When Ed Knight joined NASDAQ OMX Group in 2001 as general counsel, the company served only a few markets worldwide. Now, 14 years later, it serves 25 markets—a level of growth Knight attributes to the use of best-in-class technology and regulatory programs. “We’ve been able to mine these synergies and implement this strategy in markets around the world.”
When most people think of the National Association of Securities Dealers Automated Quotation (NASDAQ) system, they think of the global electronic marketplace for the buying and selling of stocks. That’s one of the offerings of NASDAQ OMX Group. The system was formed because the National Association of Securities Dealers wanted to create a way for investors to buy and sell stocks on a transparent computerized system. Thus, the NASDAQ went live in 1971 with quotes for 2,500 over-the-counter securities. Today, the exchange is home to more than 3,400 listed companies, with a market value greater than $8.5 trillion. But NASDAQ is also a leading provider of technology and information, powering more than 70 marketplaces in 50 countries, 1 in 10 of the world’s securities transactions, and more than 10,000 corporate clients.
“We purposely created a diversified business model designed to minimize financial risk and provide shareholders with varied sources of revenue in numerous geographic markets and product types, so we are not dependent on any one market or product,” Knight says.
Given the company’s complexity—and its large expansion in a relatively short amount of time—Knight had his work cut out for him. “In today’s modern public company, risk management is at the top of the agenda for the board and senior management, and really, for everyone in the company,” he says. “Technology risk, legal complexity, financial risk—you could write volumes about these issues. At NASDAQ, given our market responsibilities, risk takes on another dimension entirely, and we organize ourselves accordingly.” This is why Knight has implemented a number of processes and procedures that help identify and mitigate risk for the organization.
Before becoming general counsel of NASDAQ in 2001, Knight served as the chief legal officer for the National Association of Securities Dealers, now the Financial Industry Regulatory Authority. Before that, he served as general counsel of the Department of the Treasury from 1994 to 1999, making him the department’s longest-serving general counsel since the position was created in 1934. Upon his departure, Knight received the department’s highest honor, the Alexander Hamilton Award, from Treasury Secretary Robert Rubin.
As general counsel for NASDAQ, he leverages this experience to guide the protection of the organization’s integrity. “This is our focus, 24 hours a day, 7 days a week,” he says. “We are never complacent, and we are always mindful of the special responsibilities we have as the operators of marketplaces around the world.”
Knight started with a solid core of legal, compliance, and regulatory personnel and added employees as NASDAQ acquired companies and markets. Driving their efforts is NASDAQ’s compliance council, a committee of regulatory officers from around the world. This includes the chief compliance and regulatory officers from each of NASDAQ’s 26 markets, internal audit personnel, and human resources employees from the general counsel and ethics offices. The council maps the organization’s strategy for regulatory compliance on an annual basis and every month meets to review its progress. The team also seeks outside assistance when needed. “Our legal and compliance team has conducted a thorough gap analysis with a third-party management consultant, with a goal of matching or exceeding the best legal and compliance program in the world today,” Knight says.
The team’s efforts have established NASDAQ as an industry pioneer. “We’ve instituted many innovative regulatory and compliance programs, often before any other exchange in the world,” Knight says, pointing to NASDAQ’s regulatory testing program as an example. “It tests every change to our technology before it’s configured in our system, which ensures that we’re compliant with our regulatory obligations even though we change our core technology over time. It applies more than 6,000 compliance test scripts to each change.”
Supporting NASDAQ’s risk management efforts, as noted, is best-in-class technology that is designed to support the legal and regulatory function. In today’s era of global trading across a multitude of asset classes, it is difficult for regulators and compliance officers at financial companies, such as broker-dealers, to maintain a single consolidated view of trading. To that end, NASDAQ acquired Australia-based SMARTS Group, the leading provider of market surveillance solutions for exchanges, regulators, and brokers, in 2010. The SMARTS technology allows regulators, exchanges, and broker-dealers to carry out real-time, cross-venue surveillance—essentially, sourcing, capturing, and maintaining the trading data required to conduct in-depth analyses to identify potential abuse. One offering, SMARTS Broker, is a managed service that helps market participants comply with regulations and internal policies. Another, SMARTS Integrity, is a surveillance tool that allows regulators to maintain an orderly market by providing a consolidated visual view of real-time market activity; it is accompanied by sophisticated alerting tools, such as detection of unusual trading patterns that could be potential breaches of exchange or regulator trading rules. To date, SMARTS is used by more than 90 market participants across 65 global markets and all asset classes, and it processes billions of messages per day. The technology has been so pivotal it led Waters Technology, in its 2013 and 2014 Waters Rankings, to give NASDAQ the award for Best Market Surveillance Provider.
Also at the top of Knight’s risk-management watch list is cybersecurity. The Internet has become essential to the global economy, and businesses of all sizes are increasingly dependent on it for their day-to-day operations. Though cyberspace helps businesses achieve greater efficiencies, it’s increasingly become the target of criminal hackers, from industrial spies to foreign governments. Amid the growing number of cyber attacks, companies like NASDAQ are seeking more stringent security solutions as the first step to solving a complex problem. “We have made our technology resilient, with proper failovers to combat against cyber attacks and other issues,” Knight says. “We brought in some of the world’s best cybersecurity technologists.”
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