Order Matching Engine Using Timed Intervals to Prevent Market Manipulation
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Solution Overview
Problem
Current online trading systems face issues such as high bid-ask spreads disadvantageous to traders, potential for market manipulation by high-frequency traders in dark pool systems, and ineffective network security mechanisms that risk filtering legitimate trades.
Innovation Solution
A computing system with a client service engine, price update event engine, and match processing engine that sets mid-rate prices and matches orders at configurable intervals, reducing the likelihood of gaming and improving security by processing orders in timed matching intervals.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If order requests are immediately matched in dark pool systems, then trading efficiency is improved, but the system becomes vulnerable to market manipulation by high-frequency traders
Solution Approach 1:
The system performs preliminary actions by collecting all order requests during an accumulation phase before executing matching. This preliminary collection allows the system to process orders in batches at predetermined intervals rather than immediately, preventing high-frequency traders from exploiting real-time price changes while still maintaining trading efficiency through automated batch processing.
Solution Approach 2:
The matching engine operates using periodic action by executing order matching at predetermined time intervals rather than continuously. This periodic matching mechanism creates regular trading cycles that prevent manipulation while maintaining system productivity, as orders are systematically processed at consistent intervals regardless of market conditions.
2Reliability
If network security mechanisms filter suspicious trades, then system security is improved, but legitimate trades may be incorrectly blocked
Solution Approach 1:
The system introduces an intermediary mechanism by using predetermined time intervals as a neutral mediator between order submission and matching execution. This intermediary time buffer allows security mechanisms to analyze trade patterns without immediately blocking legitimate trades, reducing false positives while maintaining security monitoring.
Solution Approach 2:
Security analysis is performed on accumulated orders before final matching execution. This preliminary security check on batched orders allows the system to identify suspicious patterns more accurately without blocking legitimate individual trades, as the context of multiple orders provides better insight into trader intent.
3Productivity
If authorized market makers continuously publish bid and ask prices, then market liquidity is improved, but the bid-ask spread increases disadvantaging other traders
Solution Approach 1:
The system extracts the price dissemination function from traditional market makers and replaces it with a centralized matching engine that calculates mid-rates algorithmically. This removal of human market makers eliminates the bid-ask spread markup while maintaining continuous liquidity through automated order matching at predetermined intervals.
Solution Approach 2:
The matching engine provides self-service by automatically calculating fair mid-rates based on aggregated order book data without requiring human market makers to set prices. This automated price discovery mechanism eliminates the need for market maker profit margins, reducing trading costs for all participants while maintaining system liquidity.
Data Source
AI summary
Disclosed embodiments provide a computing system configured to match a set of transactions associated with an online trading system. The computing system includes a memory that includes a client service engine, a price update event engine, and a match processing engine. The computing system further includes a processor coupled to the memory. When executing the client service engine, the processor is configured to receive, from one or more client devices, a plurality of order requests during a first interval of configurable duration. When executing the price update event engine, the processor is configured to set a plurality of mid-rate prices corresponding to the first interval. When executing the match processing engine, the processor is configured to determine that the first interval has expired, and in response, match a first order request included in the plurality of order requests with a second order request included in the plurality of order requests.