Linear Solver for Compound Order Matching

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Solution Overview

Problem

In financial instrument trading systems, traders face challenges when executing complex or combination trades, as they often need to 'leg into' individual components of a spread, which can lead to risk due to price fluctuations before completing all legs of the trade, especially for unlisted complex orders.

Innovation Solution

The implementation of a linear solver-based system that allows for the maximization of fulfillment and matching of compound orders, enabling traders to execute a combination of individual transactions with a single composite order across multiple financial products, while managing net risk exposure levels to ensure balanced portfolios.

Engineering Contradictions & Design Principles

VSEngineering Contradiction Analysis

1Adaptability or versatility

If traders execute complex trades by legging into individual components of a spread, then they can establish positions in multiple contracts, but they face price fluctuation risk before completing all legs of the trade

Engineering Contradiction:

Improveability to execute complex tradesVSAvoidtrade completion risk

Core Design Contradiction:

Adaptability or versatilityVSReliability

Solution Approach 1:

The patent combines multiple individual trade legs into a single composite order that is executed atomically. The matching engine processes the entire combination trade as one unified order, ensuring that either all legs are filled or none are filled, thereby eliminating the risk of partial execution and price fluctuations between legs.

Inventive Principle:

Principle #5Merging (Combining)

Solution Approach 2:

The system performs preliminary validation and matching of all legs of a complex trade before execution. The matching engine checks availability and pricing for all components of the spread before committing to the trade, ensuring that all legs can be filled at the requested prices before the trade is executed.

Inventive Principle:

Principle #10Preliminary action

2Device complexity

If the exchange lists only popular or frequently traded spreads, then listing complexity is reduced, but traders cannot execute unlisted complex orders

Engineering Contradiction:

Improvelisting complexityVSAvoidorder flexibility

Core Design Contradiction:

Device complexityVSAdaptability or versatility

Solution Approach 1:

The matching engine is designed to handle both listed and unlisted complex trades universally. It can process predefined spreads from the exchange listing as well as custom complex orders submitted by traders, providing a single platform that accommodates all types of combination trades without requiring separate systems.

Inventive Principle:

Principle #6Universality (Multi-functionality)

Solution Approach 2:

The system dynamically evaluates unlisted complex orders against current market conditions and existing orders in the order book. Rather than requiring pre-listing, the matching engine adapts to trader-specific complex order requirements by performing real-time matching and fulfillment based on the submitted order parameters.

Inventive Principle:

Principle #15Dynamics

3Ease of manufacture

If traders execute individual legs of a spread separately, then order processing is simpler, but fulfillment is reduced due to incomplete matching

Engineering Contradiction:

Improveorder processing simplicityVSAvoidorder fulfillment rate

Core Design Contradiction:

Ease of manufactureVSProductivity

Solution Approach 1:

The matching engine segments the fulfillment process into two distinct phases: first matching individual legs against the order book, and then performing a second pass to fulfill remaining legs through bilateral matching with counterparty orders. This segmented approach maximizes fulfillment opportunities while maintaining processing clarity.

Inventive Principle:

Principle #1Segmentation

Solution Approach 2:

The system performs continuous matching operations in multiple passes. After initial individual leg matching, the engine continues to search for complementary orders that can fulfill remaining legs of complex trades, ensuring that no potential fulfillment opportunity is lost and maximizing the overall fulfillment rate.

Inventive Principle:

Principle #20Continuity of useful action

Data Source

PatentUS10430878B2Matched order fulfillment with linear optimization

Publication Date: 2019.10.01 CHICAGO MERCANTILE EXCHANGE INC

AI summary

A method for matching compound orders from a group of market participants includes receiving, via a communication network, compound order data, the compound order data specifying a maximum amount of a financial instrument of a plurality of financial instruments to be bought or sold by each market participant, accessing a memory in which price data is stored, the price data indicating a current price of each financial instrument, implementing, with a processor, a linear solver to maximize fulfillment of the compound orders via order matching for execution at the current prices in accordance with the maximum amounts specified in the compound order data and in accordance with a maximum net risk exposure level for each market participant arising from the fulfillment of the compound orders, and transmitting trade data indicative of the order matching for execution of trades among the market participants at the current prices.