Computer implemented and/or assisted methods and systems for providing guaranteed, specified and/or predetermined execution prices in a guaranteed, specified and/or predetermined timeframe on the purchase or sale of, for example, listed options

• US 20060069636A1
• Filed: 09/26/2005
• Published: 03/30/2006
• Est. Priority Date: 09/27/2004
• Status: Active Grant

• Current Assignee: Citadel Enterprise IP
• Original Assignee: Citadel Investment Group LLC
• Inventors: Andresen, Matthew, Griffin, Kenneth C.
• Granted Patent: US 7,603,309 B2
• Time in Patent Office: Days
• US Class Current: 705/37
• 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 are provided which enable options broker-dealers to guarantee execution of an option trade order within a specified time window. By providing means to quantify and mitigate the effects of several factors which contribute to options market inefficiency (e.g., market structure, regulatory constraints, and “market misbehavior”), these methods and systems eliminate or at least reduce the level of broker-dealer risk inherent in offering an execution speed guarantee, while optionally simultaneously providing better execution quality for investors.

Claims

1. A method of executing an order for a listed options contract at at least one of a guaranteed order execution price and a guaranteed order execution timeframe using a computer, the method at least one of implemented and assisted by the computer and comprising at least one of the sequential, sequence independent and non-sequential steps of:

receiving the order by a first broker-dealer;

processing the order by a first routing system to determine a presence of a first affiliate market-maker of the first broker-dealer with step-up capability for the listed options contract on a first options exchange;

when the first affiliate market-maker is present, sending the order by the first broker-dealer to the first options exchange for execution in accordance with at least one of a first guaranteed order execution price and a first guaranteed order execution timeframe; and

when the first affiliate market-maker is not present, sending the order to a second broker-dealer for execution in accordance with at least one of a second guaranteed order execution price and a second guaranteed order execution timeframe upon a determination by at least one of the first routing system and a second routing system that there is a second affiliate market-maker of the second broker-dealer with step-up capability for the listed options contract on at least one of the first options exchange and a second options exchange.

2. The method of claim 1, wherein the step-up capability of the first affiliate market-maker comprises the first affiliate market-maker executing the order when the order is not automatically executed by the first options exchange.

3. The method of claim 2, further comprising the step of using an electronic system with an automatic step-up feature of the first affiliate market-maker.

4. The method of claim 1, wherein the step-up capability of the second affiliate market-maker comprises the second affiliate market-maker executing the order when the order is not automatically executed by the second options exchange.

5. The method of claim 4, further comprising the step of using an electronic system with an automatic step-up feature of the second affiliate market-maker.

6. The method of claim 1, wherein the first market-maker is obligated to step up and fill the order when the order is not automatically executed by the first options exchange.

7. The method of claim 6, wherein the obligation is a contractual obligation.

8. The method of claim 1, wherein the first market-maker is willing to step up and fill the order when the order is not automatically executed by the first options exchange.

9. The method of claim 1, wherein the market-making firm of the first market-maker is owned by the same legal entity as the first broker-dealer.

10. The method of claim 1, wherein the market-making firm of the first market-maker is at least partially under the control of the same legal entity as the first broker-dealer.

11. The method of claim 1, wherein the second market-maker is obligated to step up and fill the order when the order is not automatically executed by the first or second options exchange.

12. The method of claim 11, wherein the obligation is a contractual obligation.

13. The method of claim 1, wherein the second market-maker is willing to step up and fill the order when the order is not automatically executed by the first or second options exchange.

14. The method of claim 1, wherein the market-making firm of the second market-maker is owned by the same legal entity as the second broker-dealer.

15. The method of claim 1, wherein the market-making firm of the second market-maker is at least partially under the control of the same legal entity as the second broker-dealer.

16. The method of claim 1, further comprising sending the order by the second broker-dealer to one of the first and second options exchanges when the order is sent to the second broker-dealer for execution.

17. The method of claim 1, wherein the first affiliate market-maker is a specialist of the listed options contract on the first options exchange.

18. The method of claim 1, wherein the second affiliate market—

is a specialist of the listed options contract on at least one of the first and second options exchanges.

19. The method of claim 1, further comprising the steps of receiving the order from an order flow provider, and sending the order by the order flow provider to the first broker-dealer.

20. The method of claim 1, further comprising the step of placing the order by an investor.

21. The method of claim 1, further comprising the step of placing the order by an order flow provider.

22. The method of claim 1, further comprising the step of rejecting the order if the order is determined to be ineligible for execution in accordance with at least one of the first guaranteed order execution price and the first guaranteed order execution timeframe or ineligible for execution in accordance with at least one of the second guaranteed order execution price and the second guaranteed order execution timeframe.

23. The method of claim 1, further comprising the step of executing a modified version of the order in accordance with one of the first and second guaranteed, specified and/or predetermined execution prices and timeframes.

24. The method of claim 1, wherein the first routing system is associated with the first broker-dealer and the second routing system is associated with the second broker-dealer.

25. The method of claim 24, wherein at least one of the first and second routing systems are respectively owned by the same entity as the first broker-dealer and the second broker-dealer.

26. The method of claim 24, wherein at least one of the first and second routing systems are respectively under the control of the same entity as the first broker-dealer and the second broker-dealer.

27. The method of claim 1, further comprising the step of executing the order using at least one of an automatic execution system of the exchange to which the order is sent and an electronic system with an automatic step-up feature that is associated with the first or second affiliate market-maker.

28. The method of claim 1, further comprising the step of executing the order within a guaranteed timeframe of at least one of one second and two seconds.

29. The method of claim 1, wherein the first broker-dealer, the second broker-dealer, and at least one of the first and second affiliate market-makers are part of a rapid execution consortium (REC).

30. The method of claim 29, wherein the REC comprises one or more additional broker-dealers.

31. The method of claim 1, further comprising the step of analyzing the order to determine its eligibility for execution in accordance with the first or second guaranteed order execution price and/or timeframe.

32. The method of claim 31, wherein the step of analyzing comprises determining whether the parameters of the order fall within a rapid option order execution envelope (ROOEE).

33. The method of claim 31, wherein the step of analyzing comprises the step of reviewing one or more parameters of the order relating to at least one of the theoretical value of the options contract, the frequency of order submission, the NBBO market source, the NBBO size, the liquidity of the options contract in the market, the liquidity of the underlying equity or equities, the implied spread (NBBO), one or more of the price sensitivity measures associated with the options contract, the implied option contract price volatility, the size of the order, the identity of the options contract, and the class of the options contract.

34. The method of claim 31, wherein the order is subject to execution according to the first or second guaranteed order execution price and/or timeframe only after it is determined to be eligible.

35. The method of claim 31, wherein the order is executed without being subject to either of the first and second guaranteed order execution prices and/or timeframes based on the eligibility determination.

36. The method of claim 31, further comprising the step of rejecting the order based on the eligibility determination.

37. The method of claim 31, further comprising the step of executing a modified version of the order in accordance with one of the first and second guaranteed order execution prices and/or timeframes based on the eligibility determination.

38. The method of claim 37, wherein the modified version of the order comprises at least one of a modified order size and modified option identity.

39. The method of claim 31, further comprising the step of executing the order in accordance with at least one of a third guaranteed order execution price and a third guaranteed order execution timeframe based on the eligibility determination.

40. The method of claim 1, further comprising the step of determining conformance of the order with a rule-set.

41. The method of claim 40, wherein the order is subject to execution according to the first or second guaranteed order execution price and/or timeframe only after it is determined to be in conformance with the rule-set.

42. The method of claim 40, wherein the order is executed without being subject to either of the first and second guaranteed order execution prices and/or timeframes based on the conformance determination.

43. The method of claim 40, further comprising the step of rejecting the order based on the conformance determination.

44. The method of claim 40, further comprising the step of executing a modified version of the order in accordance with the first or second guaranteed order execution price and/or timeframe based on the conformance determination.

45. The method of claim 44, wherein the modified version of the order comprises at least one of a modified order size and modified option identity.

46. The method of claim 40, further comprising the step of executing the order in accordance with at least one of a third guaranteed order execution price and a third guaranteed order execution timeframe based on the conformance determination.

47. A method of executing an order for a listed options contract at at least one of a guaranteed, specified and predetermined execution price and within at least one of a guaranteed, specified and predetermined timeframe using a computer, the method at least one of implemented and assisted by the computer and comprising at least one of the sequential, sequence independent and non-sequential steps of:

processing the order by a routing system to determine which of a plurality of market-makers has step-up capability for the listed options contract on at least one options exchange; and

sending the order to an options exchange on which a market-maker with step-up capability for the listed options contract operates for execution in accordance with a first guaranteed, specified and/or predetermined execution price and timeframe.

48. The method of claim 47, wherein at least two of the plurality of market-makers operate on the same options exchange.

49. A method of executing an order for a listed options contract at at least one of a guaranteed, specified and predetermined execution price and within at least one of a guaranteed, specified and predetermined timeframe using a computer, the method at least one of implemented and assisted by the computer and comprising at least one of the sequential, sequence independent and non-sequential steps of:

forming a rapid execution consortium (REC) that comprises a plurality of options market-makers, wherein the members of the REC collectively have step-up capability for a substantial portion of all listed options classes; and

sending the order to an options exchange for execution in accordance with a first guaranteed, specified and/or predetermined execution price and timeframe based at least in part on the presence of a market-maker with step-up capability for the listed options contract on the exchange.

50. The method of claim 49, wherein the members of the REC collectively have step-up capability for at least one of 30%, 50% and 75% of all listed options classes.

51. The method of claim 49, wherein the REC further comprises one or more broker-dealers.

52. The method of claim 49, wherein at least one of the plurality of market-makers is an affiliate of at least one of the broker-dealers.

53. The method of claim 49, wherein the market-makers each operate on the same options exchange.

54. A method of executing an order for a listed options contract at at least one of a guaranteed, specified and predetermined execution price and within at least one of a guaranteed, specified and predetermined timeframe using a computer, the method at least one of implemented and assisted by the computer and comprising at least one of the sequential, sequence independent and non-sequential steps of:

processing the order by a first routing system to determine which of a plurality of option broker-dealers of a rapid execution consortium (REC) has an affiliate market-maker with step-up capability for the listed options contract on at least one options exchange;

providing the order to one of the option broker-dealers of the REC that is determined to have an affiliate that is a market-maker with step-up capability for the listed options contract on at least one options exchange; and

sending the order to an exchange on which at least one affiliate market-maker with step-up capability for the listed options contract operates for execution in accordance with a guaranteed, specified and/or predetermined execution price and timeframe.

55. A method of executing an order for a listed options contract at at least one of a guaranteed, specified and predetermined execution price and/or within at least one of a guaranteed, specified and predetermined timeframe using a computer, the method at least one of implemented and assisted by the computer and comprising at least one of the sequential, sequence independent and non-sequential steps of:

receiving the order by a first broker-dealer;

processing the order by a first routing system to determine a presence of a first affiliate market-maker of the first broker-dealer with step-up capability for the listed options contract on a first options exchange;

when the first affiliate market-maker is present, sending the order by the first broker-dealer to the first options exchange for execution in accordance with at least one of a first guaranteed, specified and predetermined execution price and/or within at least one of a first guaranteed, specified and predetermined timeframe; and

when the first affiliate market-maker is not present, sending the order to a second broker-dealer for execution in accordance with at least one of a second guaranteed, specified and predetermined execution price and/or within at least one of a second guaranteed, specified and predetermined timeframe upon a determination by at least one of the first routing system and a second routing system that there is a second affiliate market-maker of the second broker-dealer with step-up capability for the listed options contract on at least one of the first options exchange and a second options exchange.

56. A computer system executing an order for a listed options contract, comprising:

means for receiving the order by a first broker-dealer;

means for processing the order by a first routing system to determine a presence of a first affiliate market-maker of the first broker-dealer with step-up capability for the listed options contract on a first options exchange;

means for sending the order by the first broker-dealer, if it is determined that the first affiliate market-maker is present, to the first options exchange for execution in accordance with at least one of a first guaranteed, specified and predetermined execution price and/or within at least one of a first guaranteed, specified and predetermined timeframe; and

means for sending the order to a second broker-dealer, if it is determined that the first affiliate market-maker is not present, for execution in accordance with at least one of a second guaranteed, specified and predetermined execution price and/or within at least one of a second guaranteed, specified and predetermined timeframe upon a determination by at least one of the first routing system and a second routing system that there is a second affiliate market-maker of the second broker-dealer with step-up capability for the listed options contract on at least one of the first options exchange and a second options exchange.

57. A computer system executing an order for a listed options contract, comprising:

an input device receiving the order by a first broker-dealer;

a first processor determining a presence of a first affiliate market-maker of the first broker-dealer with step-up capability for the listed options contract on a first options exchange; and

an order transmitter for sending the order by the first broker-dealer, if it is determined that the first affiliate market-maker is present, to the first options exchange for execution in accordance with at least one of a first guaranteed, specified and predetermined execution price and/or within at least one of a first guaranteed, specified and predetermined timeframe;

wherein, if it is determined that the first affiliate market-maker is not present, the order transmitter sends the order to a second broker-dealer for execution in accordance with at least one of a second guaranteed, specified and predetermined execution price and/or within at least one of a second guaranteed, specified and predetermined timeframe upon a determination by at least one of the first processor and a second processor that there is a second affiliate market-maker of the second broker-dealer with step-up capability for the listed options contract on at least one of the first options exchange and a second options exchange.