Computer implemented and/or assisted methods and systems for detecting, tracking and responding to toxic, or likely toxic, orders in an equities order flow using toxicity and/or profit analyzers

• US 7,587,347 B2
• Filed: 11/30/2004
• Issued: 09/08/2009
• Est. Priority Date: 10/19/2004
• Status: Active Grant

• Current Assignee: Citadel Enterprise IP
• Original Assignee: Citadel Investment Group LLC
• Inventors: Andresen, Matthew, Griffin, Kenneth C.
• Primary Examiner(s): Cheung; Mary
• Assistant Examiner(s): Holly; John H
• Application Number:
  US10/999,571
• Publication Number:
  US 20060085312A1
• Time in Patent Office: 1,743 Days
• Field of Search: 705/1, 705/35, 705/37, 705/36.R, 705/26, 370/252, 707 1- 10
• US Class Current: 705/35
• 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 are provided which enable equities broker-dealers to execute an equity trade order while simultaneously eliminating (or at least reducing) exposure to the negative consequences associated with toxic (or likely toxic) orders in the equities market. By using toxicity and/or profit analyzers, for example, to detect, track and respond to the level of toxic (or likely toxic) orders present in an equities order flow, a broker dealer can reduce the level of risk inherent in serving as counter-party to order flows, such as anonymous equities order flows. Various alternative embodiments are also disclosed.

Claims

1. A method of executing an equity order by a computer trading system comprising a sequential, sequence independent or non-sequential steps of:

electronically receiving an order by a broker-dealer system including order characteristics;

determining at least one toxicity quotient responsive to the order characteristics, the toxicity quotient defining when the order, if executed, comprises one of no profit, reduced profit or a loss when a wholesaler or a market maker provides market liquidity;

analyzing the order to determine eligibility for execution using the at least one toxicity quotient; and

determining whether the order is eligible for execution; and

electronically transmitting the order by the broker-dealer system to the computer trading system for execution responsive to the eligibility for execution as determined by the analyzing the order using the at least one toxicity quotient.

2. The method of claim 1, wherein the order is for an exchange listed equity.

3. The method of claim 2, wherein the step of electronically transmitting of the order comprises the step of sending the order by the broker-dealer system to an exchange for execution.

4. The method of claim 1, wherein the step of electronically transmitting of the order comprises the step of internalizing the order by the broker-dealer system.

5. The method of claim 1, further comprising the step of measuring at least one of order, market condition, and execution parameters of at least one order to be executed, and correlating the measured parameters with the outcome of trade to determine the at least one toxicity quotient.

6. The method of claim 1, wherein the step of analyzing further comprises the step of reviewing one or more parameters of the order relating to at least one of size of the order, frequency of order submission, identity of the equity, market source of national-best-bid-or-offer (NBBO), order size relative to NBBO size, liquidity of the equity, current NBBO bid-offer spread, and the equity-market performance correlation of the equity.

7. The method of claim 1, wherein the step of determining at least one toxicity quotient responsive to the order characteristics comprises the step of generating the at least one toxicity quotient by the broker-dealer system.

8. The method of claim 1, further comprising the step of receiving the at least one toxicity quotient by the broker-dealer system.

9. The method of claim 8 further comprising:

determining whether to accept the order based on the received toxicity quotient.

10. The method of claim 1, further comprising the step of either rejecting the order or executing a modified version of the order based on execution eligibility.

11. The method of claim 10, wherein the modified version of the order comprises a modified order size.

12. The method of claim 1, wherein the at least one toxicity quotient is modified following its generation.

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

receiving the order from an order flow provider system; and

sending the order from the order flow provider system to the broker-dealer system.

14. The method of claim 13, further comprising the step of sending a toxicity report to the order flow provider system based at least in part on the execution eligibility determination.

15. The method of claim 14, wherein the toxicity report comprises information to identify an investor as someone who submitted one or more orders that are likely to be toxic.

16. The method of claim 1, further comprising the step of placing the order by an investor using an order entry system.

17. The method of claim 1, further comprising the step of placing the order by an order flow provider system.

18. The method of claim 1, further comprising the step of monitoring the outcome of the trade after it has been executed.

19. The method of claim 18, wherein the step of monitoring comprises the step of logging the bid/offer spread at the time the order is filled.

20. The method of claim 18, further comprising the step of implementing corrective action based at least in part on the step of monitoring the outcome of the trade.

21. The method of claim 20, wherein the step of implementing corrective action comprises the step of modifying payment for the order received by the broker-dealer system.

22. The method of claim 20, wherein the step of implementing corrective action comprises the step of modifying payment for future order flow received by the broker-dealer system.

23. The method of claim 20, wherein the step of implementing corrective action comprises the step of increasing the fee for the investor that placed the order received by the broker-dealer system.

24. The method of claim 20, wherein the step of implementing corrective action comprises the step of increasing the fee for future orders submitted by the investor that placed the order received by the broker-dealer system.

25. The method of claim 1, further comprising the step of determining compliance of the order responsive to a rule-set providing at least one rule used to implement the order execution.

26. The method of claim 1, wherein the toxicity quotient measures the profitability of the order to the broker dealer system receiving the order, and wherein analyzing the order to determine eligibility for execution using the at least one toxicity quotient further determines the profitability of the order with respect to the system receiving the order.

27. The method of claim 26, wherein the system receiving the order is a wholesaler system.

28. The method of claim 26, wherein the system receiving the order is a market maker system.

29. The method of claim 1 wherein the order characteristics comprise order parameters including an identity of the equity, an action type, an order type, a limit price, and an order size.

30. The method of claim 1 wherein the order characteristics comprise conditional parameters including a theoretical value of the equity, a frequency of the order submission, a liquidity of the equity in a market, an implied spread, and a equity-market performance correlation.

31. The method of claim 1, wherein the order characteristics comprise execution parameters including a fill spread and fill price.

32. The method of claim 1, wherein an order flow provider determines the at least one toxicity quotient.

33. The method of claim 1 further comprising:

if the order is eligible for execution, monitoring the profitability of the executed order with a profit analyzer.

34. The method of claim 33 further comprising:

establishing an expected level of profit for the order based on the profitability of previous orders.

35. The method of claim 34 further comprising:

taking corrective action where the profitability of the order is below the expected level of profit.

36. The method of claim 1, wherein an equities market or an exchange determines if the order is eligible for execution using the toxicity quotient.

37. The method of claim 36, wherein the equities market or an exchange tracks profit or loss on some executed trades with a profit analyzer.

38. The method of claim 1, wherein a broker dealer receives the order and sends the order for execution.

39. The method of claim 1, wherein an order flow provider receives the order and sends the order for execution.

40. A method of executing an equity order by a computer trading system comprising a sequential, sequence independent or non-sequential steps of:

electronically receiving an order by a broker-dealer system;

of electronically transmitting the order by the broker-dealer system to the computer trading system for execution;

monitoring the outcome of the trade when the order is executed;

determining whether the completed trade is toxic, responsive to order characteristics comprising order parameters, market condition parameters, and execution parameters indicative of the completed order comprising one of no profit, reduced profit or a loss when at least one of a wholesaler or a market maker provides market liquidity; and

implementing a corrective action based at least in part on the step of monitoring the outcome of the trade when the completed trade is determined to be toxic.

41. The method of claim 40, wherein the step of electronically transmitting of the order comprises the step of sending the order by the broker-dealer system to an exchange for execution.

42. The method of claim 40, wherein the step of electronically transmitting the order comprises the step of internalizing the order by the broker-dealer system.

43. A method of executing an equity order by a computer trading system comprising a sequential, sequence independent or non-sequential steps of:

electronically receiving an order by a broker-dealer system;

determining compliance of the order with a rule-set, wherein the rule-set is based at least in part on the measuring parameters including;

order parameters, market condition parameters, and execution parameters of at least one order to be executed and correlating the measured parameters with the outcome of the trade, and wherein the rule-set determines whether or not a wholesaler or a market maker will accept the order;

determining that the order complies with the rule-set; and

electronically transmitting the order by the broker-dealer system to the computer trading system for execution if the order complies with the rule-set.

44. The method of claim 43, wherein the step of electronically transmitting of the order comprises the step of sending the order by the broker-dealer system to an exchange for execution.

45. The method of claim 43, wherein the step of electronically transmitting of the order comprises the step of internalizing the order by the broker-dealer system.

46. The method of claim 43, further comprising the step of monitoring the outcome of the trade after it has been executed.

47. The method of claim 46, further comprising the step of modifying the rule-set based on the step of monitoring the outcome of the trade.

48. The method of claim 43, further comprising modifying the rule-set based on market conditions.

49. The method of claim 43, further comprising the step of rejecting the order based on the compliance determination.

50. The method of claim 43, further comprising the step of executing a modified version of the order based on the compliance determination.

51. The method of claim 50, wherein the modified version of the order comprises a modified order size.

52. The method of claim 43, wherein the rule-set comprises at least one rule used to implement the execution of the order.

53. A method of executing an equity order by a computer trading system comprising a sequential, sequence independent or non-sequential steps of:

electronically receiving the order by a broker-dealer system including order characteristics;

determining at least one toxicity quotient responsive to the order characteristics, the toxicity quotient defining when the order, if executed, comprises one of no profit, reduced profit or a loss when at least one of a wholesaler or a market maker provides market liquidity;

analyzing the order to determine eligibility for execution using the at least one toxicity quotient;

determining whether the order is eligible for execution;

electronically transmitting the order by the broker dealer system to the computer trading system for execution responsive to the eligibility for execution as determined by the analyzing the order using the at least one toxicity quotient;

monitoring the outcome of the trade when the order is executed;

determining whether the completed trade is toxic; and

implementing a corrective action if the trade is determined to be toxic based at least in part on the step of monitoring the outcome of the trade.

54. A computer system executing an equity order, comprising:

means for receiving the order by a broker-dealer including order characteristics;

means for determining at least one toxicity quotient responsive to the order characteristics

where the toxicity quotient defining when the order, if executed, comprises one of no profit, reduced profit or a loss when a wholesaler or a market maker provides market liquidity;

means for analyzing the order to determine eligibility for execution using the at least one toxicity quotient; and

means for initiating execution of electronically transmitting the order, responsive to the eligibility for execution as determined by the analyzing the order using the at least one toxicity quotient.

55. A computer system executing an equity order, comprising:

an input device receiving the order by a broker-dealer including order characteristics;

a processor determining at least one toxicity quotient responsive to the order characteristics where the toxicity quotient defining when the order, if executed, comprises one of no profit, reduced profit or a loss when a wholesaler or a market maker provides market liquidity;

an order analyzer analyzing the order to determine eligibility for execution using the at least one toxicity quotient; and

an order transmitter initiating execution of the order, responsive to the eligibility for execution as determined by the analyzing the order using the at least one toxicity quotient.

56. The computer system of claim 55, wherein the computer system measures at least one of order, market condition, and execution parameters of at least one order to be executed, and correlates the measured parameters with the outcome of trade to determine the at least one toxicity quotient.

57. The computer system of claim 56, wherein the order analyzer reviews one or more parameters of the order relating to at least one of size of the order, frequency of order submission, identity of the equity, market source of national-best-bid-or-offer (NBBO), order size relative to NBBO size, liquidity of the equity, current NBBO bid-offer spread, and the equity-market performance correlation of the equity.

58. The computer system of claim 57, wherein the processor determining at least one toxicity quotient responsive to the order characteristics further comprises generating the at least one toxicity quotient by the broker-dealer.

59. The computer system of claim 55, further comprising the step of either rejecting the order or executing a modified version of the order based on execution eligibility.

60. The computer system of claim 59, wherein the modified version of the order comprises a modified order size.

61. The computer system of claim 55, wherein the computer system performs corrective action comprising at least one of:

modifying payment for the order received by the broker-dealer, modifying payment for future order flow received by the broker-dealer, increasing the fee for the investor that placed the order received by the broker-dealer, and increasing the fee for future orders submitted by the investor that placed the order received by the broker-dealer.

62. The computer system of claim 55 further comprising:

a profitability analyzer for monitoring the outcome of trades determined eligible for execution.

63. A computer system executing an equity order, comprising:

means for receiving the order by a broker-dealer;

means for initiating execution of the order by the broker-dealer;

means for monitoring the outcome of the trade when the order is executed; and

means for implementing a corrective action, if it is determined that the completed trade is toxic responsive to order characteristics comprising order parameters, market condition parameters, and execution parameters indicative of the completed order comprising one of no profit, reduced profit or a loss when a wholesaler or a market maker provides market liquidity, based at least in part on the step of monitoring the outcome of the trade.