Derivatives trading methods that use a variable order price and a hedge transaction

• US 8,630,941 B2
• Filed: 01/07/2013
• Issued: 01/14/2014
• 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, Falck, John, Troxel, Charlie Jr., Farrell, James W., Thiruthuvadoss, Agnes Shanthi, Ariathurai, Arjuna, Salvadori, David
• Primary Examiner(s): Maguire, Lindsay M.
• Application Number:
  US13/735,581
• Publication Number:
  US 20130124388A1
• Time in Patent Office: 372 Days
• Field of Search: 705/37
• 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 40/03 Credit; Loans; Processing thereof
• 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

Systems and methods are provided for executing a hedge transaction in connection with the execution of a derivative product order in which the price of the derivative product is defined by one or more variables. The hedge transaction may be executed at an exchange or match engine that is different from the exchange or match engine executing the derivative product order. The execution of derivative product transaction may be contingent on the existence of an appropriate hedge transaction. Alternatively, a best efforts approach may be used to fill the hedge transaction order after executing the derivative product transaction.

Claims

1. A method comprising:

receiving variable defined derivative product order data at a match system, wherein the match system comprises a processor configured to control operation of the match system, and wherein the received data identifies an order pricing formula;

calculating, by the match system, an order price based on the order pricing formula;

accessing limit data stored by the match system, the limit data setting upper and lower bounds on at least one variable;

identifying, by the match system, a matching order for an order associated with the calculated order price;

determining, by the match system, whether execution of a transaction based on the identified matching order will cause one of the upper or lower bounds to be exceeded;

performing, based at least in part on the determination and by the match system, one of executing the transaction or canceling the transaction;

wherein the variable defined derivative product order data corresponds to an option and an underlying contract, and wherein the at least one variable comprises at least one of

(a) a rate of change in a theoretical value of the option for a one-unit change in a price of the underlying contract,

(b) a rate of change in (a) for a one-unit change in the price of the underlying contract, and

(c) a rate of change in a theoretical value of the option for a one-unit change in a volatility of the underlying contract.

2. The method of claim 1, wherein the at least one variable comprises (a) and (c).

3. The method of claim 1, wherein the pricing formula is also based on at least one of (a) through (c).

4. The method of claim 1, wherein calculating the order price comprises calculating the order price multiple times in response to changes in a price of the underlying contract.

5. A non-transitory computer readable medium storing computer-executable instructions for performing:

receiving variable defined derivative product order data, wherein the received data identifies an order pricing formula;

calculating an order price based on the order pricing formula;

accessing stored limit data, the limit data setting upper and lower bounds on at least one variable;

identifying a matching order for an order associated with the calculated order price;

determining whether execution of a transaction based on the identified matching order will cause one of the upper or lower bounds to be exceeded;

performing, based at least in part on the determination, one of executing the transaction or canceling the transaction;

wherein the variable defined derivative product order data corresponds to an option and an underlying contract, and wherein the at least one variable comprises at least one of

(a) a rate of change in a theoretical value of the option for a one-unit change in a price of the underlying contract,

(b) a rate of change in (a) for a one-unit change in the price of the underlying contract, and

(c) a rate of change in a theoretical value of the option for a one-unit change in a volatility of the underlying contract.

6. The non-transitory computer readable medium of claim 5, wherein the at least one variable comprises (a) and (c).

7. The non-transitory computer readable medium of claim 5, wherein the pricing formula is also based on at least one of (a) through (c).

8. The non-transitory computer readable medium of claim 5, wherein calculating the order price comprises calculating the order price multiple times in response to changes in a price of the underlying contract.