How Regulation and Modernization Are Driving Market Structure Innovation: Takeaways from Nasdaq’s Market Structure Seminar

In late November, Nasdaq Co-President Tal Cohen and Nasdaq VP and Head of Trading Technology Carl Slesser hosted a fireside panel discussion in New York City for the sell-side community to discuss the factors that are currently shaping market structure innovation.

The in-depth conversation focused on key themes and challenges impacting the evolution of financial markets and how the industry is addressing those factors.

A Dynamic Environment

Financial markets are operating in a more dynamic and complex landscape than ever before.

Regulators globally have been highly active in launching regulatory proposals and updates. In North America, there is extensive market reform taking place with the move from T+2 to T+1 settlement impacting market participants within the entire ecosystem. In addition, the U.S. Securities and Exchange Commission (SEC) has put forward several market structure proposals that, if adopted as proposed, could place a substantial operational and compliance burden on market participants. 

These changes are taking place amid a macro environment influenced by geopolitical uncertainty, inflation, and high interest rates. The past years have seen periods of high volatility in many markets, and volumes have rocketed to levels not seen before. U.S. options markets have now seen peaks of 96 billion messages in a single day, compared to pre-pandemic levels, where peaks reached 25 million messages a day.

Meanwhile, transformative technologies such as cloud, artificial intelligence, and machine learning have matured and are offering ways to improve efficiency and unlock new values and service models.

Cohen and Slesser discussed how this dynamic environment is impacting the finance industry and its participants’ strategies for long-term operational and business resilience. With a global community of more than 3,000 financial institutional clients across buy-side, sell-side, banks, market infrastructure providers, and regulators, Nasdaq has a unique leadership position in the conversations around the critical factors affecting market infrastructure and driving modernization.

The aim, the executives said, is to help markets and the industry work together to build a more inclusive and resilient ecosystem that strengthens the global financial system for all its constituents. 

Resilience in the face of challenges

Cohen and Slesser highlighted several ways in which the finance industry is innovating and investing in response to these challenges. For one, organizations are building more resilient and accessible markets by using the cloud to underpin infrastructure. Adoption of cloud technology has also accelerated critical, latency-sensitive functions, while hybrid infrastructures can enhance agility and drive operational efficiencies to transform markets while better serving clients.

Nasdaq, for its part, has strongly pursued these innovations, including forming a strategic partnership with Amazon Web Services (AWS) last year to build the next generation of cloud-enabled capital markets infrastructure. The company has since successfully migrated two U.S. options markets, MRX and GEMX, to the cloud. “We brought the cloud to our clients versus waiting for our clients to bring us to the cloud,” Cohen explained.

Another important strategy firms are deploying for improved resilience is to strategically align with industry partners to accelerate modernization efforts. Pointing to Nasdaq’s recent acquisition of software provider Adenza, Cohen noted that the complementary capabilities of the two companies meant better ways to serve customers. “Find a life partner to help accelerate your journey,” he said.

Importantly, organizations are focused on evolving in accordance with and in response to the vast and growing regulatory regimes. In fact, a recent survey of banks, broker-dealers, and market operators by Nasdaq and The ValueExchange found that 64% of respondents cited increased regulation as their top external pressure. As the scope of regulation increases, so too does the financial and reputational cost of non-compliance.

Given that imperative, Cohen explained that market leaders must understand that resilience requires real, continuous investment in technology, tools, and skilled compliance teams that will stay up to date with the latest requirements. Efficiently managing these costs while mitigating any risks will remain a critical priority across the industry, they added.

And crucially, the Nasdaq executives said, innovation is ultimately ineffective without proper governance and oversight. Organizations growing for the long term will need to invest in both development and the structures to guide it appropriately. That will be especially true as AI technology is increasingly applied to solve problems and create efficiencies in the industry.