DERIVATIVES TRADING METHODS THAT USE A VARIABLE ORDER PRICE

• US 20090265267A1
• Filed: 07/02/2009
• Published: 10/22/2009
• Est. Priority Date: 03/10/2003
• Status: Active Grant

• Current Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Original Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Inventors: Salvadori, David, Thiruthuvadoss, Shanthi, Johnston, Scott, Farrell, James W., Falck, John, Ariathurai, Arjuna, Troxel, Charlie JR.
• Granted Patent: US 9,911,157 B2
• Time in Patent Office: Days
• US Class Current: 705/37
• 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 for an exchange to handle variable derivative product order prices are disclosed. The price of a derivative product order (bid or offer) is updated based on changes in the price of a related underlying product. Price determination variable(s), such as delta and gamma, are used to determine the price of the order. The exchange may periodically recalculate the price without requiring the trader to transmit additional information to the exchange.

Claims

1. A method of dynamically determining a price for an order for a derivative product at an exchange, comprising:

(a) receiving from a trader at an exchange a variable priced order for a derivative product, where the variable priced order comprises an original order price and a formula for updating the order price as a function of a change in an underlying product price and the formula includes values for a delta variable and a gamma variable; and

(b) in response to a change in the underlying product price, utilizing the formula at the exchange to update the variable priced order price without further input from the trader.

2. The method of claim 1 further comprising:

(c) periodically determining a price for the variable priced order based on the formula and a more recent price for the underlying product.

3. The method of claim 1, further including:

(c) executing a trade that includes the variable priced order.

4. The method of claim 3 further including:

(d) executing a hedge transaction at the time of executing the trade.

5. The method of claim 4, wherein the hedge transaction comprises buying or selling an underlying derivative.

6. The method of claim 5, wherein (d) includes locating a bid or offer for the underlying derivative.

7. The method of claim 4, wherein information for the hedge transaction is included in the variable priced order.

8. The method of claim 7, wherein (d) comprises executing a hedge transaction at an exchange other than the exchange used to process the variable derivative product order.

9. The method of claim 4, wherein the hedge transaction comprises a fill or kill transaction.

10. The method of claim 4, wherein the hedge transaction comprises a fill and kill transaction.

11. The method of claim 1, wherein the formula is supplied by the exchange.

12. A computer-readable medium containing computer-executable instructions for causing an exchange computer device to perform the steps comprising:

(a) receiving from a trader at an exchange a variable priced order for a derivative product, where the variable priced order comprises an original order price and a formula for updating the order price as a function of a change in an underlying product price and the formula includes values for a delta variable and a gamma variable; and

(b) in response to a change in the underlying product price, utilizing the formula at the exchange to update the variable priced order price without further input from the trader.

13. A method of determining a price for a product having an associated underlying product, comprising:

(a) receiving at an exchange an order for the product, the order having an order price and a formula for updating the order price according to changes in a price for the underlying product, the formula being based on values for a delta variable and a gamma variable; and

(b) in response to a change in the underlying product price, updating the order price according to the received formula.

14. The method of claim 13, further comprising:

(c) periodically determining a value of the order price according to the formula and an updated price for the underlying product.

15. The method of claim 13, further comprising:

(c) matching a trade for the order.

16. The method of claim 15, further including:

(d) executing a hedge transaction with the time matching of the trade.

17. The method of claim 16, wherein the hedge transaction comprises transacting in an underlying derivative.

18. The method of claim 16, wherein information for the hedge transaction is included in the variable priced order.