Nasdaq Gets Green Light from SEC to Implement AI-based Stock Trading

NNicholas September 8, 2023 8:47 PM

Nasdaq has secured an approval from the United States Securities and Exchange Commission (SEC) to implement an AI-powered order type, aimed at making stock trading more efficient. This marks the first time an exchange AI-driven order type has been approved.

SEC approves Nasdaq's AI-driven order

Nasdaq just broke new ground in the financial sector. On September 8, the SEC gave its blessing for Nasdaq to deploy the first exchange AI-driven order type. This development is a significant stride in the application of AI technology in stock trading, potentially making the process more efficient and responsive.

Introduction of dynamic M-ELO

The AI-driven order type, named the dynamic midpoint extended life order (M-ELO), is an innovative upgrade of the existing M-ELO automated order type. What sets this new system apart is its dynamic nature. It leverages AI to constantly adjust and perfect itself in real-time—a key feature that could potentially revolutionize the efficiency and accuracy of stock trading.

Order types—the software instructions that execute particular trade pairs at precise market pricing thresholds—are nothing new. But Nasdaq's dynamic M-ELO rises above the rest. For the first time ever, an order type is being powered by real-time reinforcement learning AI, making it capable of executing orders more efficiently and swiftly than ever before.

Promising results from dynamic M-ELO testing

The dynamic M-ELO's testing and research phase has already yielded promising results. It demonstrated a substantial 20.3% increase in fill rates and an 11.4% decrease in mark-outs. These impressive figures suggest that the new system could indeed transform trading efficiency and speed.

The rise of AI technology in the fintech sector is a game-changer for the entire financial industry. Nasdaq has previously dabbled with intertwining AI and finance, notably by integrating predictive AI models to assist in handling the massive 1.5 million options listings in the U.S. market. These previous endeavors have set the stage for this groundbreaking AI-driven order type.

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