Probe Order Mechanism for Hidden Liquidity Detection
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Solution Overview
Problem
Existing financial trading systems fail to effectively probe for hidden liquidity and undisclosed values in financial markets, such as hidden orders and sub-penny orders, which limits traders' ability to determine available quantities and prices for trades.
Innovation Solution
A system and method that involve placing probe orders in financial markets to reveal non-public information about hidden prices and quantities, allowing for the automatic placement of subsequent orders based on the execution of these probe orders to facilitate trading on undisclosed values.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If hidden orders and undisclosed values are maintained in financial markets, then market participants can protect their trading strategies and avoid information asymmetry disadvantages, but other market participants cannot access this liquidity and cannot make informed trading decisions
Solution Approach 1:
The system performs preliminary probing actions by placing test orders before actual trading to detect hidden liquidity. The probe order is executed in advance to reveal undisclosed values, allowing the system to plan subsequent trading strategies based on the discovered information without other participants detecting the intent.
Solution Approach 2:
The probe order acts as an intermediary mechanism that indirectly reveals hidden information. Instead of directly querying hidden orders (which would be detected), the system uses a intermediary probe order that, when executed, triggers revelations of undisclosed values through market interactions without directly exposing the probing intent.
2Loss of information
If probe orders are placed to reveal hidden prices and quantities, then market transparency and trading opportunities are improved, but transaction costs and system complexity increase
Solution Approach 1:
The system merges the probing function and trading function into a unified automated workflow. The probe order, information gathering, and subsequent trading orders are combined into a single integrated system that automatically executes multiple orders based on detected market conditions, reducing the complexity of manual coordination.
Solution Approach 2:
The system implements feedback loops where the execution results of probe orders automatically trigger subsequent trading decisions. The system monitors the outcomes of probe orders and uses this feedback information to dynamically adjust and place additional orders, creating an automated decision-making cycle that reduces manual intervention complexity.
3Productivity
If multiple orders are placed automatically based on probe order execution, then trading efficiency and ability to capitalize on hidden liquidity is improved, but risk of market manipulation detection and regulatory issues increases
Solution Approach 1:
The system uses partial probing actions rather than attempting to reveal all hidden information. By placing probe orders for specific quantities and prices, the system obtains sufficient information to execute profitable trades without excessively exposing its strategies or appearing to manipulate the market through large-scale probing activities.
Solution Approach 2:
The system employs periodic probe orders rather than continuous probing. By spacing out probe order placements and using them strategically at specific moments, the system reduces the appearance of manipulative behavior while still gathering necessary information over time to execute efficient trades.
Data Source
AI summary
In electronic trading venues, there may be orders for which the full information is not publicly displayed. For example, the full quantity of an order available for trading or the most aggressive price at which an order can be traded may not be made public. A system and method are disclosed that facilitates trading based on this non-public information. A first order associated with a financial instrument is placed at a venue to probe for non-public information related to the financial instrument. The results of the probe may then be used to place a second order at the venue that takes advantage of any discovered non-public information.