Markets are changing — and fast. The tech revolution in finance is only picking up speed and the Covid-19 pandemic has been a major accelerant. Retail investor participation is on the rise, new digital trading platforms are rapidly gaining popularity, and emerging asset classes are reaching new levels of maturity and adoption by institutional investors.
If managed thoughtfully, these changes hold the promise to facilitate even stronger, more accessible markets for all participants. A big part of Nasdaq’s job today is to ensure that all participants can rely on markets that are fair, safe and transparent. While the systems that underpin markets proved highly resilient during the most volatile days early in the pandemic, it is important now to take steps today to future-proof our infrastructure, build new marketplaces, and ensure a fair and level playing field for all market participants.
Just as broadband is now considered core to America’s national infrastructure, the cloud will play an important role in building the next frontier in market infrastructure. The cloud is a neutral, secure infrastructure that allows internal and external stakeholders to share, analyse and act on data, creating greater insight and driving value. Today, most retail investors already buy and sell equities using cloud-native mobile apps and platforms. Yet the data and trading applications to which these next-generation services connect are still housed in on-premise environments or a combination of on-premise and cloud.
We already see enormous benefits from moving market data to the cloud. For example, when we experienced our 10 most active trading days on record last year during the early days of the pandemic (peaking at about 62 billion orders, trades and quotes in a single day across Nasdaq’s equities and options markets), our cloud-hosted data-storage and API [application programming interface] solutions meaningfully enhanced our scalability. Many of our less latency-sensitive functions — such as our front-end order and execution management system for trading options and stock options, and our trading-data storage — are cloud-native. This provides us instant scalability and critical resiliency during turbulent market environments.
We have an opportunity to tackle the next challenge: leveraging our next-generation cloud-native solutions to support high-throughput, ultra-low latency core exchange systems to the cloud, realising full end-to-end exchange on cloud infrastructure. While there remain engineering hurdles today, these are breaking down with accelerating technology innovation. We are confident that we can enhance the integrity, resilience and scalability of the exchange ecosystem in the next several years by embracing the cloud.
Beyond the cloud, we see positive ways to leverage artificial intelligence and machine learning to strengthen and improve how our markets operate — both in terms of handling more data intensity and improving market quality and efficiency. Many challenges in operating markets are beyond human scale, from the number of daily decisions, to the density of information, to speed of change.
All could be handled more efficiently through technology. For example, we are making positive strides in applying AI and machine learning to our market-surveillance efforts to maintain and improve market integrity. Additionally, by using AI-controlled order and routing, options exchanges could lower the technological and information barriers to entry in execution.
The growth and maturation of cloud infrastructure and the API economy is also creating possibilities to build new markets by allowing for rapid and virtually infinite scalability. These new marketplaces — which can be digital assets, real estate, dynamic pricing for concert tickets or inventory management for restaurants, to name but a few — need to be able to scale resiliently while also providing a seamless workflow throughout the entire trading life‑cycle. They also require infrastructure technology that allows for the frictionless creation of assets, the ability to match buyers and sellers with ease, and the seamless settlement and custody of the asset and funds.
This is an area where we are applying decades of expertise and technology know-how as a market infrastructure operator. For example, last year, we launched an end-to-end software-based platform to operate marketplaces in a cloud environment with turnkey infrastructure components and a platform to plug and play as new marketplaces build, adapt and expand their business.
There is massive opportunity to drive better trust, participation and resiliency in other industries that might have less digital and more opaque structures in place.
New technologies often give rise to a new generation of criminals who seek to exploit them. Criminal activity has been on the rise as e-commerce and digital banking have grown, and has accelerated during the pandemic. A 2011 estimate from the United Nations suggests that more than $2tn is laundered through the financial system annually. A more recent estimate from E&Y puts that number closer to $3.5tn.
Nefarious actors have no rule book. They have access to the most advanced technology available to perpetrate their criminal activity. It is critically important that financial institutions also have access to the best possible technology to protect the integrity of the financial system.
The good news is that cutting-edge solutions, driven by advanced algorithms and machine learning, can close the gap between the criminals and companies and law enforcement. Nasdaq is making substantial investments in anti-financial-crime solutions, including the acquisition of Verafin, that reduce complexity and cost for banks and brokers, while also improving the efficacy of the technology to identify and mitigate criminal behaviour.
Despite the challenges the world faced over the past year, the capital markets have been a bright spot, both in facilitating capital-raising to support businesses and entrepreneurs, and by providing robust trading infrastructure to support investors.
The past year has fundamentally transformed the world, but with this transformation comes an opportunity for positive change. Our role at Nasdaq is to embrace this change.
Adena Friedman is president and CEO of Nasdaq.
This article was published by Barron’s.