Exchange Order Prioritization via Account-Based Allocation
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Solution Overview
Problem
Professional traders with advanced computer systems and algorithms have an unfair advantage in executing orders quickly, leaving non-professional market participants at a disadvantage due to their inability to acquire such resources.
Innovation Solution
An exchange computer system implements a priority-based allocation model that allows non-professional market participants to opt into a system that prioritizes the execution of their orders relative to those of professional traders, reducing the time to execution and enhancing fairness.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Speed
If professional traders use sophisticated computer algorithms and high-speed systems to place orders, then order execution speed is improved, but fairness among market participants deteriorates
Solution Approach 1:
The patent changes the priority parameter from time-based (FIFO) to account-type-based classification. By introducing different account categories (retail vs. institutional) with different priority levels, the system allows retail accounts to execute orders before institutional accounts at the same price level, thereby compensating for retail traders' lack of technological resources while maintaining overall system speed.
2Ease of operation
If the exchange uses pure price-time priority (FIFO) to match bids and offers, then execution fairness based on submission time is improved, but execution speed for non-professional participants deteriorates
Solution Approach 1:
The patent applies different matching rules to different account types within the same trading system. Retail accounts receive preferential treatment (executed first at same price level) while institutional accounts follow standard FIFO rules. This localized differentiation allows retail participants to achieve faster execution without disrupting the overall fairness mechanism for other participants.
3Ease of operation
If the exchange prioritizes orders from non-professional market participants, then fairness for retail traders is improved, but complexity of the order matching system deteriorates
Solution Approach 1:
The patent segments the order book into different priority queues based on account type. Retail orders are placed in a high-priority queue that is processed before institutional orders at the same price level. This segmentation approach maintains relative simplicity by using clear account-type classification rather than complex real-time analysis, making the system easier to understand and implement.
Data Source
AI summary
A method is provided for implementing retail priority via an exchange computer system. In some implementations, first, second, and third orders for a financial instrument are received. A determination that the first order is at or inside the National Best Bid Offer (NBBO) associated with the financial instrument is made, and a determination that the third order is associated with a priority account is also made. A determination to prioritize execution of the first order over the second and third orders is made based on the first order being at or inside the NBBO, and a determination to prioritize execution of the third order over the second order is made based on the second order's association with the priority account.