Nasdaq, the largest U.S. exchange by market share, has been on the cutting edge of innovation since its founding in 1971. It was the first electronic exchange and today its name is synonymous with high-tech global leadership. Think of almost any technology giant or new-economy pioneer – Apple, Microsoft, Amazon, Intel, Cisco, Google, Facebook, Netflix, Tesla – and you immediately know what exchange the company is listed on.
Given the vigorous regulations placed on exchanges – which is understandable given they are the backbone of the planet’s capital markets – it’s easy to assume that they’re not the most fertile ground for birthing game-changing innovations in trading. But Nasdaq has always dispelled that notion by developing sophisticated technology and trading solutions that give investors formidable advantages in protecting and growing their portfolios.
Many institutional investors aren’t fully aware of the breadth and power of the trading tools and solutions that Nasdaq offers, however – especially those most recently unveiled. Here are eight features on Nasdaq that you (or your broker) should be using regularly.
M-ELO, or Midpoint Extended Life Order feature, is a broker-neutral solution that allows like-minded investors with long-term strategies to interact. Launched in 2018, it has a 10-milliesecond waiting period before investors can engage with each other. This creates a user pool ideal for institutional investors seeking high-quality trades with strong liquidity – minimizing market impact.
“It’s important to recognize that buyers and seller do not always find each other naturally,” says Chuck Mack, Head of U.S. Equities at Nasdaq. “In order to use M-ELO, you have to be patient.” Obviously, most trading happens extremely quickly now, he notes. “Particularly with agency algos with banks – they take a parent order and slice that order into hundreds of child orders, putting them wherever they can get quality liquidity,” he says.
Institutional investors, or agency brokers acting on their behalf, naturally need to be mindful of the tradeoffs in liquidity, immediacy, information leakage, market impact and other factors when engaging in the market. Accordingly, in certain trades, they may not want to interact with many counterparties offering varieties of liquidity. For example, for a particular trade an institutional investor may wish to interact with traders at the midpoint of the bid/offer, but not trade against aggressive, spread-crossing immediate-or-cancel (IOC) orders looking for immediate liquidity. Using M-ELO ensures the investor won’t interact with those latter orders, given the platform inherently only attracts parties willing to be patient on both sides of trades.
“Right now we’re doing 15 million shares a day on M-ELO, and we want to see that increase to 50 million,” Mack reveals. “As more investors understand that M-ELO can get them high-quality fills with unique liquidity, we expect its utilization to grow.”
Further, brokers and other parties could provide more targeted service to institutional investors by using the platform when they order and execute trades on their behalf, says Andrew Oppenheimer, Head of Business Development and Strategy at Nasdaq. “If your algo provider is not utilizing M-ELO, then your midpoint order flow is not interacting in an ecosystem designed to maximize performance and protect against adverse selection,” he explains.
Quote Stability measure
“When your goal is to minimize your execution footprint, the best way to measure that is not by a markout, but rather by quote stability,” says Oppenheimer. “You really just want to know, ‘did the market move after my trade execution?’”
The Quote Stability benchmark in the M-ELO platform is a measure of the percentage of trades in which the National Best Bid and Offer (NBBO) stayed the same after execution. Investors can look at numerous timespans from milliseconds to minutes; if the quote hasn’t moved fairly soon after the trade (usually by 1 second), the investor can typically feel assured that their trade left little to no footprint.
“We primarily measure execution impact on M-ELO through quote stability, and the data shows M-ELO is doing exactly what it was designed to do” says Oppenheimer. In fact, the average quote stability for all firms is near 90% at 100 milliseconds both before and after trade execution. Even after 1 second, quote stability for all firms using M-ELO is still over 80%. (To be specific, the NBBO remained stable one second after M-ELO executions more than 82.5% of the time, and about 92% for executions of trades involving 1000+ shares, which is a higher rate than both on and off-exchange midpoint trading.)
These data points make it clear that M-ELO is the leader in the benchmark across all exchange midpoint and the average midpoint execution occurring off-exchange.
New auction functionality at open and close
Nasdaq recently made changes to their Opening and Closing Crosses to give investors more flexibility to utilize new info (especially order imbalances) they receive right before the respective auctions.
“The open is very retail-driven, with a lot of overnight day orders queued up, and we have an auction at the Opening Cross at 9:28 am to unwind that,” says Mack. Traditionally, Nasdaq disseminated data at 9.28 am ET – which only let institutions interact passively with that auction. In May, however, Nasdaq moved that time up 9:25 am. “Institutional investors now have much more flexibility to access that retail liquidity at the opening,” says Mack. “The change is also driving more participants to Nasdaq’s opening auction, further bolstering price discovery and liquidity in a virtuous cycle.”
Nasdaq was confident in making this move given the success of a similar improvement they made to their Closing Cross in 2019. That change gave investors another five minutes – until 3:55 pm ET – to issue an order for the closing auction. “Moving to 3:55 pm with a guaranteed execution was a big shift,” says Oppenheimer. “Before that move, investors didn’t have as much flexibility to react to any information they received 10 minutes before closing because everything was already locked in at 3:50 pm.”
Extended Trading Close (awaiting SEC approval)
“The Extended Trading Close is one of our most recent innovations,” says Oppenheimer, who notes it’s still pending approval by the SEC . “It will allow investors to enter orders for an additional five minutes after 4:00 pm to trade at the Nasdaq official closing price – which is one the most important and widely used benchmarks for trading,” Oppenheimer explains. This will let investors utilize that benchmark in executing trades after closing but well after the majority of trading has occurred and sourcing liquidity becomes difficult.
And other vital trading tools (that you aren’t using enough)
In addition to those ground-breaking innovations, several long-existing tools and features on the Nasdaq platform are also frequently under-utilized by institutional investors, says Mack. These include…
Reserve orders. (Also known as iceberg orders.) Placing large orders while only displaying small portions at any given time is a well-known strategy to minimize market impact by not signaling the true quantity to the market. Investors can choose how quickly a reserve order replenishes – or have it do so randomly, further reducing the chances that traders will spot it and create market movement.
Pegging. Investors and brokers can use this strategy to stabilize or target a security’s price, typically by issuing an order with a price pegged to a market bid or an index. Many institutional investors could reap benefits by making greater use of the ordering capability on the Nasdaq platform, says Oppenheimer.
Discretionary orders. These limit orders carry another “discretionary limit price” that allows the exchange to access additional liquidity for the investor within a defined range – which can help institutional investors seize an opportunity to get a high-quality fill they might otherwise miss. Discretion can be combined with reserve and pegging.
Smart Order Router (SOR). With algos determining how millions of orders are routed every hour, investors can still exert top-level control over key choices that will improve their chances of getting the liquidity and ideal fill they’re seeking. Nasdaq’s SOR enables investors to utilize various routing strategies that best align with their execution goals – and their perspectives on potential benefits vs. opportunity cost. “The main features focus on accessing liquidity quickly, however there are also more purpose-built features with different objectives such as dark-seeking and cost-conscious routing options,” says Oppenheimer.
An I-beam of the capital market
Nasdaq is currently upgrading and improving the efficiency of many tools and features like those mentioned, says Mack, with new versions set to debut in the coming months. A new risk-management system overlay is also in the works.
But offering powerful, versatile tech innovations to investors, traders, and asset managers is just one way that Nasdaq fulfills its true core mission: to serve as an I-beam of the capital market by running a robust, diverse exchange with high liquidity, extreme transparency, and strong resilience.
All the major IPOs that have occurred during the COVID-19 pandemic are a testament to the latter, says Mack, noting that market-changing companies like Zoom, Airbnb, Coinbase, and Robinhood all had their IPOs on the Nasdaq exchange during the extremely challenging conditions.
“To go completely virtual and have the markets run seamlessly during the pandemic was something even the SEC has highlighted as an achievement that exchanges deserve great credit for,” says Mack. “With the increase in volumes that we experienced at Nasdaq, we were able to make our technology more robust in a virtual environment – and that contributed to the resilience and stability of the entire financial market.”
Institutional investors and their service providers can gain significant advantages in finding new sources of liquidity, avoiding market impact, and streamlining workflows by tapping Nasdaq’s sophisticated lineup of tools, platforms, and data analytics. This array of technology solutions is constantly improving to meet the changing needs of investors amid the shifting trends and evolving pressures that are reshaping the world’s securities markets.