User-defined Matching Rules Override Exchange Logic
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Solution Overview
Problem
Financial exchanges face challenges in achieving best-execution for price-takers due to limitations in traditional price-time matching algorithms, as they need to consider additional factors such as dealer rejection probabilities and credit lines, which are not observable by price-takers, leading to a need for user-defined matching algorithms that prioritize relevant factors for each participant.
Innovation Solution
The implementation of user-defined matching algorithms at electronic exchanges through an Application Programming Interface (API) that allows market participants to define rules for object matching, using programmable code to prioritize matches based on historical data and credit lines, enhancing fill rates and security by overriding default exchange rules.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If traditional price-time matching algorithms are used, then exchange security and integrity are maintained, but fill rates and best-execution optimization are limited
Solution Approach 1:
The matching system is segmented into multiple independent components: the exchange provides the matching framework and validation, while individual participants provide their own custom matching logic through user-defined rules code. This allows each participant to optimize their own fill rates without compromising overall system security.
Solution Approach 2:
Different matching strategies are applied locally to different participants based on their individual needs and preferences. Each participant can define custom rules that reflect their specific best-execution criteria, rather than applying a single uniform matching algorithm to all participants.
2Adaptability or versatility
If user-defined rules code is allowed, then participant control over match logic is enhanced, but exchange security and integrity may be compromised
Solution Approach 1:
The exchange acts as an intermediary that receives, validates, and executes user-defined rules code. The validation process ensures that participant-provided code meets security requirements and does not compromise exchange integrity, while still allowing full adaptability in matching strategies.
Solution Approach 2:
The system implements feedback through validation checks on user-defined rules code before execution. This feedback mechanism ensures that only secure and valid custom matching logic is deployed, maintaining exchange reliability while enabling participant flexibility.
3Loss of information
If pre-trade transparency is increased, then price-takers can observe more matching factors, but market efficiency and dealer discretion are reduced
Solution Approach 1:
The system extracts the information asymmetry problem by allowing the exchange to hold and utilize confidential information (such as dealer credit lines and rejection probabilities) that is not observable by price-takers. This extracted information is then used in the matching process through user-defined rules, maintaining market efficiency while enabling informed matching decisions.
Data Source
AI summary
User-defined matching of objects is disclosed in which an electronic exchange obtains and executes user-defined rules code that overrides default exchange program code for matching objects at the electronic exchange. The electronic exchange may provide an Application Programming Interface (“API”) that exposes various immutable fields that are used to match objects. The API may also include default program code that may be overridden by the user-defined rules code, which may be implemented as a class extension or interface executed by the electronic exchange.