The Sell, Bid Bumps & Buy [SB³] algorithm uses two mathematical calculations to regulate efficient, and smooth, trading in volume. The SB³ algorithm injects simple ingenuity into the practical issues of operating an efficient Exchange. The components of the algorithm are:
- Sell
- Buy
- Bid Bumps
Sell
Originators want a simple, fast, efficient and most importantly: reliable source of alternative working capital. This can only be achieved in one of two ways, either by having:
- sufficient deposits ‘waiting’ to be approved and lent (by a bank, for example)
- committed funds that are delivered automatically, subject to meeting specific criteria
As Credebt Exchange® is not a deposit taker or lender, it can only achieve the second alternative if it has the requisite funds committed for automatic delivery. One requisite component for the success of Credebt Exchange® relies on its ability to control the Sell (i.e. the Originator offer) price. The Sell price Minimum Offer stop setting is controlled from the Back Office.
Buy
Investors, provided with choice, will naturally ‘rush to quality’, meaning that they will always seek Investment Grade [IG] with the highest yields, first. This causes a trade imbalance where medium and low IG yields force ‘heavy discounts’ onto Originators. Together, these result in Originators’ Sell price erosion to unacceptable levels and ultimately, may destroy the Exchange business proposition.
To prevent this, the Exchange must focus and adequately deliver on the Investors’ primary requirements for yield and capital protection. During the negotiation of the Buy rate with the Retail Investors/intermediaries, they commit to automated trading in the Revolving Market. This confirmation occurs during the Investor signup process where the acceptance of automated trading, at the negotiated Buy rate, and is activated using the “I Agree” button. The second requisite component for the success of Credebt Exchange® is achieved by its ability to control the Investor bid and Buy price. The Buy price is then automatically manipulated by the two Bid Bump components of the SB³ algorithm.
Bumps
Investor automated, positive or negative, bidding adjustments, or Bid ‘Bumps’, occur using two variables in the SB³ algorithm, namely the:
- CDP Fixed Variable
- Order Floating Variable
CDP Fixed Variable
Credit Default Protection [CDP] is the Credebt Exchange® trade name for credit insurance. Organisations like AIG provide credit insurance to thousands of companies. Like Credebt Exchange®, their risk exposure is to the Debtor. OngThe AIG OnRisk insurance policy, written specifically Credebt Exchange® Master Agreement, provides CDP to Retail Investors on the Exchange. In the event that any Debtor fails to Settle (i.e. pay in full) their ETR, AIG pays 90% of the Face Value of the ETR.
When an Investor buys an ETR, they pay the Purchase Price (i.e. a discounted amount) of the Face Value. The Purchase Price is calculated as follows:
Purchase Price = Face Value
1+((180/360) x (Buy Price x 12)))
On average, the Purchase Price will be about 90.000% of the ETR Face Value. In such an example, if an ETR fails to Settle, the Investor’s risk exposure would be 0.000%. Therefore, to completely eliminate the Investor’s risk exposure, the Buy Price must be increased by a CDP Fixed Variable percentage to ‘fill the gap’. The CDP Fixed Variable increase is the first Bid Bump.
Order Floating Variable
There is no sure method of predicting what ETR value a Originator will post to the Trade Floor. Equally, there is no practical and efficient method of automatically matching the total value of any single Investor’s funds to the exact same and equal value of a collection of ETR†. To maintain the negotiated Investor return for a fixed period the ‘gap’, created between their purchased ETR and the total value of their fund, must be eliminated. As ETR Settle and new ETR are purchased, this gap will frequently fluctuate throughout the fixed period. Each specific Investor will have a different and changing percentage that is called the Order Floating Variable.
SB³ Algorithm Result
The unpredictability of the Order Floating Variable creates a true random number. Its unpredictability is combined with the CDP Fixed Variable to produce a single SB³ algorithm result. This truly random figure is then used to create a truly random set of multiple, automated Investor Bids that:
- creates volatility and/or liquidity on the Exchange;
- prevents reverse engineering for price derivation;
- drives the ‘best Buy price’ towards Originators;
- ensures no Originator Offer is left without a Bid;
- maintains Investor yield at all times;
- mitigates Investor risk; and
- enables institutional Investors to manually trade the volatility