Automated exchange for matching bids between a party and a counterparty based on a relationship between the counterparty and the exchange

• US 6,405,180 B2
• Filed: 11/05/1998
• Issued: 06/11/2002
• Est. Priority Date: 11/05/1998
• Status: Expired due to Term

• Current Assignee: International Securities Exchange LLC (Nasdaq, Inc.)
• Original Assignee: International Securities Exchange LLC (Nasdaq, Inc.)
• Inventors: Katz, Gary, Tilfors, Jan
• Primary Examiner(s): Stamber, Eric W.
• Assistant Examiner(s): Alvarez, Raquel
• Application Number:
  US09/186,154
• Publication Number:
  US 20010056393A1
• Time in Patent Office: 1,314 Days
• Field of Search: 705/37, 705/35, 705/400, 705/36, 705/38, 705/39, 364/408, 364/479.8, 364/768
• 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

In an automated exchange system means are provided by means of which a market maker can enter a course of action in advance, so that the volume in the orderbook is continuously updated, and where the updating is performed differently with respect to different counter parts. Also, quotes that may result in a trade between Market Makers are hidden for some time before being matched, thus giving the Market Makers a chance to back off. The system employs a function that supports that Market Makers through pre-defined parameters will have new orders generated by the system and that a market maker can act differently with respect to different counterparts. The parameters specify if a Market Maker should add extra volume on an existing price or generate a new order at a worse price. In order to make it possible for market makers to have a very tight spread without forcing them to take larger risks, additional logic is used when matching orders. The algorithm used for this purpose protects the market makers in certain situations and gives market makers the possibility to have a tight spread without taking a large risk. The algorithm also supports that the market makers can take the risk to quote large volumes.

Claims

1. An automated exchange system for matching a bid and offer between a buyer and a seller, wherein one of the buyer or the seller is a market maker on the exchange and the other of the buyer or the seller is an investor, comprising:

means for receiving a quote for the market maker;

means for receiving an order on the exchange for the investor and identifying the investor as a type of counterpart of the market maker, wherein the type of counterpart is one of a plurality of types, and wherein each type corresponds to one of a plurality of distinct relationships between the investor and the exchange;

means for executing the matching between the quote from the market maker and the order for the investor according to at least one of at least two different matching schemes in response to the type of counterpart identified;

means for generating a revised quote for the market maker according to at least one of at least two different quote generating schemes in response to the type of counterpart; and

means for executing a further matching between the revised quote and the order entered for the investor.

2. A system according to claim 1 wherein the investor is a second market maker not on the exchange and further comprising means for delaying the matching and further matching during a predetermined period of time.

3. A system according to claim 2, further comprising means connected to the delay means for executing the matching and further matching if the selling price and the buying price still indicate a match after the predetermined period of time has elapsed.

4. The exchange according to claim 1, wherein the plurality of types includes a customer of the exchange, a firm that is not on the exchange, and a second market maker that is a market maker on another exchange.

5. The exchange according to claim 4, wherein, when the type of counterpart identified is the firm, then a volume of the bid and offer is limited to a firm volume.

6. A method of matching a bid and an offer between a buyer and a seller in an automated exchange system, wherein one of the buyer or the seller is a market maker on the exchange and the other of the buyer or the seller is an investor, comprising the steps of:

receiving a quote from a market maker;

receiving an order on the exchange for the investor and identifying the investor as a type of counterpart, wherein the type of counterpart is one of a plurality of types, and wherein each type corresponds to one of a plurality of distinct relationships between the exchange and the investor;

executing the matching between the quote from the market maker and the order for the investor according to at least one of at least two different matching schemes in response to the type of counterpart identified;

generating a revised quote for the market maker according to at least two different quote generating schemes in response to the type of counterpart identified; and

executing a further matching between the revised quote and the order entered for the investor.

7. The method according to claim 6, wherein the investor is a market maker not on the exchange, comprising the further step of:

delaying the matching and the further matching during a predetermined period of time.

8. The method according to claim 7, further comprising executing the matching and the further matching if the selling price and the buying price still indicate a match after the predetermined period of time has elapsed.

9. An automated exchange adapted to match bids and offers between an investor and a market maker on the exchange, the exchange comprising:

means for receiving an order from the investor, wherein the order identifies a relationship between the investor and the exchange;

means for determining a counterpart type of the investor, wherein the counterpart type is one of a plurality of types, and wherein each type corresponds to one of a plurality of distinct relationships between the investor and the exchange;

means for executing an algorithm to make the match wherein the algorithm is based on a selected exchange parameter, and for generating a quote on behalf of the market maker, wherein the size of the quote depends on the selected exchange parameter; and

a storage device adapted to store a plurality of exchange parameters and to select one of the exchange parameters as the selected exchange parameter based on the counterpart type of the investor identified by the means for determining.

10. The automated exchange of claim 9, wherein the investor is a second market maker not on the exchange.

11. The automated exchange of claim 10, wherein the system is further adapted to introduce a delay for a predetermined period of time prior to executing the match.