Dynamic Order Types for Options Execution
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Solution Overview
Problem
The options marketplace lacks a trading platform that allows users to send a diverse range of order types, limiting execution opportunities and adhering too closely to executing at the National Best Bid and Offer (NBBO) price.
Innovation Solution
A market center system that supports various advanced order types, including reprice-and-ship inside limit orders and stand-your-ground inside limit orders, which can be automatically capped and repriced to ensure execution at or near the NBBO, while respecting traditional specialist/market maker entitlements and price/time priority principles.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If users send orders at their most aggressive prices to enhance execution opportunities, then execution opportunities are improved, but the orders may violate NBBO pricing rules and specialist/market maker entitlements
Solution Approach 1:
The patent implements dynamic order types where the displayed price is not fixed but automatically adjusts based on NBBO changes and market conditions. Orders can transition between different price levels and execution modes dynamically, allowing aggressive pricing when beneficial while automatically retreating to compliant pricing when necessary to maintain NBBO adherence and respect specialist entitlements.
Solution Approach 2:
The system changes the price parameter of orders automatically based on NBBO movements and market state. Orders can be repriced from aggressive levels to compliant levels, or from hidden to displayed states, based on real-time market conditions. This parameter transformation allows the system to optimize execution opportunities while maintaining compliance with pricing rules.
2Adaptability or versatility
If new sophisticated order types are introduced to allow diverse pricing behaviors, then execution flexibility is improved, but system complexity increases
Solution Approach 1:
The patent creates a universal order processing framework that handles multiple order types (displayed, hidden, working, dark, reprice-and-ship, stand-your-ground) through a common processing architecture. The system uses unified data structures and processing logic that can accommodate different order behaviors, reducing the need for separate handling mechanisms for each order type and thereby managing complexity while providing versatility.
Solution Approach 2:
The system segments the order processing into distinct but manageable components: order receipt, validation, pricing logic, execution logic, and reporting. Each order type is processed through these segmented stages using consistent logic patterns, which simplifies the overall system architecture despite the diversity of order behaviors supported.
3Speed
If the quote engine continuously monitors and notifies the order matching engine of quote price changes, then execution speed is improved, but the impact of away market quote traffic on system performance increases
Solution Approach 1:
The patent extracts the quote monitoring and notification functionality from the main order matching process. The quote engine operates as a separate, dedicated component that independently monitors away market quotes and pushes relevant information to the order matching engine. This extraction allows continuous monitoring for fast execution while isolating the quote traffic from the core matching logic, preventing quote traffic from degrading overall system performance.
Data Source
AI summary
An enhanced system and method for handling, matching and executing a diverse group of limit-priced orders in an electronic options environment is disclosed. Most of the order types disclosed are automatically repriced and reposted as the NBBO changes to increase their execution opportunities. Market maker entitlements are integrated with the order processing, so that the market maker is guaranteed an allocation of the trade if the market maker is at the NBBO when an order priced at or better than the NBBO is received. Once posted to the order book, the displayed price of an order may be eligible for preferential execution in a market maker entitlement process, regardless of whether the displayed price is original or has been automatically repriced.