Ratio Spreads Link Small and Full Size Contracts
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Solution Overview
Problem
Electronic trading systems traditionally limit small contract traders from fully benefiting from the liquidity of full size contracts, as they cannot trade with or participate in trades involving full size contracts, restricting market participation and increasing costs for smaller market participants.
Innovation Solution
The implementation of a match engine that generates ratio spreads by linking small contracts with full size contracts through a common product, using lot points to determine tradable volumes, allowing small contract traders to trade with full size contract traders and increasing overall market liquidity.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Adaptability or versatility
If small contracts are offered separately from full size contracts, then small contract traders can participate in the market, but liquidity remains segmented and transaction costs increase
Solution Approach 1:
The patent merges small contracts and full size contracts into a unified trading system where both contract types can be traded simultaneously against a common benchmark contract. This allows small contract traders to access the liquidity of full size contracts while maintaining their smaller position sizes, effectively combining the advantages of both contract types in a single market ecosystem.
Solution Approach 2:
The trading system is designed to handle multiple contract types (small and full size) with a single unified matching engine that can process both types against a common benchmark. This universal approach allows the system to serve diverse trader needs while maintaining a single liquid market, eliminating the need for separate trading venues.
2Quantity of substance
If implied orders are generated from real orders, then market liquidity increases, but system complexity increases
Solution Approach 1:
The system automatically generates implied orders from real orders without requiring manual intervention. The matching engine autonomously identifies opportunities to create implied orders that link small and full size contracts, calculates the appropriate pricing and quantities, and executes the trades, making the liquidity generation process self-sustaining and automated.
Solution Approach 2:
The patent introduces an intermediary mechanism in the form of a benchmark contract that mediates between small and full size contracts. This benchmark serves as a reference point that allows the system to automatically derive implied orders and pricing relationships, simplifying the complexity by providing a clear intermediary standard rather than requiring direct complex matching between all contract pairs.
Data Source
AI summary
A method for matching orders is provided. The method includes receiving a first order for a product, the first order specifying a first volume, receiving a second order for the product, the second order specifying a second volume, wherein the first volume is different than the second volume, generating an implied order based on a ratio spread defined between the first order and the second order, and matching a third order with the implied order.