Following are excerpts from a CNBC interview with Adena Friedman, Nasdaq CEO and CNBC's Arjun Kharpal from the World Economic Forum 2018.
Kharpal: Thank you for joining us. I have the pleasure of being joined with Adena Friedman, the CEO of the Nasdaq. This is our second meeting in-, in three months-,
Friedman: It is!
Kharpal: So, this is good-, good to catch up. Adena, I wanted to kick off, a little bit, about some of the things you've been talking about, and are going to be talking about, here at WEF, and that's around market economies and, you know, what the Nasdaq becomes. So, just run me through some of your thinking around-, your thoughts around market economies, off the back of the piece you wrote yesterday.
Friedman: Sure. Well, we believe that the markets, as they exist today-, so, if we look at the professional markets and the securities markets, they're very advanced, and based on two-sided price discovery. It allows both sides to come together and determine the right price, for any asset that they're looking to-, to change hands. Whereas, in the consumer economy, there are certainly pockets of that. You know, there are some great, innovative companies, like eBay, that have really created the ability to have a two-sided price discussion between a buyer and a seller, but the vast majority of the economy still sits as what I would call a seller's economy. They set the price, and the buyer decides if they want to pay. So, what we'd like to see, and what we are seeing, in terms of clients coming to us and asking us for the use of our technology, is we're seeing more and more industries looking towards this idea of two-sided price discovery, giving the buyers and sellers the chance to come together and find the right price, for whatever service that they're trying to transact. And we do think that's going to be more pervasive in the years to come.
Kharpal: So, what does that mean for your business, then? Because, obviously, the Nasdaq is-, is synonymous with-, with financial assets, the likes of stocks, of course, and the rest of it, especially technology stocks. Where does that go, then, in terms of the products, then, you can offer on a marketplace?
Friedman: Sure, well, today, Nasdaq actually is a multi-asset class market, but primarily in financial assets, but we do provide-, we have a large technology business, where we allow our technology to be used in other markets around the world. We have 90 other markets around the world, that use our technology. Trading technology, clearing and settlement technology, data, etc. And so, what we're finding is that we're getting inbound requests from non-financial institutions, that are looking to leverage the same technology for things like Ad Futures futures, or insurance premiums, or things that are outside the scope of what I would call a financial asset, and, what we're hoping to do is make sure we provide that technology, we become a partner to them, and we carry them in to the future, and ourselves in to the future, with it.
Kharpal: So, that's-, you take the example of insurance, that's creating the marketplace around that, being able to find the right price, and-, and a buyer and a seller for an insurance, and-,
Friedman: Yes, so, if you have even some-, I think there are certain insurance companies that are looking at creating what I would call instant insurance premiums.
Friedman: So, like, short-term-, if I am going on a vacation, I want to have an insurance against that vacation, or insurance on myself, for that vacation, whatever it is. And so they basically create a marketplace that allows them to determine, what is the value of that? So, they provide information, the insurance company can value it, and they work through what is the right-, the right price to pay.
Kharpal: And so how far does that go? Can that go to things like concert tickets, or-, or other things of that nature?
Friedman: Well, certainly, the concert ticket market has become a big business, and when you look at, you know, StubHub and others, they've done a spectacular job of becoming a centralized place, and a centralized marketplace, but it still, today, is a seller's market.
Friedman: So, it's a matter of, can you create more, I would say, the ability for consumers to have a role to play in determining price at the buying level, and not just at the selling level.
Kharpal: So, from the Nasdaq's perspective, would you be licensing out your technology, or would you actually be creating your own products-,
Friedman: That's a great question-,
Kharpal: Partnering? How would that work?
Friedman: I mean, I'd certainly say that, right now, the way that we're entering the market is as a technology partner.
Friedman: As we look at certain markets that we think are particularly compelling, we'd love to see, where do we want to be more than a technology provider, and be more of a partner with certain-, with certain institutions that are looking to implement this kind of market model. We-, we want to make sure that people understand, though, that we're here as a partner, and we can do that in lots of different formats, and so we're excited about that.
Kharpal: So, are we likely to see any of these come to fruition his year? Any of the-, whether it's you providing technology to any company, or you launching your own product in a certain market, as well?
Friedman: I would say that we are well underway with a lot of our clients. Some of them are going in to production very soon, so, you know, something like the Ad Futures market is almost ready to launch, but we-, I think it takes a while. So, to create a market structure, because it's not just the technology, it's also to create-, make sure you have the right market structure to surround that technology.
Friedman: So, we do also work on an advisory basis, to determine what is the right market structure to exist, to support this market economy. And that, I think, is really important when you look at some of the nascent markets that are out there today. If you don't have the right framework to create a fair, level playing field, you do have people that get disadvantaged, and that is the last thing we want to see. So, we like to work with them both on the market structure and-, and market model, as well as the technology, and that takes time.
Kharpal: Are you able to give us a few more details around, perhaps, this Ad Futures product? Do you have a partner already lined up? And who is it? Or-,
Friedman: Well, it's a client-,
Friedman: So, they are-, they are-, it's a company called Nyiax , and they are launching this new, kind of, construct within the ad-, the ad services space, that allows companies and-, companies, basically, to trade ad futures.
Friedman: So, instead of just the spot market that exists, as it exists today, it allows them to look in to the future. That particular company chose to launch this product, or this market, in the Cloud, and using the blockchain end to end, so, it, like, creates an incredibly efficient way to do trading.
Kharpal: Interesting, and that's-, that's likely to launch this year then, is it?
Friedman: That is certainly our hope, but they're-, they're a client to us, so they have to make that decision.
Kharpal: Yes, absolutely. One of the interesting things you mentioned there is, you have to make sure everyone is involved in this shift to technology. That's one of the concerns that seems to have arisen over the past few months, and certainly last year, is, do people get left behind by the advent of artificial intelligence, of Cloud computing, big data. Are there losers here? So, how do you develop this stuff responsibly, ensuring that the entire society benefits?
Friedman: Yeah, I think that's a great question, I think that's a big, existential question, across all of every industry, as we face the-, the next wave of technology. And so, within the capital markets themselves, or, what I'll call the markets economy, you do have to make sure you're creating a framework of fairness-,
Friedman: And that's actually much easier said than done. So, you have to make sure that you're thinking through, who are all the participants who could come in, how are they going to leverage the market? What are their incentives, and what are their motivations? And make sure that you're creating a system that allows for all of those to comingle in a fair way. We would argue that the US capital markets today, particularly the equities markets, are done in a way that is a level playing field, that creates real fairness. You know, we have a lot of obligations put on us, in terms of how we share our market data, making sure everyone has equal access, making sure that the pricing is fair and transparent. And so, I think that, if we apply a lot of those same principles to these other markets, you can create a place where everyone feels that they benefit from the markets economy, as opposed to the professionals benefiting, and the retail investors, or clients, not.
Kharpal: Do you think technology players, the large players in the world, are understanding that perhaps there is some backlash against their platforms? I feel like, you know, we saw Facebook say, 'Hold on, look, we understand, we're loading a lot of ads in to your newsfeed, and let's show you-, go back to our core.' That seems to be a reaction, perhaps, to some of the feedback they were getting from users, saying, 'Well, this is just full of ads now, and it's not really what-, what I signed up for.' Is-, is there a realization? Or are a lot of the big platforms still blind to what's going on?
Friedman: I think that every company today is recognizing that they have a role in society. Or, I should say, every great company today is recognizing that they have a role in society. And it's very interesting, because I-, I actually do think it's a good era of, we've got this issue of technology just continuing to race forward. Corporate America, or global corporates, having a real role in how that is ultimately used, for the benefit of society or not.
Friedman: And having this realization, and I think that the last couple of years of the technology wave have given everyone a realization that we do play a role in creating the right society. And I think, you know, great corporates are going to continue to step up to that role, and take that technology, and use it in a way that benefits. But, there is always the chance for that technology to be used in the wrong way, so, how do you, kind of, put self-control in place? How do you create a market, or, like, a 'market mode', more broadly, that allows for that fairness? And then also, on top of that, how do you regulate? But regulation can't be the first line of defense. It should really be the last line of defense, after a fair model's been put in place.
Kharpal: In terms of how you see some of this impact, particularly automation, because that's one, even last year, I remember, at WEF, there was a lot of talk about the impact that AI and, and the rest of this automation is going to have on jobs. And there was a lot of-, a lot of doom mongering around, you know, there's going to be a huge amount of jobs wiped out, a lot of people unemployed in the next few years. How do you see that playing out?
Friedman: Yeah, I think that it's-, I think it's interesting to see, you can, kind of, envision lots of future worlds existing with the idea of AI. Is it an augmented type of experience where, you know, humans are augmented by technology? Or are they replaced by technology? If they are, let's say, in some roles, replaced by technology, is there an opportunity for that person, because of other demand characteristics, to get a different job? To, kind of, take-, take their role, and apply it in society in a different way? I just don't think that we can necessarily predict that future, but I can say that if the economies are growing, and if employment remains, you know, particularly in the United States, and increasingly in Europe, an attractive employment environment, and the business environment stays healthy, as automation comes, even if it replaces certain jobs, other jobs will likely open up. And I would even argue that the tax change in the United States has made it so more companies are going to want to do business in the United States, which then gives more demand for human capital, which then allows for that transfer to happen even more successfully. That's just a broad, you know, kind of, societal comment, but I do think AI, you have to take it very responsibly. So, in the capital markets, and in the financial markets, what we're seeing is the ability for technology to augment the human judgment, not to replace human judgment, and I think that's a very good role for technology in the financial services space.
Kharpal: And just-, just on the tax reform in the US, since you mentioned it, what kind of impact is that going to have on your business?
Friedman: So, I mean, for Nasdaq specifically, I think that we are going to benefit in the same context as other-, other global businesses, with big US operations. And today, you know, we operate around the world, we have businesses-, we have a large operation in the Nordics, and a large operation in Australia, but the US operation continues to be the largest. And so, for us to have the benefit of low tax rates just allows us to look at how do we invest globally in our business? How do we invest in the United States. How do we-, you know, how do we make sure that we are bringing as much business to the US as possible?
Kharpal: There will presumably be a lot of interest, as well, in to some of the businesses listed, particularly the tech-focused ones, who have large offshore cash piles, as well.
Friedman: Absolutely. Oh, yes. I mean, in terms of us as a market provider-,
Friedman: Just beyond our own business, but us as a market provider, you can see already the market lift. I mean, I think that the investors are understanding that this is a-, a big benefit to business, and that they should be using that benefit to-, to share that with the shareholders, and to invest in their businesses going forward.
Kharpal: Right, and-, and do you think that some of that-, that money is likely to spur a lot of M&A this year? In terms of from some of these large tech players?
Friedman: I mean, I've heard that-,
Friedman: I think we'll have to-, you know, only time will tell, as to whether or not they use that-, use it in that way.
Kharpal: Adena, I want to delve in to some of the technology that you've been speaking about, blockchain technology in particular, one of the hot topics, here, again, at the World Economic Forum. What are some of the experiments you're doing in blockchain, and when do you think this technology really is going to underpin a lot of your systems? When do we expect that to happen?
Friedman: Yeah, the good news is, I think we're moving from experimentation to implementation-,
Friedman: But still in less regulated spaces. So, when I look at the blockchain, I think that it is a foundational capability that allows for trusted transfer of assets, in an instantaneous way, right? Transfer of assets, transfer of money.
Friedman: And so, it allows for, kind of, that instantaneous capability to exist, which, of course, fuels the market economy, by the way. Right? So, if you have the blockchain underneath it, you create this trusted environment, and it allows for the transfer of goods to happen instantaneously. So, I think it's an amazing concept, but it also takes a village, and the regulated markets have been built up over many, many years, of a lot of really hard-, hardcore systems-,
Friedman: In the backs of all the banks. And to rip all of that out in the regulated space takes a lot of effort, and a lot of money. So, you have to therefore prove out that the technology itself creates enough efficiency, to make it worthwhile to create a lot of change in that back office. So, what we're seeing is, it's being implemented in the less regulated spaces, or the spaces that have a smaller ecosystem, that are more nimble. You can then show, and prove the efficiency that then can be applied to the more regulated markets. So, where are we doing that? We're doing that in-, in the Nordics, we actually have a partnership with SEB, and we're working on a fund administration platform, that allows for funds to be created and established much more efficiently. In South Africa, we've signed to have them use the blockchain for proxy voting, so, across all of their stocks. And in other parts of the world, we are using it for OTC security settlement, where we've proven out the technology that there is efficiency, and now it's a matter of, do we turn that in to something that's fully implemented? And so we definitely are moving along the path, but I do think that there's enormous opportunity, but it'll take a while. It's kind of one of those things that's evolutionary, not necessarily revolutionary.
Kharpal: Do you-, do you have an ambition, or a hope that, perhaps, the core backbone of what you guys do is underpinned by this technology? How-, how far out do you see that?
Friedman: Sure. I mean, if you want to look out a decade or more, I think that the concept of securities trading, clearing and settlement-,
Friedman: Being, kind of, transformed with the use of the blockchain, and allowing for trusted transactions that can be settled out in minutes, or maybe a day, because there's other reasons why you have it for a day, as opposed to two or three days, or longer, then you're taking a ton of risk out of the system. There's no doubt that that's an efficiency play, that the industry will ultimately benefit from.
Kharpal: Mm. Are you worried about what cryptocurrencies could potentially do to the technology? So, we've obviously seen the rise of a lot of these cryptocurrencies last year, a lot of mania around them. Does-, does that potentially derail any, kind of, euphoria or-, or ambitions around blockchain technology even though the two are-, can be separated?
Friedman: I think that in our space, in our industry, we very much have separated the blockchain from the-, from the crypto world. So, the cryptocurrencies are just an application of the blockchain on to a digital-, the concept of a digital currency. There are other ways to leverage the blockchain for currency. So, one of the major banks have created the ability, basically a digital currency within their banking system, that allows for a transfer of cash, instantaneously, through the blockchain. We are working with them, and partnering with them, in our private market, to make it so we can transfer private company securities, instantaneously, with cash transfer. All of that's on the blockchain. None of it relies on the cryptocurrencies that exist today. So, I think that there's been a pretty good bifurcation of those two concepts within our industry.
Kharpal: Mm. So, we were talking about, marketplaces, earlier, and new products. When we last spoke, we-, there were reports about, potentially, Nasdaq looking in to a futures contract, like some of the other exchanges have done. Is that-, have those discussions moved on at all? Are Bitcoin or cryptocurrency futures on the horizons this year?
Friedman: So, we are continuing to investigate the idea of a cryptocurrency future with a partner-,
Friedman: And we continue to look at the risk management around that, making sure we're putting the right protocols in place, making sure that there's proper demand, and that the construct is different than what's already out there. So, the two futures that exist today are tracking futures-,
Friedman: What we might look at is more of a total return future, so it's a little bit of a different construct-,
Friedman: On a different index type of model. So-,
Kharpal: And just explain that for us? What-,
Friedman: So, it just means that it's more of an investment than a-, than a tracking stock.
Kharpal: Absolutely. Yes.
Friedman: So, I think that we'll have to see whether it makes sense. At the end of the day, is there proper client demand, and on the risk management side, do we feel confident? In which case, then, we would -, we would look to go to the CFTC. On the broader topic of crypto, though, I think it is very much a nascent market-,
Friedman: And it's going to develop, you know, it's amazing how these types of markets go through that maturity lifecycle, and we'll have to see whether or not it, kind of, goes through to the full maturity lifecycle, and becomes a true digital currency, that people use to transact, or whether it stays in this, this, kind of, in-between world, of being an asset but not a currency.
Kharpal: Are you able to tell us who the partner is, that you're working with to investigate-,
Friedman: I-, I think that we're maintaining that within-, amongst ourselves, at the moment.
Kharpal: Yes. I want to ask you a little bit about why you think people have jumped in to cryptocurrencies. Is it because of low volatility in stocks? Is it because people feel they can't get in to public markets? What do you think's driven that?
Friedman: Well, I think that if you-, it's different motivations for different types of investors-,
Friedman: So, as a retail investor, and a person that's just looking to put their money to work, to try to get a quick return-,
Friedman: It's become the hot topic, right? So, you kind of end up getting that network effect, of saying, 'Oh, I don't want to get left out, so I'm going to continue.'
Friedman: I think that's one motivation. There's another motivation, where, if you're in a country where you're-, you don't have as much confidence in the government fiat, then you might use it as an opportunity, or a means, to actually diversify your currency holdings-,
Friedman: And-, and use it, actually, practically, to try to get in to a global currency, as opposed to being reliant on your government currency.
Friedman: So, that's interesting. There are others that are out there just who decide to bet, you know, 'Let's see what happens,' and then on the professional side, I do believe that the professionals who've gotten in to cryptocurrency markets are extremely savvy. I think that they understand, as you said, it is a low volatility environment, and this is a very volatile instrument, so, it gives them the benefit of using some of their volatility strategies in to a new market-,
Friedman: And that's unregulated, so it definitely gives them a good opportunity, in the short-term.
Kharpal: As we close out the discussion, I want to get in to, you know, what-, what essentially is still-, a lot of your core is listings and-, and new businesses. What's your outlook on the IPO market this year? There's a lot of very interesting, very large companies that are still private, Uber, Spotify, etc. What's the pipeline looking like this year?
Friedman: Sure. Well, I would say that it's going to be interesting, because in 2016, in the United States, we only had about, across both exchanges, about 120 IPOs. In '17, we had a little over 200. So-, and in '14 and '15, we had almost 300. So, I do feel like there's a-, an upward swing from '16, we're seeing some-, we're definitely seeing a lot of demand, a lot of companies getting ready, filing, propelling themselves forward, and wanting to tap the public markets, and then it's just a matter of when they decide to-, to time it, and making sure that the environment is benign, like it is right now, and-, and inviting.
Kharpal: And I'm just going to be very cheeky on my final question. Uber, saying 2019 IPO. Have you had discussions with them? Are you trying to get them on the Nasdaq?
Friedman: We try to have every company realize the benefits of Nasdaq.
Kharpal: Good answer, Adena. Thank you so much, that was fascinating thank you for taking all the questions, and lots there to talk about. I think 2018 is going to be a very exciting year for you guys, and I think the broader technology space, as well. Thank you very much, a round of applause for Adena Friedman-,
Friedman: Thank you.
Kharpal: The CEO of the Nasdaq.
Friedman: Thank you. That was great, thanks! We covered a lot of topics. Perfect