Hybrid trading system for concurrently trading through both electronic and open-outcry trading mechanisms

• US 20060149659A1
• Filed: 11/30/2005
• Published: 07/06/2006
• 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: Tilly, Edward T., Smith, Eileen C., Montesano, Anthony, Kipnes, Stuart J., Esposito, Mark A., Carone, Anthony J.
• Granted Patent: US 7,552,083 B2
• Time in Patent Office: Days
• US Class Current: 705/37
• CPC Class Codes: G06Q 30/08 Auctions
• 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

A system and method of allocating orders in an exchange configured for trading by a combination of electronic and open-outcry trading mechanisms is provided. One method includes permitting multiple quotes to be disseminated to the market, and providing market making rights of varying degrees to entities having a physical presence on the floor of the exchange and entities remotely located away from the trading floor. The system includes a trade engine configured for receiving orders from market makers on and away from the trading floor. The system also includes executable instructions for allocating to designated primary market makers a portion of an incoming order remaining after first trading against public customer orders.

Claims

1. A method of allocating 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 an incoming electronic order at a trade engine;

matching and executing the incoming electronic order against an order resting on an electronic book if the order resting on the electronic book is from a public customer;

receiving at least one remote electronic quote at the trade engine from at least one market participant positioned at a location remote from a floor of the exchange;

determining a first allocation percentage of a remainder of the incoming electronic order for each eligible market participant, each eligible market participant having one of a quote or an order matching a price of the incoming electronic order, wherein the first allocation percentage comprises a participation component and a pro rata component; and

allocating to each eligible market participant a greater of the first allocation percentage or a predetermined second allocation percentage of the remainder of the incoming electronic order.

2. The method according to claim 1, wherein the at least one market participant positioned at a location remote from the floor is a designated primary market maker.

3. The method according to claim 1, wherein the participation component is the same for all eligible market participants.

4. The method according to claim 1, wherein determining the first allocation percentage comprises calculating the first allocation percentage according to the relation:

$\mathrm{Allocation}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{percentage}=\left[\frac{\frac{1}{\text{\hspace{1em}<br><br>}<br><br>\begin{array}{c}\mathrm{number}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{of}\\ \mathrm{participants}\end{array}}+\frac{\text{\hspace{1em}<br><br>}<br><br>\begin{array}{c}\mathrm{participant}\\ \mathrm{quote}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{size}\end{array}}{\text{\hspace{1em}<br><br>}<br><br>\begin{array}{c}\sum <br><br>\mathrm{participant}\\ \mathrm{quote}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{sizes}\end{array}}}{2}\right]$

wherein the participation component and the pro rata component are equally weighted.

5. The method according to claim 1 wherein the market participants comprise in-crowd market participants and remotely located market participants.

6. The method of claim 1, wherein all eligible market participants comprising a particular category of market participant comprise a single eligible market participant for purposes of determining the allocation.

7. The method of claim 6, wherein the particular category of market participant comprises in-crowd non-market maker broker/dealers.

8. A method of allocating 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 an incoming electronic order at a trade engine;

matching and executing the incoming electronic order against an order resting on an electronic book if the order resting on the electronic book is from a public customer;

receiving at least one remote electronic quote at the trade engine from at least one designated primary market maker positioned at a location remote from a floor of the exchange and at least one quote from a designated primary market maker positioned on the floor of the exchange;

determining an allocation percentage of a remainder of the incoming electronic order for allocation among designated primary market makers based on a total number of market makers at a matching price of the incoming electronic order, wherein the total number of market makers at the matching price corresponds to a predetermined collective allocation percentage for the designated primary market makers; and

allocating the remainder of the electronic order among the designated primary market makers by multiplying the predetermined collective allocation percentage by the remainder and dividing a result by the total number of designated primary market makers.

9. The method according to claim 8, wherein the total number of market makers at the matching price is one and the corresponding predetermined collective allocation percentage is 50 percent.

10. The method according to claim 8, wherein the total number of market makers at the matching price is two and the corresponding predetermined collective allocation percentage is 40 percent.

11. The method according to claim 8, wherein the total number of market makers at the matching price is three and the corresponding predetermined collective allocation percentage is 30 percent.

12. The method according to claim 8, wherein the step of allocating the remainder of the incoming electronic order among the designated primary market makers further comprises multiplying the remainder allocated to a remote designated primary market maker by a fixed percentage.

13. The method according to claim 12, wherein the remainder is further divided equally among remote designated primary market makers at the matching price.

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

an electronic trade engine configured for receiving incoming orders generated by a market maker physically present at a floor of an exchange or a market maker at a location remote to the floor of the exchange;

an electronic book configured for storing the incoming orders received by the electronic trade engine;

a database comprising an allocation algorithm, the database in communication with the electronic trade engine; and

a trade processor in communication with the database for analyzing and executing orders according to an allocation algorithm selected from the database, the trade processor comprising;

a first set of instructions for determining a total number of market makers at a matching price of the incoming electronic order;

a second set of instructions for determining a collective allocation percentage for the designated primary market makers based on the total number of market makers at the matching price; and

a third set of instructions for allocating among the designated primary market makers a portion of the incoming electronic order remaining after execution against any public customer orders based on the collective allocation percentage.

15. The automated exchange system of claim 14, wherein the third set of instructions further comprises instructions for multiplying the portion by the collective allocation percentage and then dividing a result by a total number of designated primary market makers

16. The automated exchange system according to claim 14, wherein the third set of instructions further comprises multiplying the remainder allocated to a remote designated primary market maker by a fixed percentage.

17. The method according to claim 15, wherein the remainder is further divided equally among the number of remote designated primary market makers at the price matching the electronic order.