Auction Engine for Financially Settled Contracts
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Solution Overview
Problem
Current systems for trading financially settled contracts face challenges in improving liquidity and volume, particularly in handling complex bid structures and risk management within auctions for commodities and derivatives.
Innovation Solution
A computer-based system architecture for conducting auctions of financially settled contracts that receives and matches participant bids, including outright and non-outright bids, while ensuring trade risk limits are not exceeded, and supports the orderly reduction or liquidation of portfolios, utilizing an auction engine to optimize auction variables such as revenue and volume.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Adaptability or versatility
If the system accepts complex bid structures (outright and non-outright bids) to improve trading flexibility, then the system's adaptability improves, but the device complexity increases due to the need for sophisticated matching algorithms and risk management mechanisms
Solution Approach 1:
The patent segments the bid matching process into distinct components: outright bid matching, non-outright bid matching, risk assessment modules, and portfolio management functions. This segmentation allows the system to handle complex bid structures through modular processing, reducing overall system complexity while maintaining adaptability
Solution Approach 2:
The patent introduces an intermediary auction engine that mediates between participants' bids and the clearing system. This intermediary handles the complexity of matching algorithms and risk management internally, allowing participants to interact with a simplified interface while the system manages the underlying complexity
2Reliability
If the system implements comprehensive risk management to ensure trade risk limits are not exceeded, then the reliability improves, but the ease of operation decreases due to additional constraints and modifications to awarded bids
Solution Approach 1:
The patent performs preliminary risk assessments and trade limit checks before finalizing awarded bids. By proactively identifying and addressing risk issues in advance, the system ensures reliability while minimizing the need for complex post-auction risk management operations
Solution Approach 2:
The patent implements feedback mechanisms where the system continuously monitors portfolio trade risks and adjusts awarded bids accordingly. This automated feedback loop maintains reliability by ensuring risk limits are not exceeded while reducing manual operational complexity through algorithmic risk management
3Stability of the object's composition
If the system modifies awarded bids to reduce trade risk or liquidate defaulted portfolios, then the stability improves, but the productivity decreases due to additional processing steps and bid modifications
Solution Approach 1:
The patent implements dynamic bid modification where awarded bids are automatically adjusted based on real-time portfolio risk assessments and liquidation needs. This dynamic approach maintains portfolio stability while minimizing manual intervention, thereby preserving auction processing efficiency
Solution Approach 2:
The patent enables the system to automatically manage portfolio liquidation and risk reduction through self-service algorithms that identify and execute necessary bid modifications without external intervention. This automation maintains stability while reducing the productivity loss associated with manual processing
Data Source
AI summary
Various embodiments show a system for conducting an auction for a plurality of financially settled contracts: The system may comprise at least one computer. The at least one computer may be programmed to receive a plurality of first participant bids from a first participant and a plurality of second participant bids from a second participant. The at least one computer may also be programmed to match a batch of bids, where the matched bids may be modified to reduce the trade risk of a portfolio of the first participant, or to liquidate a defaulted portfolio subject to a Maximum Portfolio Liquidation Cost Constraint. The contracts may include, for example, an oil contract, a coal contract, a natural gas contract, an electricity contract, a weather contract, a weather-related events contract, a commodities contract, a location specific service contract (e.g., a passenger contract and/or freight contract), a financial derivative contract, or a credit default contract on any of an entity's issued securities.