Exchange evolution: Nasdaq president Tal Cohen on why fintech is now mission critical

New York-based Nasdaq is the second-largest global stock exchange by market cap and the most active stock trading in the US by volume, operating three equities and six options markets in the US alongside a thriving market network across the Nordics and Baltics.

But today’s exchange landscape has evolved far beyond the traditional concept of a stock exchange as a listing location or trading venue. To stay competitive, the exchange made the strategic decision almost 20 years ago to expand into the provision of mission-critical technology. The landmark US$10.5 billion acquisition of trade management and regulatory reporting specialist Adenza in November 2023 was the latest in a series of deals that have accelerated this business transformation: including OMX in 2007, International Securities Exchange in 2016 and anti-financial crime specialist Verafin in 2021.

Nasdaq’s technology is now used by more than 3,500 clients, including more than half of the world’s top 25 stock exchanges, 97% of global systemically important banks, and 35 central banks and regulatory authorities.  The firm has successfully pivoted from a traditional exchange to a technology powerhouse. But how did this journey start – and where will it end?

The recent Adenza deal was crucial for Nasdaq’s strategic direction, and its integration has supercharged the firm’s ambitions to become an infrastructure platform. But the journey started many years before.

Nasdaq has been providing mission critical technology for almost two decades now, since its acquisition of OMX. This accelerated in 2017 when Adena Friedman joined as CEO, and the firm undertook an exercise to understand its strategic framework. “One crucial element was the need to better manage risk: more granularly and in a real-time manner,” explains Cohen. “That was an area where we thought mission-critical infrastructure was going to become increasingly important. We wanted to explore how we could help the broader financial system modernise its infrastructure.”

At that point, Nasdaq was already one of the very few providers that operated, owned and ran its own technology – so the goal was to take a leadership position in adopting emerging and advanced technologies, and then create a unique blueprint for clients on their modernisation journey.

The firm then noticed two other things: one was a trend towards regtech, driven by an explosion in regulatory costs; and second was the heightened capital obligations that come with that. “We realised that this was a structural trend that was likely to continue,” says Cohen. “So the three key elements were increased risk, the need to modernize, and ongoing regulatory costs. The confluence of these was the key to our strategy.”

Since Friedman joined, and particularly during the past five years, Nasdaq has focused on increasing the community of clients it serves, and the range of solutions it provides, transforming from a point-to-point solutions firm to a platform company serving the broader financial ecosystem – everyone from the sell side to market operators, from the buy side to regulators and from governments to central banks.

“This community is one of our biggest assets,” says Cohen. “But we don’t want to lose focus on our foundational businesses. These have enabled us to have interesting and unique conversations with our clients.”

These conversations also enabled the firm to break early ground. It was the first market operator to take a market to the cloud in 2022 with one of its options markets, and the first to launch an approved AI-enabled order type. It was an early adopter in providing technology to new asset classes such as crypto, and it has now set its sights on the burgeoning field of carbon market technology. “We’re looking at everything from issuance and tokenisation all the way through to registry and settlement, as we make our way through the energy transition,” reveals Cohen. “We’re trying to show our customers, through our foundational markets business, how you can integrate these emerging technologies.“

The Adenza acquisition was crucial in accelerating Nasdaq’s transformation into a global technology firm. But Cohen was well aware of the potential pitfalls.

“Before we make acquisitions like this, we go through a strategic exercise to understand our role in the broader market and where we want to be over the next three, five and 10 years,” he says. “We decided that we had the ability to help our clients solve their toughest operational challenges across risk and regulation. But if you're going to help your clients with these types of operational challenges, your brand needs to stand for trust and integrity – especially with larger firms that could be facing either fines or penalties or that have their reputations on their line. Failure could have massive financial impact, so they think very carefully about who they partner with.”

Adenza had market-leading products serving 55-plus markets and with almost all the tier-1 banks as customers, but there was a strong overlap on the Calypso side, which had a market-leading trade management system that served its core customer base, the sell side.

“We often talk about ourselves as offering a full trade life cycle set of solutions from a market technology perspective, but that was primarily on the exchange-traded side,” says Cohen. “What Calypso brought was strength on the OTC side, which was a perfect fit. As an example: on the post trade side, we had clients that we both served but on opposite sides of the fence. Now, we can offer that client post-trade technologies for their equities market, Calypso for their OTC market, and we can help them optimise collateral and margin in a much more efficient way. That was a massive win for our clients.”

Nasdaq’s core clients on the sell side are facing numerous headwinds right now – not least the growing challenge of how to manage the increase of regulatory costs while complying with heightened liquidity and capital requirements.

“There’s one big theme that has been bubbling to the surface for a while now, and that is complexity,” explains Cohen. “Banks are looking for partners that help them reduce the burden of new and evolving regulations. They’re looking for ways to better manage complexity within their businesses and partners that match their footprint across the world. And they’re also often building on legacy systems that are 10, 20, 30 years old. They want partners that can help them modernize. It’s difficult for them to keep pace with forces of disruption and they are seeking partners that understand their challenges and needs.”

The way most institutions are currently managing that complexity is through operational costs – hiring more people, putting more money to work. But this is not a long-term solution. As their balance sheet gets heavier and heavier, they need to optimise cost of capital while also making sure that they can lend as much as possible.

“That’s why they talk to us, because they want to know how technology can help to manage all this complexity,” says Cohen, who believes that here lies the answer. “Can you automate this? Can you reduce manual intervention? Can you create straight-through processing? Can you take advantage of data in a more impactful way? Having a front-to-back system like Calypso that automates everything is therefore very powerful, and that's what our clients are asking us for right now.”

With a new administration taking control in the US, the geopolitical stage is in a state of flux – and even for firms such as Nasdaq, which take a long-term, five- to seven-year perspective on its product, business and strategy roadmaps, the change brings its own upheaval. One of the upsides, however, is the prospect of deregulation, with Trump’s lenient, growth-focused and Wall Street-friendly stance expected to catalyse markets – and benefit banks.

“The way we look at it is we want to see smart regulation that protects investors without stifling innovation and prosperity,” agrees Cohen. “We want banks to continue to do what they do best, efficiently allocating capital, supporting business growth and strengthening our economy. Banks will be healthier and there will be more opportunities for us to partner with them as they modernize and look to integrate new technologies like AI. There’s still going to be a lot of regulatory and operational complexity that banks need to solve for, and we want to help them on that journey.

“On the markets side, there’s an opportunity with the new SEC administration coming in to talk to them about the importance of maintaining strong US markets. We want markets to stay as robust as possible; make sure there’s a healthy environment for companies to raise capital, drive growth. Strengthening the competitiveness of capital markets requires close public sector and private sector partnership. We’ve seen a lot of change in recent years - technology is reshaping our markets, we’ve had a lot of new entrants and we look forward to speaking with regulators about how we can achieve that. We want to see reforms that advance our markets and build a healthy ecosystem.”

Exchanges globally are undergoing a critical transformation as they expand into entirely new products and services, and seek to redefine their position in the market and their value to their counterparties. We’ve seen LSEG acquire Refinitiv and tie up with Microsoft, we’ve seen Deutsche Börse take over software giant SimCorp as it expands aggressively into data and analytics, we’ve seen SIX Group snap up Aquis, we’ve seen Euronext buy Borsa Italiana and expand its clearing and post-trade functions, and we’ve Cboe Global Markets recently launched its own technology platform, Cboe Titanium – and these are just a handful of the seismic shifts occurring in the exchange landscape.

So where does Nasdaq fit, and where is next for the exchange within such a rapidly evolving industry?

“If 2024 was about integration and optimisation, this year is about impact,” concludes Cohen.

“We’ve been investing in our people to make sure they have the right skills and AI tools to enhance the customer experience. And we want to find ways to deepen our partnerships with clients by understanding how we can solve more of their operational challenges and continue to find more ways to fuel their success. If we’re going to play a leading role in modernizing the financial system, we need to bring together our people, technology, and the industry in a way that pushes the boundaries of what’s possible.”