Powering the Next-Generation of Exchanges Beyond Capital Markets
Tens of millions of times per day, buyers and sellers in the U.S. financial markets meet on a level playing field to engage with each other and figure out what equities, bonds, commodities, or other financial instruments are really worth. This dialog between buyer and seller is called price discovery.
Outside of the financial markets, commerce usually looks quite different. Typically, sellers set a fixed price and buyers choose whether to pay that price or walk away. Sellers determine their prices based on economic and competitive research, but at the end of the day, they have to make an educated guess as to what buyers are willing to pay. If they set the price too high, they are left with unused inventory. If sellers set prices too low, they may experience supply shortages or leave money on the table.
The lack of price discovery leads to massive inefficiencies. But what if there were a way to make commerce more efficient and improve price discovery throughout the economy by implementing markets everywhere?
Given the rapid pace of technological disruption and innovation, Nasdaq sees the potential for marketplaces in other industries to reinvent themselves or for new marketplaces with stock exchange-like models to develop that can bring buyers and sellers together in new ways. Nasdaq is exploring opportunities to help organizations in various verticals including transportation, logistics, gaming & wagering, digital assets, and insurance to develop these marketplaces on top of its renowned technology platform.
As Head of New Markets at Nasdaq, Scott Shechtman is on a mission to deploy Nasdaq’s Marketplace Technology outside of capital markets. Nasdaq already provides the technological backbone to support more than 130 marketplace infrastructure organizations internationally, including many of the world’s largest exchanges, banks, securities depositories, and clearinghouses.
Here, Shechtman shares his views on how well-functioning markets contribute to the greater good, how the cloud makes it easier than ever to turn a good idea into a functioning market, and how Nasdaq’s technology brings new markets to life in ways that make economies more inclusive for everyone.
How do people benefit from the creation of new markets?
At Nasdaq, we see marketplaces as the conduit for greater opportunities. They are the foundation for well-functioning economies that connect citizens with investment vehicles, give companies an avenue to raise capital, and fuel job creation. Transparency, reliability, fairness, and integrity drive the effectiveness of the capital markets ecosystem.
We have observed that in many industries where you don’t have a set-up that mirrors or functions like markets do today, you encounter unnecessary middlemen, higher fees, and less transparency on pricing. These inefficiencies work against buyers. Absent price transparency, or price discovery as we talk about it in capital markets (which is essentially the determination of a fair price that the market will bear), one person could end up paying much more than someone else for the same product or service.
If you can start to apply the dynamics that govern capital markets – known and vetted buyers and sellers, full transparency around price discovery, consistent monitoring for abusive behavior – you can build a platform powered by trust. The authentication of the participants buying and selling helps develop trust in the other side of the transaction. Transparent pricing and publishing of historical prices helps participants formulate an educated opinion on worth of a particular good or service. All of this makes it easier to conduct commerce in a way that provides buyers and sellers assurance and encourages participation.
What role does Nasdaq play in establishing or improving markets?
Nasdaq pioneered the electronic exchange 50 years ago and we are continuously working to reduce friction between buyers and sellers, whether through implementing emerging technologies or improving processes through our experiences. We’ve built our market infrastructure technology business over the last 20 years and have the on-the-ground experience in delivering our technology to a wide variety of organizations – from simple to complex—in all corners of the world. The feedback loop we’ve developed between our experiences at those 130+ customers plus the 30+ that we operate ourselves has been critical in shaping our technology and continuously improving it for the next generation of trading. At our core, we take our role as a mission-critical technology provider and partner to the industry extremely seriously.
As we encounter these opportunities to help businesses establish new marketplaces in other industries, we apply the experience that we’ve developed and perfected in capital markets. We think there is massive opportunity to drive better trust, participation, and resiliency in many other industries that might have less digital and more fragmented, opaque structures in place.
When I speak to people who are trying to set up a market and start describing what a matching engine does and what a surveillance package can do, they can see immediately how these technologies would fill essential needs – whether for instantaneous matching of buyers and sellers based on specified parameters at speed and scale or the need to monitor activity for nefarious players that could threaten the integrity of the market. When I encounter people that are part way through their marketplace journey and hear the challenges they are facing, very often those issues are similar to problems we’ve already experienced in traditional capital markets asset classes.
We try to make it as easy possible to set up a market. By leveraging the power of the cloud and our technology, we aim to take on the heavy lifting for our new marketplace customers so that they can focus on their core competencies. Last summer we launched our Marketplace Services Platform, which is essentially a single software platform deployed in the cloud and delivered via SaaS, whereby each customer can operate their market without the operational headaches and overhead.
Our portfolio of services available on the Marketplace Services Platforms covers everything from issuance (how you tokenize and issue the asset), to the matching engine that brings buyers and sellers together, to the delivery of those assets, and the risk management and market monitoring (surveillance) functions that surround the platform in order to protect the integrity of the marketplace and its members. The market can take as few or as many services as they would like and can easily add, remove and change the services they take from us as they move along the maturity curve. Additionally, we have engineered the platform to take advantage of the API economy thus we are focused on enabling our customers to connect other applications that can enrich and support their marketplace experience.
The important thing is that we take care of the continuous upgrades, maintaining operational readiness, and ensuring that our services are always up-to-date so that our customers can focus on their go-to-market strategy. As we have experience providing our software to critical operators all over the world, I think new markets can take solace in getting the best of both worlds – an exchange-grade platform that leverages the same technology components as the world’s most demanding markets coupled with the ability to grow and expand as the platform matures with a completely flexible, reliable and scalable solution.
What do you enjoy most about providing the foundation to set up new markets?
I am privileged to work on some of the most interesting areas of our business at Nasdaq. Over the years, we’ve really perfected how to make high volume, high velocity markets operate in a scalable, reliable, high performance way that keeps them up and running, even in the most extreme conditions. Through our technology business, we are taking those experiences and finding non-traditional uses for them where we can make a huge difference in how other organizations efficiently, effectively, and safely transact in an increasingly digital economy.
Whether it’s real estate, collectibles, cryptocurrencies, space in a shipping container, or other digital assets – it’s great to take the efficiencies that we have proven to exist in the capital markets and apply them in a new and different arena.
In the end, the markets we enable with our technology are empowering buyers to make more informed decisions and obtain goods or services desired at fair -- and often better -- prices, while also enabling sellers to eliminate a lot of the cost and complexity associated with operations, which brings huge efficiency gains. Every new marketplace that we support with our Marketplace Services Platform widens the universe of people who can benefit from the price discovery that happens in a well-run market. By inviting organizations from a wide range of industries to interact through markets, we hope to spread opportunity and prosperity in line with the goals of Nasdaq’s Purpose Initiative.
How important is cloud technology to this next generation of markets?
We believe that the power, flexibility, elasticity, and innovation of the cloud is critical for tomorrow’s markets – not just in capital markets, but beyond.
In the capital markets industry, firms have huge data center footprints with massive investments in physical hardware and networking with a need for continuous capacity planning. Beyond this, experienced technologists are needed to operate maintain these investments. When you look outside of the capital markets, it becomes extremely difficult to resource an approach that mirrors what we have established over many years.
As we know the current challenges in ‘spinning up a marketplace’ quite well, it was important for us to develop a platform that operates seamlessly in the cloud to enable the scalability that firms needs to establish their businesses and expand on their own terms.
After all, when you just start up a market, the transaction volume you see may be very low – or may be unpredictable if it’s something totally new. With physical infrastructure, a new market may play a guessing game in how much capacity it needs and either over- or under-procure. In the case of over-procurement, a market can waste a significant amount of funds in sunk infrastructure costs that it will never recover. On the other hand, under-procurement will create a capacity issue that may shut down a market and will certainly make it difficult to ramp up further capacity quickly. Either of these scenarios can sink a business case.
Beyond the scalability benefits, cloud technology enables new markets to outsource infrastructure management to a highly capable institution like Nasdaq. This removes a lot of the distractions that would previously have been table stakes for launching a new marketplace. Instead of worrying about managing infrastructure, startups can focus on their core competencies like securitizing assets, acquiring new customers, and solving regulatory challenges.
What does the future hold for new markets?
Markets are a fundamental engine of prosperity, economic growth, job creation and innovation. Over time, I think market forces, structures, and technologies will continue to expand into additional industry ecosystems, especially as accelerated digitalization and post-pandemic trends enable companies to reimagine how they interact and transact with their constituents. Markets will provide the transparency and integrity that improves trust and enables broader participation. They will also be able to unlock new revenue opportunities with changing models that will hopefully create opportunities in the form of capital and jobs.
The digital nature of new markets expands opportunities for greater marketplace participation among people across borders and regulatory jurisdictions. Ultimately, new markets can offer innovative investment vehicles for a completely new investor demographic.
The world will find more uses for market technologies. For example, you could imagine a scenario in which individuals might be able to treat their own personal data like an investment portfolio and monetize that data by selling it to commercial organizations seeking to gain a better understanding of a market. Or we could ‘donate’ use of our data for the public good, by making it available to medical researchers trying to find better treatments or new cures.
New marketplaces also have the potential to advance sustainability goals in ways that benefit the environment. Markets for carbon credits could encourage efforts to combat climate change through greenhouse gas reduction. Marketplaces for space on container ships could ensure that those ships travel at higher capacity, reducing waste and raising the overall efficiency of the ocean transport sector, while potentially also making international trade more accessible and affordable to a whole new group of startups and other companies with limited capital.
Markets give individuals a voice, allowing them to play an important role in an economic system that bring amazing ideas to life. Using Nasdaq’s Marketplace Technology, we can create the markets of tomorrow and help build a more inclusive economy that lets everyone benefit from participating in markets everywhere.