System and method for creating and trading a derivative investment instrument over a range of index values

• US 8,165,953 B2
• Filed: 09/04/2007
• Issued: 04/24/2012
• Est. Priority Date: 09/04/2007
• Status: Active Grant

• Current Assignee: Cboe Exchange, Inc. (Cboe Global Markets, Inc.)
• Original Assignee: Chicago Board Options Exchange Incorporated (Cboe Global Markets, Inc.)
• Inventors: O'Connell, Marty, Speth, William, Hiatt, John Jr.
• Primary Examiner(s): Cheung, Mary
• Assistant Examiner(s): Malhotra, Sanjeev
• Application Number:
  US11/849,835
• Publication Number:
  US 20090063362A1
• Time in Patent Office: 1,694 Days
• Field of Search: 705/1, 705/4, 705/8, 705/14, 705/26, 705/30, 705/31, 705/35, 705/37, 705/39, 707/3, 707/102, 707/104.1, 463/142, 726/4
• US Class Current: 705/37
• CPC Class Codes: G06Q 20/10 specially adapted for electronic funds transfer [EFT] systems; specially adapted for home banking systems
• CPC Class Codes: G06Q 30/0611 Request for offers or quotes
• 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
• CPC Class Codes: G06Q 40/08 Insurance
• CPC Class Codes: G06Q 40/12 Accounting
• CPC Class Codes: G06Q 40/123 Tax preparation or submission

Abstract

An investment instrument based on a range of index values is disclosed that allows investors to take risk positions relative to the size, or length, of the range. The investment instrument has a monetary value that increases as the index value increases within a low range interval of the range, decreases as the index value increases within a high range interval of the range, and is fixed or capped if the index value falls within a middle range interval of the range. Typically, one settlement amount will be zero and the other will be an amount greater than the investment instrument price.

Claims

1. An exchange system configured for trading a derivative investment instrument, the exchange system comprising:

an interface for receiving an incoming order to purchase the derivative investment instrument, the derivative investment instrument having a range length associated therewith, wherein the range length comprises a first range interval defining a low range for the derivative investment instrument, the low range associated with a payout amount that increases as the index value increases within the first range interval, a second range interval defining a high range for the derivative investment instrument, the high range associated with a payout amount that decreases as the index value increases in the second range interval, and a third range interval defining a middle range, the middle range having a fixed payout amount;

a book memory for storing a plurality of previously received orders, the plurality of previously received orders each having the range length associated therewith;

a system memory for storing predefined condition parameters for a plurality of predefined range intervals corresponding to a plurality of potential outcomes for the derivative investment instrument; and

a processor adapted to associate the plurality of previously received orders in the book memory with at least one of the predefined condition parameters, wherein the predefined condition parameters include at least one parameter for identifying an occurrence of at least one index value falling within one of the predefined range intervals occurring before an expiration of the derivative investment instrument; and

the processor further adapted to calculate a zero payout value for orders having at least one index value that did not fall within the range length before the expiration of the derivative investment instrument and a greater than the zero payout value for orders having at least one index value that did fall within the range length prior to or at the expiration of the derivative investment instrument.

2. The exchange system of claim 1, wherein the system memory further comprises allocating parameters for allocating orders among market participants.

3. The exchange system of claim 2, wherein the processor is further configured to allocate the previously received orders based on the allocating parameters in the system memory and wherein the allocating parameters include parameters for allocating preferentially against orders with larger size.

4. The exchange system of claim 3 wherein the derivative investment instrument comprises an option contract.

5. The exchange system of claim 3, wherein the derivative investment instrument comprises a futures contract.

6. The exchange system of claim 3, further comprising a clearing system in communication with the processor, the clearing system adapted to settle the derivative investment instrument.

7. The exchange system of claim 1, wherein a length of the middle range is equal to the range length minus twice the range interval.