Method and system for providing order routing to a virtual crowd in a hybrid trading system

• US 20060167789A1
• Filed: 12/29/2005
• Published: 07/27/2006
• 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., Carone, Anthony J.
• Granted Patent: US 7,653,588 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

A method of providing orders to a virtual trading crowd in an exchange prior to automatically linking the order to an away market is disclosed. The method may include receiving a marketable order for a security or derivative at the exchange, wherein the exchange has a price that differs from a national best bid or offer price, routing the marketable order to a trade engine, disseminating a request for price message to all market makers quoting a class in response to receiving the marketable order, the request for price message including a price equal to the national best bid or offer price, receiving a response message at the electronic trade engine in response to the request for price message from at least one market maker, initiating a quote trigger, wherein the quote trigger occurs for a period of N seconds, and allocating the order according to an allocation algorithm, wherein an order size of each market maker is capped to prevent inflation of an allocated portion of the order.

Claims

1. A method of providing orders to a virtual trading crowd in an exchange prior to automatically linking the order to an away market, the method comprising:

receiving a marketable order for a security or derivative at the exchange, wherein the exchange comprises a price for the security or derivative that differs from a national best bid or offer price;

routing the marketable order to a trade engine;

disseminating a request for price message to a plurality of market makers quoting a class;

receiving at least one response message at the electronic trade engine; and

initiating a quote trigger, wherein the quote trigger occurs for a period of N seconds.

2. The method according to claim 1, wherein the request for price message comprises a price equal to the national best bid or offer price.

3. The method according to claim 2, wherein the request for price message further comprises an order size.

4. The method according to claim 1, further comprising:

allocating the order to at least one market maker according to an allocation algorithm, wherein an order size of each market maker is capped to prevent inflation of an allocated portion of the order.

5. The method according to claim 4, wherein the allocation algorithm comprises a participation component and a pro rata component for each market maker sending a response message.

6. The method according to claim 5, wherein the allocated portion is the pro rata component.

7. The method according to claim 6, wherein the allocation algorithm comprises a relation:

$\mathrm{Participant}\text{'}"\text{'}"\text{'}<br><br>s<br><br>\text{\hspace{1em}<br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{allocation}<br><br>\text{\hspace{1em}<br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{of}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{incoming}<br><br>\text{\hspace{1em}<br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{order}=\mathrm{incoming}<br><br>\text{\hspace{1em}<br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{order}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{size}⨯<br><br>\left[\frac{\frac{1}{\mathrm{number}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{of}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{participants}}+\frac{\mathrm{participant}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{quote}<br><br>\text{\hspace{1em}<br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{size}}{\sum <br><br>\mathrm{participant}<br><br>\text{\hspace{1em}<br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{quote}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{sizes}}}{2}\right],$

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

8. A method of providing orders to a virtual trading crowd in an exchange prior to booking the order, the method comprising:

receiving an order at the exchange, wherein the exchange comprises a price that differs from a national best bid or offer price and wherein the order is not marketable upon receipt;

routing the order to a trade engine;

disseminating a request for price message to a plurality of market makers quoting a class;

receiving a response message at the electronic trade engine from at least one market maker;

initiating a quote trigger, wherein the quote trigger occurs for a period of N seconds; and

allocating the order to at least one of the at least one market maker according to an allocation algorithm, wherein an order size of each market maker is capped to prevent inflation of an allocated portion of the order.

9. The method according to claim 8, wherein the request for the price message comprises a price equal to the national best bid or offer price.

10. The method according to claim 9, wherein the request for the price message further comprises an order size.

11. The method according to claim 8, wherein the allocation algorithm comprises a participation component and a pro rata component for each market maker.

12. The method according to claim 11, wherein the allocated portion is the pro rata component

13. The method according to claim 11, wherein the allocation algorithm comprises a relation:

$\mathrm{Participant}\text{'}"\text{'}"\text{'}<br><br>s<br><br>\text{\hspace{1em}<br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{allocation}<br><br>\text{\hspace{1em}<br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{of}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{incoming}<br><br>\text{\hspace{1em}<br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{order}=\mathrm{incoming}<br><br>\text{\hspace{1em}<br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{order}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{size}⨯<br><br>\left[\frac{\frac{1}{\mathrm{number}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{of}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{participants}}+\frac{\mathrm{participant}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{quote}<br><br>\text{\hspace{1em}<br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{size}}{\sum <br><br>\mathrm{participant}<br><br>\text{\hspace{1em}<br><br>}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{quote}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{sizes}}}{2}\right]$

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

14. An automated system for providing orders to a virtual trading crowd in an exchange configured for trading securities or derivatives comprising:

an electronic trade engine operative to receive an order for a security or derivative at the exchange, wherein the exchange comprises a price for the security or derivative that differs from a national best bid or offer price, the trade engine further operative to disseminate a request for a price message to a plurality of market makers quoting a class in response to receiving the order;

an electronic book in communication with the electronic trade engine, the electronic book operative to store at least one order 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, the trade processor operative to analyze and execute orders according to the allocation algorithm selected from the database, the trade processor comprising a quote trigger that occurs for a period of N seconds.

15. The automated system of claim 14, wherein the request for the price message comprises a price equal to the national best bid or offer price.