System And Method For Creating And Trading A Digital Derivative Investment Instrument

• US 20080082436A1
• Filed: 06/28/2007
• Published: 04/03/2008
• Est. Priority Date: 05/04/2005
• Status: Abandoned Application

• Current Assignee: Catherine Shalen, Joanne Moffic-Silver
• Original Assignee: Catherine Shalen, Joanne Moffic-Silver
• Inventors: Moffic-Silver, Joanne, Shalen, Catherine
• Application Number:
  US11/770,705
• Publication Number:
  US 20080082436A1
• Time in Patent Office: Days
• US Class Current: 705/36R
• 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 and system for creating and trading an investment instrument based on an initial public offering of an entity is disclosed that allows investors to take risk positions relative to the occurrence or non-occurrence of a contingent binary event. The contingent binary event will have one of two possible outcomes. In a digital derivative contract, a long investor agrees to pay a short investor a contract amount in return for the short investor agreeing to pay the long investor one of two different settlement amounts depending on the outcome as the contingent binary event. Typically, one settlement amount will be zero and the other will be an amount greater than the digital derivative contract price.

Claims

1. A method of trading a financial instrument comprising:

identifying an initial public offering as a basis of a digital option contract;

establishing the digital option contract in which an investor will receive one of a first settlement amount and a second settlement depending on whether a strike price of the digital option contract is less than, equal to, or greater than a share value of the initial public offering at expiration of the digital option contract;

determining whether the strike price of the digital option contract is less than, equal to, or greater than the share value of the initial public offering at expiration of the digital option contract; and

settling the digital option contract according to whether the strike price of the digital option contract is less than, equal to, or greater than the share value of the initial public offering at expiration of the digital option contract.

2. The method according to claim 1, wherein the digital option contract comprises a digital call option contract and wherein the method further comprises;

allocating the first settlement amount to the investor if the strike price of the digital call option contract is less than or equal to the share value of the initial public offering at expiration of the digital call option contract; and

allocating the second settlement amount if the strike price of the digital call option contract is greater than the share value of the initial public offering at expiration of the digital call option contract.

3. The method according to claim 2, wherein the first settlement amount is a non-zero value and the second settlement amount is zero.

4. The method according to claim 1, wherein the digital option contract comprises a digital put option contract, and wherein the method further comprises:

allocating the first settlement amount to the investor if the strike price of the digital call option contract is greater than or equal to the share value of the initial public offering at expiration of the digital put option contract; and

allocating the second settlement amount to the investor if the strike price of the digital call option contract is less than the share value of the initial public offering at expiration of the digital put option contract.

5. The method according to claim 4, wherein the first settlement amount is a non-zero value and the second settlement amount is zero.

6. A computer-readable medium comprising processor executable program instructions for executing the steps of:

identifying an entity subject to an initial public offering;

establishing a digital derivative contract in which an investor will receive one of a first settlement amount and a second settlement amount depending on whether a strike price of the digital derivative contract is less than, equal to, or greater than a share value of the initial public offering; and

settling the digital derivative contract according to whether the strike price of the digital derivative contract is less than, equal to, or greater than the share value of the initial public offering at expiration of the digital derivative contract.

7. The computer-readable medium of claim 6, wherein the digital option contract comprises a digital call option contract, the computer-readable medium further comprising processor executable instructions for:

allocating the first settlement amount to an investor if the strike price of the digital call option contract is less than or equal to the share value of the initial public offering at expiration of the digital call option contract; and

allocating the second settlement amount if the strike price of the digital call option contract is greater than the share value of the initial public offering at expiration of the digital call option contract.

8. The computer-readable medium of claim 6, further comprising processor executable instructions for allocating a non-zero value for the first settlement amount and a zero value for the second settlement amount.

9. The computer-readable medium of claim 6, wherein the digital option contract comprises a digital put option contract, the computer-readable medium further comprising processor executable instructions for:

allocating the first settlement amount to the investor if the strike price of the digital call option contract is greater than or equal to the share value of the initial public offering at expiration of the digital put option contract; and

allocating the second settlement amount to the investor if the strike price of the digital call option contract is less than the share value of the initial public offering at expiration of the digital put option contract.

10. The computer-readable medium according to claim 9, further comprising processor executable instructions for allocating a non-zero value for the first settlement amount and a zero value for the second settlement amount.

11. An exchange configured for trading a digital derivative investment instrument based on an underlying initial public offering share value by a combination of electronic and open-outcry trading mechanisms, comprising:

an interface for receiving an incoming order to purchase the digital derivative investment instrument based on the underlying initial public offering share value, the incoming order having a size and a payout value associated therewith;

a book memory for storing a plurality of previously received orders, the previously received orders each having a size and a payout value associated therewith;

a system memory for storing predefined condition parameters for at least one defined state corresponding to at least one potential outcome for the digital derivative investment instrument; and

a processor adapted to allocate orders among the plurality of previously received orders in the book memory based on the condition parameters, wherein the condition parameters include at least one parameter for identifying an occurrence of at least one defined state occurring before the expiration; and

the processor further adapted to calculate a zero payout value for orders having the at least one defined state that did not occur before an expiration of the digital derivative investment instrument based on the underlying initial public offering share value and a greater than zero payout value for orders having at least one defined state that did occur prior to the expiration of the digital derivative investment instrument based on the underlying initial public offering share value.

12. The exchange of claim 11, wherein the system memory further comprises allocating parameters for allocating orders among market participants.

13. The exchange of claim 12, wherein the processor is further configured to allocate the previously received orders based on the allocating parameters in the system memory and wherein the allocating parameters include parameters for allocating preferentially against orders with larger size.

14. The exchange of claim 13, wherein the digital derivative investment instrument based on the underlying initial public offering share value comprises a digital option contract.

15. The exchange of claim 13, wherein the digital derivative investment instrument based on the underlying initial public offering share value comprises a digital futures contract.

16. The exchange of claim 13, further comprising a clearing system in communication with the processor, the clearing system adapted to settle the digital derivative investment instrument based on the underlying initial public offering share value.