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

This company in, you did an acquisition of LEVEL. So kind of a lot going on. I was curious -- what are you building to in your Equities business? And what does that business look like over the next sort of couple of years?

Thanks, having, by the way. And hopefully, the launch was not heavy and people got caffeinated, so we can have some excitement here. But everything you described is us building towards an always-on world where we are trying to increase access for investors. We're trying to provide investors with choice, and we're doing it under a well-regulated umbrella. So all of those activities you just mentioned, I know just 4 activities, but there are many more that we're undertaking, allows us to really embrace all the possibilities and all the opportunities that come with always on.

Okay. Well, let's stick it always on. I think even you've noted that 235, for example, like only about 10 percentage of volume is out sort of the core sessions and only 2 million of that is overnight. So it doesn't seem like a particularly big market. I'd be curious as some of these initiatives come through, how do you see that evolving over the next couple of years?

Yes. So it's really interesting. The U.S. equity markets, as you noted, just about 10% of it happens after 4:00 and before 9:30 in the morning. And the majority of that happens between 4 and 9:00 a.m. So -- and Nasdaq today is open 16 hours a day. So we open up at 4, we closed at 8. So we're not a non-30 to 4 operation today. So it's 16 hours. What's interesting is in the hours that were closed, as you said, there's not a lot of volume, let's call it 1% or 2%. But our -- what we envision, I should say, is when you provide an exchange that has the resilience, the operational excellence, the transparency that gets investors and regulators comfortable with trading, we expect that to be a larger percentage of overall ADV #1. More of that ADV will be executed on exchange. It's executed today off exchange. There's a lot of OTC facilities that are available to you or OTC channels that are available to you today. So I think we will unlock latent demand and it will be gradual. It will happen over time. But there's also a flywheel that comes with being 5 which I hope we have an opportunity to talk about because there's the data side of the financial technology side of it, the asset servicing side of it, the collateral side of it. So most people see just the trading side of it. and what we see is a much, much bigger picture and a grow-the-pie opportunity.

Perfect. Let's hit the topic of the moment, equity tokenization. You have your offering and various offerings out there. As I can tell, under your offering, on same security, creating the same order book certainly in I think the same way. So what exactly does an investor get once you move to a token structure? What is the benefit?

The one you are referring to is the NASDAQ equity token. And it's really important, if you put it in the context of the innovation exemption that came out. So the innovation exemption that just came out from the SEC talks about a few very important things. One is it's got to be issuer sponsored. Two, it's got to be a one-to-one backing conveying the full economic and governance interest of that security, right? And 3 is anybody can really become a TSV, -- it is not just D5 versus C5 or something like that. Okay. So we have the NASA equity took and we were the first ones to go out there and said, it should be an issuer sponsored issuer-centric. So the programmability and the composability of what we built into our token have the attributes that issuers care about, which is proxy, corporate actions, dividends. So it's really, really important for us that your rights and your protections travel with you. And that is the one thing that we're providing, which is there's many forms of tokenization. There is many forms of tokenization that don't require a true sponsorship. We have not taken that route. So one is we're trying to make sure there's more connectivity between issuers and investors, which has not been part of the tokenization story today. We need to create more engagement between issuers and investors on that. And two, is we want to make sure that while we pursue innovation, we're not sacrificing compromising market quality, market integrity or investor protections. And that is what really differentiates the Nasdaq equity token.

Okay. Perfect. Another version of a token is as Kraken has its own versions out there. Nasdaq Ventures as a partnership and has invested in , which is Kraken's parent. So maybe talk through that partnership, what you're doing there and how you envision that work and go.

Yes. We're really excited about that. Thanks for now, Matt. It started with a conversation with regards to -- can we be technology partners? Is there a commercial relationship where we can structure here and then very quickly got to the point where we understood that there was a strategic partnership that we can develop with and what's really interesting is there's this discussion going on between like permissions and permission list. And by the way, that debate is like a false choice. It should be what is the best of a permission world, what is the best of a permissions world? How do we create or combine the to and then how do we create better investor outcomes through that. And that's what we're doing with Kraken. We are growing the pie, creating interoperability, fungibility, and we're saying -- so let me give you an example. On the permissions side, there's real benefits to a layer 1 or the network layer being permissionless. Anybody can build on top of it. Innovation can grow. You have a great idea for an app. You should be able to do that. But the assets -- and the applications that sit on top of it should be permissioned. Why? Because you care about governance, you care about compliance. Institutions care about that. And so you can have the rails be permissionless, but the assets and the applications that sit on top of it be permissioned. And that is what we're working through with Kraken, which is they're going to diffuse and distribute the Nasdaq equity token. So growing the pie of what we're trying to do and creating a standard with us. And when they do that, like I said before, the rights and the protections carry through but they're then bridging the permission to permissionless world, in a way that's really constructive because what we do not want all of us who don't want to wake up in 5 years and have dual tracks. Coexistence between on chain world, and off chain world, and all of you have to figure out how to connect the back and stitch it back together. Technology can do that, but you shouldn't have to do that. So that's what this partnership is trying to do.

Okay. Perfect. So maybe just following up on that, I guess, around DFI, your onshore design keeps token moving between wallets that have been registered and screened. So they cannot be posted into permissionless protocol. Kraken is very different. So how are you thinking about that gap, particularly in terms of expanding internationally?

So Kraken provides us with a great distribution. And it's a great, if you will, template and road map for us to have other partnerships. So we can go out now and talk to others who are like-minded ethos around how tokenization and security should happen. And now we have a model that we can go out and say, this is a model that we put in place with Kraken, can we put the same model in place with you? And what we didn't talk about is Kraken has taken our surveillance solution. So that's a big deal for them to have the surveillance solution that monitors. So not only are they taking NASDAQ equity token, they're taking surveillance, and we're working with them on a gateway between permission, permission list. So that's the model we can diffuse across the globe with like-minded partners because, again, if we can drive that level of standardization and the interoperability between these chains and these networks, what we will have done is created if you will, a connection between regulated markets and blockchain networks. And you put that together, then you can start to deliver on the full problems of the tokenization that we talk about, which is that are frictionless, all of that is built on the promise that all of this infrastructure in plumbing somehow connect seamlessly for you.

Okay. Perfect. Let's talk money in how you monetize all this. I think you guys have done a good job of actually giving us some guardrails around potential here. You talked about always an opportunity being about $3 billion to $6 billion by 2030. Curious how much of that is tokenization specifically? And then even more interested in how you think about that between execution trading versus software, services, et cetera.

So the $3 billion to $6 billion number is what we think about as a SAM. And within that SAM, there are components to it -- discrete components to it. There's the trading component to it, both in equities and derivatives. So across all asset classes, and that's material. The other one is tokenization, and we can license the Nasdaq equity token. So that's a revenue stream for us and an opportunity for us there. We can provide asset servicing capabilities off the back of tokenization, which is pretty cool and something that is, if you will, a new opportunity for us. There's a data opportunity for us, a real big data opportunity because as you grow the pie and you stitch it back together with data. Very few people do better than we do. And then from a financial technology perspective, our financial technology solutions natural, if you will, add-ons to this opportunity and so I talked about surveillance, our trading, our post-trade solution, all fit within this always on narrative and allow us to really use all of our capabilities. We like to talk about it like from a 1 NASDAQ perspective, we can bring all of NASDAQ to always on which is really, really unique. I don't think any other exchange can bring as many capabilities and assets and then the customer community behind us to this.

Okay. Just a follow-up on Asset Services. I hadn't heard that before. I envision Nasdaq as the new Bank of New York for general assets. So maybe flesh it off for us.

Yes. So I think in the digital world, when we think about asset servicing, there are different components to it. I think does a great job. Stage 3 does a great job. But in the digital world, where you're the tokenization agent, and you're working with a computer share and you can have a partnership with a Computershare or liquidity or proximity even securitize there's asset servicing that you can do from a digital perspective that is kind of unique to the one that has a tokenization engine and those capabilities. So I think we'll work with our partners. We're very -- I should say, we're very open in working with partners. We actually have a really good relationship with Boni. We do not want to custody these assets. just to separate that for a second, and that's where a lot of the asset servicing happens. So we don't -- we're not looking to be a custodian to be super clear, but there are certain things as a tokenization agent or engine that you can provide.

Perfect. Okay. Let's switch to what are the hottest parts of Nasdaq's business now, your financial technology business. And particularly, tweet management services has been growing pretty well. That's your connectivity and colocation business. Just curious, like kind of what's driving that growth? How you think about sort of on-demand markets always on markets and how that can sustain growth in that business?

So Capital Markets technology, the division you're referring to in Q2 grew by 14%, revenue-wise and 17% from an ARR perspective, and that's wonderful and it includes Calypso trade management and market technology. So we love all 3 businesses and they're performing well. On the trade management services piece, which is really the infrastructure connectivity access part of that business. Two things we've done really well, and 1 is Fortuitis. In 2021, coming off the back of COVID, we were probably one of the few exchanges that said, volatility and elevated volumes are here to stay. So back in 2021, we went to our data center provider and our hyperscalers that we're working with and said, we need to build out. We need more capacity. We need more power, more compute, more space, and we were right. And by the way, we didn't know how right we would be, but it ends up really right. And that was, again, a really smart capacity planning move that started to pay dividends. By the way, so this is from 2021 and started to pay dividends in '24, '25, '26. So it just shows you the lead time that you have to think about infrastructure, that's one. Two is we have new services that we can offer because of Ozon to your point, we have new and existing services, so existing services that have become more popular and we're selling more of them. And then we've been able to integrate new services into our ecosystem that really help us power the Ozon movement. And I think we're just at the beginning of that. I mean, it is really we're the first or second innings of seeing what that can be over time.

That's very helpful. By the way, how long do you think it will take -- I didn't realize the lead time was that much. So how long do you think you would take to -- for your competitors to catch up? Because when do we look at some of the data around your cabinet capacity. It's a lot higher than peers.

I don't know if it's so much a catch-up because once you have them in your ecosystem, they're not leaving your ecosystem, you've developed this ecosystem, the center of gravity around all the markets, so we won 6 options markets to the equity markets, the SIP, the TRF. There's so much in there -- and then we -- and then there's dock pools and others that are in there that you have to think about this as like a network play, an ecosystem and. And once you've established it, it is really, really powerful. So I actually think all of them should do it, but it's not a -- I trade one for the other.

Okay. The other opportunity seems to be around collateral and collateral management. I think you've talked about Kalypso potentially been a pretty big opportunity for them. So just talk through what you mean by that, how collateral management could potentially be a growth driver.

So Calypso, which is our trade management platform has a particular strength and capability, core competency around collateral management. It is -- our clients love the collateral management module of Calypso. What we're doing now, and we've just done a test trade with Vanguard and Wellington that we published in July is we're connecting Calypso to digital rails. Like Canton and other layer ones. And by doing that, we're giving our clients or providing our clients with a 360-degree real-time IM VN view, allowing them to do scenario analysis and allowing them now on 24/7 rails to increase the velocity and the mobility of the collateral. So that's step #1. But the real unlock is this is 1 to have unleashed that collateral, your clients need more sophisticated financing, margining and optimization tools to figure out whether to take that collateral and what to do with it. So then you need to build a collateral network below that, an orchestration layer that allows them to say, hey, I freed up my collateral, there's more velocity in mobility with my collateral, what do I do with it? Where do I send it? How do I know that I'm optimizing it? That's a lot of work. So now what we're trying to create below that is this collateral network, this orchestration capability, which is incredibly powerful once you freed up that collateral. Does that make sense?

Yes.