Internal Order Matching System for Trading
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Solution Overview
Problem
Current electronic securities trading systems lack a unified platform to allow traders to transact internally while routing orders favorably between internal and external marketplaces, optimizing price achievement without revealing their hand, and unify diverse APIs for accessing multiple exchanges simultaneously.
Innovation Solution
A computer-based system with a communication network, including servers and client terminals, that implements an order routing strategy by crossing orders on internal exchanges and placing liquidity on external exchanges, using a stipulation string to manage order allocation and prioritize aggressive pricing, while abstracting traders from external market complexities and unifying APIs for seamless access.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Quantity of substance
If a trader places large orders on external exchanges to achieve desired quantity, then the order quantity is satisfied, but the trader's hand is revealed and commission costs increase
Solution Approach 1:
An internal electronic exchange acts as an intermediary between traders within the same firm and external exchanges. The internal exchange matches orders internally first, allowing traders to execute transactions without revealing their intent to external market participants. This mediator structure enables quantity fulfillment through internal matching while preventing information leakage to external exchanges.
Solution Approach 2:
The trading system segments order routing into two distinct paths: internal matching on the firm's private exchange and external routing to public exchanges. By dividing the order execution process into internal and external segments, the system can satisfy quantity requirements through internal trades while selectively routing only necessary portions externally, thereby reducing overall visibility and commission costs.
2Measurement precision
If a trader accesses multiple external exchanges simultaneously to optimize pricing, then price achievement improves, but system complexity increases due to diverse APIs
Solution Approach 1:
The internal electronic exchange provides a universal trading platform that can access multiple external exchanges through a single unified API interface. This multi-functional system handles order routing, matching, and execution across different exchanges without requiring separate API integrations for each external venue, thereby simplifying the system architecture while maintaining price optimization capabilities.
Solution Approach 2:
The internal exchange serves as an intermediary layer between the trading system and multiple external exchanges with diverse APIs. This mediator abstracts the complexity of different exchange protocols and APIs, presenting a unified interface to traders while managing the complexity of accessing multiple external venues simultaneously for optimal price achievement.
3Measurement precision
If a trader shows smaller order size on external exchanges to minimize market impact, then price impact is reduced, but the desired quantity cannot be fully executed
Solution Approach 1:
The system merges internal and external order books into a unified execution venue. By combining the liquidity from internal traders on the firm's private exchange with external exchange liquidity, the system can execute large orders in full while minimizing market impact. The internal exchange provides additional liquidity that supplements external markets, enabling complete quantity execution without excessive external exposure.
Data Source
AI summary
Presented is a computer-based system for exchange order routing over a communication network which includes a client terminal configured to provide an end-user interface between the client terminal and a first server, the interface providing a template for building an order routing strategy including a stipulation string, and to submit one or more orders and the order routing strategy to the first server. A program executable within the communication network to implement the routing strategy by crossing the order on a first electronic exchange, and placing order liquidity on respective second electronic exchanges. A method implements the order routing strategy by receiving an order and a routing strategy containing a stipulation string having parameters of predetermined criteria, a first phase order processing allocates a first order quantity to a crossing location, a second phase order processing allocates a second order quantity to an idle location.