Fireside Chat with Nasdaq CEO Adena Friedman

Transcript

So, let's get started. Nasdaq is doing a lot of exciting stuff. Um, talk about the move to 24/7 trading and how it's progressing, what's working, what might be taking a little longer. >> Sure. Well, as as you know, Joanna, we've been uh on a journey to really transform Nasdaq into a global technology company that serves the full financial system. And a big part of that has been to really architect the world's most modern markets. As we think about the future of trading, the future of trade infrastructure, not only as a market operator, but also we provide our technology to 135 other market operators and regulators around the world. And we

provide core trade infrastructure technology to hundreds and hundreds of broker-dealers and banks um around the world. So, we're really proud of the role we play, but that also means we have a lot of responsibility. There's a huge push and there's for good reason towards always-on markets. Um, the first step of that will be 23/5 trading in US equities starting in December 6th of this year. Um, now that that trading occurs um 24/5 today, but not in the exchanges. So, it the exchanges are coming to the world. We're inviting the world into our markets.

We're very very excited about it and I think that that's a first step towards always-on. Moving from 23/5 to 24/7 is actually a massive lift for the entire industry. I would say the easiest part is the exchange infrastructure. We provide 24/7 technology to other market operators around the world today. So, that part we fully understand how to architect. But when you move from having time off either to manage your systems or patch the systems or make sure that you're upgrading things and you have like the luxury of a weekend, you architect your systems differently. And if you're if you're behind the scenes managing trade risk risk management, collateral management, you have blocks of time

where you can do batch processing or things like that that allow you to, you know, have a different infrastructure to support your your activity. You move to always-on, everything has to be real-time all the time. Risk management has to be real-time all the time. You have to think about collateral management and the flow of capital needs to be real-time all the time. Why tokenization is so important. But also, it means that every bank and broker's infrastructure needs to change. So, we're building that into our trade infrastructure technology while we're also bringing our markets into this environment.

>> Okay, so talk a little bit more about tokenization and what you're seeing on that front in terms of, you know, how traditional financial markets are moving toward it and what are the benefits and drawbacks? >> Yeah. Well, I think actually it's been really interesting to see the convergence of retail interest and institutional interest come together. And I would argue that it's really been in the last year partially on the back of the Genius Act getting approved by the US Congress because it cleared the way for the rules of the road for stable coin to be a part of the core infrastructure in the US banking system.

And that's important because it means that if we can tokenize money, then we can tokenize the flow of capital. And if we can tokenize the flow of capital, there are a lot of forms of capital that really get stuck in different collateral pools around the world today, whether it's treasuries, equities, other fixed income products, money market funds. But if you tokenize all those instruments along with the flow of money, then the collateral becomes very fluid and that will free up tens and tens of billions of dollars of capital that's trapped with bank capital that's trapped within the collateral pools today. So, there's suddenly this institutional interest towards wow, I can I can use that collateral and put it to work. So, I'm very motivated

to put that infrastructure in place. The retail ecosystem, as we know, has been kind of 10 years ahead. They, you know, retail investors want to be able to trade anything all the time, anywhere. And if they can put it into a tokenized form and keep it there, it allows them to move their capital into lots of different trading tradeable instruments. So, that interest has been there for a while, but that convergence has really come in the last year, and that's why you're seeing so much momentum now towards tokenization. >> Oh, interesting. So, what's the role of artificial intelligence? We've got to ask about that these days, right? So, what are you seeing with that? How is that changing exchanges, tokenization, everything?

>> Sure. Well, it's so interesting that these tick technologies are actually coming together at the same time because it as I mentioned, if you have to manage risk real time all the time and you have to think about that, having a lot of humans in that loop, it's going to be very difficult. So, bringing AI into the risk management frameworks, we leverage AI very extensively in anti-financial crime. So, you know, AML, so anti-money laundering, fraud detection, that we have very advanced AI capabilities. We serve 2,800 banks with our anti-financial crime technology. And the AI capabilities there, both algorithmic and gen AI, is just amazing in terms of

how to create more efficiency, but really much more effectiveness in rooting out criminal actors. But then, you also have, as I mentioned, kind of trade infrastructure. And you'd say, well, why does that matter? Well, if you're managing risk 24/7 across multiple instruments with billions of capital, you need to make sure that you're that you're properly reflecting your risk and you're properly reflecting your collateral than moving that collateral and AI can be hugely helpful. So, we've launched a series of digital agents inside our Calypso platform, which is our trade infrastructure platform, that allows for clients first to we would make recommendations in terms of how they you know what their their risk recommendations are, but over time we would expect them that the banks

would start to use that to actually drive the actual behavior. They may not They may take the human out of the in a 24/7 environment. So, AI is critical for 24/7, but it also will change finance in many other ways. >> Right. Okay, can you talk a little bit about Nasdaq's overall strategy kind of 40,000-ft level? What are you focusing on? Some of it you've talked about already, but just in general, where is the exchange headed? >> Yeah, so well, we've been focused on three key pillars of our strategy because as we've grown and expanded the business um to really leveraging the market infrastructure and having a bigger impact on the industry, we've been

really excited about three key elements. So, the first is as I said, architecting the world's most modern markets. How do we really drive that? But the second is really driving I would say protecting the markets with integrity and so making sure that as I said, anti-financial crime, risk management, surveillance, those technologies are as advanced as possible to keep the world's financial systems safe and secure. And then the third is powering the innovation economy. We are very fortunate to be the home of the most innovative companies in the world, but we also have the opportunity to create investable products on the back of our listings with the Nasdaq 100 index and other Nasdaq indexes and we just crossed a trillion dollars in AUM

assets under management associated with our index or indexes. So, we're really proud of the fact we have such a huge impact today across the system. >> What about the IPO pipeline and just these mega companies that are looking to go public? What are you seeing with that and how is that playing into the tokenization AI theme? >> Well, I I think that Well, actually you're right cuz I think you've seen several companies that are really driving the tokenization of markets come public earlier in the year. That happened up primarily I would say in in Q1 Q and into Q2.

Um and then we've seen of course the AI the AI build out, you know, the infrastructure that supports AI, the model companies themselves, um as well as, you know, just the whole overall AI trade is enormous, let's just say. So, you've got the energy companies, the construction companies, data center companies, memory companies, semiconductor companies. So, there's hard tech, there's hard infrastructure, there's energy, and then there's also of course all the applications the the model companies themselves with SpaceX going public earlier this year is an example of that.

And then also all the application companies that are going to build be built on the back of AI. It is a new economy that's being created today. I mean, it's incredible. Um and it will require a lot of capital. So, we're very proud of the fact that the public markets are a great source of that capital in addition to the private markets. I think it's been a real convergence of public and private. Um and we'll see we'll see how we continue to see these great companies come to market. >> What are you seeing as some of the more exciting geographies, um whether it's say Asia or specific countries? What are you looking at for growth? I know the US markets are always seen as so big and dominant, but what else do you think?

>> Well, well, we we operate globally and we're really proud of the fact that we support um exchanges and economies all over the world. And so, where we see growth in Nasdaq's business, Southeast Asia has been a growth area for us for many years and it continues to be. I think because of the fact that Asia has been the home to really kind of the I would say the the leader of tokenization and the maturation of the crypto ecosystem, we've seen a lot of opportunity to provide our technology to crypto exchanges and to and to the ecosystem and mainstream exchanges as well across the region. And banks and brokers that want to manage risk in a more in a more streamlined way. And then I think that Latin America actually has

been a big growth area for us. They really worked hard to mature the entire financial ecosystem and economies there. And so, they're land they're leveraging our technology much more extensively today than we saw 10 years ago. That's been a huge growth area for us. But of course, US and Europe continue to be the largest markets. We operate the most of the markets in the Nordics. They're Nasdaq markets. Sweden is the most successful market in Europe and we're really, really proud of that. They have more listings than most other countries in Europe. They they're very active, lots of retail investment. So, that's actually been a good growth market for us, too.

>> So, let's go a little more into risk management. As we talked about, it does when you get to real time, it gets more challenging. Can you just talk about that a little bit cuz I think most people in the crowd would need to deal with risk management on some level. >> Yeah, and and it's interesting because as most of you all know, with within a tokenized ecosystem, particularly in the derivative space, they they have something called you know, auto deleveraging. So, there's a very um a very unique way for them to manage any sort of failure settlement failure, think of it in that way. Or the risk that's kind of one participant's taken on too much risk or they have a failing they have a position that they've it's

gone onto the wrong side of the position, and they have to kind of manage through the the cascading of that through this auto deleveraging tool. I think it's a very interesting and unique capability, but I have a feeling that it will mature into something that probably will be more appropriate for mainstream finance. You know, right now that sits in a very confined, defined ecosystem. I'll give you an example, you know, in in cash crypto, you really have a hard time shorting crypto. You can't take the the other side of that. So, they use their industry uses derivatives and kind of perpetual futures essentially, but then they put they have that to create margin and leverage and other things that are also harder to do in the cash

markets. In US cash equities, there's a lot of margin. You know, there's a lot of and there's also net settlement. There's a lot of netting that happens throughout as you as you trade throughout the day. That's creates a lot of a lot of capital efficiency. So, we already have that a lot of those problems solved and baked into our market ecosystem. So, what we're going to have to do to kind of bring tokenization to mainstream finance might look a little different than how the crypto ecosystem works today because some of those issues have already been solved in the in the mainstream financial ecosystem. So, it's going to be interesting. But, for for a financial firm, if you're managing risk and you're suddenly an institutional firm and you're looking at I want

First of all, everything's going to go 24/7. I might introduce crypto into my into my cadre. If the Clarity Act ever gets approved, that'll make it so the institutional ecosystem in the US becomes more more interested in that. Then, they I mean, managing billions and billions of dollars of risk in real time requires great capab- I mean, great skill. And making sure you're not on the wrong side of the trade at any given moment, making sure that you're not putting your balance sheet to risk. So, we're very excited about the genetic capabilities we're creating within Calypso because Calypso is one of the core risk management platforms for the world's economy. So, we're very excited about what we're doing there.

>> Okay. And how have you been dealing with anti-fraud, anti-money laundering? What new dimensions does, say, the move to longer trading hours, tokenization bring? >> Well, actually, we already provide surveillance technology to markets that operate 24/7. But, I think on AML and fraud detection, what's interesting is it's been it's been the move to real-time payments. So, and so, I mean, it used to be that you'd have time, you know, you get a wire, you spend 15 minutes reviewing the wire, you decide whether or not you're going to send that wire, and everything happens in a human time.

Well, as we know, the entire ecosystem's gone to real-time payments, and even the Fed the New York New York Fed has built or the the Fed the US Fed has built FedNow. So, everything's moving to real time and 24/7. So, the banks, especially community banks, are very concerned about how do they manage that? They've always managed that kind of risk with humans. So, now, what we're doing is we're giving them very advanced algorithmic capabilities to manage real-time payments to stop the payment before it goes is very different than you know, stopping the payment before it goes in real time is very different than having 15 minutes to review a case before you before you send something.

So, that algorithmic capability with AI, we have we have very specific topologies of what kind of criminal behaviors exist in a system. Like, a child trafficker behaves differently than a money launderer, you know, or I should say it's not a money launderer, then a then a terrorist network behaves differently than just a fraudster. And then, fraudsters behave differently whether you're, you know, unfortunately, they have things like elder abuse, they have um, you know, they're love scams and other things. They actually behave differently, too. So, we've built topologies that can identify different types of criminal behavior based on their behavior in the banking system. We then can look at networks now, which is really cool. We've brought in some a lot

of metadata leveraging GenAI now, where we can look at networks much more holistically across the system to understand how the networks operate across banks. And we have a very unique platform where we are able to bring the data together across 2,800 banks. So, we can look at payor and payee across the entire banking system across the United States. So, it's a very, very powerful capability when you bring big data together to solve the problem. This is not a problem that an individual bank can solve. This is only a problem that that the entire system has to solve together. So, we're very proud of what we've done there um to create that system.

>> What has you most excited in say the fintech, crypto, AI space? What are you looking at that maybe down the road you see as potentially becoming really useful? >> Well, I would argue that it's more just the meta trend that's happening here. I mean, if we think about every asset class in the world having the opportunity to trade 24/7, and that's a long-term vision. I'll be honest, not you know, there's not every asset asset is liquid enough to support a 24/7 environment. But, let's just argue that they all can trade 24/7.

And you think about the the the interconnectivity and the network capability of the entire financial system. It brings the world closer together. It makes it so that investors can express 8 billion people can be investors across asset classes that maybe were not accessible to them before. Um it allows everyone to think differently about um both their opportunities for wealth creation, but also the need for them to really be mindful of risk management and um and and taking control over their money, um and making sure that they're thinking with both short-term but also long-term but how to drive that wealth and change their lives. Um so, it's very very exciting to see all these technologies come together.

>> Excellent. Um I think we're going to leave it there, but thank you so much for your time, Adina. Really appreciate it. >> Thank you. Thank you.