A framework for our post-pandemic global markets

By: Ed Knight, Vice Chairman, Nasdaq Aug 2021

When the World Federation of Exchanges launched 60 years ago, the Dow was in the middle of a ten-year bull market and pushing 700, with oil companies and steel manufacturers dominating the Fortune 500. Even in a very different world from ours today, the organisation was formed with a far-sighted understanding that fair, transparent, and well-functioning markets were essential to the strength of the global economy.

As we slowly emerge from the greatest human and economic challenge of our lifetimes and learn exactly how the world will look different post-pandemic, we know one thing is true, just as it was 60 years ago; the importance of strong, transparent, and innovative markets has never been clearer, and the responsibility of this federation to sustain them never greater.

The World Federation of Exchanges has stayed relevant by evolving as markets have evolved over the years. In our current period of rapid change in technology and markets, this agility will be critical. And yet, in order to move fast, we need to remain anchored by a set of core principles.

A critical role

First, we must reinforce, through sustained argument and good practices, the critical role well-regulated, transparent markets perform in capital creation, facilitating innovation and sustainable economic growth. The simple, essential function of robust, transparent price discovery must be the bedrock of capital markets around the globe.

For all the challenges brought on by the pandemic, one critical silver lining was that exchange-led markets were stress-tested to the extreme and worked admirably. The early, most volatile days of the pandemic brought unprecedented trading volume and price swings, yet our investments in modern technology served us well. And even after that initial period of volatility subsided, markets continued to provide liquidity that allowed companies to not only survive the downturn, but actually accelerate the pace of innovation, growth, and the re-opening of the world economy.

Even at the lowest points, markets never stopped injecting capital into startups. The public biotech companies that successfully pursued COVID-19 vaccines serve as forceful reminders of how public markets can contribute to the common good – and do so profitably.

Public companies, across industries, demonstrated they could respond rapidly to the urgent needs of people and communities – including re-orienting sprawling global supply chains in order to deliver vital goods where they were needed most, saving untold lives. These innovations, too, will continue to uplift the quality of how we live and work.

It follows, then, that as we consider new developments that will affect how exchanges evolve – from cryptocurrency, to cyber-attacks, to money laundering and other financial crimes – world exchanges must continue to demonstrate this same value proposition going forward.

To do so, WFE members need to work together to ensure that markets around the world aspire to this high level of transparency and trust.

That means building a framework that ensures data integrity, facilitates co-operation with central banks and governments to promote smart but streamlined and modern regulation, and ensuring that markets evolve in a transparent way.

Developing robust defences

Second, let’s develop unified approaches to combatting emerging risks.

Incidents like the wave of recent cyber-security attacks remind us on an almost daily basis that we urgently need robust defences. This requires collective action – and as a global organisation, we can bring stakeholders together – across geographies and industries to make progress together. Similarly, we need the private and public sectors to find common ground in the war against cyber-crime.

Nasdaq has a special opportunity to contribute to this cause. In addition to operating markets in the U.S. and Europe, we also serve as a trusted advisor to the thousands of companies that list with us. Just as we have developed proposals and best practices across a number of market areas, we are actively engaged with our issuers on how to defend against – and, when necessary, respond to – cyber threats.

In the fight against cyber-crime and as we fortify markets against risks such as money laundering and other financial crimes, we should embrace emerging technologies and play a leading role in implementing them thoughtfully. That’s why Nasdaq is investing significant resources into regulatory and anti-financial crime technologies, and it’s the reason we bolstered these efforts with our recent acquisition of Verafin.

Sustainable priorities 

Third, global exchanges should align on and work to meet the growing demand from investors on ESG priorities, fostering a sustainable, inclusive capitalism that expands fair access for all.

What was once a matter of debate is one no longer. For example, academic studies show diverse boards operate better, perform better, manage risk better, and help to widen the circle of market participants to make them more inclusive. Equally important, we know inclusive boards help build public confidence in traded companies and markets.

Investors now increasingly demand ESG, including diversity in executive leadership and boards, as integral to their investment decisions.

In 2017, State Street Global Advisors and Longitudinal Research surveyed investment managers across asset classes – including private and public pension funds and endowments – and found that a full 68 percent reported seeing a clear link between ESG and higher returns.

The exchange community has demonstrated that we can innovate to meet ESG priorities, and we can also offer tools that help investors connect with and better evaluate the ESG efforts of listed entities.

At Nasdaq, in June, we acquired Puro.earth, a leading marketplace for carbon removal, and we aim to scale this business to address a growing demand for carbon removal by corporations as they pursue their sustainability efforts.

True to WFE’s spirit of sharing best practices, we are now seeing the UK government and regulators like the FCA and PRA begin to consider making diversity disclosures a part of the FCA’s premium listing rules, similar to the approach taken by Nasdaq in the United States.

These three principles – championing transparent well-regulated markets, embracing technological innovation and valuing ESG – can provide a foundation for the WFE’s continuing efforts to build strong markets.

When the next great challenge rears its head, the world will be looking to markets and exchanges to do what we did during the pandemic: provide stability and trust, look around corners to protect against cyber-threats to ensure resilient markets, and advance ESG goals that both create value and keep us true to our shared values as a federation of well-run exchanges.