Simultaneous Option Trading System with Delta Tracking
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Solution Overview
Problem
Electronic equity and index option markets face the issue of 'blank screens' due to a lack of timely and reliable market data, which hinders trading activity and investor confidence.
Innovation Solution
A system and method for facilitating trading by assigning options to classes, allowing simultaneous entry of bids and offers within predetermined ranges, with delta tracking and rate limiting to ensure fair value and prevent excessive trading, utilizing a server and interface configuration that automatically manages cumulative deltas and restricts entry rates to maintain market stability.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If options are traded individually one by one, then trading precision is maintained, but trading efficiency and market liquidity deteriorate due to slow execution and limited participation
Solution Approach 1:
The patent combines multiple individual option trades into a single simultaneous trade message. Market makers can submit bids and offers for multiple option series at once, and the matching engine processes all trades simultaneously, thereby improving trading efficiency and liquidity while maintaining operational simplicity through automated batch processing
Solution Approach 2:
The system automatically matches bids and offers across multiple option series without requiring manual intervention. The matching engine autonomously processes simultaneous trades, allocates positions, and manages the trading logic, enabling efficient batch trading while reducing operational complexity through self-service automation
2Productivity
If market makers are allowed to enter bids and offers freely without restrictions, then trading activity increases, but market stability and fairness deteriorate due to excessive or coordinated trading
Solution Approach 1:
The system implements feedback mechanisms through delta tracking and rate limiting. The matching engine monitors cumulative delta positions and entry rates, providing feedback to control trading behavior. When delta limits or rate thresholds are approached, the system adjusts matching behavior to prevent excessive or coordinated trading, thereby maintaining market stability while preserving legitimate trading activity
Solution Approach 2:
The patent dynamically adjusts trading parameters such as delta limits and rate thresholds based on market conditions. The matching engine modifies matching behavior and acceptance criteria in real-time to prevent abusive patterns while maintaining fair and stable market operation, allowing trading activity to flourish within controlled parameters
3Adaptability or versatility
If options with different quotes are treated equally, then market accessibility is improved, but quote accuracy and pricing reliability deteriorate due to lack of differentiation
Solution Approach 1:
The patent applies local quality by treating different option quotes differently based on their specific characteristics. The matching engine evaluates and processes bids and offers with varying levels of scrutiny and matching priority depending on their quote quality, thereby maintaining quote accuracy for critical prices while preserving market accessibility through differentiated handling
Data Source
AI summary
A method and system for facilitating trading of equity and index options is provided. The system incentivizes market makers to voluntarily agree to restrict the bid/offer spread on price quotes for options by enabling the market makers to submit batches of bids and offers simultaneously. The system also provides protection to the market makers by enabling withdrawal of certain bids and offers if a cumulative delta on traded options has been exceeded. The system also provides limits on the rates at which individual traders and the overall market submit bids and offers. The system provides summarization of market data to enable market makers to have relevant and timely data at all stages. In this manner, the system achieves increased liquidity of the equity and index options markets.