Computer implemented and/or assisted methods and systems for providing rapid execution of, for example, listed options contracts using toxicity and/or profit analyzers

• US 20060080196A1
• Filed: 11/19/2004
• Published: 04/13/2006
• Est. Priority Date: 10/08/2004
• Status: Active Grant

• Current Assignee: Citadel Enterprise IP
• Original Assignee: Citadel LLC (Cumulus Media Incorporated)
• Inventors: Andresen, Matthew, Griffin, Kenneth C.
• Granted Patent: US 7,958,039 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
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

Methods and systems are provided which enable options broker-dealers to execute a listed options contract trade order while simultaneously eliminating (or at least reducing) exposure to the negative consequences associated with toxic (or likely toxic) trades in the options market. By using toxicity and/or profit analyzers, for example, to detect, track and respond to the level of toxic (or likely toxic) orders present in an option contract order flow, a broker dealer can reduce the level of risk inherent in serving as a counter-party in listed options transactions, and inherent in offering a rapid execution guarantee. Various alternative embodiments are also disclosed.

Claims

1. A method of executing an order for a listed options contract comprising at least one of the sequential, sequence independent and non-sequential steps of:

receiving the order by a broker-dealer including order characteristics;

determining at least one toxicity quotient responsive to the order characteristics;

analyzing the order to determine eligibility for execution using the at least one toxicity quotient; and

if it is determined that the order is eligible for execution, sending the order by the broker-dealer to an options exchange for execution responsive to the eligibility for execution as determined by the analyzing the order using the at least one toxicity quotient.

2. The method of claim 1, further comprising the step of measuring at least one of order, market condition, and execution parameters of at least one order to be executed, and correlating the measured parameters with the outcome of trade to determine the at least one toxicity quotient.

3. The method of claim 1, wherein the step of analyzing further comprises the step of reviewing one or more parameters of the order relating to at least one of size of the order, frequency of order submission, identity of the option, market source of national-best-bid-or-offer (NBBO), order size relative to NBBO size, liquidity of the option contract in the market, liquidity of the underlying equity, current NBBO bid-offer spread, and option class of the order.

4. The method of claim 1, wherein the determining at least one toxicity quotient responsive to the order characteristics comprises generating the at least one toxicity quotient by the broker-dealer.

5. The method of claim 1, further comprising the step of receiving the at least one toxicity quotient by the broker-dealer.

6. The method of claim 1, further comprising the step of either rejecting the order or executing a modified version of the order based on execution eligibility.

7. The method of claim 6, wherein the modified version of the order comprises at least one of a modified order size and a modified option identity.

8. The method of claim 1, wherein the at least one toxicity is modified following its generation.

9. The method of claim 1, further comprising the steps of:

receiving the order from an order flow provider; and

sending the order from the order flow provider to the broker-dealer.

10. The method of claim 9, further comprising the step of sending a toxicity report to the order flow provider based at least in part on the execution eligibility determination.

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

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

13. The method of claim 1, further comprising the step of monitoring the outcome of the trade when the order is sent to the exchange for execution.

14. The method of claim 13, wherein the step of monitoring comprises logging the bid/offer spread at the time the order is filled.

15. The method of claim 13, further comprising the step of implementing corrective action based at least in part on the step of monitoring the outcome of the trade.

16. The method of claim 15, wherein the step of taking corrective action comprises modifying payment for the order received by the broker-dealer.

17. The method of claim 15, wherein the step of taking corrective action comprises modifying payment for future order flow received by the broker-dealer.

18. The method of claim 15, wherein the step of taking corrective action comprises increasing the fee for the investor that placed the order received by the broker-dealer.

19. The method of claim 15, wherein the step of taking corrective action comprises increasing the fee for future orders submitted by the investor that placed the order received by the broker-dealer.

20. The method of claim 1, further comprising the step of determining conformance of the order responsive to a rule-set providing at least one rule used to implement the order execution.

21. The method of claim 1, further comprising the step 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.

22. The method of claim 21, 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.

23. The method of claim 21, wherein the broker-dealer is part of the REC.

24. The method of claim 23, wherein at least one of the plurality of market-makers is an affiliate of the broker-dealer.

25. The method of claim 21, wherein the REC further comprises one or more additional broker-dealers.

26. The method of claim 21, wherein the market-makers each operate on the same options exchange.

27. The method of claim 21, further comprising the step of analyzing the order to determine its eligibility for execution in accordance with a rapid execution guarantee.

28. The method of claim 27, further comprising the step of providing a rapid execution guarantee in connection with the order based at least in part on the step of analyzing the order to determine its eligibility for execution in accordance with a rapid execution guarantee.

29. The method of claim 28, wherein the rapid execution guarantee comprises at least one of a guaranteed, specified and predetermined execution price and/or at least one of a guaranteed, specified and predetermined timeframe.

30. The method of claim 27, wherein the step of providing a rapid execution guarantee comprises providing a guarantee to execute the order 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.

31. The method of claim 21, further comprising the step 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

32. The method of claim 31, further comprising the step of sending the order to an options exchange for execution based at least in part on the presence of a market-maker with step-up capability for the listed options contract on the exchange.

33. The method of claim 32, wherein the step-up capability of the market-maker present on the options exchange executes the order when the order is not automatically executed by an automatic execution system of the options exchange.

34. A method of executing an order for a listed options contract comprising at least one of the sequential, sequence independent and non-sequential steps of:

receiving the order by a broker-dealer;

sending the order by the broker-dealer to an options exchange for execution;

monitoring the outcome of the trade when the order is sent to the options exchange for execution; and

if it is determined that the completed trade is toxic, implementing a corrective action based at least in part on the step of monitoring the outcome of the trade.

35. A method of executing an order for a listed options contract comprising at least one of the sequential, sequence independent and non-sequential steps of:

receiving the order for a listed options contract by a broker-dealer;

determining conformance of the order for a listed options contract with a rule-set, wherein the rule-set is based at least in part on the measuring of at least one of order, market condition, and execution parameters of at least one order to be executed and correlating the measured parameters with the outcome of the trade; and

if it is determined that the order for a listed options contract conforms with the rule-set, sending the order for a listed options contract by the broker-dealer to an options exchange for execution.

36. The method of claim 35, further comprising the step of monitoring the outcome of the trade when the order for a listed options contract is sent to the exchange for execution.

37. The method of claim 36, further comprising the step of modifying the rule-set based on the step of monitoring the outcome of the trade.

38. The method of claim 35, further comprising modifying the rule-set based on market conditions.

39. The method of claim 35, further comprising the step of rejecting the order for a listed options contract based on the conformance determination.

40. The method of claim 35, further comprising the step of executing a modified version of the order for a listed options contract based on the conformance determination.

41. The method of claim 40, wherein the modified version of the order for a listed options contract comprises at least one of a modified order size and modified option identity.

42. The method of claim 35, further comprising the step of providing a rapid execution guarantee based on the conformance determination.

43. The method of claim 35, wherein the rule-set comprises at least one rule used to implement the execution of the order for a listed options contract.

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

means for receiving the order by a broker-dealer including order characteristics;

means for determining at least one toxicity quotient responsive to the order characteristics;

means for analyzing the order to determine eligibility for execution using the at least one toxicity quotient; and

means for sending the order by the broker-dealer, if it is determined that the order is eligible for execution, to an options exchange for execution responsive to the eligibility for execution as determined by the analyzing the order using the at least one toxicity quotient.

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

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

a processor determining at least one toxicity quotient responsive to the order characteristics;

an order analyzer analyzing the order to determine eligibility for execution using the at least one toxicity quotient; and

an order transmitter sending the order by the broker-dealer if it is determined that the order is eligible for execution to an options exchange for execution responsive to the eligibility for execution as determined by the analyzing the order using the at least one toxicity quotient.

46. The computer system of claim 45, wherein the computer system measures at least one of order, market condition, and execution parameters of at least one order to be executed, and correlating the measured parameters with the outcome of trade to determine the at least one toxicity quotient.

47. The computer system of claim 46, wherein the order analyzer reviews one or more parameters of the order relating to at least one of size of the order, frequency of order submission, identity of the option, market source of national-best-bid-or-offer (NBBO), order size relative to NBBO size, liquidity of the option contract in the market, liquidity of the underlying equity, current NBBO bid-offer spread, and option class of the order.

48. The computer system of claim 47, wherein the processor determines at least one toxicity quotient responsive to the order characteristics comprising generating the at least one toxicity quotient by the broker-dealer.

49. The computer system of claim 45, further comprising the step of either rejecting the order or executing a modified version of the order based on execution eligibility, and wherein the modified version of the order comprises at least one of a modified order size and a modified option identity.

50. The computer system of claim 45, wherein the computer system performs corrective action comprising at least one of:

modifying payment for the order received by the broker-dealer, modifying payment for future order flow received by the broker-dealer, increasing the fee for the investor that placed the order received by the broker-dealer, increasing the fee for future orders submitted by the investor that placed the order received by the broker-dealer.

51. The computer system of claim 45, wherein the computer system is used to form 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 wherein the order analyzer analyzes the order to determine its eligibility for execution in accordance with a rapid execution guarantee.

52. The computer system of claim 51, wherein the computer system provides a rapid execution guarantee in connection with the order based at least in part on analyzing the order to determine its eligibility for execution in accordance with a rapid execution guarantee, and wherein the rapid execution guarantee comprises at least one of a guaranteed, specified and predetermined execution price and/or at least one of a guaranteed, specified and predetermined timeframe.

53. The computer system of claim 45, wherein the processor processes 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 wherein the order is transmitted to an options exchange for execution based at least in part on the presence of a market-maker with step-up capability for the listed options contract on the exchange.