Electronic Exchange Portfolio Transformation via Imbalance Offset
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Solution Overview
Problem
Current electronic portfolio management systems fail to accurately transform non-hedged futures contracts portfolios into adequately hedged portfolios due to unreliable market price fixings processes, leading to an inability to effectively hedge against the 'fixings basis' difference between auction prices and actual market prices.
Innovation Solution
A system and method that receive buy or sell orders, determine imbalances, request offsetting orders, compare and pair orders to determine a final auction price, calculate an adjustment amount, and apply it to the initial settlement price to transform a non-hedged portfolio into a hedged portfolio via an electronic exchange system.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Measurement precision
If traditional fixings processes are used to determine market price, then the pricing process is simple and fast, but the pricing accuracy and reliability deteriorate due to inability to accurately represent actual market price during fixings time
Solution Approach 1:
The fixings process is segmented into multiple distinct phases: Pre-Auction Phase for order collection, Auction Phase One for initial price discovery, and Auction Phase Two for final price determination. This segmentation allows each phase to focus on specific tasks, improving overall pricing accuracy while maintaining manageable system complexity through structured progression.
Solution Approach 2:
Offsetting orders are collected in advance during the Pre-Auction Phase before the actual fixings process begins. This preliminary action ensures that offsetting capacity is already available when needed, enabling accurate price determination without last-minute market disruptions and improving reliability of the fixings process.
2Reliability
If offsetting orders are collected and processed to hedge against fixings basis, then the hedging effectiveness improves, but the processing time and operational complexity increase
Solution Approach 1:
Offsetting orders are collected during the Pre-Auction Phase, which occurs before the formal auction process. This preliminary collection of offsetting orders allows the system to prepare hedging capacity in advance, ensuring that when the auction phases occur, the matching and processing can proceed efficiently without delays, thus maintaining both high reliability and acceptable processing time.
Solution Approach 2:
The system maintains continuous processing across all phases by continuously receiving, matching, and processing orders through Pre-Auction Phase, Auction Phase One, and Auction Phase Two without interruption. This continuous action ensures that hedging is established seamlessly, improving reliability while minimizing total processing time through uninterrupted workflow.
3Measurement precision
If multiple auction phases are implemented to determine final settlement price, then the price accuracy improves by reflecting true market conditions, but the complexity of the trading system increases
Solution Approach 1:
The pricing mechanism is divided into structured phases: Pre-Auction Phase for order gathering, Auction Phase One for initial equilibrium, and Auction Phase Two for final adjustment with offsetting orders. Each phase has clearly defined objectives and rules, which improves price accuracy through systematic refinement while containing system complexity through modular design with distinct functional boundaries.
Solution Approach 2:
The system dynamically adapts through multiple auction phases, allowing the settlement price to evolve and refine itself based on incoming orders and market conditions at each stage. This dynamic process enables the system to capture true market value more accurately while managing complexity through progressive refinement rather than attempting to determine the final price in a single static step.
Data Source
AI summary
Systems and methods for electronic transformation of a portfolio via an electronic exchange server are provided. The electronic exchange server transforms an initial portfolio (e.g., a non-hedged trading portfolio) into a transformed portfolio (e.g., a hedged trading portfolio) by receiving buy or sell orders of an initial portfolio to be transformed, determining an imbalance in the received buy or sell orders, and receiving offsetting buy or sell orders to offset the imbalance. The transformation can be performed, for example, by comparing data from the buy or sell orders with data from the offsetting buy or sell orders, pairing the buy or sell orders with the offsetting buy or sell orders, determining a final auction price, determining an adjustment amount, applying the adjustment amount to the final auction price to determine a final settlement price, and applying the final settlement price to the initial portfolio.