Adena Friedman went from working as an intern at the Nasdaq to CEO and President over the course of 23 years. There were a couple of stops along the way, notably at The Carlyle Group, where she was the CFO and Managing Director from 2011 to 2014. But on January 1, 2017, she became the first woman in history to lead a global exchange.
The Nasdaq itself was the first electronic stock exchange, opening its virtual doors in 1971. Today, it's a global technology company that serves the capital markets and other industries with data, analytics, software and services. To be sure, it is still a pre-eminent stock exchange where some of the most notable companies in the world are listed and traded.
Given Friedman's extensive history at Nasdaq and her history-making career in the capital markets, I spoke with her about the future of stock exchanges, investing trends and the impact of new technology.
Passive vs. Active Investing
Silver: How will the passive investing trend help shape the future of the exchange? Obviously we've seen a big move that way.
Friedman: We have about $200 billion of assets under management tied to index products that we've created, which means that we like the passive world. It's been an interesting 10 years. When the market is primarily going in one direction, it makes it harder for active investors to differentiate themselves from the beta of the market. They've had 10 years of that challenge. I think the question is over the next 10 to 20 years, will there be a cycle that will allow them to differentiate themselves positively to a passive fund? Will they find new ways to differentiate themselves through alternative data and the use of AI—and how much do we want that?
I believe that there will, there has to be a balance between active and passive because if every single dollar coming into the market is a passive seller, and there's no individual thought going into making investment decisions, I think you've got a herd mentality that to me creates a huge arbitrage opportunity. That therefore will give rise to the actives coming in and seeing a total dislocation. I do believe that there will always be a balance. I think though that in this world of 10 years of bull runs that balance is shifting and I think over the next 10 to 20 years, if we go through normal economic cycles, we'll probably find a more of a rebalance there.
Active managers are having to rethink what value they provide and how much they can charge for that. That is happening now. So if they get to a point of being more efficient and less expensive and they can show some alpha over a cycle using more advanced tools to make investment, that's where I think that they can continue to find a new way to differentiate themselves.
Artificial Intelligence and Frictionless Trading
Silver: What will be the biggest difference in the way that exchanges operate from today and the way they'll operate 10 to 20 years from now? What's your perspective on that?
Friedman: I think that the core benefits of exchanges being a central hub where buyers and sellers come together, will continue to be very much alive and well. So you might have a buyer of a company and a seller of a company and yes, they may not come together at that exact moment at the exact price, so those intermediaries provide the ability for those investors to find it, to be able to buy and sell at a price they are looking for at a time that they're looking for. And the role of the markets is to bring all of that together. I think that will persist.
I think there is still friction after the trade is determined. That level of friction creates a lot of costs for the broker dealers, all the intermediaries and the investors, particularly institutional investors. And yet, it's a very hard nut to crack. So 10 to 20 years out, I believe we will go down a road towards a much more streamlined process of going from agreeing to buy and sell to settling out the trade regardless of the asset class—whether that's blockchain or some other modern technology to manage that information in a much more streamlined way. I think that's a key.
The other change that I think will be much more prevalent in the market is the use of artificial intelligence and other data to be able to make smarter investment decisions. And then you get closer to what we call, perfectly efficient markets. Whether or not that happens in five, 10 and 20 years, I don't know. But if you assume that you've got this continued march towards actionable AI, the use of artificial intelligence to make better decisions, mountains of data with that, they can synthesize it and make up and draw conclusions from it. If you then pile on top of that in 10 to 20 years, the potential of quantum computing, then you've got the ability to look at thousands of outcomes in seconds to understand what's the right path and what's the right price and how do you make the right decision around buying and selling a certain company or an asset class.
Silver: How are you already using trading technology and reg tech like AI and blockchain that may shape the Nasdaq's future?
Friedman: The most important AI work that we're doing is really applying it to our market monitoring tools. It’s a technology we use for market surveillance in our own markets, but we also sell that tool to 50 other exchanges, 12 regulators, and about 160 broker dealers. All of those tools, they're supposed to root out bad behavior, market manipulation, insider trading, just all the bad things that make markets unfair.
We are very dedicated to using the most modern technology available to make sure that we put the right defenses in place and we can find and root out and eliminate that kind of bad behavior. So AI is a critical part of our roadmap there. We've been starting to bring AI into our own tools for our own market. We're starting to make that available to other markets and then we'll start to launch that out into the broker dealer platform as well in the coming months and years. So we're pretty excited about that.
Blockchain and the Stock Market
Silver: What about Blockchain? How will that fit in?
Friedman: The public equity market is not going to be the first place that blockchain disrupts the world. That said, we're using the blockchain for proxy voting, and we've actually gotten to the point where we're close to deploying that in one of the countries that we provide technology to. The last area in the blockchain is on kind of a stable point type of structure. We're making investments in that area into companies that are really focused on stable points. So those are the areas that we think blockchain will have the most impact over the next five years.
Silver: Will the trading of assets like a digital currency change the way that the Nasdaq operates in the future?
Friedman: The first question is, will digital currencies become an actual fiat for people to use to transfer certain goods for certain services? I think really the jury is still out on that. I'm probably not going to give you a predictive view on that one because it’s impossible to know. Right now, certainly Bitcoin is not used holistically for that purpose. Do I think stable coin have a better ability to try to create an environment for that over time? Yes. I think because you're finding a way to market to a government-issued fiat, so I think that's the faster way to adoption, and it's just digitizing a currency in a way that takes friction out of the system and allowing for the transfer of money in a faster, more efficient way.
Will IPOs Still Matter?
Silver: Obviously going public, and going public on the Nasdaq, is a badge of honor and credibility and a big moment for a lot of companies. How will being a public company from your perspective change in the next 20 years? How important will it be to have that listing?
Friedman: I think the real question is, will there be a convergence between the private markets and the public markets in the next 20 years? I believe personally that it's inevitable. How that's going to converge is hard to know because the regulatory environment around that is the critical component. Right now private markets are only available to accredited investors or qualified purchasers so it's really only available to the wealthy. To try and create a convergence of these types of markets, I think that you'd have to number one, make those private markets more available and accessible to a broader stream of investors. But number two, you really have to ramp up the disclosure obligations and a lot of the transparency elements that the private markets don't undertake today.
Silver: In the era of low cost products and, and falling prices for trade execution, what would be the Nasdaq's most important function as you look out a decade, two decades?
Friedman: We are very clearly thinking that our most important function is to provide the technology underpinning the data and insight to allow for capital markets around the world to flourish. So we run our own markets, but we also provide the technology to others. We want to make it so our data and insights really help power investors around the world, across the capital markets.