Yield-Based Trading System Using Neural Networks for Risk Hedging
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Solution Overview
Problem
The existing financial instrument trading systems face inefficiencies in managing interest rate-based derivatives, particularly in OTC markets, due to complex convexity issues and lack of transparency, which hinders effective trading and risk management, especially for smaller firms and in compliance with regulatory requirements.
Innovation Solution
The SECURE MULTI-SERVER INTEREST RATE BASED INSTRUMENT TRADING SYSTEM utilizes an artificial neural network with multiple layers to facilitate trading in round units of forward risk, eliminating the need for fixed notional values, allowing for transparent risk management and efficient transactions by linking trades to yield-based conventions, and enabling settlement through Treasury Auctions.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If traditional OTC derivatives trading systems are used, then trading volume and market coverage are maintained, but computational complexity and operational costs increase due to convexity calculations
Solution Approach 1:
The patent transforms the trading system from using traditional notional value parameters to using yield-based parameters (basis points). This parameter change eliminates the need for complex convexity calculations while maintaining trading functionality, as yield movements directly correlate with price changes in a linear manner.
Solution Approach 2:
The patent extracts and removes the convexity calculation component from the trading system. By focusing solely on yield-based trading without attempting to model or calculate convexity effects, the system simplifies computational requirements while capturing the essential trading dynamics.
2Adaptability or versatility
If fixed notional values are used in contracts, then contract standardization is achieved, but flexibility in risk management and hedging is reduced
Solution Approach 1:
The patent introduces dynamic contract sizing based on yield movements rather than fixed notional values. Contracts can be adjusted in basis points to match the actual risk exposure, allowing the contract structure to adapt dynamically to changing market conditions and risk requirements.
Solution Approach 2:
The patent changes the fundamental parameter from fixed notional value to variable yield-based sizing. This allows contract values to flexibly respond to market conditions while maintaining standardization through the use of common yield metrics and basis point increments.
3Measurement precision
If complex yield-to-price calculations are performed, then pricing accuracy is improved, but trading speed and execution efficiency decrease
Solution Approach 1:
The patent replaces the mechanical yield-to-price calculation process with a direct yield-based pricing mechanism. Instead of converting yields to prices through complex iterative calculations, the system trades directly in yield terms, eliminating the computational burden while maintaining pricing accuracy.
Solution Approach 2:
The patent changes the pricing parameter from price-based to yield-based. This fundamental parameter change eliminates the need for yield-to-price conversions, allowing for immediate and accurate pricing decisions without iterative calculations, thereby significantly improving trading speed.
4Reliability
If traditional OTC trading practices are maintained, then market liquidity is preserved, but transparency and regulatory compliance are reduced
Solution Approach 1:
The patent changes the reporting parameter from notional value to yield-based metrics. This transformation enhances transparency by using standardized yield measurements that are easier to understand, compare, and regulate, while maintaining full market liquidity through the preservation of trading functionality.
Data Source
AI summary
The SECURE MULTI-SERVER INTEREST RATE BASED INSTRUMENT TRADING SYSTEM AND METHODS OF INCREASING EFFICIENCY THEREOF AND ASSOCIATED INTEREST RATE BASED FINANCIAL INSTRUMENT (“IRFI”) provides efficient, secure instrument transactions. The IRFI provides increased trading system security and efficiency for an interest-rate based instrument exchange utilizing a server-based trading platform. The IRFI receives a user selection of a contract including associated characteristic parameters. The IRFI receives user-selected number of contracts to trade associated with a basis point for the contract. An artificial neural network, including at least one input layer, a hidden layer and an output layer, can determine a risk hedging amount based on the basis point for the contract and the selected number of contracts to cover a risk in an auction. The IRFI receives pricing data associated with an auction system, the pricing data including settlement yield and delivery price and determines a delivery amount for the contract.