Hybrid trading system for concurrently trading securities or derivatives through both electronic and open-outcry trading mechanisms

• US 20040215538A1
• Filed: 04/24/2003
• Published: 10/28/2004
• Est. Priority Date: 04/24/2003
• Status: Active Grant

• Current Assignee: Cboe Exchange, Inc. (Cboe Global Markets, Inc.)
• Original Assignee: Chicago Board Options Exchange Incorporated (Cboe Global Markets, Inc.)
• Inventors: Carone, Anthony J., Tilly, Edward T., Smith, Eileen C., Montesano, Anthony, Kipnes, Stuart J., Esposito, Mark A.
• Granted Patent: US 7,613,650 B2
• Time in Patent Office: Days
• US Class Current: 705/35
• 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

Abstract

A system and method of allocating orders in an exchange configured for trading by a combination of electronic and open-outcry trading mechanisms is provided. One method includes permitting multiple quotes to be disseminated to the market, but limiting market making to only those entities having a physical presence on the floor of the exchange. Methods of enhancing the hybrid electronic and open-outcry exchange also include automatically eliminating crossed quotes and locked quotes while permitting certain orders to trade against locked quotes.

Claims

1. A method of allocating orders for the purchase or sale of securities or derivatives in an exchange configured for trading securities or derivatives by a combination of electronic and open-outcry trading mechanisms, the method comprising:

comparing an incoming order to orders maintained in an electronic database;

matching and executing the incoming electronic order against an order resting on the electronic database if the order resting on the electronic book is from a public participant;

determining an allocation percentage of any remainder of the incoming electronic order among market participants having one of a quote and an order matching a price of the incoming electronic order by calculating a participation component and a pro rata component for each market participant; and

allocating the remainder of the electronic order by multiplying the determined allocation percentage for each respective market participant by the remainder.

2. The method of claim 1, wherein the participation component is the same for all market participants.

3. The method of claim 1, wherein the steps of determining the allocation percentage and allocating the remainder of the electronic order are calculated according to the relation:

4. The method of claim 1 wherein the market participants comprise of in-crowd market participants.

5. The method of claim 1, wherein all market participants comprising a particular category of market participant comprise a single market participant for purposes of determining the allocation.

6. The method of claim 5, wherein the particular category of market participant comprises in-crowd non-market maker broker/dealers.

7. A method of trading derivatives in an exchange having both real-time screen-based trading and open-outcry trading capabilities for a derivative, the method comprising:

receiving electronic orders for derivatives;

allocating a portion of the electronic orders for immediate execution if the portion of the electronic order qualifies for immediate execution according to a first order routing rule;

allocating a portion of the electronic orders to a trading floor for open-outcry trading if the portion of the electronic order qualifies for open-outcry trading according to a second order routing rule;

placing any remaining portion of the electronic orders in an electronic order book after the allocation of electronic orders for immediate execution and open-outcry trading; and

concurrently permitting a plurality of market makers for a particular product to generate quotes for dissemination only if the market maker is a person physically present on trading floor of the exchange.

8. The method of claim 7 wherein market makers permitted to disseminate quotes may disseminate quotes by entering a quote electronically into an exchange electronic quoting device.

9. The method of claim 8 wherein market makers permitted to disseminate quotes may also disseminate a quote by public outcry on the trading floor of the exchange in response to a request for a quote.

10. The method of claim 7, further comprising allowing a broker/dealer physically present on the trading floor to place electronic orders for immediate execution while denying access to placing electronic orders for immediate execution to any broker/dealer not physically present on the trading floor.

11. The method of claim 7, further comprising sending an electronic order from an ICM to the electronic order book if the ICM order did not immediately execute while sending an electronic order from a non-ICM directly to the trading floor if the non-ICM order did not immediately execute.

12. The method of claim 7, wherein the exchange manages a plurality of classes of derivatives, each of the plurality of classes of derivatives associated with an underlying asset.

13. The method of claim 12, wherein the underlying asset comprises one of a stock, a bond, a note, a future, an exchange traded fund, an index and a commodity.

14. A method of trading derivatives in an exchange comprising:

collecting orders for derivatives and placing them in an electronic database;

identifying a new quote from a first market participant, wherein one of a bid and an offer price in the new quote matches a respective price in an order in the electronic database from a public customer;

removing at least a portion of the order in the electronic database, delaying automatic execution of the quote and the order, and starting a timer;

reporting a market quote indicative of execution of the at least a portion of the order while delaying automatic execution;

receiving a second quote from a second market participant after receiving the new quote or order from the first market participant and before an expiration of the timer, wherein the second quote or order matches the respective price of the public customer order in the electronic database; and

allocating the order between the first and second in-crowd market participant, wherein the order is not executed until expiration of the timer.

15. The method of claim 14, wherein the timer expires in a fixed period of time.

16. The method of claim 15, wherein delaying automatic execution comprises delaying allocation of the portion of the order.

17. The method of claim 15, wherein the fixed period of time is one second.

18. The method of claim 14, wherein a quantity of the order is less than a sum of the quantities of the new quote or order from the first market participant and the second quote or order from the second market participant, whereby each of the first and second market participants execute only a portion of their respective quote quantities.

19. The method of claim 14, wherein the first market participant and the second market participant are in-crowd market participants, wherein each in-crowd market participant is a person physically present on a trading floor of the exchange.

20. A method of trading derivatives in an exchange comprising:

detecting a locked quote of a first market maker and a second market maker at an electronic trade engine;

delaying automatic execution of the locked quote and initiating a delay timer;

disseminating the locked quote to the exchange and permitting execution of orders against the locked quote; and

notifying the first and second market makers of the locked quote after a notification period.

21. The method of claim 20, wherein permitting execution of orders against the locked quote comprises permitting only non-ICM orders to trade against the locked quote.

22. The method of claim 21, wherein the non-ICM orders comprise public customer orders.

23. The method of claim 20, wherein the first and second market makers comprise in-crowd market participants having a physical presence on a floor of the exchange.

24. The method of claim 20, further comprising detecting a crossed quote between the first and second market makers and widening a quote spread of one of the first and second market makers to lock with a quote of the other of the first and the second market makers.

25. The method of claim 24, wherein widening a quote of one of the first and second market makers comprises widening a later of two quotes to arrive at the electronic trade engine.