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NASDAQ CEO Adena Friedman on finance, IPOs and the future of capitalism in a post-COVID 19 era

NASDAQ CEO Adena Friedman's full interview with Yahoo Finance reporter Julia La Roche discusses challenges businesses are facing amid the pandemic and reforming free markets.

Video Transcript

JULIA LA ROCHE: Welcome. I'm Julia La Roche. I'm Julia La Roche, and I'm pleased to be with NASDAQ CEO, Adena Friedman. Adena, thank you so much for having us here.

ADENA FRIEDMAN: Absolutely. It's great to have you here.

JULIA LA ROCHE: We appreciate it. I want to go back to March 2. You wrote this op-ed in "The Wall Street Journal." And I'm just gonna quote it in part. You said, quote, "look markets are resilient and capital is part of the cure for this pandemic." You were really reassuring investors at the time. Can you take us back to that moment and then walk us through the last seven months?

ADENA FRIEDMAN: Sure. Well, certainly back in March, there was an enormous amount of disruption happening in the markets as people were absorbing the news that there was a pandemic that was sweeping across the world. And so as we thought about what do we need to make sure of that investors and the population understands; is that in our system, when we have a problem, capital is part of the cure in terms of making sure that companies get funded to be able to be problem-solvers, for one thing.

Whether they're solving problems to help us through the pandemic, like health care companies, technology companies-- but also in terms of managing through the disruption to their business in terms of some of the other parts of our economy that were hard hit, capital became a really critical component of them being able to work their way through it. So our view is keeping the markets open was an absolute critical element of making sure that our system and our economy could continue to function as we were absorbing that news and starting to walk into a different world.

JULIA LA ROCHE: I would like to just double-click on that a little bit. The markets have obviously done very well throughout the pandemic, yet we still see a lot of suffering across America, and I guess the world. And we were having this conversation earlier. We'd love to just explore that a bit more. And you have an interesting vantage point being the CEO of the NASDAQ. You have a pulse of the economy. What do you make of what's going on?

ADENA FRIEDMAN: I would say that it really does feel like a tale of two cities in terms of some elements of our economy that are just unbelievably hard hit. We have a lot of companies that are struggling significantly, a lot of parts of the economy that just aren't working the way they should. And of course, small businesses in particular are hit the most.

And so as you see the fiscal stimulus and the monetary stimulus that's come out of the government, those are critical elements of keeping our economy going through what is an incredible disruption to many elements of the economy-- whether that's retail, consumer retail, certainly foot traffic into restaurants and into stores, as well as travel related companies and things like that; where they just are hit to the point where none of this is-- it's completely outside their control. But yet they have to manage through potentially a very long period of time of significant downturn.

And yet on the flip side, you have all these technology companies and health care companies that are frankly enabling us to continue to operate as an economy. For instance, if you think about home delivery, it went from being a consumer convenience to a necessity during the lockdown. And then people started getting used to that convenience to the point where now they see to stay safe, I'm gonna continue to leverage that service. Well, then for all of those companies that are providing that service, that's a huge, huge boom to their business.

Same with remote working, in terms of all the companies that really empower us to continue to work in a completely remote environment. And then, of course, the health care industry, where not only health care companies solving the COVID problem, but these health care companies solving many health problems. People understand these are long-term investments. And there's a lot of capital being put to work there right now.

JULIA LA ROCHE: Well, of course, we're at the NASDAQ. We have the opening bell right now. So I just have to plug that right there. Let's talk about your business and how that's been doing. I think it's worth highlighting-- this was a very striking statistic. In the third quarter, you all had 105 IPOs, 174 in the first 9 months, a lot of pent up demand I suppose. What is driving that?

ADENA FRIEDMAN: Well, going into the year, before the pandemic hit the world, we expected to have a really strong year for IPOs. So we saw a lot of demand really building as we exited 2019. In fact, we had about 190 IPOs last year as well. So it was a busy year last year. And we saw that we could end up having an even busier year this year.

But when the pandemic hit, we saw a massive disruption. Every IPO was put on pause. And we weren't sure what was going to happen. And so in April, we actually talked to our investors and said we could see this being a much slower year than we thought it was gonna be, based on what was happening at the time.

But then some IPOs started trickling out. So first it was a health care IPO. And then it was a significant tech company, ZoomInfo, that came out. And they did really, really well.

And so, as people started realizing, investors have a lot of cash to put to work. There are not a lot of other asset classes that can deliver them returns and yield, because of the fact that the Fed brought down the interest rates so low.

And so then they say, well, gosh-- in order for us to be able to meet our investors' needs, we need to start to look at putting risk capital to work. And equities was but the best option. And then some really, really interesting companies started coming in. And it started taking off.

So by June we started seeing a very healthy environment growing. And then of course you also see this year the year of the SPAC. So a lot of acquisition company vehicles also choosing to tap the public markets at the same time that operating companies are.

So we are very pleased because we have 80% of all operating companies going public so far this year have chosen NASDAQ. And then about 50%, in the third quarter, of the SPACs have come to NASDAQ as well. So we've had a very, very robust year so far in IPOs.

JULIA LA ROCHE: What's your take on the SPACs? You're right. We have seen this real boom in this space. And you have a lot of folks who are well-known names. And then it seems like almost everybody is making a SPAC at this point. What do you make of it?

ADENA FRIEDMAN: Well, if you think about the types of people who are coming into the SPAC market, they're generally very well-known investors or very well-known CEOs who have a great track record. And so from the investor perspective, they could choose to raise money through private vehicles, through LPs, which they normally do. Or in this particular case, they're choosing to raise money in the public markets to allow retail to be a part of it.

But then the interesting thing about SPACs is the way it works is you have essentially 18 to 24 months to find a company to populate the SPAC. And at the time that you populate the SPAC, the investors have another bite at the apple. They get to vote on whether or not they support the company that you choose to acquire.

So in a way, investors are putting their money behind a great name. They're then saying, well, I still have some control over the outcome here because I get to vote on the ultimate company. And that seems like a pretty interesting way to deploy capital in this environment right now.

JULIA LA ROCHE: Well, I want to shift gears. Because over the last few years now, we've had these growing tensions between the US and China. And we're gonna have Ray Dalio on later today. And in our conversation he brought up the capital flows. He sees capital flows going to China, more IPOs coming out of China.

How do you think of the global competition? And specifically, what do you make of the STAR market? Of course, the news over the weekend is the financial IPO coming to Hong Kong and the STAR market.

ADENA FRIEDMAN: Well, it is very much a global competitive landscape for capital formation. So the exchanges in China and Hong Kong are highly competitive in terms of trying to attract companies that are domiciled in China to come and list there. But then we still have a lot of companies from China also looking to tap the US public markets.

And so it is a great opportunity for Chinese companies to realize they have a lot of choice. But we also have to make sure that the US public markets remain open and available to companies coming from China and the broader Asian region.

And that's where some politics have come into the mix in recent months. We are cautious about making sure that when companies come to the US, that they are vetted the way that they should be, of course, and that the audit firms live by the same standards as any other jurisdiction.

But at the same time, we want to make sure that we don't choke off access to capital by making it so that the barriers to entry are too high. So it's been an interesting time for us to manage through a global capital competitive landscape, and at the same time, making sure that the companies come here live up to the standards that we expect.

JULIA LA ROCHE: Of course. And I think it's another topic we should explore, and that is capitalism. Of course capitalism-- it sometimes brings a lot of controversy these days. Or at least it seems like that. It's got a lot of critique around it now.

And I know you have this concept of cooperative capitalism. I would love for you to unpack that for our viewers. And how do you think that's evolved during this pandemic?

ADENA FRIEDMAN: Well, I remain a true believer that capitalism, as a concept, is the best system that exists because it allows for people to maximize their opportunity. I think the key though is to make sure that everyone in society has an equal opportunity. So that's where I think that the execution of capitalism could continue to improve, both in terms of making sure that everyone in our society has access to capital to create a business, create jobs, and be able to innovate around ideas that they have.

And I think we still have work to do. Because we have a lot of underserved and certain minority populations that really just don't have that equal access. And so we want to make sure that as a purpose initiative that we have, that we start to make sure we educate entrepreneurs from all backgrounds on how they can access the public markets, or early capital as well, to grow and expand their businesses.

And at the same time, we have to look at what is the responsibility of a company. In particular companies that have been scaled and grown too, in terms of their responsibility in the broader societies that they operate in; the communities that they serve. And what we're seeing on the back of the pandemic is that companies have really stepped up and stood up and said, "I'm here to make sure that I provide a great return to our shareholders. But I'm also here to serve our employees and the communities around us."

And so some of the commitments that we've seen them make in terms of-- my favorite example is a grocery store chain who basically bought up all of the produce from local farmers, who otherwise we're not going to be able to sell their goods during the lockdown. And they bought them all up. And they donated them to food banks.

Or you saw car manufacturers transferring their plants to be able to create ventilators. Those are great examples where those companies took that moment and said, we're here for a broader purpose. And we're gonna make sure that we serve the communities around us in addition to making sure our shareholders get served over the long term.

And I think that is a kind of spirit of cooperative capitalism. I think going forward, as we go through this pandemic on the other side of it, there's also really big opportunity for companies to cooperate with government to say "there are some big problems that we now have within our societies. And there's a way for us to use innovation in order to solve those problems."

The private sector really benefits. They have great innovation. And they have great access to capital. The public sector has the ability to solve big problems. And if you put those two together you have a really great ability for us to advance our economy and advance our society going forward.

JULIA LA ROCHE: Something else in there that I'd love to explore further with you, Adena, of course access to investing in the markets. And we've seen a lot of brokers just bring their fees down. We've seen this wave of new retail investor participants.

What do you think is the biggest barrier to stock ownership? We mentioned this tale of two cities. The market's have done so well. But we know the wealthier own the financial assets in this country.

So what do you think are the barriers? And if we address those barriers, what are the broader implications when we can have more access to the markets for more people?

ADENA FRIEDMAN: Well, today I would say over 50% of the adult population in the United States owns equities either directly or indirectly. They might own them through a 401(k) or through a pension, through their own mutual funds, or direct ownership through the stock market.

And what we're seeing this year is a whole new wave of retail coming in and saying, "I want to have control over my investment decisions. I'm gonna come and participate directly in the markets, which is very exciting. But you also want to make sure that they get educated properly, so that when they come In, they have a good experience and they stay for the long term.

So we've actually launched an investor education portal in conjunction with the online brokerage firms and other industry organizations to make sure that as these next these new investors come in, that they understand what they're buying; they understand how to leverage the markets; they understand how to think about investments over the long term.

But at the same time, we have still a lot of work to do to make it so that the other half of the population also have the ability to access the markets as well. And that comes to a much bigger program in terms of access to banking in underserved communities, making sure they can get small business loans in a way that they may not have access to them today.

And then ultimately, if they're able to create a business and create jobs, them giving their employees equity. So the more we can have employees at these companies own equity, to me, that's a great way to spread the access to capital to the broader population.

JULIA LA ROCHE: Yeah. It's an interesting point. I think I can bring up a recent example of more companies who are starting to rethink that and bring up equity investments for their employees. One final question for you, because when you think of the NASDAQ, it's more than just a stock exchange. It really is a market technology company.

I know you've been at the forefront of a lot of changes. So I would love to pose a broad question to you. When you talk about the future of work, what that might look like, what do you think the future of markets might look; the future of financial services? I'd love just to explore a bigger theme with you here.

ADENA FRIEDMAN: Sure. Well, certainly the financial services industry has always been a data-first industry. Every decision that happens to the markets is on the back of data. So we've been in that business, the data-first approach to running our business, for a long time.

But what's really happening now is a complete digitization of the trade lifecycle. There's still a lot of elements, particularly post-trade, that are on either old tech or done in a more manual format. So you're gonna see more digitization of that.

But the thing that's most exciting to us, as a provider of technology to over 130 other markets around the world-- and we also provide advanced surveillance technology to the broker dealer community-- is leveraging the cloud. So can we bring markets into the cloud? Could we operate NASDAQ as a cloud-enabled marketplace?

And I think that we're getting closer to that reality as we've been working with the cloud providers and as we've been re-architecting our own systems to be cloud-enabled in a microservice architecture. So as we think about the future going into the cloud, that then gives you a much more of a data-first approach to running markets, which then you get better access to machine learning, machine intelligence capabilities; which can then provide even better surveillance and better defensive capabilities in the markets as well as more alpha-generating opportunities for investors and for the broker dealers.

So to us, I think about moving the infrastructure into the cloud, leveraging all of the capabilities that the cloud have in terms of data management and machine learning, and then continue to advance those markets to be able to make it so that we become evermore efficient and evermore global.

JULIA LA ROCHE: Adena Friedman, CEO of NASDAQ. This is something that we'll want to explore further with you. I thank you so much for your time. And thanks again for having us here.

ADENA FRIEDMAN: Yeah, thank you so much and enjoy the day.

JULIA LA ROCHE: Thank you. And we have Hans Vestberg, Verizon CEO, next.