Randomized Auction Notification for Fair Trading
Find Innovative SolutionsGenerate Solutions
Solution Overview
Problem
In electronic financial exchanges, traders with advanced technology and algorithms can execute orders faster than others, gaining an unfair advantage due to their ability to process and send orders quickly.
Innovation Solution
Implementing an on-demand auction system within an exchange computer system that allows market participants to opt in to a system that minimizes the advantages of fast order execution by introducing delays and auctions, ensuring that the best-priced orders trade, not necessarily the first to arrive.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If electronic exchanges match bids and offers based on price-time priority and first-come-first-served principles, then trading efficiency and execution speed are improved, but unfair advantages are created for traders with faster algorithms, computers, and network connections
Solution Approach 1:
The patent implements periodic auctions at predetermined times where all received orders are matched simultaneously based on price rather than arrival time. This periodic intervention disrupts the continuous first-come-first-served matching, creating fair trading opportunities for all participants regardless of their technological speed advantages, while maintaining efficient continuous matching between auctions.
Solution Approach 2:
The system changes the matching parameter from time-based priority to price-based priority during auction periods. By switching the dominant matching criterion from temporal to pricing dimensions, the system neutralizes speed advantages and allows all participants to compete on equal footing based on their valuation of the instrument.
2Speed
If traders invest in cutting-edge computer systems and fastest network connections to reduce communications latency, then order submission speed is improved, but the cost and complexity of trading increases
Solution Approach 1:
The system collects all orders in advance during the order reception period before simultaneous matching at the auction time. This preliminary collection phase allows slower systems to submit orders without penalty, as all orders receive equal consideration at matching time regardless of when they arrived, eliminating the need for premature high-speed submission infrastructure.
3Adaptability or versatility
If not all traders have access to resources for fastest order execution, then trading inclusivity is improved, but the ability to execute trades at optimal prices may be reduced for some participants
Solution Approach 1:
The auction mechanism creates equipotential conditions for all traders by simultaneously matching all received orders at the auction time based on price priority. This levels the playing field so that traders with different technological capabilities face identical matching conditions, ensuring fair access to trade execution opportunities while maintaining price efficiency through competitive bidding.
Data Source
AI summary
A method for performing an auction implemented via an exchange computer system includes receiving, from a user device, a security transaction order, receiving a first matching order, initiating a delay timer that runs for a first period of time, initiating an auction timer that runs for a second period of time, determining that the first period of time has expired, notifying a plurality of market participants of an auction, receiving, during the second period of time, one or more additional matching orders, wherein each of the one or more additional matching orders includes a request for participation in the auction, determining that the second period of time has expired, and facilitating a transaction based on the security transaction order.