Technologies like blockchain and artificial intelligence were hot topics at the Milken Institute Global Conference this week in Beverly Hills, Calif. The "The Transformation of Finance: Technology's Impact on Wall Street" panel featured Nasdaq President and COO Adena Friedman (scroll down for video of the panel discussion). SmartBrief chatted with Friedman after the panel to hear her thoughts on how certain technological advances are changing the way Wall Street does business.
What did you think of the discussion during the panel about blockchain; particularly the concern about public blockchain vs private blockchain?
I was on the same panel last year and all the focus was on robo-advisors. I mentioned the topic of the blockchain once and people didn’t know what I was talking about. One year later, everyone knows about it. It is really interesting to see how quickly the concept of the technology has been adopted and turned mainstream. Now it is about turning that concept into a reality.
Blockchain will be an evolution. You’ve got this amazing concept around the technology. And then you say you are going to put it out on the public internet. Well, the word public internet makes people in the financial services industry a little nervous. People want to start with something that is more private in a controlled network. I think that is how a lot of things start. Then things move toward the public when people become more comfortable with the security, privacy and unhackability of the public network.
At Nasdaq, we can embrace either the public or the private. We let the clients decide. Right now, they are more comfortable in the private blockchain space, but that will change.
The industry has been working for years to shorten the settlement cycle. Does the arrival of blockchain make the efforts at reaching a T+2 settlement cycle obsolete?
There have been straight through processing discussions in the equities space for 20 years. At times, there have been questions about whether or not the effort and energy required to take a day or two out of the settlement cycle is really worth it. The answer at the end of the day is yes.
Previous efforts only focused on the equities markets. What is great about the blockchain is that it is focused on every asset class and it is much more global.
The capital requirements for banks have so fundamentally changed over the last 15 years that it has become much more relevant to find new ways to shorten settlement cycles and release capital back to them. It has always been a need and identified as something that people want, it is just much more relevant today.
During the panel, there was a discussion around artificial intelligence and automated trading. You expressed some caution about letting machines do all the work?
Trading algorithms have more governance today than ever before. We’ve learned a lot from past mistakes. People have put a lot more control around the code, they put more controls around QC and they put more controls around regression testing. They have really tightened up the use of algorithms in trading. We have a very advanced surveillance technology that is real-time and the firms have breaks around technology, which we provide, that allow them to make sure they watching for anomalous trades and can call people during the day to reach out immediately.
There has been a infrastructure built up around trading algorithms because they have been in effect for a long time. That same infrastructure will have to be built up around what I call investing algorithms. There are a few advanced players, but as it becomes more mainstream there will have to be a level of governance. I think it is all going to rely heavily on surveillance technology. Our surveillance technology is now moving into the buy-side for the first time.
Governance regimes will all have to elevate their game. In a real-time environment, you are going to have to have a lot of tools in place to be able to put breaks on and identify abnormal behavior and know when things are going wrong. That is the responsibility of the investment manager. That is the responsibility of the broker-dealer and it is responsibility of the exchange. It is going to be a chain of responsibility.
Nasdaq and Tanium recently released the results of a survey on cybersecurity. The results suggest there is still a disconnect at the board level about how to tackle the complicated details surrounding cybersecurity. Short of stacking the board of directors with technologists, what is a company to do?
Every board member probably is and should be curious around cybersecurity. Pretty much every industry today is impacted immensely by cybersecurity. There is a level of intellectual curiosity. It is a question of if there are outlets available for directors to learn enough. Companies should use board meetings and briefings as a means to educate or leverage more concentrated places like National Association of Corporate Directors to help the directors become more educated on issues of cybersecurity. It comes down to knowing what types of questions to ask.
The paper is meant to elevate awareness that this is an issue that needs constant vigilance. Nasdaq does webinars and seminars for companies to learn about major issues and we have an entire year’s worth of seminars around cybersecurity. Last October, we launched POINT, which is a series of educational briefings, seminars, online and in-person that looks at major threats facing companies today, with cybersecurity being a major one.
What is the Nasdaq Validator and why did you decide to offer such a service to the industry?
A lot of the major exchanges around the world use our technology. The speed of change and the ability for them to adapt to a new order type or new features and functions in their exchanges is becoming very rapid. All that needs to be tested. We have the need to adapt and the need to be incredibly resilient. We have an extremely low tolerance for errors, so the Validator allows for some of that testing to be automated through a model-based approach. It allows for rapid development testing using algorithms and technology itself to supplement the QA staff. It is not to replace the QA staff. Particularly in regression testing, it allows them to do rapid development but still have a high level of resiliency.
We developed it for our market and we’ve used it in a lot of areas. It has been remarkably effective, so we decided to “productize” it and turn it into an offering for our exchange clients because all of our clients have the same job we have. That’s one of the reasons we are successful in being a market technology provider to other exchanges. We live it. We learn from it. And we provide what we learn to them.