The US Patent Office has awarded Green Key Technologies a patent for the design of its OTC liquidity allocation process called Decline Ratio Matching.
Within Green Key’s Block Pool, a quote management platform used by OTC derivative participants, brokers are able to rank traders in the matching algorithm according to performance metrics such as their “decline ratio” by dragging them up or down in a GUI.
“The problem with indicative markets is the no obligation-optionality embedded into each market maker quote. Since quotes are not the same as firm orders, brokers are often probed with indications from traders searching for real liquidity only to have the trader decline should their quote be elected for a deal,” says Anthony Tassone, chief executive officer for Green Key Technologies.
To provide brokers with the tools for correcting this behaviour, Green Key Technologies offers the ability to change the allocation algorithm, specifically the user ranking, which prioritises how liquidity gets allocated. Within the Block Pool, brokers are able to see the historical number of times a trader accepted a deal versus the number of times they declined. Each trading firm is then assigned a “decline ratio” which can then be used to dynamically adjust their queue position up and down the order book relative to other trading firm’s decline ratios. Liquidity is therefore allocated to those firms with the highest probability of accepting the deal.
"Decline ratio allocation is a smart order router for OTC brokers that increases the integrity of their liquidity by firming up quotes,” says Tassone. “Voice brokers are already doing this over the phone. They know who is likely to flake and who is not. We have just quantified and automated the process and are thrilled the USPTO agrees it’s unique and novel.”
The patented liquidity allocation process was integrated into The Block Pool by Stockholm based trading systems vendor Baymarkets.
“Decline Ratio allocation is extremely interesting to OTC Brokers,” says Peter Fredriksson, CEO for Baymarkets. We have many brokers in various asset classes as clients and users of our trading platform Edge, the base for Block Pool. We believe the decline ratio algorithm has the potential to revolutionise OTC trading.”