Tracking Liquidity Order for Internal Execution
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Solution Overview
Problem
In the current marketplace, traders face disadvantages when orders are routed to another market center, as the exposed order prices can move quickly, leading to potential fills being missed, and liquidity providers are hesitant to participate in large orders that could sweep their reserves. There is a need for an order type that intercepts orders destined for routing while preventing large incoming orders from sweeping liquidity provider reserves.
Innovation Solution
A market center implements a Tracking Liquidity Order with a hidden price and size component, automatically priced based on the national best bid and offer, which executes incoming orders if they do not exceed the size of the tracking order, thereby providing a fill of last resort and preventing routing.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If orders are routed to another market center for execution, then execution can occur at the national best bid or offer, but the order price is exposed and may move quickly causing missed fills and loss of liquidity
Solution Approach 1:
The market center preemptively posts a tracking liquidity order at the NBBO before incoming orders arrive. This preliminary action ensures liquidity is already in place and ready to execute incoming orders immediately, preventing the need to route orders elsewhere and eliminating the exposure time problem
2Productivity
If liquidity providers post displayed orders to increase liquidity, then more orders can be executed internally, but large incoming orders can sweep through and deplete the liquidity provider's reserves
Solution Approach 1:
The tracking liquidity order has differentiated properties: it displays a limited size to the market but has hidden additional size available. This local quality differentiation allows small orders to execute against the displayed portion while protecting the hidden reserves from being swept by large orders
Solution Approach 2:
The order structure is asymmetric with two distinct components: a displayed size visible to the market and a hidden size concealed from incoming orders. This asymmetry creates different execution behaviors for different order sizes, protecting liquidity while enabling internal fills
3Quantity of substance
If the tracking liquidity order displays its full size, then more liquidity is visible to attract orders, but large incoming orders will execute against the full displayed size depleting reserves
Solution Approach 1:
The tracking liquidity order presents different quantities to different situations: a limited displayed size to the market and a larger hidden size for actual execution. This local quality approach displays sufficient liquidity to attract orders while protecting reserves from being swept
Data Source
AI summary
A tracking liquidity order and related market center and process are disclosed which allow posting market centers (e.g. exchanges) to fill routable, smaller orders that would have otherwise routed off the posting market center. Such tracking liquidity orders increase the liquidity of that posting market center and allow it to execute more orders internally, without having to route them to an away market center.