Matching Engine On-Demand Auction Liquidity Pooling
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Solution Overview
Problem
In financial markets, large orders face challenges in execution due to reduced visible liquidity, increased information leakage, and higher execution costs, exacerbated by automated trading and rapid response times, which complicate the ability to attract significant liquidity pools without exposing orders publicly.
Innovation Solution
An automated system and method for conducting sub-second on-demand auctions within a Matching Engine that pre-pools liquidity through auction-only orders, prioritizes them based on initial receipt time, and supports SNAP Auctions to execute orders efficiently, minimizing information leakage and interference with open trading.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Speed
If large orders are executed in real-time open trading, then execution speed is improved, but information leakage increases and execution costs rise
Solution Approach 1:
The system pre-pools liquidity by accepting auction-only orders before the auction event, building a hidden pool of potential counterparties in advance. This preliminary action allows the large order to be executed against pre-assembled liquidity rather than searching for it in real-time, preventing information leakage while maintaining execution speed.
Solution Approach 2:
The matching engine acts as an intermediary by creating a hidden auction pool that shields the large order from public view. The system mediates between the large order and potential counterparties through a confidential matching process, preventing direct exposure of the large order while still enabling execution.
2Productivity
If automated liquidity providers are used, then trading efficiency is improved, but the pool of available liquidity decreases
Solution Approach 1:
The system performs preliminary liquidity aggregation by accepting auction-only orders from multiple sources before the auction event. This pre-pooling mechanism accumulates sufficient liquidity in advance, ensuring that when the large order arrives, there is adequate hidden liquidity available for execution without relying solely on real-time automated providers.
3Speed
If response time is shortened for rapid trading, then market responsiveness is improved, but liquidity providers cannot react to large orders
Solution Approach 1:
The system accepts auction-only orders in advance of the auction event, building a pool of committed liquidity providers before the large order needs execution. This preliminary action gives liquidity providers time to prepare and commit their liquidity without requiring rapid reaction to the large order itself, while still enabling fast execution when needed.
Data Source
AI summary
A system and method for operating an on-demand auction for a Financial Instrument are provided in which a request is made for a Trading Center to conduct an on-demand auction for a Financial Instrument. If requirements are met, the Trading Center transitions from an Open Trading State (OTS) to a SNAP Auction State (SAS), excludes from the auction any order which explicitly requests exclusion, includes in the auction any remaining Resting Orders, includes in the auction certain new orders which arrive before the auction ends, activates and includes currently dormant orders, takes a snapshot of displayed buying/selling interest and attempts to include in the auction any available buying/selling interest in other Trading Centers which must be satisfied, computes the auction price, sends external Satisfaction Orders, attempts to match all responses to Satisfaction Orders and all internal orders included in the auction, and transitions back from the SAS to the OTS.