer and it actually sounds a lot like the conversation I’ve had recently with Andy Slavitt, who will be here tomorrow about the ACA, the Affordable Care Act. We haven’t had a lot of nuance in the news cycle in the last couple of weeks. I’m hoping your nuanced approach will prevail.

I honestly believe that’s what the legislative process is for. It’s to create nuance out of an initial statement.

As opposed to, “We’re going to destroy Dodd‑Frank.” Let’s talk about Nasdaq. I think people in the valley think about Nasdaq as the technology index, sort of the brand was built as the place where fast‑moving, super innovative technology companies list. How do you describe what Nasdaq is today?

Well, Nasdaq is a financial technology company. We were born a fintech company.

Your valuation just went up!

Well, I would actually argue that we were one of the first fintech companies because we took what was happening on the floor with humans running around throwing papers around, to putting it into a computerized network. We essentially electronified the markets, and that was how we were created.

We were, in fact, probably a very early fintech company. If we then look at it, we grew into becoming more of an exchange company. It would argue today we’ve grown and matured again back into a much more multinational financial technology company.

I say that with great confidence because we do provide critical market infrastructure, including serving as several exchanges, frankly, here in the United States, in US equities, US options, energy futures.

In Europe, we own and operate almost all of the exchanges in the Nordics, in terms of equities, options, and futures. What we’ve done with our business as we continue to mature, is realize that we are a great technology company.

We shouldn’t just hoard that technology for our own exchanges, but we should provide that technology to allow other exchanges to grow and expand. We now have the technology that powers over 85 markets around the world, and we really are partner to those exchanges for trading, clearing risk management, surveillance. We are the leading global surveillance technology company…

When you say “surveillance,” you might want to unpack that.

Yes, great point. [laughs] We provide trade supervision. We basically allow banks to watch the activities that are occurring on their own desks to know whether or not there’s rogue activity, to root it out and obviously resolve it, or prevent it.

We also now have added into that an e‑comms compliance capability using machine intelligence that allows the firms to look for intent through communications that occur within their firms, and then see whether or not that’s translating into actual activity through the trading desks.

It is a surveillance. It’s an important one in terms of making sure that we really put the risk management, and we put very advanced technology behind the ability for banks to execute their risk management capabilities, as well as exchanges and regulators. The entire ecosystem uses our technology.

If there was a place besides Google search infrastructure, where a super intelligence might break out, one we think it would be within the markets. There are so many actors pressing so many advantages in almost near real‑time. It’s a very complicated ecosystem. Is that the heart of the technology that you guys are both developing and applying now?

We find that we have to face extremely sophisticated firms and individual actors, whether it’s from an IT security perspective who are trying to make sure that they’re finding ways into the markets, or in terms of making sure that we understand the behaviors that they are trying to perpetrate on the markets.

It is really, really critical that we provide extremely advanced technology, and we are using the best of what we can see and made available to us. We come out and meet with the venture firms here. We meet with venture‑backed companies on a regular basis.

We have actually done some venture investing into certain technology companies, both in the blockchain and machine intelligence. We are actually organizing that venture activity into, I would say, a more organized effort with real stated goals around it, in addition to us investing in our own technology and becoming a true leader in the capital market space.

A good example of that also is we provide, as I said, the technology for our own exchanges and others, but one significant broker‑dealer has recently asked us to host and manage their dark pool for them. It’s an example where we can extend out what we do to further the entire ecosystem.

Tell us what a dark pool is, if we haven’t read our Michael Lewis.

Sure. The US markets today are operated through a very integrated network of exchanges and other broker‑dealers that operated very sophisticated trading engines, just like we operate trading engines until today. Some of them are exchange venues, like ours. We actually own six exchanges in the United States, and our peers and several exchanges each as well.

We have several broker‑dealers who have the ability for them to execute orders within their matching engines, but not have the orders exposed to the market. Those are called dark pools. It is essentially a result of the regulation that the SEC put in place back in.

It’s very interconnected. It works quite well, but it is much more complex than it was years ago. Part of that is making sure that we are helping make sure that that ecosystem all works properly together.

If you’re an individual investor, are you just hopelessly behind?

No, not at all.

I look at my little blinking Fidelity browser and think…

Fidelity is perfect.

…I’m just a rube. They’re taking advantage of me.

No. Actually, I don’t agree with that at all. I actually think individual investors get treated better today than they’ve ever been in the markets. Fidelity is extremely advanced in how they interact with the markets.

They themselves have great technology. They’re providing you with an immense amount of transparency in information that allows you to make an informed decision. It’s all right there in your hands.

You can then make an informed decision, put it in there, and then it snap, you are getting an execution, likely even potentially better, than the price at which you put the order in. The key is to put limit orders in so that you’re establishing a value that you’re willing to buy or sell out, and let them do the rest. They are extremely, extremely advanced. They and Ameritrade and Schwab, they all know…

I just got a tip, use limit orders…

Yes, limit order. They all know how to interact with the market and make sure that you’re getting a great execution.

I’ll ask you one last one before we go to audience questions. You are in a unique position of being able to see people who are interested in going public. Can you give us a list of who’s next? [laughs] It’s been a rough patch for tech IPOs. Snapchat just revealed their S1. We knew it was coming. That gives people a sense of hope. This market cycle loves the, “Oh, Netscape and boom we’re off and running for another five years.” How do you rate where we are in that cycle? Are we at the beginning of a new one, in the middle, at the end, in a dip?

It’s first important to look back a little bit. The companies that did choose to go public last year…and I have to tout us for one second. We did, 87 percent of all the tech IPOs in the United States last year, and 73 percent overall in terms of total IPOs that came to market last year.

We feel, from a relative perspective, we did well. But the companies that did go public last year experienced a 24 percent average return. If you look holistically, all the companies that went public, they had a 24 percent return in the US markets, including in Nasdaq.

They were rewarded for taking the risk. As a result, as we started getting into the latter part of the year, we had a much more healthy conversation with firms saying they’ve been wanting to come into the markets. They’re starting to recognize that investors are getting rewarded. They’re starting to feel it free up. They’re starting to really move into with more confidence that the markets will reward them.

Of course, the markets can shift around. There’s going to be pockets of opportunity. It may not be open all year, but we are starting to see companies coming into the markets. We’re seeing, as we move through the rest of Q into Q, that we could hopefully see a nice run of companies starting to tap the markets again.

Good news. Yes?

Audience member: We’re interested in hearing about the thesis for your VC investment and start‑up engagement activity.

Sure. Historically, NASDAQ has actually grown a lot through acquisition, but we have not really been there to make early‑stage investments. Yet, we’re going for our own transformation. We are extraordinarily proud of who we are as the US Exchange. I spent an enormous amount of time supporting that part of our business. We love every company that comes and joins us.

As we look at our future, we have to make sure that we’re expanding our vision into what our role is in the broader capital markets. It’s very clear to me that advanced technology is going to be our path forward.

We are embracing that. We are going to be the disruptor as opposed to the disrupted. We are going to make sure that the cloud, machine intelligence, blockchain, and potentially, ultimately quantum or things that are integrated into what we do for a living all the time.

Therefore, we’ve been looking for companies that we believe are a strategic fit in terms of they might bring a core technology capability that we can apply into our market. We can hopefully catalyze their business. We might become a large customer. We’re not interested in purely as a financial investment. We’re looking at it as a strategic investment, a way for us to get connected into new technologies, new thinking, new intelligence, and allow it to frankly seep into the way that we think of things. Hopefully, they’ll learn a lot and benefit a lot from us and we all learn a lot from them.

Therefore, we’re making some smaller investments. We’ve made one in one in machine intelligence company, one in the blockchain company. We hope to continue to do that in a way that is strategic to us.

We have quick question here.

Audience member: Hi. My name is Elsa. I have a question about what you see as a role for Nasdaq not just in the capital markets, but in society. Recent events, we have seen a lot of companies and now in the past, might not have taken a statement. Now they’re taking on values. They’re now professing that publicly. As an exchange, as a marketplace, do you see that’s a role where Nasdaq would go? Also, how would you explain the answer, “Not to a tech crowd.” But if you run into someone not in Blue Bottle but in a Dunkin’ Donuts, how would you answer that question?

The way that we answer that question is we are all about embracing entrepreneurship. If we look at how we see the future of business, and the future of the markets, and frankly being self‑serving, the future companies are going to be coming into the markets. We really do think that entrepreneurship is the most important thing that this country can support in order to make sure that it’s feeding the next generation of growth and expansion.

We are very committed to that. We have a foundation that is also committed to that specifically. We’ve launched the Entrepreneur Center here in San Francisco specifically to help small companies and founders get started, understand what it takes to run a great business and move forward and get educated on that.

That’s our platform. We’re very, very involved politically in that, in making sure that we don’t make mistakes and making sure that we have a great society that allows for entrepreneurs to succeed. That goes with it in terms of looking at tax policies, looking at trade policies, looking at the way that we’re running our economy to support those entrepreneurs. That is our big push as a company.


Leave a Reply