Nasdaq Inc. (NDAQ.O) on Friday said it won approval from the U.S. Securities and Exchange Commission to launch the first exchange artificial intelligence-driven order type, a move that, if successful, could further increase the efficiency of an already fast-paced stock market.
The approval of the dynamic midpoint extended life order (M-ELO) would speed up the frequency at which orders are matched and minimize market impact, which would result in better trading outcomes for investors, the exchange said.
The SEC declined to comment.
Order types are programmed instructions traders use to tell exchanges how to handle their trades. The news comes as interest is increasing in artificial intelligence and the different ways it can be used in capital markets.
M-ELO, first released in 2018, is a strategic order type that enables investors with longer-term horizons to trade with each other using a 10-millisecond waiting period.
The dynamic version of this will use an AI technique known as reinforcement learning to watch market behavior and make real-time adjustments to that holding period to improve the quality of execution and percentage of order filled in the market.
Nasdaq’s research shows that the real-time AI order type has a 20.3% increase in fill rates and an 11.4% reduction in mark-outs, indicating the improvements AI-powered solutions can bring to capital markets.
“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,” said Owen Lau, senior analyst at Oppenheimer & Co.