Basis Derivative Contract for Atomic Cash-Futures Trading
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Solution Overview
Problem
Current basis trading involves separate transactions for cash and futures positions, leading to inefficiencies, market slippage, and inconvenience, as traders must manage multiple positions, which indirectly exposes them to disadvantages like slippage.
Innovation Solution
An exchange computer system creates, trades, and manages basis derivative contracts, allowing a single contract to represent the difference between cash and futures prices, with components for delivery and derivative obligations, enabling efficient trading of the basis across multiple subject matters.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If traders separately conduct cash and futures transactions to trade the basis, then they can trade the basis, but they are subject to market slippage and inefficiency
Solution Approach 1:
The patent combines separate cash and futures transactions into a single integrated basis derivative contract. The contract simultaneously establishes both the cash market position and futures position, eliminating the need for separate executions and thereby removing market slippage between the two transactions.
Solution Approach 2:
The basis derivative contract acts as an intermediary instrument that encapsulates the basis trade. Instead of directly executing separate cash and futures trades, traders use this intermediate contract that automatically establishes both positions atomically, preventing slippage exposure.
2Adaptability or versatility
If traders separately manage cash and futures positions, then they can trade the basis, but the process is inconvenient and inefficient
Solution Approach 1:
The patent merges the management of cash and futures positions into a single basis derivative contract. Traders manage one contract rather than two separate positions, significantly simplifying operational complexity while maintaining full basis trading functionality.
Solution Approach 2:
The basis derivative contract serves multiple functions simultaneously: it establishes cash market exposure, establishes futures market exposure, and provides the basis trade mechanism all in one instrument. This multi-functionality eliminates the need for separate position management.
3Measurement precision
If cash market dealers quote basis directly to customers, then customers can trade at one price, but positions must still be broken out by the dealer, leaving customers indirectly subject to slippage
Solution Approach 1:
The patent enables customers to directly enter into integrated basis derivative contracts with dealers, combining what was previously separate cash and futures positions into one atomic transaction. This eliminates the dealer's need to break out positions and prevents indirect slippage exposure while maintaining precise basis pricing.
Data Source
AI summary
An exchange computer system creates, trades and/or otherwise manages basis derivative contracts. At maturity, a basis derivative contract may have two components. A first component may require a party to the basis derivative contract to make or take some type of delivery related to a particular subject matter. A second component may require the basis derivative contractee to accept a further obligation under one or more derivative contracts related to the subject matter.