Price improvement processor for electronic trading of financial instruments

• US 20040254804A1
• Filed: 10/30/2003
• Published: 12/16/2004
• Est. Priority Date: 10/30/2002
• Status: Active Grant

• Current Assignee: Box Options Market LLC
• Original Assignee: Boston Options Exchange Group LLC (TMX Group Limited)
• Inventors: Leibler, Ken, Peterffy, Thomas, Bertrand, Luc
• Granted Patent: US 7,941,364 B2
• Time in Patent Office: Days
• US Class Current: 705/1
• CPC Class Codes: G06Q 30/0601 Electronic shopping [e-shopping]
• CPC Class Codes: G06Q 30/08 Auctions
• CPC Class Codes: G06Q 40/03 Credit; Loans; Processing thereof
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange

Abstract

A price improvement processor to effectuate more rapid matching of bids and offers of financial instruments by conducting a rapid automated auction in which certain market participants may provide price improvement in increments that are finer than the prevailing standard minimum price variation and are provided a certain allocation as an incentive for such price improvements.

Claims

1. A processor for electronic trading of financial instruments comprising:

(a) a receiver for information messages from market participants that bid for purchase or offer for sale of a financial instrument, said receiver time-stamping received information messages;

(b) an electronic order book;

(c) an updater communicating with said receiver and said electronic order book for qualifying and parsing price, size and time-stamp bid or offer data from information messages received on said receiver and entering said parsed data on said electronic order book with priority tracked by instrument in price and time-stamp of a received and qualified message;

(d) a transmitter communicating with said electronic order book for display to market participants anonymous data entered on said electronic order book;

(e) a price improvement period timer communicating with said updater (i) initiated upon receipt by said receiver of an information message from a qualified market participant containing a bid or offer at or better than a preset price improvement over the best bid or offer prevailing across multiple markets for a particular instrument and (ii) terminated upon an elapsing of a preset price improvement period time less than a minute and commensurate with market risk; and

(f) a transaction executor communicating with said price improvement period timer and said electronic order book for allocating and executing upon said termination matches of bids or offers for said particular instrument, data for which are entered on said electronic order book, against market offers or bids in said order, subject to a partial time priority for said qualified market participant, and updating said electronic order book accordingly.

2. The processor of claim 1 wherein said best bid or offer prevailing across multiple markets is the best bid or offer on a national market.

3. The processor of claim 2 wherein said preset price improvement and increments in subsequent bids or offers during said price improvement are finer increments than those reported for best bids and offers on said national market.

4. The processor of claim 2 wherein said preset price improvement period is three seconds.

5. The processor of claim 2 wherein said qualified market participant is a non-market-maker broker-dealer and said qualified market participant receives time priority for forty percent by size of any remaining allocation at said qualified market participant'"'"'s best price.

6. The processor of claim 5 wherein a market maker bidding or offering at the national best bid or offer at the commencement of said price improvement period receives time priority for one-third by size of any remaining allocation at said qualified market participant'"'"'s best price after said qualified market participant'"'"'s allocation at that or better price.

7. A processor for automatic trading of equity option contracts comprising:

(a) a receiver for information messages from market participants that order bids for purchase or offers for sale of an equity option contract, said receiver time-stamping received information messages;

(b) an electronic order book;

(c) an updater communicating with said receiver and said electronic order book for qualifying and parsing price, size and time-stamp bid or offer data from information messages received on said receiver and entering said parsed data on said electronic order book with priority tracked by equity option contract in price and time-stamp of a received and qualified message;

(d) a transmitter communicating with said electronic order book for display to market participants anonymous data entered on said electronic order book;

(e) a price improvement period timer communicating with said updater (i) initiated upon receipt by said receiver of an information message from a qualified market participant containing a bid or offer at or better than a preset price improvement over the national best bid or offer for a particular equity option contract and (ii) terminated upon an elapsing of a preset price improvement period time of greater than zero and less than ten seconds; and

(f) a transaction executor communicating with said price improvement period timer and said electronic order book for allocating and executing upon said termination matches of bids and offers for said particular equity option contact, data for which are entered on said electronic order book, against market offers or bids in said order, subject to a partial time priority for said qualified market participant, and updating said electronic order book accordingly.

8. The processor of claim 7 wherein said qualified market participant is an order flow provider and said order flow provider receives time priority for forty percent by size of any remaining allocation at said order flow provider'"'"'s best price.

9. The processor of claim 8 wherein a market maker bidding or offering at the national best bid or offer at the commencement of said price improvement period receives time priority for one-third by size of any remaining allocation at said order flow provider'"'"'s best price after said order flow provider'"'"'s allocation at that or better price.

10. A computer program product for conducting a fast price improvement auction of financial instruments traded across national markets, said computer program product residing on a computer-readable medium comprising instructions for causing a computer to:

receive an order an order specifying the commencement of a price-improvement auction with better price than the prevailing price across national markets, commence and conduct an auction with a time duration of greater than zero and less than ten seconds where bids or offers are matched with contra market orders or bids according to an allocation at the best price first and within each price level by time of receipt, with a share of any allocation at the best price level received from a market participant commencing said price-improvement auction reserved to said market participant.

11. A process for electronic trading of financial instruments comprising the steps of:

(a) receiving an information message that bids for purchase of or offers for sale a financial instrument;

(b) entering on an electronic order book data parsed from said information message where said information message bids for purchase of or offers for sale a financial instrument at price at or better than a preset price improvement over the best national bid or offer;

(c) initiating a price improvement period timer upon receipt of the first said bid or offer at or better than said preset price improvement;

(d) receiving and information messages and entering according to steps (a) and (b) until the elapsing of a preset price improvement period time;

(e) allocating and executing, upon the said elapsing of said preset price improvement period time, matches of bids or offers for a particular equity option contract, data for which are entered on said electronic order book, in order of best bids or offers and earliest time of receipt at each price level, against market offers or bids, subject to a partial time priority for a qualified market participant from whom was received said information message initiating said price improvement period timer.

12. The process of claim 11 wherein said best bid or offer prevailing across multiple markets is the best bid or offer on a national market.

13. The process of claim 12 wherein said preset price improvement and increments in subsequent bids or offers during steps (a) and (b) are finer increments than those reported for best bids and offers on said national market.

14. The process of claim 13 wherein said preset price improvement period is three seconds.

15. The processor of claim 12 wherein said qualified market participant is a non-market-maker broker-dealer and said qualified market participant receives time priority for forty percent by size of any remaining allocation at said qualified market participant'"'"'s best price

16. The process of claim 15 wherein a market maker bidding or offering at the national best bid or offer at the commencement of said price improvement period receives time priority for one-third by size of any remaining allocation at said qualified market participant'"'"'s best price after said qualified market participant'"'"'s allocation at that or better price.

17. A process for automatic trading of equity option contracts comprising:

(a) receiving an information message that bids for purchase of or offers for sale an equity option contract;

(b) entering on an electronic order book data parsed from said information message where said information message bids for purchase of or offers for sale an equity option contract at price at or better than a preset price improvement over a bid or offer prevailing on a national market;

(c) initiating a price improvement period timer upon receipt of the first said bid or offer at or better than said preset price improvement;

(d) receiving and information messages and entering according to steps (a) and (b) until the elapsing of a preset price improvement period time of greater than zero and less than ten seconds;

(e) allocating and executing, upon the said elapsing of said preset price improvement period time, matches of bids or offers for a particular equity option contract data for which are entered on said electronic order book, in order of best bids or offers and earliest time of receipt at each price level, against market offers or bids, subject to a partial time priority for a qualified market participant from whom was received said information message initiating said price improvement period timer.

18. The process of claim 17 wherein said qualified market participant is an order flow provider and said order flow provider receives time priority for forty percent by size of any remaining allocation at said order flow provider'"'"'s best price.

19. The process of claim 18 wherein a market maker bidding or offering at the national best bid or offer at the commencement of said price improvement period receives time priority for one-third by size of any remaining allocation at said order flow provider'"'"'s best price after said order flow provider'"'"'s allocation at that or better price.

20. A method for conducting a fast price improvement auction of financial instruments traded across national markets comprising the steps of:

receiving an order an order from a qualified market participant specifying the commencement of a price-improvement auction with better price than the prevailing price across national markets;

commencing an auction with a time duration of greater than zero and less than ten seconds in which improved bids or offers are received; and

at the termination of said auction, mating with contra market orders or bids according to an allocation at the best price first and within each price level by time of receipt, with a share of any allocation remaining at the best price level of said market participant commencing said price-improvement auction reserved to said market participant.