Automated Order Routing System for Financial Instruments
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Solution Overview
Problem
In financial trading systems, undisclosed liquidity can lead to inefficiencies and adverse effects, as traders and dealers are unaware of hidden reserve quantities, resulting in potential inefficiencies in trading costs and suboptimal execution of orders.
Innovation Solution
A computerized system and method that receives updated order book information from multiple trade execution entities, allowing orders to include both disclosed and undisclosed liquidity quantities, and routes orders based on this information to optimize execution by considering both displayed and hidden quantities.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If undisclosed liquidity is used in orders, then order execution efficiency is improved and trading costs are reduced, but market transparency deteriorates and other traders cannot see hidden quantities
Solution Approach 1:
The patent segments liquidity into two distinct components: disclosed liquidity (visible to market) and undisclosed liquidity (hidden from market). This segmentation allows the system to simultaneously maintain market transparency for part of the order while utilizing hidden liquidity for efficient execution, resolving the contradiction by dividing the order book into transparent and non-transparent segments that serve different functions
Solution Approach 2:
The patent introduces an intermediary routing system that sits between traders and exchange venues. This intermediary has access to both disclosed and undisclosed liquidity information and acts as a mediator to route orders optimally across multiple venues based on hidden liquidity availability, while presenting a unified transparent interface to traders. The intermediary resolves the contradiction by hiding the complexity of undisclosed liquidity management while leveraging its benefits
2Loss of energy
If orders are routed based on undisclosed liquidity, then trading cost efficiency is improved, but system complexity increases due to multiple trade execution entities
Solution Approach 1:
The patent creates a universal order routing system that can handle multiple types of orders (market orders, limit orders, iceberg orders) across multiple trade execution entities (exchanges, ECNs, ATS) through a single unified platform. The system performs multiple functions including order reception, liquidity analysis across venues, intelligent routing, and execution monitoring, all through one multi-functional system that reduces overall complexity despite managing multiple execution entities
Solution Approach 2:
The patent implements feedback mechanisms where the routing system continuously receives information about order execution results, liquidity changes, and price movements from multiple trade execution entities. This feedback is used to dynamically adjust routing decisions and optimize future order placement, allowing the system to learn and improve trading cost efficiency while managing complexity through adaptive control rather than static complex rules
Data Source
AI summary
A computerized system and method for placing orders for financial instruments with an exchange or alternative trading system is provided. In accordance with this embodiment, updated order book information is received from each of a plurality of trade execution entities. An order for a first financial instrument of the plurality of financial instruments is received from a first user. The order includes a first price per unit component, and a first unit quantity. The first unit quantity includes a disclosed liquidity quantity and an undisclosed liquidity quantity. The order, including the disclosed liquidity quantity and the undisclosed liquidity quantity, is sent to a first one of the plurality of trade execution entities for execution. A reciprocal order for the first financial instrument that does not require that the trade execution entity be the first one of the trade execution entities is received from a second user. The reciprocal order includes a second price per unit component, and a second unit quantity, and the first and second price per unit components have overlapping values. As a function of (1) the price per unit value and the disclosed liquidity quantity for the first financial instrument in the updated order book information, and (2) the first price per unit component and the first undisclosed liquidity quantity, the reciprocal order is sent to one of the plurality of trade execution entities.