Derivatives trading methods that use a variable order price

• US 7,567,932 B1
• Filed: 11/03/2006
• Issued: 07/28/2009
• 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: Johnston, Scott, Salvadori, David, Troxel, Charlie Jr., Farrell, James W., Falck, John, Ariathurai, Arjuna, Thiruthuvadoss, Agnes S.
• Primary Examiner(s): Hamilton; Lalita M
• Application Number:
  US11/556,499
• Time in Patent Office: 998 Days
• Field of Search: 705/38, 705/36.R, 705/35
• 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 40/04 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 at an exchange that includes a match engine that matches orders for derivative products and 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 an exchange computer to update the variable priced order price without further input from the trader wherein the formula for updating the order price as a function of a change in an underlying product price comprises;

Change in price of the order=ChgUnderlyingPrice*delta+(½

(ChgUnderlyingPrice^2*gamma))

where ChgUnderlyingPrice is the change in price of the underlying product.

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 priced 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 at an exchange that includes a match engine that matches orders for derivative products 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 an exchange computer to update the variable priced order price without further input from the trader;

wherein the formula for updating the order price as a function of a change in an underlying product price comprises;

Change in price of the order=ChgUnderlyingPrice*delta+(½

(ChgUnderlyingPrice^2*gamma))

where ChgUnderlyingPrice is the change in price of the underlying product.