Method and System for Trading Combinations of Financial Instruments

• US 20100017323A1
• Filed: 07/15/2009
• Published: 01/21/2010
• Est. Priority Date: 07/16/2008
• Status: Active Application

• Current Assignee: Jason A. Zimmerman
• Original Assignee: Carla Git Ying Wong
• Inventors: Zimmerman, Jason Arthur
• Application Number:
  US12/503,494
• Publication Number:
  US 20100017323A1
• 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
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

A method and system are provided for obtaining and matching single leg and multi-leg orders to trade combinations of financial instruments included in a set of two or more selected financial instruments. In preferred embodiments, orders are received during a selected time period and eligible orders are processed with a combinatorial matching algorithm that is not constrained by limit prices. All embodiments have the advantages that matched multi-leg orders can be executed with no bid/offer spread on any of their legs, there is no risk that some legs of a multi-leg order execute while others do not execute, and said embodiments can be implemented by selecting two or more existing financial instruments without requiring the creation of any special financial instrument representing a multi-leg strategy.

Claims

1. A computer-implemented method for trading combinations of financial instruments, said method comprising:

receiving, during a selected time period, combination orders to trade financial instruments;

storing each eligible received combination order, wherein a received combination order is eligible if it satisfies at least one selected condition, wherein said at least one selected condition includes the necessary condition that all financial instruments specified by the legs of an eligible order are in a set of two or more selected financial instruments; and

processing eligible orders or expanded eligible orders with a combinatorial matching algorithm (CMA), wherein said processing begins at a selected time.

2. The method of claim 1, wherein the genus of said CMA is greater than two.

3. The method of claim 1, wherein said CMA is based on a search of a combinatorial tree corresponding to the expanded eligible orders.

4. The method of claim 3, wherein said search is based on a pruning heuristic.

5. The method of claim 1, wherein said CMA is based on an algorithm that solves a selected matching problem.

6. The method of claim 5, wherein said algorithm is based on a combinatorial optimization heuristic.

7. The method of claim 5, wherein said selected matching problem is linear, and wherein said algorithm is based on an algorithm that solves an integer programming problem.

8. The method of claim 7, further comprising selecting a collection of expanded eligible orders, wherein the matching score for each order in said collection is equal to one of the following:

a respective number; and

the sum of the absolute values of the respective generalized leg quantities.

9. The method of claim 1, further comprising receiving, for each financial instrument in said set, a respective price per unit at which said each financial instrument may be traded, wherein said CMA satisfies one of the following conditions:

said CMA is not constrained by limit prices and said each financial instrument in a selected subset of said set may not be traded at a price per unit other than said respective price; and

said CMA is constrained by limit prices and uses the received prices to determine if a subcollection of expanded eligible orders containing limit orders is a matching collection satisfying the limit price constraints of said orders.

10. The method of claim 1, wherein said at least one selected condition includes one of the following necessary conditions:

an eligible order must allow partial fills;

an eligible order must not specify a limit price;

the order quantity of an eligible order must be less than or equal to a selected number;

the order quantity of an eligible order multiplied by the sum of the leg quantities of said eligible order must be less than or equal to a selected number;

the number of legs of an eligible order must be less than or equal to a selected number;

each leg quantity of an eligible order that allows partial fills must be less than or equal to a selected number;

each leg quantity of an eligible order of the all or none execution type multiplied by the order quantity of said eligible order must be less than or equal to a selected number; and

to each financial instrument in said set is associated a respective number such that for each eligible order having a leg specifying a quantity of said each financial instrument to buy or sell, said quantity must be less than or equal to said respective number.

11. The method of claim 1, wherein each financial instrument in said set is one of the following:

a respective derivative;

a respective stock;

a respective futures contract;

a respective currency pair; and

a respective option.

12. The method of claim 1, further comprising periodically performing said method, wherein each financial instrument in said set is traded during respective regular trading hours on each respective regular trading day at a respective trading venue that operates so as to facilitate the process of price discovery in said each financial instrument, wherein said method is performed on selected days after DMTM prices of said financial instruments have been determined, and wherein said set is comprised of a financial instrument and selected options on said financial instrument.

13. The method of claim 1, further comprising one of the following:

computer-executable software, transmitted as an information signal, for causing a computer to implement the steps of said method; and

a computer-readable medium having computer-executable instructions stored thereon for causing a computer to implement the steps of said method.

14. A computer-implemented method for trading combinations of financial instruments, said method comprising:

receiving, during a first selected time period, combination orders to trade financial instruments;

storing each eligible received combination order, wherein a received combination order is eligible if it satisfies at least one selected condition, wherein said at least one selected condition includes the necessary condition that all financial instruments specified by the legs of an eligible order are in a set of two or more selected financial instruments; and

processing eligible or expanded eligible orders with a combinatorial matching algorithm (CMA), wherein said processing begins at a selected time, wherein said CMA is not constrained by limit prices, and wherein said CMA is based on one of the following;

a forward matching algorithm (FMA), and a reverse elimination algorithm (REA).

15. The method of claim 14, wherein said CMA is based on one of the following:

a FMA whose corresponding initial selection scheme, in respect of each considered expanded eligible order, is based on one of the following numbers;

the order quantity, the number of legs, and the generalized leg quantities; and

an REA whose corresponding priority elimination scheme, in respect of each considered expanded eligible order, is based on one of the following numbers;

the order quantity, the number of legs, and the generalized leg quantities.

17. The method of claim 14, wherein said CMA is based on a REA whose corresponding priority elimination scheme (PES) has one of the following characteristics:

said PES is based on a priority ordering imposed on a selected subset of said set;

said PES is based on the components of a current imbalance vector; and

said PES performs an exhaustive search with respect to the current preferred collection if the number of orders in said collection is less than or equal to a selected number.

18. The method of claim 14, wherein said CMA is based on a REA, and further comprising imposing a priority ordering on a selected subset of said set, wherein said priority ordering is based on one of the following:

a buy quantity;

a sell quantity;

a positive integer k and a respective ordering on k-tuples associated with each index, wherein said respective ordering is either the supremum ordering or the infimum ordering, wherein said priority ordering associates a respective k-tuple of selected numbers to each considered financial instrument, and wherein said priority ordering is the standard priority ordering.

19. The method of claim 14, wherein the priority elimination scheme, when the current preferred collection is non-empty, chooses orders in a non-empty selected subcollection of the current preferred collection, wherein said subcollection is determined by imposing a priority ordering on a selected subset of said set, wherein each financial instrument in said subset has a current trade imbalance, and wherein each order in said subcollection has a respective non-zero generalized leg quantity corresponding to a financial instrument having maximal priority in said subset.

20. The method of claim 14, wherein said CMA is based on a REA, and wherein the associated priority elimination scheme (PES) has one of the following characteristics:

said PES chooses all orders in the current unmatchable collection when the current unmatchable collection is non-empty, said PES chooses orders in a non-empty selected subcollection of the current preferred collection when the current preferred collection is non-empty, said PES chooses one order in the current imbalance collection when the current preferred collection is empty, and said PES, when the current preferred collection is empty and the current expanded collection is non-empty, chooses one order in the current expanded collection wherein the number of outside legs of said one order is minimal in the current expanded collection.

21. The method of claim 14, further comprising accepting, during said first selected time period, modification orders, wherein each such modification order is a directive from a sender to either cancel or to both cancel and replace a prior order that was received from said sender;

further comprising informing the respective sender or the respective trader associated with each eligible order of the respective quantity of said each eligible order filled;

further comprising providing information on the state of said processing to at least one market maker for said method;

further comprising receiving zero or more combination orders to trade financial instruments from said at least one market maker during a second selected time period;

further comprising determining whether to accept a received combination order from said market maker as an eligible order;

wherein said CMA is a preferred CMA;

wherein said preferred CMA solves a linear selected matching problem;

wherein the matching score for any expanded eligible order is equal to one;

wherein said selected time follows the conclusion of said first selected time period;

wherein the number of financial instruments in said set is less than a first selected number; and

wherein said at least one selected condition includes all of the following necessary conditions;

the order quantity of an eligible order multiplied by the sum of the leg quantities of said eligible order is less than or equal to a second selected number, the number of legs of an eligible order is less than or equal to a third selected number, each leg quantity of an eligible order is less than or equal to a fourth selected number, an eligible order must allow partial fills, and an eligible order must not specify a limit price.

16. The method of claiml4, wherein said CMA is based on one of the following:

a FMA having a priority selection scheme that selects orders from the current preferred collection;

a FMA having an initial selection scheme that selects expanded eligible orders from the collection consisting of expanded eligible orders in the current candidate collection having a minimal number of fills; and

a FMA having priority selection scheme that performs an exhaustive search with respect to the current preferred collection if the number of orders in said collection is less than or equal to a selected number.

22. A computer-implemented method for trading combinations of financial instruments, said method comprising:

steps for obtaining combination orders to trade financial instruments; and

steps for obtaining a matched collection of expanded eligible orders, wherein an obtained combination order is eligible if it satisfies at least one selected condition, and wherein said at least one selected condition includes the necessary condition that all financial instruments specified by the legs of an eligible order are in a set of two or more selected financial instruments.

23. A computer-based system for trading combinations of financial instruments, said system comprising:

means for obtaining combination orders to trade financial instruments; and

means for obtaining a matched collection of expanded eligible orders, wherein an obtained order is eligible if it satisfies at least one selected condition, and wherein said at least one selected condition includes the necessary condition that all financial instruments specified by the legs of an eligible order are in a set of two or more selected financial instruments.

24. The system of claim 23, further comprising means and steps for increasing, at least in principle, the quality of said matched collection.

25. The system of claim 23, further comprising means and steps for providing additional trading functionality.