Method and system for providing an automated auction for internalization and complex orders in a hybrid trading system

• US 20060106713A1
• Filed: 10/11/2005
• Published: 05/18/2006
• 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: Smith, Eileen C., Montesano, Anthony, Kipnes, Stuart J., Gazis, James, Carone, Anthony J., Tilly, Edward
• Granted Patent: US 7,676,421 B2
• Time in Patent Office: Days
• US Class Current: 705/37
• CPC Class Codes: G06Q 30/08 Auctions
• 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

A method of providing an automated auction for internalization for the purchase or sale of securities or derivatives in an exchange is disclosed. The method may include receiving an order at an electronic trade engine, disseminating a request for price message to at least one user in response to receiving the order, receiving a one-sided response message representative of a participant-type in response to the request for price message, selecting an allocation algorithm from a plurality of allocation algorithms, initiating the selected allocation algorithm and allocating the order according to the participant-type upon termination of the selected auction. The system may include an electronic trading engine configured to disseminate an auction message in response to an order, a database of allocation algorithms, and a trade processor for initiating an auction according the one of the allocation algorithms and terminating the auction upon defined early termination events.

Claims

1. A method of providing an automated auction for internalization for the purchase or sale of securities or derivatives in an exchange configured for trading securities or derivatives, the method comprising:

receiving an order at an electronic trade engine;

disseminating a request for price message from the electronic trade engine to at least one user in response to receiving the order;

receiving a one-sided response message representative of a participant-type at the electronic trade engine in response to the request for price message from the at least one user;

selecting an allocation algorithm from a plurality of allocation algorithms, each allocation algorithm representative of an auction-type and having at least one starting price associated therewith;

initiating the selected allocation algorithm, wherein the auction occurs for a period between M and N seconds; and

allocating the order according to the participant-type upon termination of the selected auction.

2. The method according to claim 1, wherein the request for price message includes at least one of a minimum price data, side data, size of the order data or contingency data.

3. The method according to claim 1, wherein the auction type is a complex order auction.

4. The method according to claim 1, wherein the auction commences substantially instantaneously upon receipt of the one-sided response message.

5. The method according to claim 3, wherein the at least one starting price is a price equal to the better of an exchange spread market, a customer limit price or a limit price on any resting spread orders.

6. The method according to claim 4, wherein the at least one starting price is a price equal to the better of the national best bid or offer, a customer limit price or a firm limit price.

7. The method according to claim 4, wherein the at least one starting price is a price equal to the better of one tick better than the national best bid or offer, a customer limit price or a firm limit price.

8. The method according to claim 1, wherein the at least one starting price is a price equal to the better of the best bid or offer or national best bid or offer prevailing across multiple markets for a security or derivative.

9. The method according to claim 1, wherein the one-sided response message comprises multiple prices.

10. The method according to claim 1, wherein the participant-type is selected from the group consisting of customers, market makers, firms and brokers.

11. The method according to claim 1, wherein the order is further allocated based on the number of participants and the size each participant represents.

12. The method according to claim 3, wherein the complex order auction is configurable to allow or disallow at least one spread type.

13. The method according to claim 12, wherein the at least one spread type is selected from the group consisting of vertical spread, calendar spread, diagonal spread, combo spread, butterfly spread, box spread, straddle, strangle, gut strangles, and ratio spread.

14. The method according to claim 1, wherein the order is marked for processing in an internalization auction.

15. A method of auctioning complex 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:

receiving a complex order at an electronic trade engine;

adding a top-of-the-spread market to the complex order;

verifying the complex order qualifies for auction;

disseminating a request for price message from the electronic trade engine to at least one user;

receiving a two-sided response message comprising a participant-type at the electronic trade engine in response to the request for price message from the at least one user;

selecting a starting price for the auction, the starting price equal to the better of an exchange market spread, a customer limit price or a limit price on any resting spread order;

initiating the auction substantially instantaneously upon receipt of the two-sided response message, wherein the auction occurs for a period between M and N seconds; and

allocating the complex order based on participant-type priority.

16. The method according to claim 15, wherein the participant-type priority is in a sequence of:

(a) quoters in legs that can fill the order in ratio;

(b) customers at a best spread market; and

(c) request for price responses and non-customers at the best spread market.

17. A method for providing an automated auction for the purchase or sale of securities or derivatives in an exchange configured for trading securities or derivatives, the method comprising:

receiving an order at an electronic trade engine;

disseminating an auction message to all market makers quoting a class in response to receiving the order;

initiating an auction for the order when the size from a market maker is sufficient to fulfill a firm quote obligation;

prohibiting the market maker quoters in a series from moving quotes on the side being auctioned; and

wherein the auction terminates prior to an auction expiration upon an occurrence of an early termination event.

18. The automated auction system according to claim 17, wherein the early termination event is an incoming quote or order that locks or crosses a displayed market.

19. The automated auction system according to claim 17, wherein the early termination event is an opposite side order tradable against the auctioned order and equal to or greater than the size of the auctioned order.

20. The automated auction system according to claim 17, wherein the early termination event is a same side marketable order.

21. The method according to claim 17, wherein the order is marked for processing in the auction.

22. A method of providing an automated auction for complex orders for the purchase or sale of securities or derivatives in an exchange configured for trading securities or derivatives, the method comprising:

receiving an order at an electronic trade engine;

disseminating a request for price message from the electronic trade engine to at least one user in response to receiving the order;

receiving a two-sided response message comprising a participant-type at the electronic trade engine in response to the request for price message from the at least one user;

selecting an allocation algorithm from a plurality of allocation algorithms, each allocation algorithm representative of an auction-type and having at least one starting price associated therewith;

initiating the selected allocation algorithm, wherein the auction occurs for a period between M and N seconds; and

allocating the order according to the participant-type upon termination of the selected auction.

23. The method according to claim 22, wherein the request for price message includes at least one of a minimum price data, side data, size of the order data or contingency data.

24. The method according to claim 22, wherein the auction-type is a complex order auction.

25. The method according to claim 22, wherein the auction-type is an internalization auction.

26. The method according to claim 24, wherein the at least one starting price is a price equal to the better of an exchange spread market, a customer limit price or a limit price on any resting spread orders.

27. The method according to claim 25, wherein the at least one starting price is a price equal to the better of the national best bid or offer, a customer limit price or a firm limit price.

28. The method according to claim 25, wherein the at least one starting price is a price equal to the better of one tick better than the national best bid or offer, a customer limit price or a firm limit price.

29. The method according to claim 22, wherein the at least one starting price is a price equal to the better of the best bid or offer or national best bid or offer prevailing across multiple markets for a security or derivative.

30. The method according to claim 22, wherein the one-sided response message comprises multiple prices.

31. The method according to claim 22, wherein the participant type is selected from the group consisting of customers, market makers, firms and brokers.

32. The method according to claim 22, wherein the order is further allocated based on the number of participants and the size each participant represents.

33. The method according to claim 24, wherein the complex order auction is configurable to allow or disallow at least one spread type.

34. The method according to claim 33, wherein the at least one spread type is selected from the group consisting of vertical spread, calendar spread, diagonal spread, combo spread, butterfly spread, box spread, straddle, strangle, gut strangles, and ratio spread.

35. The method according to claim 22, wherein the order is marked for processing in the auction.

36. A method for automatically matching orders in an automated auction for the purchase or sale of securities or derivatives in an exchange configured for trading securities or derivatives, the method comprising:

marking an order by a market participant for automatic matching by an electronic trade engine;

automatically matching a best price quoted by another participant by the electronic trade engine in response to a request for price message; and

wherein the electronic trade engine steps-up the marked order to correspond to a step-up amount of the another participant.

37. An automated auction system for the purchase or sale of securities or derivatives in an exchange configured for trading securities or derivatives comprising:

an electronic trade engine for receiving an order and disseminating an auction message to all market makers quoting a class in response to receiving the order;

a database in communication with the electronic trade engine for storing a plurality of allocation algorithms;

a trade processor in communication with the database for analyzing and executing orders according to an allocation algorithm selected from the plurality of allocation algorithms, the trade processor initiating an auction for the order when a quote size from a market maker is sufficient to fulfill a firm quote obligation and prohibiting the market maker quoters in a series from moving quotes on the side being auctioned; and

wherein the auction terminates prior to an auction expiration upon an occurrence of an early termination event.

38. The automated auction system according to claim 37, wherein the early termination event is an incoming quote or order that locks or crosses a displayed market.

39. The automated auction system according to claim 37, wherein the early termination event is an opposite side order tradable against the auctioned order and equal to or greater than the size of the auctioned order.

40. The automated auction system according to claim 37, wherein the early termination event is a same side marketable order.

41. The automated auction system according to claim 37, wherein the order is marked for processing in the auction.