Smart Hedging Order Placement for Electronic Trading Queue Management
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Solution Overview
Problem
In electronic trading, traders face challenges with spread trading, particularly in maintaining favorable queue positions for spread leg orders when market conditions change, leading to increased risks of orders being 'legged up' and reduced filling rates.
Innovation Solution
The implementation of intelligent order placement and movement strategies, where additional orders are submitted at prices below or above the calculated price level to ensure better queue positions for future re-priced orders, allowing for deletion and replacement of initial orders at re-calculated prices, thereby improving queue positions and filling rates.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Measurement precision
If orders are placed at calculated price levels based on market conditions, then trading accuracy is improved, but queue position deteriorates when market conditions change
Solution Approach 1:
The system preemptively places additional hedge orders at adjacent price levels before the market actually moves to those levels. When market conditions change and the original order needs re-pricing, the hedge orders are already in place with favorable queue positions, eliminating the delay and risk associated with placing new orders after market movement.
Solution Approach 2:
The system anticipates potential market movements and places hedge orders that counteract the risk of the original order losing its queue position. These preliminary hedge orders serve as a protective measure against the harmful effect of queue position deterioration when market conditions change.
2Adaptability or versatility
If orders are re-priced quickly in response to market changes, then adaptability is improved, but queue position is lost
Solution Approach 1:
Instead of waiting for market changes to occur and then re-pricing orders (which causes queue position loss), the system places hedge orders in advance at multiple price levels. When the market moves, the system can immediately utilize these pre-positioned hedge orders, maintaining both adaptability and favorable queue position.
3Reliability
If additional hedge orders are placed at adjacent price levels, then queue position is improved, but order complexity increases
Solution Approach 1:
The system continuously monitors market conditions and the status of hedge orders, automatically canceling or modifying hedge orders when they are no longer needed. This feedback mechanism prevents the accumulation of unnecessary orders and maintains manageable complexity while preserving the benefits of improved queue position.
Solution Approach 2:
The system strategically places hedge orders that can be discarded (cancelled) when they serve their protective purpose. The resources spent on placing these temporary hedge orders are recovered when the original order is filled or the market movement is captured, making the increased complexity worthwhile.
4Productivity
If multiple hedge orders are submitted, then filling rate is improved, but loss of time in managing orders increases
Solution Approach 1:
The automated trading system manages the placement, monitoring, and cancellation of multiple hedge orders without requiring manual intervention. The system self-adjusts the hedge orders based on market conditions and the status of the original order, eliminating the time loss that would occur if a trader manually managed each hedge order.
Data Source
AI summary
A system and associated methods are provided for smart hedging in an electronic trading environment. According to one example method, a first order for a first tradeable object and a second order for a second tradeable object are placed based on a spread strategy. Upon receiving an indication that a quantity of the first order is filled, the method involves determining if the second order can be used to offset the quantity filled of the first order by determining if a price of the second order would result in achieving a desired spread price defined for the spread strategy. If the price results in the desired price, the second order is used to offset the quantity filled for the first order in an attempt to achieve the desired spread price. Other tools are provided as well.