Variable Maker-Taker Pricing Model for Exchange Trading Systems
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Solution Overview
Problem
Traditional trading systems face challenges in attracting and retaining participants due to inefficiencies in quote management and risk exposure, particularly in electronic exchanges where rapid response times can lead to adverse risk for market makers and limited liquidity provision capabilities.
Innovation Solution
A system and method for implementing a variable maker-taker pricing model that allows market participants to choose their rebate rates, enabling efficient and transparent dissemination of transaction costs and providing opportunities for price improvement by associating marked orders with varying rebate amounts and executing trades based on these indications.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Speed
If electronic trading mechanisms are used to achieve rapid response times and efficient order execution, then trading speed and information dissemination are improved, but market makers are exposed to increased unwanted risk due to communication delays and rapid market movements
Solution Approach 1:
The patent applies parameter changes by introducing variable rebate rates that adjust based on market conditions and order characteristics. This allows the exchange to dynamically modify economic parameters (rebate amounts) to compensate market makers for risk taken during rapid electronic trading, thereby maintaining trading speed while managing risk exposure
Solution Approach 2:
The system implements dynamics by allowing rebate rates to vary rather than remaining fixed. The rebate structure becomes dynamic, adjusting in real-time to reflect changing market volatility, liquidity conditions, and individual market participant risk profiles, enabling the system to adapt to rapid market movements
2Ease of operation
If fixed pricing models are used for maker-taker fees, then pricing simplicity is maintained, but the exchange cannot effectively attract and retain different types of market participants with varying liquidity needs and risk tolerances
Solution Approach 1:
The patent transforms the static pricing model into a dynamic one where rebate rates can adjust based on multiple factors including market conditions, participant type, and liquidity provision levels. This dynamic approach maintains operational simplicity through automated calculation while dramatically improving adaptability to different participant needs
Solution Approach 2:
The system applies local quality by allowing different rebate rates for different market participants, order types, and liquidity conditions rather than applying a uniform rate. This enables tailored pricing for specific participants or situations while maintaining overall system simplicity through standardized rules
3Reliability
If market makers reduce quote sizes to reduce risk in rapid electronic trading, then risk exposure is decreased, but liquidity provision capability is reduced
Solution Approach 1:
The patent changes the economic parameters by offering variable rebates that compensate market makers for the risk associated with larger quote sizes. This allows market makers to maintain or increase liquidity provision while being compensated for the additional risk through adjusted rebate parameters
Data Source
AI summary
A method is described for providing one of a plurality of maker-taker pricing models to a system connected with the exchange system. The method includes the steps of an exchange server receiving from a first market participant of the exchange a marked order at the exchange connected to a database, the marked order marked with an indication of an expected rebate amount for trading orders; associating the marked order with an order from a second market participant of the exchange stored in a database configured to receive and store orders having varying rebate amounts according to the expected rebate amount; and executing the marked order according to the indication of an expected rebate amount. An exchange system for accessing at least one maker-taker pricing model for executing a trade on an exchange is also disclosed.