Nasdaq’s biennial Technology of the Future (ToF) conference, now in its 17th (and first virtual) edition, brings together Nasdaq’s Market Technology customer community, to discuss how marketplace operators can evolve their businesses and embrace emerging technologies as they look to advance their capital market ecosystems.
As part of the conference, Lars Ottersgård, Executive Vice President and Head of Market Technology spoke with Nasdaq’s President and CEO Adena Friedman on the state of technology in the capital markets in 2020.
An abridged version of their conversation is what follows.
These past months coping with a global pandemic have changed the economic outlook and everyday life for people across the globe. We have seen extreme market conditions while managing new work from home realities. In terms of the unusual market conditions, how has Nasdaq as a market operator and a technology partner handled the market volatility and the technology resiliency challenges that come with it?
I believe that we've done a very good job of working together as a team to make decisions quickly to ensure that the markets are operating efficiently and effectively.
March was a really unprecedented month; it was probably a month that we will all remember forever. We started to see significant volatility in the markets, and had our biggest volume day in the equities and options markets on February 28, with 62 billion messages in one day. We suddenly pivoted to work from home globally, and at the same time were managing unprecedented levels, volatility and volumes. It was a busy time.
One thing that was challenging was, in the U.S., there were a lot of discussions around whether or not we should consider closing the markets, for a period of a day or more, to allow calm to try to re-establish itself. However, we are here to provide liquidity to investors and companies, and if we had done anything to disrupt that flow of liquidity, I feel it would have created a huge trust issue within the capital markets in the United States and elsewhere.
We've been in this work-from-home environment for a while now, and I'm sure we all know it has its unique challenges in communicating effectively and making sure people feel connected to each other. To build that sense of community, we've been doing biweekly all-hands calls, and I'm going to continue that forever, just to make sure that each employee has a chance to connect and hear from me and others around the company.
You’ve previously talked about cooperative capitalism. Long term, how has the pandemic influenced your take on what cooperative capitalism means for our economies and communities? How has the pandemic shaped businesses’ opportunities to address and embrace cooperative capitalism?
In recent years, there’s a sense that, frankly, the business community has not done everything it can to serve the broader communities around them, and therefore people have been left behind, and the government should step in and just take control.
When we think about striking the right balance between the role of government and the role of business, I’m very drawn to this concept of collaborative capitalism, where companies serve a role in the society. Companies play a real role in the wellbeing of their employees, serving their clients fairly and exceeding their clients’ expectations, and serving the communities around them.
So how can the private sector join up with the government to solve some of the larger societal issues that have clearly become exposed during this pandemic? How do we modernize education? How do we make sure that we shore up the stability of our healthcare system? How do we make sure that we lean into the next digital age of infrastructure?
All of those things are places where the private sector can play a huge role in joining up with government to solve big problems. Our view is that there is a way you can have a shareholder-led part of our economy that still provides a great public good in teaming up with government.
If anything, we've seen cooperative capitalism really shine during this time when companies have converted their manufacturing plants to create PPE [personal protective equipment], or grocery stores that used their supply chain to buy up produce and provide them to food banks.
Those are all the things that are there to support society that don’t have short-term economic impact, but long-term create a more sustainable economy.
Has the pandemic changed your way of interacting and working with customers, investors and employees? If so, how?
A foundation of trust has to be there, whether it's trust in each other as a provider and a client or trust in each other as an employer and employee. You've spent years building up trust with your clients and employees, and now is the time to be able to leverage that trust. I believe Nasdaq has done a good job of developing trust in our employees and clients over a period of many years, so that they can continue to trust us as we work in a much more remote environment.
There's nothing like being in person though, so the minute that we have a vaccine that is propagated and available, we will all be working to get back together. I want to be able to travel to be together with all of our teammates and meet our clients. It's one of the great things about this role, that I have a chance to meet people from all over the world and understand their perspective.
That's certainly a big part of who we are in the long term, but in the short term, we do appreciate all the work that everyone's done to work through this time remotely.
In addition to these shifts, do you see any technology trends that have emerged or accelerated during the pandemic?
The adoption of cloud and software as a service (SaaS) is the most immediate impact that we've seen and we've heard from our customers.
The level of scalability, the level of complexity, and the needs around tech security are all incredibly amplified at the moment. Working together to move our markets and applications into a cloud environment, allows us to have more instant scalability, ready access to expertise around harder areas of tech security, as well as the ability to run a much more dynamic market place and have faster time to market on a lot of elements.
The second trend is machine learning. We've been on a journey around that for a while, and that will continue to be a constant part of the new economy.
The last thing is cybersecurity, which has hit a new peak of complexity. There are new techniques that people are using, particularly around phishing and ways to infiltrate remote networks, and we've all had to be on very high alert, leveraging every technology available to make sure that we keep all of our markets secure.
What are the benefits that you see for the financial system using cloud? I think you alluded to some of them, but are there any concrete, tangible benefits that you see?
The first thing is a lot more flexibility and scalability. We’re constantly making huge investments in the scalability of our system, whereas if we were in a cloud environment, it would allow for instant scalability. Therefore, it also allows you to accelerate your innovation, because instead of focusing a lot of your resources on that part of the markets, you're allowing those resources to focus on accelerating innovation, whether it's in continuing to go to a lower latency environment, bringing in new features and functions, and really taking advantage of this highly scalable platform and environment.
The other thing is just expertise. The ability for us to really maintain our expertise in managing a highly secured, scalable infrastructure with high capacity, is just going to increase.
The last thing that we're thinking a lot about is to open up and democratise market access. Today, Nasdaq operates in a very defined ecosystem, but requires our clients to put in a lot of advanced software. Making the ecosystem more democratised and less expensive to come into our market and join can be done through standardising the APIs [Application Programming Interfaces]. It’s a really interesting way to create a more global market ecosystem while maintaining each market as its own.
I know we were very early in using cloud for our data. For market data being deployed via the cloud, how do you see those offerings changing the way data distribution works, and what benefits will we find from this new way of working?
We’ve done a ton of work to move everything closer and closer into a cloud environment for over 10 years now.
One area that we really have focused on this year is moving data distribution into clouds. Basically, creating a native version of our market data in a cloud system that allows for a much easier way for customers to come in and use different API structures to grab the data and populate whatever the front ends are, or to be able to bring it into their infrastructure in a much more seamless way.
We've heard from customers that it’s much easier to write, it allows them to grab only the data they want, and they can do it much faster and cheaper. The more that we can partner with our clients in creating a more joint ecosystem in a cloud environment, the more our clients get to propagate distribution of their data and our customers can lessen their other reliance on third party vendors, which will make it even cheaper for them to take the data.
Beyond cloud, we’ve been quite bullish about our use of AI to monitor markets. How do you see AI continuing to play a role in protecting tomorrow’s markets?
We've had three areas in machine learning that we focus on. One is in investor relations intelligence where we’ve used natural language processing to help our analysts prepare reports for their clients using data.
The second has been in Quandl, a little bit more of an offensive look of taking data and using MI to find signals in the markets that could give you an alpha edge. Partnering with our buy-side clients on applying that alternative data to create an edge has definitely been an area of focus.
Our biggest investment, however, has definitely been in market surveillance. It’s a core function of who we are. I always say that the nefarious players don’t operate under any rules or regulations – they’re going to use every means possible to try to find ways to infiltrate the markets with bad behaviour. So we need to be equally innovative. In market surveillance, we deployed our first machine learning algorithms in our Nordic markets, with smarter alerting so we can narrow down on the false negatives and positives, so the analysts can spend their time on the most important activities.
We've now since deployed another machine learning initiative on the Nasdaq stock market in the US, where we've used TensorFlow and deep learning. They’ve, one, made it so that we have fewer false positives, but two, actually unearthed behaviours that we wouldn't have seen with our naked eye looking at the data. Overall, we've been able to get smarter in finding new behaviours that we think we need to be generating alerts from. We are also able to utilise transfer learning which allows our deep neural networks to scale across clients and markets.
We look forward to propagating that out through the Nasdaq Market Surveillance platform and ultimately out to the Trade Surveillance platform, which is leveraged by banks and broker-dealers. They have a lot more restrictions on using machine learning, so we're going to be working with the industry to find ways to deploy that the right way.
We’ve discussed the state of the economy and the capital markets and relevant technology trends that have emerged during the pandemic. How has all of this affected Nasdaq’s outlook or strategy and by extension Nasdaq’s products and our customers?
If anything, the pandemic has really given us proof points for our strategy. I believe the move to the cloud and SaaS will be accelerated on the back of the current pandemic.
Next is focusing on data and analytics, and continuing to grow in modernising markets to make a more inclusive ecosystem.
Lastly, our index business has been very on the front page, so we want to invest more in developing really innovative indices that carry investment strategies forward.
A final question I wanted to ask you. Cyber security is top of mind right now as we are seeing increased activity spanning the exchange industry globally. How is Nasdaq looking at cybersecurity programs in the wake of recent events?
We all know cyber security is a CEO-level challenge. It's one that I pay a lot of attention to with our chief information security officer (CISO) and his team, as well as our CIO.
Moving to the remote environment has definitely increased phishing attempts in corporates, and it’s something that we have to be ever vigilant around. We now do a lot more education with our employees and remind them constantly of what they should and should not expect in terms of emails, as well as running phishing tests. We’ve also done a lot with DDoS [distributed denial of service] – making sure that established ways of managing DDoS attacks is absolutely critical.
We partner deeply with a lot of new companies from the US, Europe, Middle East and everywhere in between that really focus on cyber risk. We deploy a lot of new tech into our infrastructure every year, it’s been a real focus.
One of the great things about the exchange industry is that for the most part we all operate within our own ecosystems. Therefore, there's a lot more collaboration across exchanges than in other industries. Sharing information on cybersecurity risks and experiences allows us to learn from each other. I know our CISO has conversations across the exchange landscape on a regular basis, but certainly in recent weeks with some of the challenges that the industry has experienced. I strong believe it’s important to recognise that sharing makes us all better.
We appreciate the open dialogue, and we're always happy to facilitate conversations between other exchanges.
This is an abridged version of the conversation that took place at Nasdaq’s virtual Future of Technology Conference.