Derivatives trading methods that use a variable order price

• US 10,217,165 B2
• Filed: 01/22/2018
• Issued: 02/26/2019
• Est. Priority Date: 03/10/2003
• Status: Active Grant

• Current Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Original Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Inventors: Johnston, Scott, Falck, John, Troxel, Jr., Charlie, Farrell, James W., Thiruthuvadoss, Agnes Shanthi, Ariathurai, Arjuna, Salvadori, David
• Primary Examiner(s): Hamilton, Lalita M
• Application Number:
  US15/876,681
• Publication Number:
  US 20180144405A1
• Time in Patent Office: 400 Days
• Field of Search: 705 35, 705 36 R
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

Methods and systems for an exchange to handle variable derivative product order prices are disclosed. The price of a derivative product order (bid or offer) is updated based on changes in the price of a related underlying product. Price determination variable(s), such as delta and gamma, are used to determine the price of the order. The exchange may periodically recalculate the price without requiring the trader to transmit additional information to the exchange.

Claims

1. A computer system comprising:

a computer device configured to transmit an order for a derivative product, wherein the order has a price that is a function of a value of an underlying financial instrument and at least one price determination variable;

an exchange computer system programmed with computer-executable instructions to perform the steps comprising;

receiving the order from the computer device;

receiving a designation of a formula for determining an updated price;

determining, based on the order and the formula, book listings for current bids and offers for the derivative product;

transmitting, to the computer device, the determined book listings;

detecting a change in the value of the underlying financial instrument;

after detecting the change in the underlying financial instrument price, utilizing the formula to determine, based in part on the determined book listings, an updated value for the price of the order without further input from the computer device; and

executing a trade that includes the received order.

2. The computer system of claim 1, wherein the at least one price determination variable represents a volatility.

3. The computer system of claim 2, wherein the at least one price determination variable represents a volatility of an underlying financial instrument.

4. The computer system of claim 3, wherein the at least one price determination variable represents a rate of change in a financial instrument'"'"'s theoretical value for a one-unit change in volatility of an underlying financial instrument.

5. The computer system of claim 1, wherein the exchange computer system is further programmed with computer-executable instructions to perform the step comprising:

executing a hedge transaction at the time of executing the trade.

6. The computer system of claim 5, wherein the hedge transaction comprises buying or selling a derivative financial instrument.

7. The computer system of claim 6, wherein information for the hedge transaction is included in the received order.

8. A method comprising:

receiving, by an exchange computer system and from a computing device, an order for a derivative product, wherein the order has a price that is a function of a value of an underlying financial instrument and at least one price determination variable;

receiving a designation of a formula for determining an updated price;

determining, by the exchange computer system and based on the order and the formula, book listings for current bids and offers for the derivative;

transmitting, to the computing device, the determined book listings;

detecting a change in the value of the underlying financial instrument price;

after detecting the change in the underlying financial instrument price, utilizing the formula to determine, by the exchange computer system and based in part on the determined book listings, an updated value for the price of the order without further input from the computing device; and

executing, by the exchange computer system, a trade that includes the received order.

9. The method of claim 8, wherein the at least one price determination variable represents a volatility.

10. The method of claim 9, wherein the at least one price determination variable represents a volatility of an underlying financial instrument.

11. The method of claim 10, wherein the at least one price determination variable represents a rate of change in a financial instrument'"'"'s theoretical value for a one-unit change in volatility of an underlying financial instrument.

12. The method of claim 8, further including:

executing a hedge transaction at the time of executing the trade.

13. The method of claim 12 wherein the hedge transaction comprises buying or selling a derivative financial instrument.

14. The method of claim 12, wherein information for the hedge transaction is included in the received order.

15. The method of claim 12, wherein executing the hedge transaction further comprises:

executing the hedge transaction at an exchange other than the exchange computer system.

16. The method of claim 8, wherein the formula is supplied by an exchange.

17. A non-transitory computer-readable medium containing computer-executable instructions that when executed cause an exchange computer system to perform the steps comprising:

receiving, from a computer device, an order for a derivative product, wherein the order has a price that is a function of a value of an underlying financial instrument and at least one price determination variable;

receiving a designation of a formula for determining an updated price;

determining, based on the order and the formula, book listings for current bids and offers for the derivative product;

detecting a change in the value of the underlying financial instrument;

after detecting the change in the underlying financial instrument price, utilizing the formula to determine, based in part on the determined book listings, an updated value for the price of the order without further input from the computing device; and

executing a trade that includes the received order.

18. The non-transitory computer-readable medium of claim 17, wherein the at least one price determination variable represents a volatility.

19. The non-transitory computer-readable medium of claim 18, wherein the at least one price determination variable represents a volatility of an underlying financial instrument.

20. The non-transitory computer-readable medium of claim 19, wherein the at least one price determination variable represents a rate of change in a financial instrument'"'"'s theoretical value for a one-unit change in volatility of an underlying financial instrument.