Nasdaq secures SEC approval for AI-powered order type
Nasdaq (NASDAQ:NDAQ) today announced it has received SEC approval to launch Dynamic Midpoint Extended Life Order (M-ELO), the first exchange Artificial Intelligence (AI) powered order type.
Nasdaq’s M-ELO matches like-minded counterparties with longer-term investing horizons on a broker-neutral SEC-regulated Exchange by requiring each party to a trade to wait a short period of time before trading. Dynamic M-ELO will leverage Artificial Intelligence to provide real-time changes to holding periods for M-ELO participants, which is set to improve fill rates and reduce market impact.
The order type applies an AI model with over 140 factors and offers an average combined volume-weighted improvement of over 30% in testing. Dynamic M-ELO simultaneously enhances both liquidity and execution quality improvement outcomes, usually considered mutually exclusive, by adjusting dynamically to real-time market conditions.
The traditional M-ELO order type was originally designed using a static holding period set to common, nonspecific market conditions. Through extensive research and market participant feedback, Nasdaq found that high-quality executions and protection against adverse selection are improved when the holding period is dynamically adjusted to real-time market conditions.
Based on that research, Nasdaq developed the first real-time AI order type, Dynamic M-ELO, which has shown a 20.3% increase in fill rates and an 11.4% reduction in mark-outs.
“As part of our commitment to modernizing markets, Nasdaq takes a thoughtful long-term approach to technology adoption and advancement to ensure we drive innovation in a responsible manner” said Tal Cohen, President of Market Platforms at Nasdaq. “AI powered Dynamic M-ELO is a purpose built solution that encapsulates our ambition to cultivate the quality of our markets and underscores our commitment to delivering innovative products and tools that benefit all market participants.”
In addition to the AI powered order type, Nasdaq also implemented predictive AI in its US options markets this year. The initiative was designed to improve overall efficiency and provide strike lists more aligned to market and client demand across all six of Nasdaq’s US options exchanges.