Nasdaq gets SEC nod for first exchange AI-driven order type

Nasdaq Inc. announced on Friday that it has received approval from the U.S. Securities and Exchange Commission (SEC) to launch the first-ever exchange artificial intelligence-driven order type. This move has the potential to further enhance the efficiency of the already fast-paced stock market.

The newly approved order type, known as the dynamic midpoint extended life order (M-ELO), aims to accelerate the matching frequency of orders and minimize market impact. These improvements are expected to result in better trading outcomes for investors, as confirmed by the exchange.

The SEC declined to provide any comments regarding this recent development.

Order types are instructions programmed by traders to inform exchanges on how to handle their trades. This approval coincides with the growing interest in the application of artificial intelligence in capital markets.

M-ELO, which was first introduced in 2018, is a strategic order type designed to enable investors with longer-term horizons to trade with each other using a 10-millisecond waiting period.

The dynamic version of M-ELO will utilize reinforcement learning, an AI technique, to observe market behavior and make real-time adjustments to the holding period. This feature aims to enhance the execution quality and increase the percentage of order filled in the market.

Research conducted by Nasdaq demonstrates that the real-time AI order type has increased fill rates by 20.3% and reduced mark-outs by 11.4%. These figures highlight the potential benefits that AI-powered solutions can bring to capital markets.

Owen Lau, senior analyst at Oppenheimer & Co., commented on this development, stating, “This new order type can increase order fill rate and reduce holding time if successfully implemented, which could help Nasdaq take market shares from other exchange operators.”

Reporting on this news is Laura Matthews, with editing by Mark Porter.