Financial products having a demand-based, adjustable return, and trading exchange therefor

• US 6,321,212 B1
• Filed: 11/24/1999
• Issued: 11/20/2001
• Est. Priority Date: 07/21/1999
• Status: Expired due to Term

• Current Assignee: Longitude LLC
• Original Assignee: Longitude LLC
• Inventors: Lange, Jeffrey
• Primary Examiner(s): Trammell, James P.
• Assistant Examiner(s): Tesfamariam, Mussie
• Application Number:
  US09/448,822
• Time in Patent Office: 727 Days
• Field of Search: 705/35, 705/36, 705/37, 705/23, 705/26, 705/38
• US Class Current: 705/36.00R
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/03 Credit; Loans; Processing thereof
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G07F 7/10 together with a coded signal , e.g. in the form of personal identification information, like personal identification number [PIN] or biometric data

Abstract

This invention provides methods and systems for trading and investing in groups of demand-based adjustable-return contingent claims, and for establishing markets and exchanges for such claims. The advantages of the present invention, as applied to the derivative securities and similar financial markets, include increased liquidity, reduced credit risk, improved information aggregation, increased price transparency, reduced settlement or clearing costs, reduced hedging costs, reduced model risk, reduced event risk, increased liquidity incentives, improved self-consistency, reduced influence by market makers, and increased ability to generate and replicate arbitrary payout distributions, In addition to the trading of derivative securities, the present invention also facilitates the trading of other financial-related contingent claims; non-financial-related contingent claims such as energy, commodity, and weather derivatives; traditional insurance and reinsurance contracts; and contingent claims relating to events which have generally not been readily insurable or hedgeable such as corporate earnings announcements, future semiconductor demand, and changes in technology. A preferred embodiment of a method of the present invention includes the steps of (a) establishing a plurality of defined states and a plurality of predetermined termination criteria, wherein each of the defined states corresponds to at least one possible outcome of an event of economic significance; (b) accepting investments of value units by a plurality of traders in the defined states, and (c) allocating a payout to each investment upon the fulfillment of predetermined termination criteria.

Claims

1. A method for conducting demand-based trading, comprising the steps of:

establishing a plurality of defined states and a plurality of predetermined termination criteria, wherein each of the defined states corresponds to at least one possible outcome of an event of economic significance;

accepting, prior to fulfillment of all of the termination criteria, an investment of value units by each of a plurality of traders in at least one of the plurality of defined states; and

allocating a payout to each investment, responsive to

the total number of the value units invested in the plurality of defined states,

the relative number of the value units invested in each of the plurality of defined states, and

an identification of the defined state that occurred upon the fulfillment of all of the termination criteria.

3. The method for conducting demand-based trading of claims 1 or 2, wherein at least one investment is made in connection with a security transaction.

4. The method for conducting demand-based trading of claims 1 or 2, wherein the payout to each investment in each of the defined states that did not occur upon fulfillment of all of the termination criteria is zero, and a sum of the payouts to all of the investments is not greater than the value of the total number of the value units invested in the plurality defined states.

5. The method for conducting demand-based trading of claim 4, wherein the sum of the values of the payouts to all of the investments is equal to the value of all of the value units invested in the plurality of defined states less a fee.

6. The method for conducting demand-based trading of claims 1 or 2, wherein at least one investment of value units designates a set of defined states and a desired return-on-investment from the designated set of defined states, and wherein the allocating step is further responsive to the desired return-on-investment from the designated set of defined states.

7. The method for conducting demand-based trading of claims 1 or 2, further comprising the step of calculating Capital-At-Risk for at least one investment of value units by at least one trader.

8. The method for conducting demand-based trading of claim 7, wherein the calculating step includes the use of the Capital-At-Risk Value-At-Risk method.

9. The method for conducting demand-based trading of claim 7, wherein the calculating step includes the use of the Capital-At-Risk Monte Carlo Simulation method.

10. The method for conducting demand-based trading of claim 7, wherein the calculating step includes the use of the Capital-At-Risk Historical Simulation method.

11. The method for conducting demand-based trading of claims 1 or 2, further comprising the step of calculating Credit-Capital-At-Risk for at least one investment of value units by at least one trader.

12. The method for conducting demand-based trading of claim 11, wherein the calculating step includes the use of the Credit-Capital-At-Risk Value-At-Risk method.

13. The method for conducting demand-based trading of claim 11, wherein the calculating step includes the use of the Credit-Capital-At-Risk Monte Carlo Simulation method.

14. The method for conducting demand-based trading of claim 11, wherein the calculating step includes the use of the Credit-Capital-At-Risk Historical Simulation method.

2. A method for conducting demand-based trading, comprising the steps of:

establishing a plurality of defined states and a plurality of predetermined termination criteria, wherein each of the defined states corresponds to a possible state of a selected financial product when each of the termination criteria is fulfilled;

accepting, prior to fulfillment of all of the termination criteria, an investment of value units by each of a plurality of traders in at least one of the plurality of defined states; and

allocating a payout to each investment, responsive to

the total number of the value units invested in the plurality of defined states,

the relative number of the value units invested in each of the plurality of defined states, and

an identification of the defined state that occurred upon the fulfillment of all of the termination criteria.

15. A method for estimating state probabilities in a demand-based trading method, comprising the steps of:

performing a demand-based trading method having a plurality of defined states and a plurality of predetermined termination criteria, wherein each of the defined states corresponds to at least one possible outcome of an event of economic significance and wherein an investment of value units by each of a plurality of traders is accepted in at least one of the plurality of defined states;

monitoring the relative number of value units invested in each of the plurality of defined states; and

estimating, responsive to the monitoring step, the probability that a selected defined state of the plurality of defined states will be the defined state that occurs upon fulfillment of all of the termination criteria.

16. A method for estimating state probabilities in a demand-based trading method, comprising the steps of:

performing a demand-based trading method having a plurality of defined states and a plurality of predetermined termination criteria, wherein each of the defined states corresponds to a possible state of a selected financial product when each of the termination criteria is fulfilled and wherein an investment of value units by each of a plurality of traders is accepted in at least one of the plurality of defined states;

monitoring the relative number of value units invested in each of the plurality of defined states; and

estimating, responsive to the monitoring step, the probability that a selected defined state of the plurality of defined states will be the defined state that occurs upon fulfillment of all of the termination criteria.

17. A method for promoting liquidity in a demand-based trading method, comprising the step of:

performing a demand-based trading method having a plurality of defined states and a plurality of predetermined termination criteria, wherein each of the defined states corresponds to at least one possible outcome of an event of economic significance, wherein an investment of value units by each of a plurality of traders is accepted in at least one of the plurality of defined states, and wherein any investment of value units cannot be withdrawn after acceptance.

18. The method for promoting liquidity in a demand-based trading method of claim 17, further comprising the step of hedging, wherein a trader hedges a previous investment of value units by making a new investment of value units in one or more of the defined states not invested in by the previous investment.

19. A method for promoting liquidity in a demand-based trading method, comprising the step of:

performing a demand-based trading method having a plurality of defined states and a plurality of predetermined termination criteria, wherein each of the defined states corresponds to a possible state of a selected financial product, wherein an investment of value units by each of a plurality of traders is accepted in at least one of the plurality of defined states, and wherein any investment of value units cannot be withdrawn after acceptance.

20. The method for promoting liquidity in a demand-based trading method of claim 19, further comprising the step of hedging, wherein a trader hedges a previous investment of value units by making a new investment of value units in one or more of the defined states not invested in by the previous investment.

21. A method for conducting quasi-continuous demand-based trading, comprising the steps of:

establishing a plurality of defined states and a plurality of predetermined termination criteria, wherein each of the defined states corresponds to at least one possible outcome of an event;

conducting a plurality of trading cycles, wherein each trading cycle comprises the step of accepting, during a predefined trading period and prior to fulfillment of all of the termination criteria, an investment of value units by each of a plurality of traders in at least one of the plurality of defined states; and

allocating a payout to each investment, responsive to

the total number of the value units invested in the plurality of defined states during each of the predefined trading periods of the plurality of trading cycles,

the relative number of the value units invested in each of the plurality of defined states during each of the predefined trading periods of the plurality of trading cycles, and

an identification of the defined state that occurred upon the fulfillment of all of the termination criteria.

22. The method for conducting quasi-continuous demand-based trading of claim 21, wherein the predefined trading periods of the plurality of trading cycles are sequential and do not overlap.

23. A system for conducting demand-based trading, comprising:

means for accepting, prior to fulfillment of all of a plurality of predetermined termination criteria, an investment of value units by each of a plurality of traders in at least one of a plurality of defined states, wherein each of the plurality of defined states corresponds to at least one possible outcome of an event of economic significance; and

means for allocating a payout to each investment, responsive to

the total number of the value units invested in the plurality of defined states,

the relative number of the value units invested in each of the plurality of defined states, and

an identification of the defined state that occurred upon fulfillment of all of the termination criteria.

24. A system for conducting demand-based trading, comprising:

means for accepting, prior to fulfillment of all of a plurality of predetermined termination criteria, an investment of value units by each of a plurality of traders in at least one of a plurality of defined states, wherein each of the defined states corresponds to a possible state of a selected financial product when each of the termination criteria is fulfilled; and

means for allocating a payout to each investment, responsive to

the total number of the value units invested in the plurality of defined states,

the relative number of the value units invested in each of the plurality of defined states, and

an identification of the defined state that occurred upon fulfillment of all of the termination criteria.