Nasdaq’s Tal Cohen on Adapting to Increased Competition and Bolstering the Sports Betting Market
Over the last several years, the market has rapidly evolved, with new venues, new digital assets and a new wave of retail investors. At a recent Securities Traders Association conference, Nasdaq’s Head of North American Markets Tal Cohen spoke about how the company is adapting to increased competition, leveraging emerging technologies and bolstering the sports betting market.
“The industry has been pretty competitive for the past two decades, actually, since about 1999 with the rise of [alternative trading systems] ATSs, so competition isn’t necessarily new,” Cohen said. “But the issue that really faces us today in terms of competition is not just the on-exchange level of competition; we have off-exchange competition.”
Cohen noted that off-exchange has gone from about 35% to about 45% of the market, with approximately 30 or more ATSs. There are also more exchanges, with 16 exchanges today compared to 10 in 1999. Additionally, regulation has shaped competition, creating more segmentation.
“There’s a lot more trying to be precise about the client segments that you’re trying to attract, maybe parts of the market that you’re going after,” Cohen said. “That’s a very, very different set of competitive factors than we saw in 2005 and 2007. So, we’re focused on the buy-side and retail and different segments of the business in a way that we just were not in 2005.”
With the increased competition both on- and off-exchange, it presents the opportunity for Nasdaq to ensure that its operations are running as efficiently as possible.
“What we’re also focused on is making sure there’s a level playing field so we can compete for that part of the pie,” said Cohen.
Competition is just one of the three critical topics on which U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler is currently homing in. According to Cohen, the SEC chair is looking to promote competition not only at the venue level but also order by order competition. Furthermore, the regulatory agency is focused on enhanced transparency and disclosure, especially given the influx of retail investors. Cohen acknowledged that several changes could modernize the current reporting regime that provides retail investors with clarity about where their executions happened and with whom. For instance, he believes that best execution can be clearer and more systematic.
“Best execution might be best price, but we know that it’s a whole host of factors that go into it, especially for institutions versus retail. That’s one in terms of the increased disclosure and transparency,” Cohen said.
“The last one is around managing conflicts. Chair Gensler has been really clear about his desire to manage conflicts. We’re supportive of that,” Cohen continued. “But at the same time, we want to make sure that he’s not applying any blunt instruments in a way that would then really reduce the level of activity [and] the level of engagement we’re seeing from retail investors and therefore put us at a more fragile state as a market.”
From Cohen’s viewpoint, he believes that incremental changes driven by data would be more beneficial than a blunt instrument that could be construed as a ban or artificial restriction on activity.
“We have a role to play in investor protection, and we’ll work hand-in-hand with the SEC,” said Cohen.
Leveraging Emerging Technologies
As competition increases, there are a number of emerging technologies that the financial services industry can leverage, from artificial intelligence and blockchain to the cloud and machine learning. At Nasdaq, several of its business have embraced artificial intelligence, most notable for its trade surveillance system, according to Cohen.
“We look for market manipulation; we generate patterns and alerts and look for nefarious activity through AI,” Cohen said. “But now, as we think about the next five years, we’re thinking about how AI has the potential to make our markets more adaptive, more dynamic to changes in market conditions.”
More specifically, Cohen said Nasdaq is exploring how artificial intelligence can help scale key capabilities and launch innovative prototypes on market data products.
In addition to artificial intelligence, blockchain, or distributed ledger technology, is another focus area for Nasdaq. Given that blockchain can serve as a transaction and a settlement layer for decentralized activities, Cohen sees it becoming an integral part of the capital markets infrastructure of the future.
Beyond artificial intelligence and blockchain, Nasdaq believes the cloud is a fundamental driver of change in the capital markets. The company began its cloud journey over a decade ago, leveraging the cloud for its SaaS-based trade surveillance, matching engine and essential market data services, among other solutions. Now, Cohen said Nasdaq is looking at potentially putting its markets in the cloud.
“[The cloud] will allow you to convert fixed costs to variable costs that will allow for smart, intelligent capacity management,” Cohen said. “If you think about the pandemic, when we saw volatility and volumes spike up immediately, the ability to be responsive to that means you were responsive to your customers. And so that was the highlight, I think, for the industry around online versus cloud.”
Another area that Nasdaq is closely watching as it rapidly grows is sports betting. Cohen noted that it’s a “significant market already” but remains fairly rudimentary.
“We think by applying the principles of capital markets, we can really enhance the customer experience and protect the customer,” Cohen said. “There’s not a lot of competition or a lot of transparency. If you bring the exchange market model into sports betting, what you do is effectively introduce competition and transparency.”
Over the summer, Nasdaq took a stake in Sporttrade, a fintech company poised to enter the U.S. market with the first regulated sports betting exchange. Last month, Nasdaq announced that it would provide Sporttrade with market surveillance technology to bolster the market integrity of its platform.
“Think about all the things that we can present from an in-game perspective if you put it on advanced technology,” Cohen said. “That’s why we’re super excited to have invested in Sporttrade.”
Cohen acknowledged that the sports betting market will continue to grow with or without Nasdaq, but the company is analyzing what role it can play to improve how the market works for its users.
“What we’re going to have to think about as a country is just based on investor protection and making sure we’re not raising a culture of betters,” Cohen said. “Well, how do we do that responsibly? I think that’s going to be the moral question.”