Nasdaq, Inc. (NDAQ) Earnings Call Transcript & Summary

All right. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. Taking of photographs and the use of recording devices are not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. All right. With that out of the way, good morning, everyone. Thanks for staying with us here on day 1 of Morgan Stanley Financials Conference. I'm Mike Cyprys, lead analyst covering brokers, asset managers and exchanges for Morgan Stanley Research. And welcome to our fireside chat with Nasdaq, and it's my pleasure to welcome Nasdaq's President, Tal Cohen. As many of you know, Nasdaq to be a global exchange operator. But in recent years, Nasdaq has been transforming the business through a series of acquisitions to become a technology and platform provider to serve corporates, investment managers and financial institutions as they navigate and interact with the global capital markets and the broader financial system. So Tal, thank you for joining us today to discuss the transformation of Nasdaq.

Yes. Thanks for having me.

Why don't we start off on the market side. A lot of volatility from a macro standpoint. We have seen record equities, options volumes in April, since normalized a little bit into May. So I guess how is the exchange navigating here? What's different or maybe even similar this time around in terms of retail participation that you're seeing in the markets versus maybe prior periods of volatility? And how do you think about the volume growth and sort of market share dynamics as we roll forward from here?

Yes. So there's a lot there. So I think we've all experienced quite a bit of volatility in the first 5-plus months of the year. I'm just going to provide a little bit of information or stats, and this should give you a sense of what we've seen in the markets. So first of all, we're really, really proud of the fact that we can ensure that the markets are well functioning, resilient and inspire investor confidence. You may not always like the prices you see, but we're giving you the most accurate real-time prices in the market so people can make decisions and apply their view of the market against what they see in the market. So in the beginning of the year, we braced ourselves for some level of volatility, but we saw that kind of roll through our markets in the middle of March, we started to see a little bit of volatility roll through our options markets, so before Liberation Day. And then we got the Liberation Day, and I just want to give a few stats on that. We broke records almost every record we had in terms of message traffic and volumes. We did $100 million as an industry in options, $100 million of contracts that is, 31 billion shares in equities. And we had 5 of the 6 largest days ever in equities in April and 4 out of the 6 largest days in options from a message traffic in the beginning of April. From a message traffic perspective, if you were to ask me in early 2024, what a really active day in our options market would have been, I would have said 100 billion messages, really active day. We got to just about 200 billion messages in our options market alone on Liberation Day plus 2. That's just incredible. And we managed it and so did the industry flawlessly. And then in terms of our overall -- all of our systems, the inbound and the outbound message traffic, this is a stat for you. We -- again, in 2024, if you would have said, what's a big day, I would have said 250 billion messages running through the system in and out would have been a pretty big day, a really impressive day. We did over 550 billion messages in a single day and the markets operated all mission-critical infrastructure operated as it should. So that was pretty incredible. And the markets, if you guys recall, in early April, again, we had down days and up days of plus 5, minus 5 on those days. So it's just astounding. And we sit here today, off of our lows, where the NASDAQ was down about 20%, the NASDAQ is up 2.5% on the year. It's incredible if you think about how the market has responded in the better part of 2 months to what we've seen with respect to the tariff conversations. And so the market has proved resilient. The economy has proved resilient. And one last stat is the European markets, and we operate markets in Europe, are outperforming the U.S. markets. If you sat here in November and ask if Europe would outperform the U.S. in the first couple of months of the year, I don't know if I would have said that to be the case, but Europe is also performing well. We run markets in the Nordics and the Baltics. And we saw, again, in all of those markets, records in terms of message traffic, strong resiliency, and we continue to invest in our infrastructure. And the last thing I'll say is we took markets to the cloud over the last couple of years. And those markets are performing extremely well from a latency and capacity perspective.

And anything you would note around retail participation...

Sorry. Retail, extremely resilient. Retail has continued to be a big part of the market, in particular, the equities market. We're seeing strong retail participation in the options market, too. And of course, we're seeing a lot of foreign retail activity. So you can talk about it in the context of 24/5, but I think foreign ownership of U.S. equities has doubled in the last 5-plus years. So retail, not only here, but retail globally has proven to be very resilient. It is not the retail that you thought of in 2016, '17, much more sophisticated. They are playing both sides of the market. They're using better tools. They're getting better information. And so retail is definitely more advanced, and we see them in the market, in particular on the option side in a more advanced sophisticated manner.

Great. Maybe sticking with markets. I think your intention is to launch 24/5 trading by the second half of '26. Maybe just talk a little bit about the rationale behind that move. What are the types of market participants that this could appeal to most? And what sort of steps hurdles, infrastructure need to sort of be overcome, built in order to achieve the sort of 2026 time frame?

I'll start with the last part of your question. So -- and maybe just as an overview, is 24/5 trading is happening today. And it's happening off exchange today, and it has been. There are ATSs that are operating today. But we have seen an increased demand, in particular from retail, from North Asia, predominantly North Asia, and it's unidirectional. It's not necessarily that U.S. retail wants to invest in the world, although we are seeing a little bit of that. It's much more that Asia and the world is coming into the U.S. and has been for the last 3, 4, 5 years. And as we looked at the landscape, we noted that these are mostly NASDAQ companies that they want to trade. And so we started to think about the opportunity in 24/5, and we walked through it in the following way. One is we said, if we're going to do it, we want to make sure that we preserve the integrity and the quality of the market we're in exchange. If we enter the space, we're going to want to do it, in our words, the right way. And the right way means bringing other mission-critical infrastructure providers with us, DTCC, the securities information processor and the trade reporting facility, which is there for all the off-exchange activity, provide transparency for all of that. So in coordination with DTCC and the SIP and TRF, we all agreed that we're going to go to 24/5 together the right way. The second thing is we saw a number of proposals out there that added to the complexity. So other exchanges put out 22/5, 23/5. And we looked at it and said, it's tough to harmonize. And if we want to get to 24/5, let's just get to 24/5 the right way. And so harmonizing and aligning the exchanges on '22, '23, '24 was really important, bringing the infrastructure providers along, very important. And so those are the 2 things we've been focused on, and we're going to do in collaborating with the industry. We're bringing the issuer voice to the discussion because we don't want issuers looking at their stock at 2:00 in the afternoon, seeing that it's up 2%. At 2:00 in the morning, it's down 3%. That's a bad call, and people would ask why. So we want to make sure the issuer brought into the conversation. The last thing that we want to do is make sure that volatility guards are there, we can handle corporate actions, and we also can apply the resiliency and controls that we have during market hours. So those are all the things we think about. We think this is a long game. We think there's a real opportunity. I think 24/5 trading will be mostly retail on day 1. We will preserve the sanctity of our open and close. That's important for institutions to hear. That open and close is really important to those that are benchmark focused. I'll also note that we are 16 hours today. So we opened at 4 in the morning, we closed at 8 a night. So we're talking about being open another 8 hours of the day, just to be very clear. And then if we do this and if we do it well, then it opens us up to other opportunities. We can think about 24/5 for our options markets or proprietary products. CME has already opened 24/5 today for futures. There's questions around digital assets and crypto. And if there is regulatory clarity there, we can position ourselves to again offer those products if we can prove ourselves in equities in 24/5. So I just think there's a number of opportunities we look to if we can get 24/5 right for equities. And we're very, very focused on the operational aspects of that.

So 8 more hours you make it sound like it's sort of easy. But what would you say the biggest hurdle is?

It's not easy. So the technology itself is not the challenge. We can operate the technology. It's the operational elements that I just noted, which is where do you staff yourself 24/5? How do you ensure you have staffing? It's a follow-the-sun model that you have to have when you do 24/5. So from a staffing perspective and an operational perspective, we want to think about that. We want to have the same level of service and support and resiliency during those 8 hours. The other one is what you just mentioned is operationally working with DTCC and figuring out when the cutoff is, what is the trading day? When do you cut it off? What's ex dividend? How do you manage corporate actions seamlessly? And then how do you ensure that the markets when they're less liquid and wider, you have the proper volatility guards. And that requires a collaboration with the industry. So it's those operational elements of service, support, resiliency, how do you handle corporate actions? How do you handle the trading day? When do you provide DTCC with that? Like how do you agree with all of the industry in terms of what that new trading day looks like is -- are things that we're just going to have to solve together before we go live.

Great. Why don't we shift and talk about Nasdaq's strategic pivot towards information services. Where are we in this journey here, which you have embarked on, I guess, at this point, nearly 10 years ago, I guess, about 8 years ago? So I guess how do you see Nasdaq's role in the ecosystem evolving as you look out over the next 5, 10 years?

Great question. So in 2017, when our current CEO, Adena Friedman, came in place, we conducted a strategic pivot, but that was after a long evaluation of what the current megatrends were, what we saw structural trends in the market. And we got a number of those right. A number of those we looked at and we thought about and they didn't play out the way we did, but there were a number that did. And as a result of that, we've built up a financial technology business and the acquisition of Adenza plays right into that theme and into that strategy over the last 10 years or 8 years. And the trends that we were playing into exists today, which is in 2017 and afterwards, we felt like there was a megatrend in terms of financial institutions wanting to better manage risk, all types of risk in real time, more accurately, operational risk, credit risk, market risk, managing risk in a world that is changing faster than it's ever changed before was incredibly important. We also saw that regulation, the regulation, the pace and intensity of regulatory reforms, we felt as a highly regulated entity ourselves, we feel it. We feel how much it requires of us. We just saw that it was going to be global, was going to go downstream, and it was going to hit both sides of financial institutions on the banking side and the trading side. And then finally, is modernization. And this is before AI was a big topic. At that point, we were thinking about cloud and how all of you and all of us were going to modernize our tech to take advantage of the opportunities we had in front of us, again, blockchain, DLT, AI now, but how do we modernize our tech to meet evolving client needs and make sure that, that tech debt wasn't impacting our resilience and wasn't creating more complexity within all of our businesses. And all of that, all of what I've just mentioned was then taken up one level into one theme that we articulated, which is there's going to be increasing complexity in the world. So we, as Nasdaq and we have a trusted brand, we want to be our clients' trusted partner in helping them solve their toughest, most pressing operational challenges. That's how we thought about it. It was that simple. And since then, we've made a number of acquisitions. And now we have an incredible portfolio of companies under our Financial Technology division that allow us to do a few things. We have financial crime management with Verafin. It's a leading solution. We have a capital markets offering that looks at the full trade life cycle from Calypso and Market Tech. And now we have a Regulatory Technology subdivision with Surveillance and Axiom, and that allows us to protect our clients' reputation and brands. So we feel really good about the collection of assets we have. We feel really good about our ability to solve our clients' toughest problems, be your trusted partner. And we're continuously trying to earn that right. And we earn that right, and this is what makes us unique because we're highly regulated. We consume a lot of the technology we sell, and we adopt and integrate a lot of the advanced technology that we talk to you about. No client wants to talk to you about the cloud unless you've done it. No client wants to talk to you about how do you input AI and bring it into your products unless you've done it. They want to know what the blueprint is, what proof points do you have? What pain did you go through? So our ability to share that with clients is incredibly valuable. So I'm really proud of what we built over the last 8 years. We have a great collection of assets. And what's different again is each of these assets are either #1 or have leading assets in the services and capabilities that they provide.

Great. Why don't we dig in there a little bit, starting with Axiom and Calypso. It's about -- maybe about a year or so into the integration. Revenue ARR growth have been pretty strong there. Recently, you did call out a little bit of an elongated sales cycle, which could weigh on revenue growth for the year. Walk through for us what you're seeing in each of those businesses and what it's going to take for the sales cycle to normalize and even potentially accelerate?

So I'll just take the last part of that question first again and say that we came out early in the year and talked about sales cycles, in particular, with respect to Calypso. And what we should recognize there was a moment in time that's transpired in the market. That moment in time, again, the markets were down 20% 1.5 months ago, now they're up 2%. So everybody was feeling that moment in time. And as a result of that moment in time, mostly due to the uncertainty around tariffs, there was an understandable pause in the market, where in Calypso for bigger deals, we saw more people in the room and more decision-makers and a buying process that involved more people. And that was understandable. Since then, we've seen that normalize. Since then, we have seen the sales cycle across all of our products continue -- demand continues to be strong, competitive position continues to be strong, and the sales cycle matter that we raised with respect to Calypso has kind of solved itself where we now see it being much more, if you will, typical in the way that we're approaching clients, and the clients are approaching us on the decision-making side. So that is what we're seeing now. In terms of just demand and how we see demand by product because I think that was your question. I'll run through it product by product real quick. On the regulatory side, RegTech solutions for Axiom, internationally, there's a number of countries and economies that are trying to level up in terms of the integrity of the banking system. They're trying to modernize the way that they report, modernize their ability to manage capital and liquidity. That presents opportunity for us because Axiom is in 60-plus countries, serves 130 regulators. So it's global and comprehensive, and it is an incredible solution for those countries and the banks and those -- and the financial institutions in those jurisdictions that are looking to modernize and advance their integrity. So that's an opportunity. The other opportunity for Axiom is also down market. We're looking at the down market opportunity, so banks under $100 billion. represent an opportunity from a financial reporting perspective. We have spent a lot of time trying to design the solution, a cloud version of the solution that would serve that market. So the right price point, the right functionality, the right delivery model, the right support model and the right go-to-market, and that presents an opportunity for us on Axiom. Surveillance, there's 2 or 3 really trends that are very clear to most people. One is crypto. Crypto is a tailwind, a lot more trading in crypto. And as the regulation comes in place, there's more regulatory clarity, that's going to be a tailwind for us. The elevated volumes and volatility, where markets are up 1 day, plus 5, down minus 5, there's a lot of questions about trading activity and what kind of trading activity we're seeing. So that has been a tailwind. And then the last one is just from a regulatory perspective, we're seeing regulators very interestingly, do much more with data to help regulate across asset classes and across asset classes that were previously not as transparent. They're getting their hands on fixed income data, OTC data and asking questions about related securities. How does like trading in one security affect trading in another security. So that is great for surveillance. It's a tailwind for us. And in surveillance, we have this community of exchanges, regulators and broker-dealers. So we have this 3-sided community, and it's wonderful because it is powering a lot of our demand. So a lot going on in surveillance and demand has been very constructive. On the capital market side for Calypso, collateral management, risk management. Risk management in all the forms I shared earlier, but collateral management, capital efficiency is top of mind, managing your balance sheet, managing risk and automation and straight-through processing has been a large and big tailwind for Calypso, especially in the segments that we serve, Tier 2 and Tier 3 banks. So that's been great. And it's global. And it's global and multi-asset class with a strength in OTC securities. So that also has been playing into a trend, if you will, where a lot of the banking community now is also thinking about their global footprint. Market Tech and -- which is our trading and our post-trade and risk solution, that has been all about modernization. We have just launched next-gen solutions there. Modernization is top of mind for all critical market infrastructure providers. If you're sitting there and you're an exchange today or a market today and volumes have been persistently high for the last 4 years and volatility has been persistently high, you're thinking it's here to stay. Like how do I manage this for years to come. And it could get even greater. So I think when we came out of 2020 and 2021, and we had the mean phenomenon in January 2021, people ask, is this volatility and volume going to stay with us? And then we had '23, '24 and now '25, where I gave you stats where we doubled. And so people are seeing this as a need, is a must do in terms of modernizing and making sure they have the capacity and the performance and its determinism they need. So that is a big driver for those solutions. And then Verafin. Just the anecdote I'll share with you is I don't oversee Verafin. But in every conversation I have on the voice of customer tours that I do around the globe, whether it's in the Philippines or Latin America, I was in Lithuania last week. The first question I get is fraud is a big problem. Fraud is a massive problem. It is for digital banks and others and for growing economies, developing economies, maybe they're #1 issue. And so Verafin is sitting with a tremendous opportunity in front of it. It's solving a problem that is a drain on the economic system. It's a drain on capital markets in general. And so from a fraud and AML perspective, I think, again, Verafin is really, really well positioned. And the demand for that is only growing because, like I said, in the U.K., the governments now understand there needs to be a private-public partnership, and they're holding banks accountable. And that's also creating an incentive and a demand driver for us there. So across all of our products, we're seeing different types of demand, but these levers are really powerful for us, and I think they're structural.

Maybe just on the last one with Verafin. Why don't we dig in there just for a moment. That's your fastest-growing revenue stream at Nasdaq today growing over 20% top line annually. Maybe just talk about how you're adjusting the offering as you look to enter other markets. You mentioned overseas. So how do you adjust the offering as you go into new markets, new channels? And then what are some of the opportunities you're most excited about as you look out over the next couple of years? Maybe just update us on the pipeline of Tier 1, Tier 2 bank opportunities.

There continues to be a long runway in small and medium banks, which is Verafin's sweet spot. So we continue to think there's a long runway there. There's much more we can do there, and we continue to be excited about serving that community. And then in terms of Tier 1s and Tier 2s, we've had success there in proving out that we can reduce false positives. We can help them identify, if you will, financial crime that they can identify on their own. And that's because we have built a franchise where we have 2,600 clients, over 650 million accounts that we look at. Verafin looks at the payor and the payee, which is different than most solutions. And we also do fraud [indiscernible]. So we really feel like we came for Tier 1 and Tier 2 enterprise, which accounts for about 50% of the TAM, serve that market well and early indications are that we can, and we've had some success there. But there is still a long road ahead of us in terms of being able to do that. And then the last part, which is maybe to your question, is when we look at new geographies, and we are the U.K., the Nordics and Canada, we're implementing a One Nasdaq approach. And that's what you can do when you have the financial technology franchise that we have. So Verafin can leverage the Calypso footprint that we have in Europe, for example, the fintech footprint that we have in Europe. To go in and establish we have resourcing on the ground, we have client relationships on the ground, we have the right tooling in place, we have the right incentive model in place. And that allows us to export Verafin and take advantage of the financial technology business and franchise that we've established. And that's what we're doing in Europe. In Canada, again, we're doing the same thing. We have really good relationships with the larger banks in Canada as well as the smaller banks. And so having this One Nasdaq approach, elevating those discussions to the C-suite, which we can, which really is a differentiator for us when you're trying to cross-sell, has been very, very powerful. So very early innings. It's going to take some time to manifest itself. You got to have the right go-to-market. You're going to tune that. You're going to make sure that the pitch is right in the markets you're in. But we're committed to that global expansion. I'm really excited about how we're working together and it's early days.

Great. Why don't we shift and talk about AI. It touches Nasdaq in many areas, notably Verafin, which is cloud native that uses machine learning. Maybe just talk about some of the new offerings that embed AI capabilities at Nasdaq, sort of what the rollout traction has been? And how might you quantify the benefit so far? And what are some of the other areas you're exploring?

So the way that we look at AI is there's 2 vectors for us in the product and on the business. And your question is more about in the product, but I also want to talk about on the business just for a moment because on the business has to do with how we're developing software, the productivity gains, the efficiency gains. And we think they're going to be significant and material benefits to us, the quality of the code, the speed at which we can deliver code, the speed in which we can implement, and then there's the client experience piece. So our service and support model will benefit from AI, all the tooling that we can put in place, all the automation we can put in place. And that's really important because our clients' happiness, our clients' satisfaction with our products has to do in part with our products, but in part with how we support and service our clients. So it's really important that we have a holistic view and think about both of those vectors. In terms of -- in the product, I'll just speak to a few. I'll give you just a few examples. Calypso is a great example. We have something called XVA, ex valuation adjustment. And it's a mark-to-market adjustment of complex derivatives. And today, to use XVA in Calypso, you are running thousands of Monte Carlo simulations, thousands, maybe 10,000. And that is compute-intensive, and it takes all day. And the accuracy is really good, but it could even be better. So we've implemented and just launched XVA Accelerator. And remember what I talked about in terms of managing risk. And when you're looking at XVA, you're looking at market risk, credit risk, operational risk, right? You're trying to do a mark-to-market on a pretty complex asset. And that drives how you manage collateral and manage risk. And now with XVA Accelerator, which is using machine learning, we can run this in a matter of a half hour, and we -- which means that you're getting it quicker, it's less compute intensive, much less compute intensive. So it's less expensive, you can do it faster, and we're finding that it's more accurate. So if you're a client of ours, thinking about managing complex derivatives, and we come to you and have this very, very easy kind of explanation of what XVA Accelerator can do for you, it's incredibly powerful. And so the way that we look at that is it's an add-on feature. There's an upsell opportunity. We will -- there will be a price to it. And we're going through that and identifying the banks that already have XVA or in the past have said to us, we have our own risk modeling in place because we need to do it in more -- in a real-time manner. And XVA, for whatever reason, doesn't meet our requirements. So it's allowing us to go to our existing clients and upsell, it's allowing us to approach new clients, and it's strengthening the competitive offering. So when we go and we do -- we have a bake-off with somebody else, being able to tell the story of how we're implementing AI through our product in a very meaningful, tangible way is incredibly powerful. And we're doing 2 other things, by the way, in Calypso that are great, too, is one is we're predicting settlement failure. So we're helping them manage settlement failure through the data that we have on the platform and say, hey, listen, you might want to look at this counterparty. It's likely to fail based on the experience and the data that we have, really powerful. That's in a POC. And think about how much capital you tie up or can free up if you better manage settlement failure. Massive, massive on the OTC side. And so that's just another very, very powerful, but simple to understand use case for AI.

Great. I know we have a few minutes left, but I do want to get a crypto and digital asset question in here. It seems like a more business and regulatory-friendly environment now for crypto and digital assets. Maybe just talk about Nasdaq's digital asset strategy, what role Nasdaq may play in the ecosystem today and in the coming years and how digital assets may contribute to Nasdaq in the coming years?

So we are in crypto and digital today in the following way. We offer trading technology, post-trade technology and surveillance technology. We also list on our NASDAQ markets, ETFs, like IBIT from BlackRock and others. And so we're in crypto and VA and digital assets in a number of different ways. All right. As we look at what's possible, we see a number of opportunities if there is regulatory clarity. Of course, everybody wants to talk about the trading of crypto and digital assets, but we'd like to see more regulatory clarity there. We'd like to understand the taxonomy of how they look at digital assets and crypto. And so we're paying attention to that. But the more pressing problem and the one that we keep hearing from the industry, and I'm curious like if we would have a big open discussion, what you guys are hearing is it's all about capital efficiency and collateral management. So in crypto, it's prefunded, it's overfunded. Collateral is hard to move on-ramps and off-ramps. And so we're looking at Calypso, our trade management platform, which has a best-of-breed collateral management solution. And we see an opportunity to connect to digital rails and offer collateral management by accepting stable coins and tokenized assets, whether it's treasuries, on money market funds, which can serve as the other side of the trade, right, of an OTC trade. Think about like an OTC crypto derivatives trade, like one side might be a Bitcoin option. The other side of that could be a treasury or some tokenized money market fund or stablecoin, right? And so being able to then manage your collateral, manage your capital through Calypso along with -- alongside of all your other assets, right, in a tool that gives you initial margin, variation margin, allows you to optimize collateral and look at it holistically, have a 360-degree view of it in real time is incredibly powerful, especially if these assets become bankable. So stablecoins and tokenized treasuries and other tokenized assets become bankable, then it's incredibly powerful to manage your capital and your collateral through an application and a tool and solution like Calypso. So that's a really interesting opportunity for us, and that allows us to do something great, which is merge the traditional world with digital rails, which we're a big believer. We need to merge the digital world and what people will call the TradFi world because you don't want 2 separate systems. Digital assets will never fulfill their promise if there aren't standards, fungibility and interoperability, and that's what we drive.

Great. Well, I'm afraid we're out of time. Please join me in thanking Nasdaq's Tal Cohen. Thank you.

Thank you. Thanks for having me.