Trading Order Allocation by Displayed Quantity Ratios
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Solution Overview
Problem
Existing electronic trading systems lack transparency and efficiency in allocating trading orders, leading to suboptimal market liquidity.
Innovation Solution
A trading platform that allocates counterorders to reserved quantities of orders in proportion to the size of the displayed quantities, incentivizing greater transparency by rewarding traders who display larger portions of their orders.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If a trading system uses a bid/offer process with passive and aggressive sides, then trading execution is facilitated, but market transparency and allocation efficiency deteriorate due to lack of proportional allocation based on displayed quantities
Solution Approach 1:
The patent changes the allocation parameter from simple first-come-first-served or equal allocation to proportional allocation based on displayed quantities. This parameter change enables the system to maintain trading execution efficiency while improving market transparency by allocating counterorders in proportion to the displayed quantities of existing orders, thereby rewarding traders who display larger portions of their orders.
2Adaptability or versatility
If traders hide portions of their orders (use reserved quantities), then trading flexibility is improved, but market liquidity deteriorates due to reduced transparency
Solution Approach 1:
The patent introduces a feedback mechanism where the allocation of counterorders to reserved quantities is based on the ratio of displayed quantities. This feedback loop encourages traders to display larger portions of their orders because they receive proportional allocation rewards, thereby increasing market transparency and liquidity while still allowing trading flexibility through the reserved quantity mechanism.
3Device complexity
If counterorders are allocated without considering displayed quantity ratios, then allocation simplicity is maintained, but market efficiency deteriorates due to suboptimal liquidity distribution
Solution Approach 1:
The patent modifies the allocation parameter to include the ratio of displayed quantities when distributing counterorders to reserved quantities. This parameter enhancement increases allocation accuracy and market efficiency without significantly increasing system complexity, as the calculation is based on existing order book data that is already maintained by the trading system.
Data Source
AI summary
An apparatus for processing trade orders comprises a processor and memory that stores first and second orders. The first order is associated with a product and comprises displayed and reserved quantities. The second order is associated with the product and comprises displayed and reserved quantities. The processor is coupled to the memory and receives a counterorder associated with the product. The processor fills the displayed quantity of the first order with a corresponding portion of the counterorder, and the displayed quantity of the second order with a corresponding portion of the counterorder. The processor allocates a first additional portion of the counterorder to the first order. The first additional portion is based at least in part on a ratio of the displayed quantity of the first order to a sum of the displayed quantity of the first order and the displayed quantity of the second order.