Is Market Surveillance Harmonization in the Cards?


The drive for cross-border cooperation continues to gain greater momentum and much has been accomplished by EU and US regulators. However, is there room for more rule harmonization, especially around market center compliance?

Adena Friedman, CEO of Nasdaq, and Valerie Bannert-Thurner, global head of sales, risk & surveillance solutions at Nasdaq, discussed this and other major issues facing market surveillance professionals during the Nasdaq SMARTS conference in Chicago. The following is a small excerpt from their conversation.

Valerie Bannert-Thurner: You have made some massive changes since becoming CEO of Nasdaq. Can you share with the SMARTS community your plans and your technology strategy?

Adena Friedman, Nasdaq

Adena Friedman: Nasdaq is an advanced technology company that serves the broader capital markets. As an exchange, we’ve developed relationships across the entire ecosystem over many years. We have deep relationships with broker-dealers, other exchanges that use our technology, as well as with corporate clients. We provide data and information to the investor community, but we have an opportunity to expand. Our recent acquisitions of Sybenetix and eVestment will allow us to deepen those relationships, and provide technology that enables the capital markets to operate more efficiently.

We meet regularly with several key venture firms. We also created Nasdaq Ventures which allows us to invest in technologies and experiment with them so we can bring the best of the overall environment to the capital markets.


What’s the role of SMARTS, and how has it changed since Nasdaq acquired the company in 2010?

Adena Friedman: At Nasdaq, we instill a culture of innovation, insights and integrity – both internally and externally. SMARTS innovates and provides insights into behaviors within firms and exchanges to enhance market integrity.


Can you talk about the value Sybenetix will bring to Nasdaq because of the acquisition?

Adena Friedman: Nasdaq wants to bring the latest technology capabilities to our clients. Behavioral science is an area that we haven’t been as focused on in our overall regtech strategy. Yet, it plays a critical role in understanding the behavior of employees and market participants. Sybenetix leverages easy-to-use tools to bring behavioral science to light using data, analytics and machine intelligence. It’s a perfect fit for Nasdaq.


How does a large company like Nasdaq invest in technologies such as machine intelligence, blockchain and behavioral science?

Adena Friedman: Nasdaq’s brand is associated with innovation, so companies often approach us with technologies that could reshape the capital markets and the financial services industry. Once we determine that something could reshape the industry, we invest in it. We retrain people internally to build up our expertise. We also bring in outside talent and partner with external firms to help us catalyze that capability. In blockchain, for example, we now have expertise in the U.S., Stockholm, Lithuania, and Australia.


Regulation is changing around the world. Where do you see the biggest challenges?

Adena Friedman: MiFID II has been largest implementation we’ve had to do in a long time. While most of the reporting, transparency and reporting obligations fall on market participants, exchanges are affected as well. We’ve spent the last 18 months ensuring that our exchanges are fully compliant with MiFID II. We hope to get some benefit out of increased transparency and the ability from a regtech perspective to conduct holistic surveillance of market behaviors. But it will take a while before we see the full impact of MiFID II across the entire industry.

Currently, we’re focused on a couple areas. One is incremental transparency, particularly in fixed income trading, which is unregulated currently. The second area is unbundling research from other paid services the sell-side offers to the buy-side.


Could potential changes to U.S. regulatory policies result in regulatory arbitrage?

Adena Friedman: After the credit crisis, there was much needed regulation put in place. However, there were also some regulations that didn’t help the financial sector either and created unnecessary bureaucracy. Now we’re starting to see the pendulum swing toward the center, and that’s a good thing. The heads of the SEC and CFTC, the Treasury Secretary and the Council of Economic Advisors are true professionals who understand what’s positive and negative, and they’re trying to find the center. Importantly, the new head of the SEC is focusing on the burden and opportunities companies face in tapping the capital markets.


Do you think industry is ready for cross-collaboration in surveillance?

Adena Friedman: That’s a great question. Technologically, we’re at a point where we can use metadata to build a circle of trust across companies to understand behavior. Many technologies are available to provide a community view into surveillance and behavioral science. The question is whether our clients are ready for us to create that ability. They need to be willing to share data with SMARTS and with each other. The clients need to be initiator, and we can be the connector.

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