G Smithline, A Gu, and MP Wellman
6th ACM International Conference on AI in Finance (ICAIF), November 2025. To appear.
Abstract
We study midpoint matching through Nasdaq’s Midpoint Extended-Life Order (M-ELO) mechanism, which offers non-displayed mid-point execution subject to a mandatory holding period to balance liquidity and adverse-selection concerns. We conduct an empirical game-theoretic analysis using an agent-based simulation in PyMarketSim that models both M-ELO and a traditional lit order book, simulating traders’ venue choices across a range of holding periods and enumerating pure and mixed Nash equilibria for each setting. We analyze welfare outcomes, strategic stability via deviation graphs, and basins of attraction across these equilibria. Our findings reveal that shorter holding periods can insufficiently deter higher frequency small lot trading, while excessively long delays erode the midpoint premium for large traders. This highlights the fundamental trade-off in designing holding periods that effectively screen predatory trading without undermining value for intended users.
