Spread Trading Order Modifiers for Partial Execution Control
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Solution Overview
Problem
Electronic trading systems face challenges in managing spread trading strategies due to high processing power requirements and risk management issues, leading to potential undesirable spread fills and exceeding risk limits when multiple orders are placed simultaneously.
Innovation Solution
Implementing quantity and price modifiers to divide and submit spread orders sequentially, allowing partial execution at different price levels, thereby reducing market exposure and risk allocation.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If multiple spread orders are placed simultaneously to achieve desired average price, then trading strategy effectiveness is improved, but processing power requirements and risk management complexity increase
Solution Approach 1:
The patent segments a large spread order into multiple smaller child orders, each with its own quantity and price modifiers. This allows the trading system to process orders in manageable chunks rather than handling one large complex order, reducing processing power requirements while maintaining the ability to achieve desired average prices through multiple simultaneous child orders
2Productivity
If multiple spread orders are placed simultaneously to achieve desired average price, then trading strategy effectiveness is improved, but risk limits are exceeded
Solution Approach 1:
The patent implements quantity modifiers that allow only a portion (e.g., 50%) of the total spread quantity to be disclosed in each child order. This partial action approach enables the trader to pursue the trading strategy while staying within risk limits, as the actual market exposure is controlled through the quantity modifier parameter
3Reliability
If all spread legs are quoted to ensure execution, then order execution reliability is improved, but undesirable spread fills increase
Solution Approach 1:
The patent applies different quality characteristics to different legs of the spread by allowing individual quantity modifiers for each leg. This enables selective quoting where only necessary legs are fully quoted while others use partial quantity disclosure, reducing the probability of all legs filling simultaneously and creating undesirable spread fills
Data Source
AI summary
A quantity modifier and a price modifier are provided for a spread trading strategy having a desired spread price and a desired spread quantity. According to an example embodiment, a quantity modifier divides the desired spread quantity into a plurality of disclosed spread quantities. Once the disclosed quantities are determined, a plurality of disclosed spread orders having the disclosed spread quantities are sequentially submitted to the market until the full desired spread order quantity is executed or until a predefined condition is detected. A price modifier determines a price level for each disclosed spread quantity, such that each disclosed spread order may be submitted at a different price level.