Spread Trading Application Implied Price Computation
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Solution Overview
Problem
Electronic trading systems face challenges in providing traders with efficient tools to calculate and execute spread trading strategies quickly and accurately, especially in environments where real-time market information is incomplete or not directly available.
Innovation Solution
The development of a trading application and interface that allows for the configuration of trading screens to display and compute both direct and implied prices and quantities for spreads, enabling traders to view and trade spreads as atomic units, and automatically calculating implied prices and quantities based on market data.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If traders manually calculate spread prices and quantities using available market data, then basic trading functionality is maintained, but the speed and accuracy of trading decisions are reduced
Solution Approach 1:
The system pre-calculates and stores spread prices and quantities in a lookup table before trading occurs. When a trader needs spread information, the pre-computed values are immediately retrieved and displayed, eliminating manual calculation time and enabling instant trading decisions.
Solution Approach 2:
The trading system automatically computes spread prices and quantities by itself using the formula: spread price = (ask price of first leg + bid price of second leg) / 2, and spread quantity = minimum of available quantities. This self-computation eliminates the need for external calculation tools and provides real-time accurate spread data.
2Loss of information
If the system displays only direct market prices for individual legs, then data accuracy is maintained, but traders cannot easily determine spread pricing information
Solution Approach 1:
The system segments price information display into two distinct parts: direct market prices for individual legs and computed spread prices. The direct prices show actual market data from exchanges, while the computed spread prices are derived using the formula: (ask price of first leg + bid price of second leg) / 2. This segmentation provides complete information without overwhelming the trader.
Solution Approach 2:
The system introduces an intermediary computation layer that transforms raw market data into meaningful spread pricing information. The intermediary automatically applies the spread pricing formula to combine individual leg prices, providing traders with derived spread prices and quantities without requiring them to perform the calculations themselves.
3Measurement precision
If traders execute spread trades by manually entering orders for each leg, then basic trading functionality is maintained, but the accuracy and speed of execution are reduced
Solution Approach 1:
The system merges the ordering of multiple legs into a single unified spread order. Instead of requiring traders to separately enter orders for each individual leg, the system allows traders to specify a spread trade with multiple legs, and the system automatically coordinates the execution of all legs as an atomic unit, ensuring accurate spread trading.
Solution Approach 2:
The system pre-configures spread trading parameters including the legs composition, pricing formula, and quantity calculations before trade execution. When a trader initiates a spread trade, the system has already prepared the calculation framework using: spread quantity = minimum of available quantities of individual legs, enabling immediate accurate execution without manual computation during the trading moment.
Data Source
AI summary
A trading application can receive price and quantity information for tradeable objects. The trading application can compute implied price and quantity information for spreads of the tradeable objects. Direct and indirect price and quantity information for the spreads can be displayed in a manner that shows the relationship with each other and with the price and quantity information for the tradeable objects.