Binary options on an organized exchange and the systems and methods for trading the same

• US 20050165669A1
• Filed: 12/21/2004
• Published: 07/28/2005
• Est. Priority Date: 01/22/2004
• Status: Active Grant

• Current Assignee: NYSE American LLC (Intercontinental Exchange, Inc.)
• Original Assignee: NYSE American LLC (Intercontinental Exchange, Inc.)
• Inventors: Ebner, Scott R., Montanaro, Donato A., Masciale, Christopher P., Burns, Jeffrey P., Bickford, Michael T.
• Granted Patent: US 8,738,499 B2
• Time in Patent Office: Days
• US Class Current: 705/37
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange

Abstract

The invention relates to financial systems and methods for trading fixed return options on secondary markets such as stock exchanges. A financial system of the invention includes both an electronic order delivery and execution system and/or an on-floor trading auction, configured to provide an exchange-traded environment. The financial system also includes at least one fixed return option or binary option traded through an exchange'"'"'s order delivery and execution system or on-floor trading auction, whereby such trading environment provides an open market. The system of the invention makes the trading of fixed return options or binary options possible via a unique use of the existing symbology schemes for standardized (non-binary) options, such that “Finish High” options are processed as calls, and “Finish Low” options are processed as puts, enabling these newly standardized binary options to be both recognized and accepted as standardized option contracts by existing trading, clearance, margin and settlement systems, while also enabling these options to be differentiated from traditional standardized options, and appropriately segregated for different treatment than the typical standardized option forms. The system employs a novel method for calculating the closing settlement value for securities underlying fixed return options or binary options in order to maintain a fair and orderly trading environment for these instruments on an organized exchange.

Claims

1. A method comprising:

listing and trading a fixed return option in standardized form on an organized exchange, and

clearing and settling the fixed return option using the same systems used on the exchange to trade, clear and settle standardized, non-binary options.

2. The method of claim 1, further comprising:

assigning symbols to the fixed return option that comply with the symbol conventions of standard exchange-traded options.

3. The method of claim 2, further comprising:

processing transactions involving the fixed return option using existing trading, clearance, margin, and settlement systems based on the symbols assigned to the fixed return option.

4. The method of claim 3, further comprising:

calculating the closing settlement value of a security underlying the fixed return option using a volume weighted average price of the security.

5. The method of claim 4, wherein the volume weighted average price of the security is calculated over a pre-determined time period on the last regular trading day prior to expiration.

6. The method of claim 1, wherein a multiplier code for the fixed return option provides information about the fixed return option for the systems used on the exchange to clear and settle standardized, non-binary options.

7. A system for trading a fixed return option, comprising:

an electronic order delivery and execution system in an exchange-trading environment, wherein the same electronic order delivery and execution system used to execute transactions in and deliver the fixed return option is used to execute transactions in and deliver standard, non-binary options.

8. The system of claim 7, wherein the system includes means for assigning symbols to the fixed return option that comply with the symbol conventions of standard exchange-traded options.

9. The system of claim 8, wherein the system further comprises means for processing transactions involving the fixed return option using existing trading, clearance, margin, and settlement systems based on the symbols assigned to the fixed return option.

10. The system of claim 9, further comprising means for calculating the closing settlement value of a security underlying the fixed return option using a volume weighted average price of the security.

11. The system of claim 7, wherein the fixed return option is traded through an on-floor auction.

12. The system of claim 11, wherein the system includes means for assigning symbols to the fixed return option that comply with the symbol conventions of standard exchange-traded options.

13. The system of claim 12, wherein the system further comprises means for processing transactions involving the fixed return option using existing trading, clearance, margin, and settlement systems based on the symbols assigned to the fixed return option.

14. The system of claim 13, further comprising means for calculating the closing settlement value of a security underlying the fixed return option using a volume weighted average price of the security.

15. The system of claim 7, wherein a multiplier code for the fixed return option provides information about the fixed return option for the systems used on the exchange to clear and settle standardized, non-binary options.

16. A computer program product for listing fixed return options on an exchange, comprising instructions for assigning symbols to the fixed return option that comply with the symbol conventions of standard exchange-traded options.

17. The computer program product of claim 16, wherein the symbols provide sufficient information for existing trading, clearance, margin, and settlement systems to process transactions involving the fixed return option based on the symbols assigned by the computer program product to the fixed return option.

18. The computer program product of claim 16, further comprising a second computer program product that computes a closing settlement value of a security underlying the fixed return option using a volume weighted average price of the security.

19. The computer program product of claim 18, wherein the second computer program product includes means for inputting data from an exchange comprising the number of shares of the underlying security and the price of the underlying security for a predetermined amount of time before market close.

20. The computer program product of claim 16, further comprising an instruction for assigning a multiplier code for the fixed return option that provides information about the fixed return option for the systems used on the exchange to clear and settle standardized, non-binary options.