Neutral Price Improvement Orders in Electronic Trading Stacks
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Solution Overview
Problem
Electronic trading systems that implement price improvement features often result in situations where all bids or offers use price improvement, leading to a stack arrangement similar to systems without price improvement functionality, and traders may want to opt out of these rules while still engaging in competitive trading.
Innovation Solution
The introduction of neutral price improvement orders that allow traders to submit orders at predetermined pricing increments, maintaining their position in the trading stack based on existing orders, and opting out of price improvement rules, enabling traders to trade competitively without automatic displacement by price-improved orders.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Adaptability or versatility
If price improvement is implemented in the trading system, then traders can improve prices within predetermined increments, but all bids or offers may use price improvement leading to a stack arrangement similar to systems without price improvement functionality
Solution Approach 1:
The patent segments orders into different types: neutral price improvement orders and non-neutral price improvement orders. This segmentation allows the system to maintain price improvement functionality while creating a distinct stack arrangement for neutral orders that is not affected by subsequent price-improved orders, thereby resolving the contradiction between price improvement capability and stack arrangement complexity.
Solution Approach 2:
The patent introduces neutral price improvement orders as an intermediary category between traditional limit orders and aggressive price improvement orders. These neutral orders act as a buffer that maintains price improvement benefits while preventing the stacking complexity that would result from all orders using price improvement, thus resolving the technical contradiction.
2Measurement precision
If traders submit orders at improved prices, then they can achieve better execution prices, but their orders may be automatically displaced by subsequently submitted price-improved orders
Solution Approach 1:
The patent applies preliminary action by establishing the position of neutral price improvement orders in the stack before subsequent price-improved orders are submitted. Once a neutral order is placed, its position is locked and cannot be displaced by later submissions, thereby maintaining both price improvement benefits and order position reliability.
Solution Approach 2:
Instead of allowing subsequent price-improved orders to displace earlier orders (the traditional mechanism), the patent inverts this behavior for neutral price improvement orders: earlier neutral orders are protected from displacement by subsequent submissions. This inversion resolves the contradiction between achieving price improvement and maintaining reliable order positions.
3Adaptability or versatility
If the system allows price improvement at multiple levels, then traders can select among different aggressive price improvement increments, but price improvement levels may be inflated when not needed to maintain stack position
Solution Approach 1:
The patent extracts the price improvement level selection capability from the stack position maintenance mechanism for neutral orders. Neutral price improvement orders can select from multiple price improvement levels, but their position in the stack is determined by submission time rather than price improvement level. This separation allows traders to use multiple price improvement levels without causing level inflation, resolving the contradiction between adaptability and energy loss.
Data Source
AI summary
Electronic trading systems and methods are provided that permit traders to submit price improvement orders that are traded at predetermined pricing increments and that maintain a position in a trading stack based on the size of other orders already existing in the stack at the time the order is submitted. This type of price improvement relates to neutral price improvement according to the invention. Neutral price improvement represents an option that permits a trader to opt out of being subjected to the trading rules and/or scheme governing a particular feature (e.g., price improvement), yet still permit traders to engage in competitive trading. In such a system, the trading rules may be applied generally to all orders in the system, except for orders submitted with the neutral price improvement option.