System and method for trading options

• US 8,032,444 B2
• Filed: 01/11/2010
• Issued: 10/04/2011
• Est. Priority Date: 08/24/2000
• Status: Expired due to Term

• Current Assignee: Volbroker Limited.
• Original Assignee: Volbroker Limited.
• Inventors: Rodgers, Kevin, Ward, Jeffrey Dirk
• Primary Examiner(s): Subramanian; Narayanswamy
• Application Number:
  US12/685,610
• Publication Number:
  US 20100114756A1
• Time in Patent Office: 631 Days
• Field of Search: 705/37, 705/35
• 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

A system and method of trading option contracts, such as foreign currency option contracts, is described. In one embodiment, a system and method for web-based or network-based interactive trading of currency options is described. Users of the system provide volatility runs of currency options, deal on existing offers to sell or bids to buy, or may improve on existing offers to sell or bids to buy. The system and method provide automatic price quotations for a requested option contract by polling internal volatility surfaces of users for prices on the requested contract, and ensure a more orderly pattern of trades by categorizing the users into discrete tiers which determine a user'"'"'s obligations to provide offers and bids to the system and which determine a user'"'"'s opportunities and rights to trade on the system.

Claims

1. A computerized system for trading options, the system comprising:

a system server operating protocols to;

enter runs of offers to sell and bids to buy options, enter offers to sell and bids to buy specific interest options, deal on offers to sell or bids to buy options, and improve on offers to sell or bids to buy options by a first tier of users;

enter runs of offers to sell and bids to buy options, deal on offers to sell or bids to buy options, and improve on offers to sell or bids to buy options by a second tier of users, wherein at least one of the protocols precludes the second tier users from entering offers to sell or bids to buy specific interest options;

receive a user'"'"'s quote for an offer to sell or a bid to buy an option contract, the option contract having an underlying financial instrument having a current market price;

receive a period of time defined by the user corresponding to the quote, wherein a protocol withdraws the quote if the corresponding period of time expires; and

receive a spot price for the financial instrument underlying the option contract provided by the user corresponding to the quote, wherein a protocol compares the user'"'"'s spot price to the current market price for the financial instrument underlying the option contract, and withdraws the user'"'"'s quote if the user'"'"'s spot price equals the current market price for the financial instrument underlying the option contract;

workstations for receiving offer and bid information on option contracts from users, and for displaying offer and bid information on options to users; and

a communication link that receives and transmits communications between users and the system server, including communications to users that are parties to a completed option contract, the communications providing information concerning the completed contract,

wherein a run is a dealer'"'"'s set of prices to buy and sell tenors for options in a particular financial instrument underlying an option contract.

2. The computerized system of claim l , wherein an option is a currency option and an option contract for a financial instrument is a currency option contract for a currency pair.

3. The computerized system of claim 2, wherein a currency pair is a pair of currencies which trade for cash settlement among professional dealers in an inter-bank market.

4. The computerized system of claim 3, wherein the currency options are for a currency pair, each of the currency pair selected from the group consisting of the following currencies:

the Euro, the United States dollar, the Japanese yen, the British pound, the Swiss franc, the Australian dollar, the New Zealand dollar, the Canadian dollar, the Swedish krona, the Norwegian krone and the Greek drachma.

5. The computerized system of claim 3, wherein the runs entered by the first tier users and the second tier users are volatility runs.

6. The computerized system of claim 3, wherein the option contracts are entered and displayed in units of volatility.

7. The computerized system of claim 5, wherein the first tier users and the second tier users are required to periodically submit volatility runs.

8. A computerized system for trading currency options, the system comprising:

a system server operating protocols to;

enter runs of offers to sell and bids to buy options, enter offers to sell and bids to buy specific interest options, deal on offers to sell or bids to buy options and improve on outstanding offers to sell or bids to buy options by a first tier of users;

enter runs of offers to sell and bids to buy options, deal on offers to sell or bids to buy options and improve on offers to sell or bids to buy options by a second tier of users, wherein a protocol precludes the second tier users from entering offers to sell specific interest options and bids to buy specific interest options; and

deal on offers to sell or bids to buy options by a third tier of users, wherein a protocol precludes third tier users from entering runs of offers to sell and bids to buy options, entering offers to sell and bids to buy specific interest options and improving on offers to sell or bids to buy options; and

receive a user'"'"'s quote for an offer to sell or a bid to buy an option contract, the option contract having an underlying financial instrument having a current market price;

receive a period of time defined by the user corresponding to the quote, wherein a protocol withdraws the quote if the corresponding period of time expires; and

receive a spot price for the financial instrument underlying the option contract provided by the user corresponding to the quote, wherein a protocol compares the user'"'"'s spot price to the current market price for the financial instrument underlying the option contract, and withdraws the user'"'"'s quote if the user'"'"'s spot price equals the current market price for the financial instrument underlying the option contract;

workstations for receiving offer and bid information on options from users and for displaying offer and bids information on options to users; and

a communication link that receives and transmits communications between users and the system server, including communications to users that are parties to a completed system transaction, the communications providing information concerning the completed contract,

wherein a run is a dealer'"'"'s set of prices to buy and sell tenors for options in a particular financial instrument underlying an option contract.

9. The computerized system of claim 8, wherein an option is a currency option and an option contract for a financial instrument is a currency option contract for a currency pair.

10. The computerized system of claim 9, wherein a currency pair is a pair of currencies which trade for cash settlement among professional dealers in an inter-bank market.

11. The computerized system of claim 8, wherein the system server operates a protocol to:

permit a user to provide credit criteria via the communication link specifying counterparties with which the user will deal, the protocol operating such that the user may access only offers to sell and bids to buy from the counterparties that meet the credit criteria.

12. The computerized system of claim 11, wherein the credit criteria provided comprises a maximum deal amount.

13. The computerized system of claim 8, wherein the runs entered by the first tier users and the second tier users are volatility runs.

14. The computerized system of claim 8, wherein the options traded on the system have a tenor of one week to one year.

15. The computerized system of claim 8, wherein the options traded have a tenor selected from a group of tenors consisting of:

one week, one month, two months, three months, six months, nine months and one year.

16. The computerized system of claim 10, wherein each of the currency pair is selected from the group consisting of the following currencies:

the Euro, the United States dollar, the Japanese yen, the British pound, the Swiss franc, the Australian dollar, the New Zealand dollar, the Canadian dollar, the Swedish krona, the Norwegian krone and the Greek drachma.

17. The computerized system of claim 8, wherein the option contracts are entered and displayed in units of volatility.

18. The computerized system of claim 8, wherein the first tier users and the second tier users can access a display of a volatility run.

19. The computerized system of claim 18, wherein the display of the volatility run comprises a current market rate for each of the options in the volatility run until a volatility run is entered by a user.

20. The computerized system of claim 19, wherein the first tier users are required to periodically submit volatility runs.

21. The computerized system of claim 8, wherein the information transmitted to the parties of the completed system option contract includes a conversion of the cost of the contract from units of volatility into a monetary price.

22. A computer system method for trading of currency option contracts on a comprising:

providing by a computer system to a plurality of users offers to sell and bids to buy options, wherein the plurality of users comprises a first tier of users, a second tier of users, and a third tier of users;

receiving by the computer system from the first tier of users (i) a set of runs of offers to sell and bids to buy options and (ii) a first set of commands to deal on offers to sell or bids to buy options and (iii) a first set of improvements to offers to sell or bids to buy options;

receiving by the computer system from the second tier of users (i) a second set of commands to deal on offers to sell or bids to buy options and (ii) a second set of improvements to offers to sell or bids to buy options;

receiving by the computer system from the third tier of users a third set of commands to deal on offers to sell or bids to buy options;

receiving by the computer system a user'"'"'s quote for an offer to sell or a bid to buy an option contract, the option contract for a financial instrument having a current market price, the quote previously defined in a run;

receiving by the computer system a period of time defined by the user corresponding to the quote;

withdrawing by the computer system the quote if the corresponding period of time expires;

receiving by the computer system a defined value for the financial instrument underlying the option contract provided by the user corresponding to the quote;

comparing by the computer system the user'"'"'s defined value for the financial instrument to the current market price for the financial instrument;

withdrawing by the computer system the user'"'"'s quote if the user'"'"'s defined value for the financial instrument equals the current market price for the financial instrument;

engaging by the computer system in a sell or buy transaction in accordance with the first, second, or third commands to deal on offers to sell or bids to buy options; and

transmitting by the computer system information concerning a transaction to all users party to the transaction,

wherein a run is a dealer'"'"'s set of prices to buy and sell tenors for options in a particular financial instrument underlying an option contract.

23. The method of claim 22, wherein the method further comprises receiving credit criteria from the users whereby each user specifies the other users with which the user will deal;

and transmitting offers to sell and bids to buy option contracts provided by the other users that meet the criteria specified by the user.

24. The method of claim 22, wherein an option is a currency option and an option contract for a financial instrument is a currency option contract for a currency pair.

25. The method of claim 24, wherein a currency pair is a pair of currencies which trade for cash settlement among professional dealers in an inter-bank market.

26. The method of claim 25, wherein the information transmitted concerning a completed transaction includes names of the parties to the completed transaction, tenor, volume of currency, price and date and time that the transaction was completed.

27. The method of claim 22, wherein the price is provided in units of volatility.

28. The method of claim 27, wherein the information concerning a completed transaction includes a price in volatility units and monetary units.

29. The method of claim 25, wherein the runs received from the first tier users are volatility runs, wherein a volatility run is a set of prices expressed in terms of volatility for a standard tenor for a particular currency pair at a particular strike price.

30. The method of claim 29, wherein the volatility runs are received periodically from each of the first tier users.