Post-Trade Aggregation Middleware for Custodial Fee Reduction

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Solution Overview

Problem

Existing securities order processing and routing systems incur substantial custodial 'per-trade' ticket fees for trade allocations across multiple brokers, limiting trade compression to exchanges and electronic communication networks, and requiring customers to purchase new systems or pay additional fees for post-trade aggregation.

Innovation Solution

A computer-based system that apportions trade orders into smaller orders, communicates them to multiple order destinations, combines individual executions into a single average-priced block, and delivers this block to a clearing agent for aggregated clearing, allowing customers to use existing technologies and reduce custodial costs.

Engineering Contradictions & Design Principles

VSEngineering Contradiction Analysis

1Productivity

If trade orders are executed across multiple brokers to find liquidity and reduce market impact, then trading efficiency and market impact are improved, but custodial per-trade ticket fees increase substantially

Engineering Contradiction:

Improvetrading efficiencyVSAvoidcustodial fees

Core Design Contradiction:

ProductivityVSLoss of energy

Solution Approach 1:

The system segments a large trade order into multiple smaller child orders that can be executed across different brokers and venues. This segmentation allows the trading algorithm to access liquidity from multiple sources while the post-trade aggregation system consolidates the executions, thereby maintaining trading efficiency while reducing custodial fees through compressed settlement.

Inventive Principle:

Principle #1Segmentation

Solution Approach 2:

The post-trade aggregation system acts as an intermediary between the execution management system and the custodian. It receives individual trade executions from multiple brokers, compresses them into a single aggregated trade, and submits this compressed trade to the custodian for settlement. This intermediary function eliminates the need for the custodian to process multiple individual trades, thereby reducing per-trade ticket fees.

Inventive Principle:

Principle #24Intermediary (Mediator)

2Adaptability or versatility

If existing securities order processing systems are used for trade allocations across multiple brokers, then system compatibility is maintained, but substantial custodial per-trade ticket fees are incurred

Engineering Contradiction:

Improvesystem compatibilityVSAvoidcustodial fees

Core Design Contradiction:

Adaptability or versatilityVSLoss of energy

Solution Approach 1:

The post-trade aggregation system is designed with universal interfaces that can accept trade executions from multiple different brokers and execution venues. It provides a multi-functional capability to compress trades regardless of the execution path, making it compatible with existing securities order processing systems while enabling fee reduction through aggregation.

Inventive Principle:

Principle #6Universality (Multi-functionality)

3Speed

If trade compression is limited to executions on exchanges and electronic communication networks where the brokerage firm is a direct member, then execution speed is improved, but the scope of trade compression is restricted

Engineering Contradiction:

Improveexecution speedVSAvoidscope of trade compression

Core Design Contradiction:

SpeedVSAdaptability or versatility

Solution Approach 1:

The post-trade aggregation system serves as an intermediary that receives executions from any broker or venue, not just direct members of exchanges or ECNs. It consolidates these diverse executions and processes them as compressed trades, thereby extending the scope of trade compression beyond the limitations of direct membership while maintaining efficient processing.

Inventive Principle:

Principle #24Intermediary (Mediator)

4Productivity

If customers purchase new systems or pay additional fees for post-trade aggregation, then trade compression capability is achieved, but system complexity or additional costs are incurred

Engineering Contradiction:

Improvetrade compression capabilityVSAvoidsystem complexity

Core Design Contradiction:

ProductivityVSDevice complexity

Solution Approach 1:

The post-trade aggregation system is designed as a standalone intermediary component that can be integrated with existing order management and execution systems. It provides trade compression capability as a separate service layer, avoiding the need for customers to purchase entirely new systems while reducing the complexity of implementing aggregation across multiple existing platforms.

Inventive Principle:

Principle #24Intermediary (Mediator)

Data Source

PatentUS9978102B2Apparatus and method for trade aggregation of trade allocations and settlements

Publication Date: 2018.05.22 ITG SOFTWARE SOLUTIONS INC

AI summary

A post-trade aggregation system includes an allocation middleware interface, which interacts with data interface to allocate and settle trades. An order management system receives a trade order on behalf of a customer and causes apportionment of the trade into a plurality of smaller orders to be transmitted to a plurality of order destinations directly (e.g. via the FIX protocol). The post-trade aggregation system includes an allocation middleware interface which receives the individual trade executions from the plurality of order destination and compresses them into a single average-priced block. The allocation middleware interface then transmits the single average-priced block to be cleared by a designated clearing agent and allocates the single average-priced block into one or more custodian accounts.