Directed Order Execution via Virtual Guarantee Books
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Solution Overview
Problem
Existing directed order systems in market centers are not integrated with non-directed order processes, leading to directed orders executing at inferior prices, bypassing non-directed limit orders with price and/or time priority, and lacking flexibility for market makers in specifying interaction prices and sizes, while also revealing the presence of incoming directed orders.
Innovation Solution
A directed order processing system that integrates with the non-directed order process, using a posting market center with a guarantee order book to pair directed orders with marketable contra-side guarantee orders, ensuring price and time priority matching, and allowing market makers to specify prices and sizes flexibly without revealing the sender of the directed order.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If directed orders are processed separately from non-directed orders, then directed orders can be executed quickly with specific market makers, but directed orders execute at inferior prices and bypass non-directed limit orders with price and/or time priority
Solution Approach 1:
The patent merges the directed order processing system with the non-directed order process by integrating the guarantee order book into the existing order management infrastructure. This allows directed orders to be executed against guarantee orders while simultaneously checking for and respecting non-directed limit orders with superior price-time priority, thereby maintaining both execution efficiency and price fairness
Solution Approach 2:
The patent introduces guarantee orders as intermediary virtual orders that represent market maker intentions without being directly visible in the public order book. These guarantee orders act as mediators that enable directed order execution while the system simultaneously monitors non-directed orders to ensure price priority is maintained, resolving the conflict between speed and price fairness
2Reliability
If market makers are obligated to unconditionally improve the price of the market to execute with directed orders, then directed orders can execute cleanly, but many market makers refuse to accept directed orders
Solution Approach 1:
The patent makes the guarantee order book dynamic and adaptable by allowing market makers to flexibly specify the prices and sizes at which they are willing to interact with incoming directed order flow. Market makers can adjust their guarantee orders based on market conditions and their own trading strategies, transforming the rigid unconditional price improvement requirement into a flexible, market-responsive system
Solution Approach 2:
The patent changes the parameters of directed order execution by allowing market makers to set custom price and size parameters for their guarantee orders. This replaces the fixed requirement of unconditional price improvement with adjustable parameters that market makers can optimize based on their risk tolerance, liquidity needs, and market outlook, thereby increasing participation
3Device complexity
If directed orders are processed without integration with non-directed order process, then directed order execution is simplified, but the presence and sender of incoming directed order flow is revealed
Solution Approach 1:
The patent extracts the identity and presence information of directed orders from the execution process by using guarantee orders that do not reveal the sender. The guarantee order book stores virtual orders without associating them with specific incoming directed order senders, separating the execution mechanism from the identity revelation, thereby simplifying processing while maintaining anonymity
Data Source
AI summary
A directed order process and related market center system are disclosed, wherein a market center system grants permission to order sending firms to send directed order flow to participating designated market makers. Such designated market makers create a virtual guarantee order book for each permissioned order sending firm. If an order sending firm sends a directed order to the market center that is marketable against a virtual guarantee order, then the market center system automatically pairs the orders in a two-sided directed cross order instruction, which executes against any superior interest in an electronic marketplace before crossing, all while maintaining anonymity amongst the parties.