Nasdaq announced it has received approval from the Securities and Exchange Commission (SEC) 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 taps 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 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.
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.
“Through decades of investment and experience in underlying technological infrastructure and data standardization, Nasdaq is able to leverage new technology, including AI, to improve price discovery and market efficiency,” said Kevin Kennedy, executive vice president in North American Trading Services at Nasdaq, in a statement. “Dynamic M-ELO delivers optimal outcomes to market participants by intelligently adapting to real-time market conditions, which improves overall execution quality and fill rates. As our clients operate in an increasingly dynamic market environment, we look forward to partnering and supporting them with best-in-class markets and innovative solutions.”
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.