Nasdaq’s M-ELO Order Enhancement Shows Early Returns
The surest sign that a product or service is successful is customer demand, and on that basis, Nasdaq’s recent enhancement of its Midpoint Extended Life Order was the right move.
In the two-week period after Nasdaq reduced the holding period for M-ELO last month, daily volume increased from about eight million shares to over 15 million shares, the exchange operator said. Order reloads, which occur when a trading firm sends another order in the same symbol and on the same side within five seconds of an execution, increased by 20% from a month earlier.
“The increase in reloads shows that firms are increasingly able to return to M-ELO for additional high-quality liquidity after an execution,” Andrew Oppenheimer, Associate Vice President, North American Markets at Nasdaq, told Markets Media. “M-ELO is performing exactly as we intended.”
Nasdaq launched M-ELO in 2018 to attract and unite counterparties with longer-term investment horizons. By setting M-ELO orders to ‘rest’ on the order book for a half-second, or 500 milliseconds, before becoming eligible for execution, the orders would be protected from negative price impact and match only with other M-ELO orders.
On May 11, 2020, Nasdaq enhanced M-ELO by reducing the resting period from 500 milliseconds to 10 milliseconds, to broaden use cases of the order type while preserving its performance attributes.
In the first 10 trading days after the enhancement, Quote Stability, which measures the percentage the NBBO remains stable after an execution, was more than 90% 100 milliseconds after a M-ELO trade, and 78% at the one-second time snapshot, according to Nasdaq data. M-ELO beats other exchanges and off-exchange trading venues across all the time horizons measured for quote stability, Nasdaq said.
The absolute market response for M-ELO midpoint executions, a measure of market impact, was about 0.08 basis points at 20 milliseconds, lower than midpoint executions that took place off-exchange and well below the 0.67 basis points for other exchanges on average.
Oppenheimer emphasized reloads as validation of the M-ELO enhancement. “If traders find liquidity, they want to go back to where they found it,” he said in a May 27 TradeTalks interview. “They’re doing that more so with M-ELO since the change.”
“M-ELO is continuing to do exactly what we designed it to do — provide high-quality executions and enable customers to get liquidity, have a good experience and outperform TRF and other exchanges,” Oppenheimer said.
Oppenheimer added that the M-ELO change fits with Nasdaq’s broader ethos, which is do no harm to the markets, do what the data says, and listen to customers. “When you marry all three, you know you are on the right path to building the right products. It’s our north star.”
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