Privacy-Preserving Inventory Matching via Cryptographic Segmentation
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Solution Overview
Problem
Current methods for inventory matching in financial markets reveal a firm's trading interests, leading to potential adverse price movements and increased costs, as they must trade in public markets or disclose sensitive information.
Innovation Solution
A privacy-preserving inventory matching system using a server with computer processors that receives axe submissions with quantity commitments, arranges parties based on direction, verifies secret-shares from an arithmetized comparison circuit, and executes trades while maintaining secrecy through Pedersen schemes over elliptic curves, ensuring security against malicious adversaries.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If a bank publishes lists of securities it is interested in trading to incentivize client trading and achieve better internalization, then trading activity increases and internalization improves, but the bank reveals its inventory and leaks its own trading interests
Solution Approach 1:
The patent segments the inventory matching process into multiple cryptographic stages: commitment phase, comparison phase, and revelation phase. Each party's inventory is divided into secret shares that are processed independently through arithmetized comparison circuits, allowing the system to achieve internalization benefits while maintaining inventory privacy through cryptographic segmentation of information.
Solution Approach 2:
The patent introduces cryptographic intermediaries including commitment schemes, zero-knowledge proofs, and secure multi-party computation protocols. These intermediaries enable the bank and clients to verify trading compatibility and execute internalization without directly revealing inventory information, acting as trusted mediators that preserve privacy while facilitating trade matching.
2Adaptability or versatility
If a bank aggregates internal firm inventory along with risk inventory from facilitating client trades to construct axe lists, then more trading opportunities are available for internalization, but the trading activity of contributing clients is implicitly revealed to other clients
Solution Approach 1:
The patent extracts and separates client trading information from the aggregated inventory data through cryptographic techniques. Each client's contribution to the risk inventory is processed through secret sharing and comparison circuits that prevent the extraction of individual trading patterns, allowing the system to benefit from aggregated liquidity while protecting individual client privacy.
Solution Approach 2:
The patent applies different privacy protection mechanisms to different components of the inventory system. Internal firm inventory and client risk inventory are handled with appropriate cryptographic safeguards tailored to their specific privacy requirements, allowing versatile trading opportunities while maintaining localized privacy protections for each data source.
3Reliability
If conventional inventory matching methods are used, then trading compatibility can be determined, but trading interests are revealed leading to adverse price movements and increased costs
Solution Approach 1:
The patent performs preliminary cryptographic commitments and comparisons before any trading information is revealed. Parties establish binding commitments to their inventory positions and undergo secret comparison procedures in advance, allowing trading compatibility to be determined and internalization to be arranged before market conditions can change, thereby preventing adverse price movements.
Solution Approach 2:
The patent converts the potential harm of information revelation into a benefit by using cryptographic proofs. The same comparison mechanism that determines trading compatibility also generates zero-knowledge proofs that verify compatibility without revealing the underlying inventory information, turning what would be a harmful information leak into a privacy-preserving verification mechanism.
Data Source
AI summary
A method for privacy-preserving inventory matching may include: (1) receiving a plurality of axe submissions; (2) arranging the parties into data structures based on a direction in the party's axe submission; (3) sending each party's commitment to the other party; (4) receiving, from each party, output secret-shares of an arithmetized comparison circuit; (5) verifying that the output secret-shares of the arithmetized comparison circuit received from the parties match commitments to the output secret-shares sent by the respective opposite party; (6) identifying a minimal party based on the outputs of the arithmetized comparison circuit; (7) generating and sending a proof of the minimal party identification to the minimal party; (8) receiving a minimal quantity integer from the minimal party; (9) revealing the minimal quantity integer to the first party and the second party; and (10) executing the trade for the minimal quantity integer.