Dynamic Price Improvement in Credit-Screened Trading
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Solution Overview
Problem
Credit-screened electronic trading systems in foreign exchange markets lack a mechanism for price improvement due to the absence of a touch price and varying dealable prices among trading floors, making it difficult to implement price improvement effectively.
Innovation Solution
The method involves calculating a maximum price improvement (MPI) and dealt price improvement (DPI) to enhance a quote's position in the queue, with DPI dependent on the taker's credit relationships and quote queue, allowing price improvement to be applied only when necessary, and charging makers a fee for price-improved quotes.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If price improvement is implemented in credit-screened systems, then deal likelihood and liquidity are improved, but system complexity increases due to varying dealable prices and absence of touch price
Solution Approach 1:
The system changes the parameter of price improvement calculation from a fixed touch price reference to a dynamic reference based on individual taker's dealable prices and quote queue position. This allows price improvement to be calculated relative to each taker's specific market view, resolving the contradiction between implementing price improvement and managing system complexity in credit-screened environments.
Solution Approach 2:
The patent applies local quality by customizing the price improvement calculation for each taker based on their specific credit relationships and dealable price queue. Instead of a uniform touch price for all traders, the system determines individualized reference prices for each taker, allowing price improvement to be meaningfully applied in a differentiated manner that reflects each participant's unique market access.
2Ease of operation
If maximum price improvement is calculated based on quote queue position, then quote positioning is optimized, but measurement precision is reduced due to approximation in DPI calculation
Solution Approach 1:
The system applies partial action by calculating price improvement based on the minimum necessary improvement to achieve queue positioning, rather than using excessive or fixed improvement amounts. The dealt price improvement (DPI) is computed as the actual improvement needed based on the taker's quote queue position, providing sufficient precision for operational purposes without over-engineering the measurement.
3Loss of energy
If price improvement is applied only when necessary, then transaction costs are minimized, but productivity decreases due to fewer deals executed
Solution Approach 1:
The system implements feedback by continuously monitoring quote queue positions and calculating the actual price improvement needed based on real-time market conditions and individual taker preferences. This feedback mechanism allows the system to apply price improvement only when and where it is actually necessary to achieve a deal, rather than applying it universally, thus balancing cost efficiency with deal execution productivity.
Data Source
AI summary
Price improvement in credit screened trading systems is achieved by entering a maximum price improvement (MPI) amount with a maker quote. The system prepares separate quote queues for each trading floor including only quotes where bilateral credit exists. Quotes are arranged using Price, MPI, time priority. When a quote is dealt, a dealable price improvement is calculated as the amount of the MPI required to improve the dealt quote's position in the queue.