Artificial intelligence-driven order classification has the potential to further enhance the efficiency of stock trading.
The United States Securities and Exchange Commission (SEC) has approved Nasdaq’s request to launch the first AI-driven order type on September 8.
This innovative system, dubbed the “dynamic midpoint extended life order” (M-ELO), develops upon the existing M-ELO automated order type by endowing it with dynamic capabilities and employing artificial intelligence to update and re-calibrate itself in real-time continuously.
Order types are software instructions designed to implement particular trade pairs at precise market price thresholds.
Although this form of automation has existed for some time, this AI-driven order type is a revolutionary innovation, as it employs AI with real-time reinforcement learning for order execution.
This is expected to speed up the processing of orders through the system considerably.
In a blog post accompanying the approval announcement, Nasdaq stated that the dynamic M-ELO demonstrated an extraordinary “20.3% increase in fill rates and an 11.1% reduction in mark-outs” during their research and testing phase.
According to a Nasdaq data sheet:
“Calculated on a symbol-by-symbol basis, this new functionality analyzes 140+ data points every 30 seconds to detect market conditions and optimize the holding period prior to which a trade is eligible to execute.”
By dynamically adjusting holding periods for orders in real-time as opposed to the conventional method of implementing static timeouts, fill rates are anticipated to increase without causing a significant increase in market impact.
The incorporation of AI technologies into the fintech industry has had a profound effect on the entire financial industry. ChatGPT language models have found use as educational aids for both traditional stock traders and cryptocurrency traders.
Prior efforts by Nasdaq to combine AI with finance included incorporating predictive AI models to facilitate parsing the more than 1.5 million options listings on the U.S. market.
