Midpoint Matching System for Algorithmic Order Processing
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Solution Overview
Problem
Current Crossing Networks lack the ability to efficiently process multiple computer-generated orders from algorithmic and automated trading systems, fail to provide anonymous and continuous trading, and do not accommodate order shredding or volume weighted average pricing strategies, leading to inefficiencies and information leakage.
Innovation Solution
An automated system that operates on a fully-anonymous and continuous basis, processes multiple computer-generated orders of any size, automatically matches executable orders according to a priority scheme, and executes a matching algorithm to maximize tradable volume, utilizing a hidden reserve book linked with a displayed market to improve liquidity and provide price improvement opportunities.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If Crossing Networks execute block-sized orders at a reference price, then trading cost is reduced and anonymity is provided, but the system lacks the ability to process multiple computer-generated orders from algorithmic trading systems and provides inefficient order matching
Solution Approach 1:
The Crossing Network system is enhanced to serve multiple functions: it processes both traditional block orders and multiple computer-generated orders from algorithmic trading systems. The system accommodates various order types including market orders, limit orders, and specialized strategies like order shredding and VWAP, making it universally applicable to different trading approaches while maintaining its core matching functionality.
Solution Approach 2:
The system transitions from static, passive matching to dynamic, continuous processing. Multiple computer-generated orders are processed in real-time with continuous matching against the reserve book, allowing the system to adapt to changing market conditions and automated trading strategies while maintaining efficiency.
2Loss of information
If orders are displayed in the order book for transparency, then market visibility is improved, but information leakage occurs and anonymity is compromised
Solution Approach 1:
The system extracts order details from public display and stores them in a hidden reserve book. Orders are removed from the transparent order book and held in confidential storage, where they can be matched without public exposure. This extraction prevents information leakage while maintaining the ability to match orders efficiently.
Solution Approach 2:
The reserve book acts as an intermediary between order submission and execution. Orders are placed in the reserve book as a intermediate storage layer, allowing matching to occur without direct public exposure. This intermediary structure enables anonymous matching while maintaining market functionality.
3Speed
If the system matches orders immediately when marketable, then execution speed is improved, but market disruption occurs for large block orders
Solution Approach 1:
Orders are pre-positioned in the hidden reserve book before execution. This preliminary storage allows the system to prepare for potential matches without immediately impacting the market. When matching conditions are met, executions occur at favorable times, reducing market disruption while maintaining speed.
Solution Approach 2:
Instead of continuous immediate execution, the system uses periodic matching cycles where orders in the reserve book are matched at predetermined intervals or when specific conditions are met. This periodic approach allows large block orders to be executed in a manner that minimizes market impact while maintaining overall execution efficiency.
Data Source
AI summary
An automated system for matching orders to buy and sell securities including a displayed market where orders are executed at a BBO price and where information about the market is made available to investors and a midpoint matching market for matching buy and sell orders at a predetermined price, namely, the midpoint between the national best bid and offer. The displayed market and the midpoint matching market are linked so that orders submitted to the displayed market are exposed to the midpoint matching market and can be executed at an improved price if a contra order is available on the midpoint matching market.