Trade Internalization Manager for Latency Reduction
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Solution Overview
Problem
In electronic trading systems, there is a need to efficiently internalize trade orders within a trading firm or financial institution to avoid exchange fees and latency, as many orders are not optimally matched within the exchange, leading to inefficiencies and additional communication delays.
Innovation Solution
A multicast system is implemented where trade orders are simultaneously transmitted to both an exchange and a trade internalization manager, allowing for internalization without additional latency, by comparing orders to identify matching contra-side trades and canceling or modifying exchange-listed orders to complete trades internally.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If trade orders are transmitted to an exchange for matching, then orders can be executed through external market liquidity, but exchange fees and communication latency increase trading costs and reduce speed
Solution Approach 1:
The patent extracts the trade matching function from the external exchange environment and relocates it to an internal matching engine within the financial institution. This allows the institution to capture internal crossing orders (orders from different departments or traders within the same firm) without submitting them to the exchange, thereby eliminating exchange communication latency and fees while maintaining efficient trade execution
Solution Approach 2:
The patent introduces an internal matching engine as an intermediary component between internal order sources and the external exchange. This matching engine acts as a mediator that first attempts to match internal orders against each other, and only routes unmatched orders to the exchange, thus reducing the volume of external communications and improving overall trade execution speed
2Adaptability or versatility
If all trade orders are submitted to the exchange, then external market liquidity is utilized, but exchange fees increase trading costs
Solution Approach 1:
The patent extracts internal crossing orders from the external exchange submission process and handles them internally through a dedicated matching engine. This separation allows the institution to maintain full market access capability for external orders while eliminating unnecessary exchange fees for internal trades by capturing and executing them within the firm's own trading infrastructure
Solution Approach 2:
The patent implements a self-service internal matching mechanism where the institution's own trading orders are automatically matched and executed against each other through an internal matching engine, without requiring external exchange intervention. This self-service approach eliminates exchange fees for internal trades while the exchange remains available as a backup for orders that cannot be internally matched
Data Source
AI summary
Methods and apparatus to internalize trade orders are described herein. An example method includes obtaining, via an internalization manager, a trade order communicated to an exchange. The trade order corresponds to a tradeable object offered at the exchange. The example method includes comparing, via the internalization manager, the trade order to one or more trade orders in an internalization order record to determine whether a matching contra-side trade order is included in the one or more trade orders in the internalization order record. The example method includes communicating, via the internalization manager, an order modification to the exchange if a matching contra-side trade order is included in the one or more trade orders in the internalization order record, and matching, via the internalization manager, if a matching contra-side trade order is included in the one or more trade orders in the internalization order record, the trade order to the matching contra-side trade order in the internalization order record.