HomeAINasdaq: the SEC has approved a prototype AI-based market order

Nasdaq: the SEC has approved a prototype AI-based market order

The Nasdaq electronic stock market has received approval from the US SEC to launch the first AI-based prototype order, called the “Dynamic Midpoint Extended Life Order” (Dynamic M-ELO).

According to tests conducted, the new order increases the speed and efficiency of transactions, improving fill rates by more than 20% and reducing mark-outs by about 10%.

Thus, artificial intelligence is also being applied in one of the world’s largest and most famous markets and seems to be aiming to establish itself as a disruptive technology for the coming years.

Moving on to another topic, we can also note how the Nasdaq Composite, which represents an index of all the companies listed in that market, seems to have broken the correlative trend with Bitcoin that has been recorded throughout the summer.

Full details below.

Nasdaq receives SEC approval to launch an AI-based order type

On Friday, 8 September, the US stock exchange Nasdaq announced that it has received approval from the SEC to launch the first prototype AI-based market order.

The artificial intelligence modified and improved an existing order type, the “Midpoint Extended Life Order” (M-ELO), used to match buyers and sellers according to predetermined waiting periods.

In its place, the “Dynamic Midpoint Extended Life Order” (Dynamic M-ELO) is being introduced, which is expected to increase fill rates on Nasdaq 20.3% while reducing mark-outs by 11.4 %, according to tests conducted.

This new order is designed to combine supply and demand where stock owners intend to hold positions for long periods.

Basically, the technology analyzes potential new option contracts and predicts which ones might be traded in the future.

The new AI system analyzes more than 140 factors in real time (every 30 seconds) to reduce the impact of trading on stock prices, benefiting long-term investors and finding matches more efficiently than usual. 

In addition, Dynamic M-ELO strives to improve liquidity and execution quality, which are only sometimes compatible goals.

The fact that the federal agency (SEC) has allowed the introduction of an AI-based order speaks volumes about the potential of this technology, which attracted a lot of hype in the cryptocurrency market at the beginning of the year soon after OpenAI introduced ChatGPT.

Trading is moving in a modernizing direction for the US markets, promising greater efficiency for both institutions and retail investors, who will be able to leverage artificial intelligence to gain an operational advantage from here on out.

Nasdaq’s president of market platforms, Tal Cohen, confirming his commitment to long-term innovation, commented on the innovation introduced by the stock exchange with these words:

“AI powered Dynamic M-ELO is a purpose built solution that encapsulates our ambition to cultivate the quality of our markets and underscores our commitment to delivering innovative products and tools that benefit all market participants.”

Nasdaq’s executive vice president of North American business services Kevin Kennedy, who believes in dynamic market development, also noted:

“We look forward to partnering and supporting them with best-in-class markets and innovative solutions.”

Nasdaq Composite: rising summer correlation with Bitcoin is wearing off

As the Nasdaq dives into technology innovation after the SEC approved the launch of the AI Dynamic M-ELO order, the stocks of the companies listed within it are experiencing a downturn.

The Nasdaq composite, which represents an index of all the stocks it encompasses, has been posting negative performance since mid-July with declines of about 5% , after having spent a 2023 crackling to the upside.

By contrast, for Bitcoin, the situation appears to be worse, with cryptocurrency prices down about an 18% in the same time frame.

The two assets, which represent totally different worlds, often show signs of correlation in which Bitcoin follows the exploits of the stock index.

In this regard, between late January and early February and between late March and early April, the correlation between Bitcoin and the Nasdaq reached very high levels, before falling toward annual lows in late May.

During the summer season, the trend returned to positive levels, with the exception of the first part of July where the stock market registered price increases while Bitcoin faced uncertainties regarding the implementation of an SEC-approved spot ETF.

Now however, the correlation index appears to have sharply reversed the summer positive, with a downward surge inaugurated in late August.

nasdaq ai sec
Daily chart of the Nasdaq index

In any case, although directionality seems to be leaning toward a continuation of the de-correlation, it is interesting to note that we are still in positive territory with a value of 0.33.

It is worth recalling that the correlation coefficient is a number between -1 (negative correlation) and +1 (positive correlation).

According to data from The Block, over the past 4 years the 30-day “Pearson Correlation” has been above 0 most of the time, showing how the two assets follow roughly the same movements. 

In total there have been only 5 periods since 2019 when BTC and Nasdaq were each going their own way: June 2019, December 2019, July 2021, December 2022, and June 2023.

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Alessandro Adami
Alessandro Adami
Graduated in "Information, Media and Advertising", for over 4 years interested in the cryptocurrency and blockchain space. Co-Founder of Tokenparty, community active in spreading crypto-enthusiasm. Co-founder of Legal Hackers Civitanova marche. Information technology consultant. Ethereum Fan Boy and supporter of Chainlink oracles, strongly believes that smart contracts will be central in the development of society.