New York, May 14, 2008. David Warren, Chief Financial Officer of The NASDAQ Stock Market delivered a keynote presentation at Argyle Executive Forum’s 2008 Chief Financial Officer Leadership Forum.
Warren started his talk by discussing how the current economic challenges make the Chief Financial Officer role even more difficult. He said how he is the company’s chief worrier in that CFOs must fly at 50,000 feet all while avoiding crashing in to treetops.
Warren continued his talk by discussing how NASDAQ is more than a verb and acronym. It is a publicly traded company that has experienced thirteen straight quarters of top line growth. The decision was made to go public in order to be subject to the same market forces as the companies that choose to list with them. Additionally, it was necessary in order to have access to capital markets in order to acquire technology and skill sets to maintain leadership in world markets. NASDAQ has experienced a tremendous amount of activity in the past few years, acquiring OMX, an exchange operator and technology company. Additionally, NASDAQ took a one-third stake in the Dubai International Financial Exchange, purchased the Boston Stock Exchange and the Philadelphia Stock Exchange, as well as announced a plan to introduce a Pan European trading platform.
While many of these exchanges started as mutualized corporations, they demutalized and listed themselves on their own market, similar to NASDAQ. This brought expanded access to capital and provided equity currency for mergers and acquisitions. However, it also marked a shift from a non-profit organization to a for-profit company and brought a new degree of economic rationality to behaviors and actions. NASDAQ looks to generate revenue by adding more transactions and volume.
Exchanges that have demutalized have had to rethink their business model to understand the competitive landscape and the advantages within it. Technology has been a tremendous influence here as without it, there would essentially be no reason to merge and no reason to grow as there are very few, if any, synergies that exist when two floor-based exchanges come together.
A second factor is how securities are exchanged electronically and almost instantaneously around the world. It is now possible to sit at your desk and within a second get an execution around the world. This is a tremendous upgrade of having to make a phone call in order to do this, as was standard practice not all that long ago.
This is beneficial because today billions of dollars can be exchanged around the world in an instant. Investors can now come to you, rather than being sought out. Warren pointed to NASDAQ’s investment in Dubai as an example of this. An opportunity was seen to act as a gateway to U.S. assets across the world.
Warren then shifted the focus of his talk to discuss how we are in the middle of a very interesting time that presents some unique opportunities. Looking at what has happened recently, with the credit crisis and the collapse of Bear Stearns, questions now exist about whether or not bilateral trading actually works. However, if a step is taken back and past financial crises are examined, opportunities to move forward are seen.
As an example, Warren pointed to the formation of the Fed, which resulted from a series of banking panics, particularly a sever panic in 1907. The FCC was formed in 1934 as a result of the stock market crash in 1929. NASDAQ was also formed in the context of a needed change. In 1963 a special study of the securities market conducted by the FCC criticized the fragmentation of non-listed securities. It declared that automation had the potential for removing some fundamental problems. As a result, in 1968 the basic technology and technology needed for NASDAQ was set.
Secretary Paulson has come through with a fundamental reform package of the financial services industry. He started on this as soon as he assumed office and while it was put in to effect before the current crisis; Warren views it as a positive opportunity. He views it as a chance to review some of the acts passed in 1933 and 1934 and to take a close look at regulation of markets in the U.S., and to shift from a rules-based regulation to a more principles approach.
Warren then went on to discuss how the IPO market has become scarce. March was the first month, in approximately five years that did not have a single IPO. There is a strong pipeline however, as NASDAQ had over a hundred companies that want to do an IPO. Many executives are feeling confident about their companies and are waiting for the markets to open up so they can go public.
In responding to a question about how he views the landscape five years from now, Warren noted that right now it feels like a big land grab. There will be more consolidation because technology calls for it. However, he does feel there is a limit to how far it can go, as smaller exchanges in Europe will need to become regional in order to stay relevant. Warren also feels that there will be more worldwide legislation and policy directives aimed at opening up trading, so established exchanges will no longer have a protected monopoly. The importance of technology cannot be underscored, however as most consumers do not care who owns the exchange or where it is headquartered. Instead they care about the trading experience and by having a common network, such as NASDAQ, available for use, will only increase customer satisfaction.
As to whether we are moving towards a 24-hour trading day, Warren responded by saying that it is something the customer will dictate. The technology is available to do it, and if it is something that the customers want, given that companies and the market already want it, it may happen, however, Warren does not see it as needed any time soon.
There was a question that asked while the stretched out trading day benefits large cap companies, given more liquidity, is there an increased risk of manipulation on stocks for smaller cap companies. To this Warren responded that a stock needs a certain amount of liquidity to work for the investor and for the company to feel like it is getting the right access to the markets in both the primary and secondary level. He believes the structure is starting to evolve such that liquidity will be able to find its own level, so that the stocks that are traded a lot can be traded and stocks that are not can find liquidity in a smaller part of the world.
Warren was then asked about the technology platforms and how robust they are and whether NASDAQ invests heavily in it, such that if any center were to go down the system would continue to work. To this Warren responded that there is a lot of oversight from the FCC in terms of technology and that NASDAQ is currently handling about 250,000 transactions per second. In order to assure there are no problems, NASDAQ conducts tests all the time and has backups and they intentionally fail it every week to make sure it still works.