U.S. patent application number 11/183559 was filed with the patent office on 2006-04-20 for simulation auction for public offering.
Invention is credited to F. Burke Dempsey, William E. Staib.
Application Number | 20060085321 11/183559 |
Document ID | / |
Family ID | 36181953 |
Filed Date | 2006-04-20 |
United States Patent
Application |
20060085321 |
Kind Code |
A1 |
Staib; William E. ; et
al. |
April 20, 2006 |
Simulation auction for public offering
Abstract
The invention provides a method and system to estimate demand,
pricing, allocation and aftermarket demand for public offerings via
a simulation auction using collaborative forecasting. The
simulation auction incorporates features to enhance participant
knowledge about a particular company and its proposed auction. The
simulation auction may be used to collect information regarding
likely or equilibrium pricing of actual offerings, as well as to
generate demand curve provides for different types of participants
(e.g. retail and institutional investors).
Inventors: |
Staib; William E.;
(Coralville, IA) ; Dempsey; F. Burke; (Greenwich,
CT) |
Correspondence
Address: |
DORSEY & WHITNEY LLP;INTELLECTUAL PROPERTY DEPARTMENT
50 SOUTH SIXTH STREET
MINNEAPOLIS
MN
55402-1498
US
|
Family ID: |
36181953 |
Appl. No.: |
11/183559 |
Filed: |
July 18, 2005 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
|
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60589328 |
Jul 20, 2004 |
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Current U.S.
Class: |
705/37 |
Current CPC
Class: |
G06Q 30/08 20130101;
G06Q 10/04 20130101; G06Q 40/06 20130101; G06Q 40/04 20130101; G06Q
30/0601 20130101 |
Class at
Publication: |
705/037 |
International
Class: |
G06Q 40/00 20060101
G06Q040/00 |
Claims
1. A computer implemented method for determining a simulated price
and other market information corresponding to real-world securities
in an offering comprising: selecting a real world securities
offering for a simulation auction and providing information about
the selected offering to stimulate simulated bids for simulated
securities corresponding to the selected offering; offering to
accept simulated bids from one or more potential participants via a
communication network for the simulation auction of securities,
said offering requiring payment of a bid participation fee that
increases with the total value of the securities for which the
simulated bid is made; receiving simulated bids via a communication
network from paying participants; determining a simulated clearing
price for the securities in the simulation auction based upon the
received simulated bids; and providing to participants making a bid
an individual auction outcome indicating whether or not their bid
was rejected or not and, if rejected, whether it was rejected as
below the simulated clearing price determined in the simulation
auction.
2. The computer implemented method of claim 1 further comprising:
determining the relative utility for the auction of bids submitted
by participants in the simulation auction: and providing to
selected participants who provide bids with greater relative
utility, additional information determined in the simulated
auction, including at least the simulated clearing price.
3. The computer implemented method of claim 1 further comprising
applying a participant filter to simulated bids received to filter
out bidders or bids that are detrimental to the simulation.
4. The computer implemented method of claim 1 further comprising
applying a participant filter to simulated bids received to filter
out bidders or bids that are manipulative.
5. The computer implemented method of claim 1 further comprising
applying a participant filter to simulated bids received to filter
out bidders that are viewed as having a conflict of interest.
6. The computer implemented method of claim 1 wherein the step of
determining a simulated clearing price comprises selecting from a
library of auction methods one method and applying it to the
simulated bids received.
7. The computer implemented method of claim 1 wherein the step of
determining a simulated clearing price comprises selecting from a
library of auction methods one method that tracks the method to be
used in the real world securities offering and applying it to the
simulated bids received.
8. The computer implemented method of claim 1 wherein the step of
determining a simulated clearing price comprises selecting from a
library of auction methods more than one auction method and
applying each to the simulated bids received to develop an
individual outcome for each simulated bid received and each of the
more than one methods.
9. The computer implemented method of claim 1 further comprising a
rewards module that evaluates bids based in part on proximity to
the simulated clearing price and selecting certain bids as having
earned a reward.
10. The computer implemented method of claim 1 further comprising a
rewards module that evaluates bids based in part on proximity to
the simulated clearing price and also based on the total value of
the bid and selecting certain bids as having earned a reward.
11. The computer implemented method of claim 1 further comprising a
rewards module that evaluates bids based in part on proximity to
the simulated clearing price and also based on the total value of
the bid and selecting certain bids as having earned a premium
content report derived from the simulation bids received in the
simulation auction.
12. The computer implemented method of claim 1 further comprising a
rewards module that evaluates bids based in part on proximity to
the simulated clearing price and also based on the total value of
the bid and selecting certain bids as having earned a the right to
participate in another simulation auction based on a credit from a
prior bid participation fee.
13. The computer implemented method of claim 1 further comprising a
rewards module that evaluates bids based in part on proximity to
the simulated clearing price and also based on the total value of
the bid and selecting certain bids based on weighting of these
factors that is adjustable.
14. The computer implemented method of claim 1 further comprising
comparing a participant's bid level to the price of a security in
the selected real world securities offering and providing a
purchase prompt to at least one participant who provided a bid that
exceeds a clearing price in the selected a real world securities
offering.
15. A computer readable medium containing a computer program for
determining a simulated price and other market information
corresponding to real-world securities in an offering, the computer
program comprising: a code component defining a simulation auction
and providing information about a selected real world securities
offering corresponding to the simulation auction to stimulate
simulated bids for simulated securities corresponding to the
selected offering; a code component for offering to accept
simulated bids from one or more potential participants via a
communication network for the simulation auction of securities,
said offering requiring payment of a bid participation fee that
increases with the total value of the securities for which the
simulated bid is made; a code component for receiving simulated
bids via a communication network from participants; a code
component for determining a simulated clearing price for the
securities in the simulation auction based upon the received
simulated bids; and a code component for providing to participants
making a bid an individual auction outcome indicating whether or
not their bid was rejected or not and, if rejected, whether it was
rejected as below the simulated clearing price determined in the
simulation auction.
16. The computer readable medium of claim 15 further comprising: a
code component for determining the relative utility for the auction
of bids submitted by participants in the simulation auction: and a
code component for providing to selected participants who provide
bids with greater relative utility, additional information
determined in the simulated auction, including at least the
simulated clearing price.
17. The computer readable medium of claim 15 further comprising a
code component for evaluating bids and selecting certain bids as
having earned a reward.
18. A computer system for data processing with a computer program
for determining a simulated price and other market information
corresponding to real-world securities in an offering, the computer
program comprising: a code component defining a simulation auction
and providing information about a selected real world securities
offering corresponding to the simulation auction to stimulate
simulated bids for simulated securities corresponding to the
selected offering; a code component for offering to accept
simulated bids from one or more potential participants via a
communication network for the simulation auction of securities,
said offering requiring payment of a bid participation fee that
increases with the total value of the securities for which the
simulated bid is made; a code component for receiving simulated
bids via a communication network from participants; a code
component for determining a simulated clearing price for the
securities in the simulation auction based upon the received
simulated bids; and a code component for providing to participants
making a bid an individual auction outcome indicating whether or
not their bid was rejected or not and, if rejected, whether it was
rejected as below the simulated clearing price determined in the
simulation auction.
19. The system of claim 18 further comprising: a code component for
determining the relative utility for the auction of bids submitted
by participants in the simulation auction: and a code component for
providing to selected participants who provide bids with greater
relative utility, additional information determined in the
simulated auction, including at least the simulated clearing
price.
20. The computer system of claim 18 further comprising a code
component for evaluating bids and selecting certain bids as having
earned a reward.
Description
CROSS-REFERENCE TO RELATED APPLICATION(S)
[0001] This application claims the benefit of U.S. Provisional
application No. 60/589,328, entitled "SIMULATION AUCTION FOR PUBLIC
OFFERING", filed on Jul. 20, 2004, the subject matter of which is
hereby incorporated by reference herein in its entirety.
FIELD OF THE INVENTION
[0002] This invention relates generally to a method and system for
simulating a public offering of securities. More specifically, the
invention relates to a method and system to estimate demand,
pricing, allocation and aftermarket demand for public offerings via
a simulation auction of securities using collaborative
forecasting.
BACKGROUND OF THE INVENTION
Price Discovery
[0003] Investment securities may be sold to institutions or to
individuals and sold in public or private offerings. Companies with
certain profiles can raise significant financing by public
offerings. The amount of money raised depends on the unit price of
the securities sold and the number of units sold. One example of a
securities offering is an initial public offering (IPO). In an IPO
there has been no prior public market for the securities that would
establish a price-demand curve for the securities. This makes
pricing of securities difficult in an IPO. However, also for other
kinds of offerings, investors may be uncertain about an appropriate
price offer, and the offering party may need information about
demand and appropriate pricing.
[0004] Generally, the offeror selects a lead underwriter for the
offering and that underwriter uses a variety of methods to develop
information on possible demand for the securities, so that a price
can be established. The underwriter must contact potential buyers
and work with them to determine the price (if any) they are willing
to pay for the to-be-offered securities. With sufficient firm bids
in hand, the underwriter can then sell the securities, making
allocation decisions as needed, if the bids exceed the amount of
securities offered.
[0005] In public securities offerings, a lead underwriter
(book-runner) manages and coordinates the entire process of a
securities distribution and has sole access to an aggregated "book"
of bids as well as the discretion to allocate securities to bona
fide investors. There are several possible methods a book-runner
can utilize to price and distribute securities; however, the
"book-building" methods is that most frequently utilized with the
"dutch auction" method being utilized on occasion. Both methods
serve as a final means to collect, aggregate and calculate a final
price and allocate shares. On rare occasions, a lottery is held by
a specific underwriter during an oversubscribed transaction to
allocate a portion of shares for retail/individual investors.
[0006] During the course of the securities registration period, the
issuer (the company offering the stock) and the underwriters may
mutually agree to change the proposed price range or amount offered
in response to: (1) inferred market conditions' impact on potential
demand and pricing; (2) feedback the lead manager receives from its
syndicate's respective distribution network of salespeople and
brokers; or (3) specific issuer demands or objectives.
[0007] The conventional price discovery methods have limitations
affecting both investors and underwriters, for several reasons. The
methods lack transparency. That is, investors have no opportunity
to review the aggregated source bid data or the rationale upon
which final pricing its based by the book-runner. Further, there
are barriers inhibiting pricing feedback between the offering
syndicate and the investing community, so that communication of
pricing information is not truly real-time. The issuer and its
bankers are traveling on a "roadshow," often globally, to meet
potential investors, which can exacerbate timing lags in
communication and decision making. During the course of the
roadshow there are many layers of communications among the
syndicate, their respective distribution networks, and potential
investors, each of which can create a timing lag, as well as
potential for miscommunication.
[0008] Another limitation on communication is created by SEC
regulations. SEC regulations strictly limit the information a
broker/dealer involved in a securities distribution may
provide--the information is limited to the delivery of a
prospectus. Thus, by law, underwriters may not show investors any
other data, no matter how valuable the market might deem it, lest
such information be deemed a prospectus subject to SEC review.
Trying to provide the marketplace with additional information
beyond a traditional prospectus creates an unworkable paradox
because of the regulations placed on the broker/dealer community.
Providing the data would require adjusting the prospectus, which
would take time. During such time lag and as a result of data
change, the market could change again. Thus, no market equilibrium
is reached, and with multiple adjustments the final pricing could
theoretically be delayed substantially. This can hurt the issuer,
underwriter and the efficiency of the capital markets. Depending on
the security and type of registration document that the issuer
utilizes, SEC regulations may also require that if the total dollar
amount raised based on the final pricing is increased or decreased
by greater than 20% of the latest prospectus filing amount, the
issuer must file an amended registration statement with the new
amounts and wait 48 hours for effectiveness of such amended
registration statement. Facing such a time delay forces
underwriters and issuers to determine the costs and benefits of
filing such an amendment.
[0009] One suggested alternative for developing pricing for an
offering is to sell the securities in some form of open auction,
where the public can submit bids. The shares can be allocated by
rules stated to the bidders by the underwriter that manages the
auction. Such a public auction is described in U.S. Pat. No.
6,629,082. That patent discusses allocation rules defined by
economist William Vickrey.
Pricing and Allocation of Demand
[0010] The "book-build" and "dutch auction" processes have a
similar underlying objective to aggregate and qualify all demand
(excluding non bona fide or outlying bids) and create a clearing
price. In both processes, the underwriters canvass demand of
investors via a roadshow, placing primary emphasis on large
institutional buyers who have the experience and resources to
evaluate a company and determine valuation for securities of an
issuer. The two methods vary, however, in their determination of
what constitutes the clearing price and in allocation of
demand.
[0011] In the "book-build" process, underwriters receive
indications of interest that are forwarded to the book-runner, who
compiles a list of bona fide potential investors, the security
amounts they desire and price level or limitations. The book-runner
generally has total discretion to allocate shares and to move the
price within the allowable range. Once satisfied with the process,
the book-runner proposes to the Issuer final prices and terms, as
well as a "book" of investors recommended to receive an allocation.
Typically there is room for the issuer to negotiate several items
such as price and preferred investors. Once an underwriting
agreement is executed, the orders from investors are confirmed
(investors may also cancel their order up to this time for any
reason including if the terms, conditions, or price have been
varied as a result of negotiations between the book-runner and
issuer).
[0012] Inherent in the book-build process is an estimation of the
discount (if any) required to attract investors to a new issuer
(versus other similar public comparables). This discount then forms
the basis for the so-called aftermarket "pop," or value increase A
"pop" enables the transaction to be perceived as a success in the
investment community, compensates investors (mostly institutional)
for taking a risk on a new issuance of a security, and reduces the
odds that the underwriters will be left holding the security. This
could happen if investors failed to pay for their allocation,
because the security traded immediately below its issue price.
Alternatively, a disproportionately large "pop" often means there
was large unfilled demand. Such underpricing may deprive the issuer
of useful incremental capital. Instead such profits flow to the
secondary markets (for example, investors and traders).
[0013] In the "dutch auction" process, bidders are qualified by the
lead manager to participate and receive a bidder identification
number. When the bidding period opens, investors may submit one or
more bids of varying amounts. Bids may be modified while the
auction is open; however, they become final at a specific
timeframe, and the transaction is priced. To determine a clearing
price, bids are aggregated by price from highest to lowest, and by
summing shares bid until the supply (the number of shares the
company desires to sell) is met. The dutch auction manager reserves
the right to eliminate bids it considers manipulative (excessively
high or large bids). The price per share of the lowest bid that
fulfills the supply available is the price that all investors in a
dutch auction IPO receive on their investment. The dutch auction
considers the individual's bid equally alongside an institutional
bid without regard to number of shares bid.
Challenges of Historical Price Discovery and Allocation
Process:
[0014] The Book Build Process
[0015] The book-build and, more recently, the dutch auction
processes have successfully matched trillions of capital of
investors to issuers over the history of the public U.S. capital
markets. The depth and fluidity of U.S. capital markets exceed any
other in the world; however, recent regulatory action against, and
large financial settlements by numerous broker/dealers with regard
to underwriter research, IPO pricing, securities allocation, and
aftermarket trading commissions provides the moment to consider
novel approaches for the U.S. to further improve its capital
markets.
[0016] These regulatory actions sought to inject more transparency
into price discovery and greater allocation fairness into the
capital raising systems. A reason for the lack of transparency lies
in the price discovery and allocation process resting solely with
the book-runner. The book-runner must mitigate the risk of
conflicts of interest inherent in having two clients, one on each
side of the transaction, i.e., the investor and broker/salesperson
v. the issuer and the corporate finance banker. In addition, the
book-runner has obligations to its own representatives.
[0017] The book-build process has inherent limitations. For price
discovery, the book-build process is dependent on human interaction
between the book-runner's distribution network and syndicate and
the investment community. As a result, it is subject to time-lags,
miscommunication and disinformation.
[0018] Time-lags occur, because the entire distribution system and
syndicate must canvass demand, primarily in the oral format, and
then take the time to convert the raw data into useful
computer-based analytical materials. Time-lags and inefficiency of
information collection also arise because the syndicate suffers the
same vagaries of human interaction that exist in a typical
vendor/customer relationship. A given salesperson/broker may not
have a strong enough relationship with his/her customer to elicit
timely feedback, or may decline to make further follow-up calls
requested by the book-runner on any specific securities transaction
in the short-term, for fear of upsetting the long-term customer
relationship.
[0019] Miscommunication can result from simple verbal or body
language miscues, interpretive mistakes in converting oral
instructions to written, or a misunderstanding by the
broker/salesperson or customer of the issuer or its proposed
transaction terms and conditions. Such miscommunications increase
the risk of erroneous data being factored into the pricing.
[0020] Disinformation results from investor tactics employed to
offset the asymmetric information balance between any one investor
and the book-runner, who is the only entity with full access to all
investor bids and the Issuer's objectives. The largest investors
are heavily courted during a securities transaction as a result of
their collective buying power and knowledge of securities
valuation. As a result, they know their inputs are valuable to the
book-runner as well as to other potential investors. The buyer's
desire for the lowest possible price for the investment can result
in disinformation tactics in the early stages of a securities
transaction. Customers often worry that conveying or "exposing"
their true bid price level (and knowledge) early to a
broker/salesperson may result in higher pricing, and/or could be
shared with other customers during the canvassing of demand (as a
result of the oral-based nature of the book-build process). These
tactics often lead to a rush of bids and price changes at the end
of the process--such a change in price or demand can catch a
book-runner unprepared. If the change is large enough, the issuer
may need to file an amendment to its registration statement to
capture the increase in demand or pricing (also creating a
time-lag), or accept that such unfulfilled demand and price
flexibility from customers will result in potentially lower
proceeds than justified and an excessive aftermarket "pop."
[0021] Another limitation of the book-build process lies in
allocations. The book-runner has sole discretion to accept orders
and to allocate shares (though generally the book-runner takes
issuer preferences into account to the degree that a reasonable
transaction may still be executed). The book-runner often
prioritizes and maximizes allocations to customers who are
considered knowledgeable about the issuer's sector and who have a
history of maintaining reasonable holding periods for securities
purchases via a new issue (i.e., they are not short-term "flippers"
who immediately, or a short time thereafter, trade a security back
to the syndicate to collect a profit or limit a loss). An investor
desires to obtain an allocation reflective of its view on that
issuer's sector and commensurate with the customer's overall
portfolio size.
[0022] Other general securities underwriting challenges include
allocation issues where it is frequently difficult for a small
investor to obtain shares of a "hot" issue, and pricing quandaries
based on the tradition that the underwriting process is a closed
process where only the underwriters know the demand price and
overall interest level in a given offer (i.e. asymmetric
information) and there is no real-time feedback to investors about
their bid price or potential allocation before the auction closes,
which permit them to refine their bid to the benefit of all
parties.
[0023] The Dutch Auction Process
[0024] Offering processes, such as "Open IPO" processes, where the
offering price is determined via a "dutch auction" methodology have
recently been introduced (See U.S. Pat. No. 6,629,082 mentioned
above.). In such process, the price at which the company sells
shares to the public is based upon actual bids from institutional
and individual retail investors. The offering price is determined
by sorting all of the bids from high price per share to low price
per share, and summing shares bid until the supply (the number of
shares the company desires to sell) is met. The price per share of
that bid that fulfills the supply available is the price that all
investors in a dutch auction securities offering receive to make
their investment. This approach improves price discovery relative
to the book-build process and places institutions and retail
investors on more equal footing.
[0025] The offerings built on the dutch auction process have
several limitations. While more fair and democratic to a broader
spectrum of investors than a book-build offering in the sense that
those at or above the clearing price receive allocations
irrespective of their investment "pedigree", the open offering
process is not necessarily more "open" or transparent to all
participants. Firstly, the underwriters may choose to prohibit
participation of certain parties based on their own review and
qualification criteria so it is not truly open to all bidders.
Secondarily, because the bids for an open offering are only known
to the underwriters (again the asymmetric information quandary), it
is impossible for bidders or potential bidders to know whether
their bid is likely high enough to purchase shares until after the
auction process is completed, thus there is no more transparency in
a dutch auction than a book-build. Experience with dutch auctions
for securities underwriting has shown that there may be completely
different demand curves for retail and institutional investors. For
example, in an IPO, retail investors may get caught up in the
frenzy of an IPO and overbid for the offering.
[0026] While there is some protection from overbidding--if an
investor bids $100 per share and the security is priced at $20 per
share, all investors are charged $20 per share--this protection is
not absolute. If many investors bid irrational prices in an attempt
to guarantee participation in an offering, the result may be
artificially to drive up the price of the offering beyond the true
market price (commonly known as the "winner's curse"). Thus, all
investors may lose money if the price subsequently drops. Further,
in some dutch auction securities offerings, underwriters have the
right to disqualify bids that are deemed to be "manipulative" by
the underwriters. The rules to determine what constitutes
"manipulative" are typically not defined to the public and an
investor bidding too high may find itself disqualified from the
offering. There is no mechanism for participants in advance to
review the demand curve of the open offering to determine whether
their bid level is likely to be viewed as manipulative. For
example, a participant might want to know that their bid is more
than a certain amount higher (for example 3 standard deviations)
than the mean bid and thus likely to be discarded.
[0027] There is also no mechanism for participants in a dutch
auction securities offering to understand the effect on their bid
if the underwriter decides to lower the offering price to a level
below what the statistics of the securities offering would
otherwise indicate (e.g., will the underwriters price the
securities at 5%, 10%, or 20% below the auction-based price level).
There are issues for institutional investors with regard to
maintaining an optimal investment position size for any given
issuer in their portfolio. Thus if the institutional investor were
to receive too small of an allocation due to a unilateral clearing
price reduction by the underwriter and/or issuer, the institutional
investor would either need to purchase more shares in the
aftermarket or would consider "flipping" their sub-optimal sized
allocation back to the syndicate--creating an unattractive dilemma
for either underwriter or investor.
[0028] Further, conflicts of interest arise among underwriters with
retail distribution networks (i.e. individual investors) in a dutch
auction securities offering. There is difficulty in determining how
to protect the privacy of a broker's accounts while qualifying such
retail investors. The traditional book-build process for retail
distribution is opaque from each underwriter's point-of-view, as
the specific retail customers' identities are kept confidential
from any other broker/dealer involved in the offering. In a
book-build process, co-managers and syndicate members of the
offering, who plan to sell the securities (collectively, the
"selling group") are given an allocation of priced shares that may
or may not correspond to their retail network's aggregate demand.
These priced securities are then allocated at the discretion of
that specific underwriter (or, more rarely, on a "first-come
first-serve" or lottery basis) to their individual retail clients.
In the dutch auction securities offering process, the trade-off for
a more democratic and fair process for the smaller investor is that
the broker/dealer must allow his customer to be reviewed and
qualified by another underwriter who may become a competitor for
that very customer relationship. This creates concerns of privacy
among underwriters, because one underwriter may not want to share
the bid data and the qualifications of a list or particular
investor. The one underwriter will not want the lead underwriter to
be able to see the demographics or even possibly names and
addresses of that underwriter's account base.
Price Discovery via User Simulations to attain a Collaborative
Forecast
[0029] The Internet provides access to financial and news
information. Applications such as eBay provide marketplaces where
buyers and sellers converge to determine "fair" prices for products
via the dynamics of many participants in the market. Currently
there is no equivalent for transparently developing the fair price
of financial securities to be issued in an underwritten
offering.
[0030] Generally, the public cannot acquire objective research
regarding the offered security until they have already purchased
the security. Traditionally, investors in offerings base their
decisions on the S-1 filings with the SEC. At a set time after the
offering closes (the "quiet period"), research reports from
financial analysts working for underwriting companies often become
available to customers of those underwriters. While these analysts
evaluate the financial performance, business plans, and competitive
landscape of companies, because the formal research reports are not
available until after the public offering and those research
reports are written by firms that were compensated to complete the
offering, this practice has raised concerns regarding the
independence, objectivity and value of such research.
[0031] Investors can find copious amounts of general news and
information related to an upcoming public securities transaction
via websites like Yahoo!, Reuters, or Google. However, there is a
dearth of public websites that provide indepth information and
tools relevant to a detailed analysis of a transaction. One website
called EconomicInvestor (www.c4cast.com), with a patented process
(U.S. Pat. No. 6,606,615), provides Bayesian analyses of
participant input on various predictions, including value of stocks
indexes and individual stocks with recognition for winners. Such
data is applied to study how assets and portfolios respond to key
economic factors.
[0032] Specifically catering to IPOs there are broad based web
sites such as IPO Financial Network, or IPOHome.com; temporary
niche sites such as googleiposwami.com, goggle-ipo.com; sites such
as Iowa Electronic Markets which act like a derivative or futures
market to establish a price for a security; or online offshore
gaming sites such as tradesports.com which allow wagering on IPO
outcomes. Finally price discovery logic has been applied solely for
entertainment purposes to showcase a customer's stock trading
(virtualstockexchange.com), or successful movie picking (Hollywood
Stock Exchange) prowess. Many of these sites have polls that enable
participants to vote on what they believe the results of an
upcoming event will be, create model portfolios and compare their
portfolio's performance to that of other participants, or even
place monetary bids based upon whether an offering will exceed a
particular value. However, voting and online offshore gaming are
less likely to produce useful information about interest level and
pricing on an upcoming offering. Voting is not effective for a
securities offering as small and large investors carry the same
weight which can be misleading given the different bid sizes that
occur in an offering versus the vote. Furthermore the polling sites
generally allow users to vote for free. Lack of financial risk and
strict dependence on user trustworthiness are significant
weaknesses--there is no penalty for being wrong or misleading.
Online offshore gaming does not provide transparency between
institutional and individual investors, and is not legal in the
U.S. Neither system is appropriate to provide the relevant feedback
and analysis for a securities offering and likely provide
inaccurate or suspicious results. Thus, participants may place
irrational wagers such as selecting volatile stock options or
"voting" a very high or low value for an upcoming IPO, because
there is no financial deterrent to a participant for placing wild
guesses as to the securities pricing or post-IPO market performance
given the "all-or-none" nature of those types of data collection
systems. The absence of realistic participation rules means that
participant behavior and, thus, the process results lack
realism.
[0033] Applications such as Hollywood Stock Exchange or the Iowa
Electronic Markets can provide some value, but most are structured
as contracts that pay a certain amount if a price threshold of the
event is reached and nothing otherwise. If participants utilize
real money for these methods, these "markets" may provide
information of more value. However, there is considerable
information missing from the results produced in such systems. For
example, it is not possible to differentiate between the demand
curves for institutional investors and for retail investors. Each
group may have substantially different risk-reward profiles and
amounts of capital to invest. Also, such simulations do not offer
simulation participants a full range of bid sizes. For example,
Iowa Electronic Markets have an account limit of $500 invested per
participant. Thus, there is no means for an institution to simulate
the results of a $20 million bid in a large public offering. There
is also question of whether a derivative market can legally exist
to provide true futures contracts for IPOs--SEC rules prohibit a
whole series of so-called "when-issued" gray markets, as well as
restrict the ability to borrow/rehypothecate stock, or short an IPO
before the end of the quiet period which is approximately 25 days
after the IPO.
BRIEF SUMMARY OF THE INVENTION
[0034] A computer implemented method is provided for determining a
simulated price and other market information corresponding to
real-world securities in an offering based on the concept of
collaborative forecasting. The method comprises selecting a real
world securities offering for a simulation auction and providing
information about the selected offering to stimulate simulated bids
for simulated securities corresponding to the selected offering;
offering to accept simulated bids from one or more potential
participants via a communication network for the simulation auction
of securities, said offering requiring payment of a bid
participation fee that increases with the total value of the
securities for which the simulated bid is made; and receiving
simulated bids via a communication network from paying
participants. The method further involves determining a simulated
clearing price for the securities in the simulation auction based
upon the received simulated bids; and providing to participants
making a bid feedback, or individual auction outcomes, indicating
whether or not their bid was rejected and, if rejected, whether it
was rejected as below the simulated clearing price determined in
the simulation auction. The method also provides for further data
exchange, after the actual offering of securities has been
completed, with participants via the communication network to
compare the collective forecast of the auction simulation with the
actual outcome.
BRIEF DESCRIPTION OF THE DRAWINGS
[0035] FIG. 1 is a block diagram of a simulation auction process in
accordance with one embodiment of the present invention.
[0036] FIG. 2 is a block diagram of the interaction of bidders
and/or purchasers with an auction manager website and auction
manager system in accordance with one embodiment of the present
invention.
[0037] FIG. 3 illustrates a screen shot of creating a new account
on the auction management website in accordance with one embodiment
of the present invention.
[0038] FIG. 4 illustrates a screen shot of the auction management
website prompting a user to purchase credits in accordance with one
embodiment of the present invention.
[0039] FIG. 5 illustrates a screen shot of placing a bid on the
auction management website in accordance with one embodiment of the
present invention.
[0040] FIG. 6 illustrates a block diagram of the relationships
between a simulated securities offering and a real world securities
offering in accordance with one embodiment of the present
invention.
DETAILED DESCRIPTION OF THE INVENTION
A. Invention Overview
[0041] The invention provides a method and system for estimating
demand, pricing, allocation and aftermarket demand for an actual,
real-world public offering of securities via a simulation auction.
The simulation auction incorporates features to encourage
participant behavior that is close to behavior that would or will
occur in the real-world offering. One feature is providing adequate
information to enhance participant (or bidder) knowledge about a
particular company and its proposed offering. The invention may
also include features to select or encourage participants who will
make useful bids, to discourage participants from making irrational
bids, or to encourage future bids representative of real-world
demand.
[0042] The simulation auction may be used to collect information
regarding likely or equilibrium pricing of actual securities
offerings, as well as to generate demand curve profiles for
different types of participants (e.g., retail and institutional
investors, small lot purchasers and larger lot purchasers). The
auction or pricing discovery mechanism collects and aggregates
information across the investment community, leveraging the
connectivity and real time nature of the Internet to provide
value-added feedback to participants. They can receive this
information in advance of a real offering. Dissemination of the
information from the simulation can enhance transparency and
efficiency of the capital markets with more rapid and accurate
modeling of the real-world price discovery process.
[0043] The invention provides a simulation auction for a public
offering of securities that may be used for any suitable type of
real public offering. Participants in the simulation auction
provide information on how they value the security and how much
they would consider purchasing at such a price. The simulation
auction determines a simulated clearing price. This clearing price,
along with one or more demand curves (for example, aggregate or
separate retail and institutional participants), provides
information on the likely demand for and value of the stock. This
information may be used by simulation auction participants in their
decision of whether to, and how to, participate in a real-world
offering, whether that offering is via a dutch auction process or
via a book-build process. After the auction, participants have
information at their disposal that is not currently available to
them and that will allow more productive investment discussions
with their financial advisor.
[0044] Thus, the invention offers a simulation auction based on a
real-world offering using the power of online collaborative
forecasting. The invention may offer a simulation auction
corresponding to a real-world dutch auction public offering.
Alternately, the invention may offer a simulation auction
corresponding to a traditional, or book-build, public offering.
Further, the auction process used in the simulation auction need
not reflect that of the real-world offering. For example, the
simulation auction may be a dutch auction even though the
real-world auction is a traditional offering. Likewise, the
simulation auction may implement more traditional offering
principles even though the real-world auction is a dutch auction.
While the invention is described in terms of book-build auctions
and dutch auctions, the invention may use as its auction rule set
any rules that will attract participants and develop useful demand
curve information and may correspond to any suitable type of
offering of securities.
[0045] Further, the invention may be used for simulating an
offering of any type of security. This may include equity
securities, debt, or any other financial vehicles used for
investment purposes.
[0046] Using the present invention, a real-world auction process
may be emulated. For example, if the real-world auction will use a
"dutch auction" process, each bidder in the simulation may submit
any number of bids at any price. Further, if the real-world
offering, based on its registration statement, specified minimum
and maximum shares for bids, the simulation auction will similarly
include minimum and maximum shares eligible for simulation bid.
[0047] Using the present invention, asymmetric pricing knowledge
traditionally held by one constituency such as the bookrunner of
the transaction, poses less of a hurdle to efficient price
discovery. The present invention helps aggregate similar
information for its participants to that used by a bookrunner,
mitigating some or all of the bookrunner's asymmetric advantage.
Thus, a currently opaque process becomes a more transparent process
where each participant may be able to obtain more information
relevant to the forecast of potential initial and aftermarket
demand for a given offering. This realtime feedback is missing from
currently available underwriting processes, thus frequently
resulting in dramatic last minute transaction changes to pricing or
size of the offering, which can have a negative impact on the
issuer, underwriter, or investor. The invention's ability to
utilize collaborative forecasting to provide transparency on
potential demand and pricing, and the ability to emulate bidding
strategies in advance of the actual offering provides investors
with important analytical, tactical and potential market sentiment
feedback. Additionally, the invention's ability to emulate the
issuer's and underwriters' actual intended process creates a "mock"
or "practice" session allowing participants to gain knowledge and
confidence in the basic offering process, which could later improve
the actual offering's efficiency. Finally the invention generally
avoids the potential conflicts of interest inherent in the current
underwriting price discovery and allocation system whereby the
underwriter has a client on each side of the transaction (i.e.
investor v. issuer). FIG. 1 illustrates a block diagram of the
steps for a simulation auction in accordance with the present
invention. The diagram assumes the simulation auction manager has
already selected an offering to simulate, has provided a
description of that offering and the simulation offering that
corresponds to it. A participant registers, at block 10, purchases
auction credits, at block 12, and uses a portion of or all of those
credits to place at least one bid in an auction, at block 14. A bid
includes the price the participant would pay per share of stock as
well as an amount of stock. Thus, the bid is the product of the
price and the amount. An auction management system receives and
stores the bid, at block 16. After other bids for that auction are
submitted and the auction simulation is completed, the auction
management system determines the clearing price, at block 18, and
the individual auction outcomes, i.e., the status of each bid, at
block 20. At block 22, each participant is notified regarding the
individual auction outcome for the participant's bids. The auction
management system further analyzes bid information, at block 26.
Additional participant profile (if available, e.g., demographics,
investment goals, etc.) information may be used for market
segmentation or other purposes. Analyzed bid information, or
premium content, may be provided to selected participants, at block
28, as a reward or offered for purchase by a participant or
others.
B. Simulation Auction System Overview
[0048] As shown in FIG. 2, an auction management system 40 and an
auction manager website 42 are provided for handling the multiple
components and activities of the simulation auction. The auction
management system 40 includes auctioning modules 44, an individual
auction outcome processor 46, and an analyzed bid information
processor 48. The auctioning modules 44 compile the information
from bid participants 50, for example the bid price and units, for
the various auctions. The auctioning modules 44 further include a
participant filter 52 and data enhancing components 54 including a
fee structure module 56 and a reward module 58. The participant
filter 52 excludes persons who are recognized as not useful to the
simulation. The data enhancing components 54 act at two points in
time. First, the components 54, via the fee structure module 56,
present a fee structure that shapes participant behavior toward the
same bidding behavior as in a real-world securities purchase.
Second, once auction outcomes are determined, the components 54,
via the reward module 58, allocate information, participation
credits or other value items to reward participants for placing
bids that end up near the clearing price. When the bid submission
closes, the individual auction outcomes processor 46 processes to
find the final clearing price determined by the auction method
stipulated and to determine the outcome for each bid. The analyzed
bid information processor 48 further processes the bids placed to
generate information such as a comprehensive distribution of bid
sizes and prices, aggregate demand curves for both professional and
non-professional investors (or other identifiable market segments),
implied valuation multiples versus comparable companies at the
clearing price, and other statistics relevant to understanding the
mindset of other participants.
[0049] Access to the simulation auction is generally provided
through the auction manager website 42. The auction manager website
42 includes the simulated securities offering 60, a bid acceptance
module 62, participant password access to individual outcomes 64,
participant and purchaser password access to premium content 66,
and offers to sell premium content 68. The simulated securities
offering 60 on the website 42 may include access to information
regarding the real world securities offering, such as the
prospectus, road show information, and research reports, in
addition to the rules governing the simulation auction.
[0050] Participation in the simulation auction does not require
extensive personal information from a user. Thus, users are not
discouraged from participating due to privacy concerns. On the
other hand, if additional profile information can be elicited that
helps segment the market or further develop the demand curve, it
can be requested and, in appropriate circumstances, required. For
example, if two consecutive simulation auctions are staged for the
same offering, one auction could be structured to request greater
participant profile information than the other, with the
recognition that this might change results in a revealing way.
[0051] The auction management system 40 uses a participant filter
52. The participant filter 52 excludes persons who are recognized
as not useful to or possibly detrimental to the simulation. This
may be done during registration based on information regarding the
person. Alternately, this may be done during the auction based on
bids placed.
[0052] One aspect of the participant filter is to try to identity
participants who are trying to game the simulation auction to
distort its outcomes. Another aspect of the filter is to identify
persons whose participation makes the simulation outcomes suspect,
even if the person does nothing to distort them. For filtering in
one embodiment it is useful to sort non-professionals from others.
For the purposes of the simulation auction, a non-professional
investor is a natural person who is applying/acting in a personal
capacity, and neither a principal, officer, partner, employee, nor
agent of any business, also not acting on behalf of any other
individual Further, a non-professional investor is a person who
obtains information for his/her own investment purposes and not for
any business purposes. A non-professional investor cannot be
registered or qualified with: The Securities Exchange Commission
(SEC) in any capacity; The Commodities Futures Trading Commission;
any state securities agency; an securities exchange or association;
any commodities or futures contract market or association.
Furthermore, a non-professional investor can not be (a) an
investment advisor; (b) a person employed by a bank, or other
organization exempt from registration under federal and/or state
securities laws, to perform functions that would require
registration or qualification if such functions were performed for
an organization not so exempt; or (c) a person engaged as a
consultant, independent contractor, software developer, or other
person that uses market information for any purpose for profit
other than the trading of that person's own personal account(s).
These requirement of a non-professional investor are guidelines for
the purposes of gathering more accurate information regarding
demand curves. They can be implemented by questions and warnings on
the website. However, the preceding guidelines may be varied for
different auctions.
[0053] To register to participate in a simulation auction, a user
accesses the website 42 and creates a new account by entering user
information online as at FIG. 3. This information includes a name
70 (in one embodiment, a pseudonym may be used), a valid e-mail 72
(for the purposes of receiving information regarding the auction),
whether the user is a non-professional investor or a professional
investor 74, and whether the participant (or an immediate family
member thereof) is an employee of or affiliated with a NASD member
76. Also, users may be asked whether they are an employee or
relative of an underwriter of the real-world offering or of the
company that is offering securities for sale. Such users may be
excluded from participation in that company's simulation auction
due to potential conflicts of interest. The information gathered
using the questions relating to NASD affiliation and underwriter or
company affiliation may be used in the participant filter.
[0054] The auction management system 40 further uses a data
enhancing components 54 to incentivize and reward participants for
placing bids that end up near the clearing price. The data
enhancing components 54 include a fee structure module 56 prior to
bidding and a reward module 58 based on the results of the
auction.
[0055] To participate in the auction, the registered participant is
prompted, at block 80, to purchase auction credits, as shown at
FIG. 4. The participant purchases auction credits for placing a
bid. The cost of the auction credits may be tied to the total
amount the participant plans to bid. For example, in one fee
structure the amount of credits and the corresponding underlying
dollars to buy the credits may be as follows: TABLE-US-00001 Amount
of Credits Dollars to Buy Credits $10k $10 $100k $50 $1 m $200 $10
m $500 $100 m $2000
[0056] Of course, other pricing schemes for the credits may be
used. By having the investors (or participants or bidders) have
some stake in bidding accurately insofar as a payment may be
required to make the bid and that payment may be tied to the total
amount bid, such that as the amount bid increases, the payment
increases. A non-linear increase (for example, as shown above) is
useful in one embodiment, to help encourage bidding at higher
amounts. Thus, the fee structure module may require bidders to have
a stake in the auction that more accurately simulates reality,
where bidders must pay more to bid more and have real money
invested in the position they take. The extent of the increase and
the degree of non-linearity is selectable in the software and is
communicated as part of the auction rules in one embodiment.
[0057] In one embodiment, some users may register and participate
in the auction for free at some minimum level. For example, a
non-paying user may place one bid for up to ten shares. Generally,
such users are not given information about the outcome of the
auction--for example, the clearing price. However, the registration
information and bid may have sufficient utility to allow simulation
participation and a basic bid outcome report.
[0058] After purchasing (or registering for) credits, the
participant may place a bid, as shown at FIG. 5. The bid generally
reflects the bidder's viewpoint on value of the securities and
their investment capacity and needs. The participant places a bid
by entering a bid amount 82 and a share or unit price 84. The
participant filter 52 may filter participants based on the bids
placed--either by excessive small bids or massive bids at either
extreme of the bidding range. In one embodiment, the participant
filter may include a rule structure to discourage submission of
many small bids to find the edges, peaks, or valleys of the demand
curve and triangulate a clearing price. A user who submits many
small bids clutters the demand curves. This user may also be
seeking to derive information made available only as premium
content. Similarly, a massive bid at either extreme to "head-fake"
the market or to walk the market up and down may be noticed and
disqualified. Such a massive bid, if not disqualified, may dilute
the results by swaying the outcome dramatically.
[0059] The auction process may use the participant filter 52 to
filter out participants based on their bids. Thus, bids may be
disqualified during the simulation. For example, if such bids would
be considered speculative in the real-world auction, they may be
disqualified during the simulation auction.
[0060] Returning to FIG. 1, at the end of the auction, the auction
management system determines the clearing price, at block 18. One
method for determining the clearing price is to sum up the bid
quantities (the "rolling accumulation") starting from the bid with
the highest price and working downward. At the bid price at which
the rolling accumulation surpasses the quantity of securities being
offered (the "aggregate securities"), the auction management system
will establish such price as the price at which all participants
whose bids are included in the rolling accumulation will be
allocated shares (the "clearing price"). This pricing calculation
may be done by a computer software algorithm. U.S. Pat. No.
6,629,082 describes one such algorithm. Other algorithms may be
implemented in the auctioning modules, including one or more
intended to embody book-build offering principles.
[0061] If the clearing price is determined on the basis of a
book-build offering, the auction management system uses a set of
rules emulating a real-world book-build offering to determine the
clearing price. Thus, the auction management system may set what
the maximum or desired percentage of institutional versus retail
investors should be, what investors may be preferred (as having
special interest in, knowledge of, or an ownership stake in the
comparable or complementary industry sector), and what the
appropriate discount could be based on comparables, general market
conditions, specific transaction related documentation or
restrictions demanded by the issuer. Further, the auction
management system may consider the amount of over- or
under-subscription in setting pricing and allocations. Thus, the
auction management system may have a library of auction rules. It
may present a simulation auction based on one set of rules and
determine and report outcomes based only on that set. It may also
apply to a simulation auction one or more sets of auction rules and
determine and report auction outcomes based on one or more sets of
auction rules. This may have utility where the auction/allocation
process for the real-world offering has a discretionary element or
some other not fully-revealed methodology and two different
modeling methodologies may assist persons studying the real-world
offering by triangulating between the outcomes provided by the
different methodologies.
C. Distribution of Auction Outcomes
[0062] As shown in FIGS. 1 and 2, after the auction closes the
auction manager system then determines the individual auction
outcomes, at block 20. Each bidder receives, at block 32, an
outcome report giving his/her/its individual auction outcome. In
one embodiment, three possible outcomes are available for each bid:
"considered speculative and rejected," "below clearing price and
rejected," and "accepted." Thus, the invention allows a user to
estimate the outcome of a public offering based upon bids by
investors in a simulation auction, who may be actual bidders in the
real-world auction. The outcome reports may be transmitted to each
participant electronically, for example via e-mail. Alternately, or
additionally, the reports may be made available on the website via
password access, as at 64 of FIG. 2. Timely availability is
important, as participants may be developing a strategy for a bid
in a real-world offering that will soon open or close.
[0063] As noted, the participant filter 52 is intended to deter or
exclude persons whose bid might lack utility or distort the auction
outcome. However, the value of the information increases when the
participating bids are of high utility. Thus the reward module 58
of the data enhancing components 54 utilizes several possible
incentives to encourage bidders to bid accurately and in an amount
in the stimulation that bears some relation to a bid they would
pursue in the corresponding, real-world auction. Generally, the
invention has a bid analysis structure with weighting that rewards
bidders whose best bid was close to the clearing price and large in
absolute terms. In the case of multiple bids by a participant, the
relative size of the closest potential successful bid to other
outlying bids placed by that participant may be reviewed.
[0064] One incentive reward may be tied to the credits used to
place a bid. Depending on the proximity of the bid to the clearing
price, some or all of the credits used in one auction or one bid
may be carried to a further auction. The further auction may be a
further auction round of the same auction or may be a new auction.
Alternately, the further auction may be a further auction round
until the final round of the auction, the credits then becoming
transferable to a new auction. In one embodiment, the proximity
required to carry credits depends on the bid amount. Alternately,
the transferability of the credits may be tied to other criteria,
such as other research tools. For example, if the bidder purchases
a research report on the related public offering, the bidder can
carry the credits to a further auction.
[0065] The following table illustrates example proximities based
upon bid amounts: TABLE-US-00002 Bid Amount Proximity Required $10k
+/-$0.25/share $100k +/-$0.50/share $1 m +/-$1/share $10 m
+/-$5/share $100 m no proximity required.
[0066] The proximity listed above permits a big investor with a
less precise bid to be rewarded. More specifically, if a
participant bids using $10,000 auction credits (which, in one
embodiment, may be purchased for $10), they may have to be within
1% of the clearing price to maintain their auction credits for
future use. In contrast, if the participant bids $100M auction
credits (which they may have purchased for $2000), they can
automatically carry their auction credits for future use no matter
how far off their bid is from the simulation auction clearing
price. This encourages larger investors, for example professional
investors, to participate in the simulation as they would in the
real-world offering.
[0067] Another possible incentive to bidders to provide
well-considered bids, is to provide analyzed bid information, or a
"Premium Content," report to selected bidders based on the relative
value or utility of their bid in the simulation auction. With a
given evaluation yardstick, the specified percentage of bidders
that measures highest can be rewarded. As shown in FIGS. 1 and 2,
the auction manager system analyzes and processes the bids placed
to find the clearing price, at block 18, and to generate the
premium content information, at block 26. This information may
include the clearing price determined by the auction method
stipulated, a comprehensive distribution of bid sizes and prices,
aggregate demand curves for both professional and non-professional
investors (or other identifiable segments of the participants),
implied valuation multiples versus comparable at the clearing
price, and other statistics relevant to understanding the bids and
evaluation perspective of other participants. The Premium Content
report may also be offered for sale, at block 30, to participants
who were not provided it as a reward or to persons who are not
participants but value the simulation outcome.
[0068] In one embodiment, the 25% of bidders closest (based on a
weighted measure) to the clearing price may be rewarded with a free
Premium Content report. In one embodiment, the following evaluation
formula may be used to determine the top 25% of bidders (or winning
bidders):
Confidence_Coefficient=(Size_Of_Your_Best_Bid/Total_Of_All_Your_Bids)
2
Impact_Score=Confidence_Coefficient*(Your_Best_Bid_Size+7000)/(abs
(Your_Best_Bid_Price_Clearing_Price)+0.00000001)
[0069] Thus, the utility determination is based generally on a
weighting of two factors: the amount bid and the proximity of the
bid to the clearing price. The exact weightings are adjustable and
selectable in the software.
[0070] In lieu of a set percentage of bidders, in one embodiment
bidders whose bid is within a certain range from the clearing price
may be rewarded. This range may depend on the size of the bid. For
example, the following relationship may exist between size of bid
and bid precision in order to be rewarded: TABLE-US-00003 Size of
Bid Bid Precision $1000 $0.01 $10000 $0.02 $100000 $0.13 $1000000
$1.26 $10000000 $12.51
[0071] The ranges listed above permit a big investor with a less
precise bid to be rewarded. This encourages big investors, for
example professional investors, to participate in the simulation as
they would in the real-world offering. Again, the exact threshold
for selection is adjustable and selectable in the software.
[0072] Other incentives may be provided to stimulate participation
in general. For example, any bidder who purchases at least $300
worth of credits for one company's offering may receive premium
research content on that series of auctions corresponding to that
company's real-world offering for no additional charge. A plurality
of simulation auction rounds may be held before each real-world
auction. Thus, bidders may input different prices or purchase
amounts or use varying strategies in different auction rounds.
[0073] As stated above, a plurality of simulation rounds may be
held for each real world auction. As people become interested in
and educated about an offering, the market information regarding
the offering will develop. Holding a plurality of simulation rounds
provides information about the market as the market develops. Thus,
each auction round may provide a different view of the market
information and the bidders' mentality.
[0074] Feedback, such as the individual auction outcome, is
provided to each bidder prior to the occurrence of the real auction
being simulated by the invention. The outcome report may be
transmitted to each bidder via email. Providing this timely outcome
report allows a bidder to place a bid in the real auction with at
least some knowledge of what the simulation auction showed demand
to be. Greater amounts of demand curve information would be
expected to have higher value to a simulation auction bidder who
becomes a bidder in the real-world auction.
[0075] Further, after the real-world auction, the invention may
provide after-market information to the bidder reflecting
information from the simulation auction as well as information from
the real-world auction. For example, if a bidder bid $27 during the
simulation auction and the real-world auction brokered clearing
price was $23, the invention may notify such a bidder using a
market prompt reporting that the real-world clearing price was
below their proposed bid in the simulation auction. Such a prompt
allows the bidder to take the opportunity to bid at a value more
favorable than one they had indicated as acceptable. As with
auction outcomes, the prompt may be communicated by e-mail or
provided at a website or by other electronic means.
D. Further Design Considerations
[0076] FIG. 6 illustrates the relationship of a simulated
securities offering 90 to a corresponding real world securities
offering 92. In the simulated securities offering 90, a simulation
auction 94 is held for a set of securities that is the same as or
designed to be a representative sample of the real-world offering
92 that is the selected subject for the simulation. Participant
bidders 96 place bids for the simulation auction 94 at block 98. An
auction manager 100, using the auction management system,
aggregates the bid information 102 and applies an allocation rule
set to determine the individual auction outcome for each bidder 96.
The individual auction outcome is then transmitted, at block 104,
to each participant bidder 96. At block 106, the auction management
system also determines which participant bidders 96 should receive
additional outcome information 108 as a reward for participation in
a way that adds utility to the simulation. This may involve a
calculation of the utility of each bid to the statistical validity,
accuracy or some realism measure of the simulation. It is expected
that the weighing processes for rewarding certain types of bids and
bidders will be refined by comparison of simulation results to
actual auction results. Neural networks or other correlation tools
may be used to develop the utility evaluation processes and
implement rewards in the auction management system in such a way
that participation of bidders that add validity to the simulation
as a pricing and demand curve exploration tool is encouraged.
[0077] The auction management system further analyzes the bid
information to develop premium content that is expected to be
useful for the real-world bidding strategy of participant bidders
96 who are considering bids in the corresponding real-world
offering 92. The analyzed bid information 105, or premium content,
may be transmitted to those bidders receiving rewards, at block
110. The auction information, including aggregated bid information
and analyzed bid information may also be offered for purchase, 112,
although its value to participant bidders 96 is expected to make it
important as an incentive to attract participants that contribute
validity to the simulation.
[0078] The participant bidders 96 may use the information garnered
from the simulation auction 94 to place real world bids 114 in a
real world auction 116 of the real world securities offering 92.
Thus, there may be an overlap between the participant bidders 92 in
the simulated securities offering 90 and the bidders 118 in the
real-world securities offering 92. In the real world securities
offering 92, a real world auction 116 is held wherein bidders 118
submit real world bids 114. An auction manager 120 conducts the
real-world offering auction 116 (including processes that may be
rule oriented or that may involve discretion) and, ultimately,
aggregates the bids, at block 122, according to the rules. The
winning bids are determined and an offeror 124 sells the
securities, at block 126, to the winners of the real-world auction
116. A goal of the invention is to provide a simulated bidding
situation in which the participants can make a bid (or bids) and
will receive a reported outcome that will accurately predict the
result if they make that same bid in the real world offering. The
premium information helps a participant decide how to adjust a bid
so as to achieve a desired purchase objective, which may be the
same as or different from the objective of the bid on which they
receive a direct outcome report. If enough realism can be achieved
in the simulation auction, the resulting demand curve information
will permit a recipient of that information to make an educated
bid, better calculated to optimize investment objectives.
[0079] Fundamentally, the present invention provides a simulation
for a securities offering that combines the following features:
[0080] 1. Validity and data enhancing features, including
participant filters to filter out bidders and bids that are viewed
as distorting the simulation, including a bid fee structure that
increases with the total value of the bid made, and rewards to
incentivize participants to provide bids of the kind that add
validity and accuracy to the outcome of the simulation [0081] 2.
Flexible auction structures for bid processing, including providing
one or more sets of auction rules, which can be selected in a given
simulation to track the structure of a securities offering auction
that is the subject of simulation, to appeal to participants or to
provide a particular view of the demand curve(s) that is derived
from the simulations bids. [0082] 3. Development of additional
market information going beyond individual bid outcomes, to provide
valuable demand curve information usable either as an incentive to
encourage bids that have greater value or as salable market
research information to persons who are considering bids in the
securities offering auction that is the subject of simulation.
[0083] 4. Distribution of the individual bid outcomes and/or the
additional market information to all participants, selected
participants who have earned rewards or purchasers who value the
data available from a simulation. E. Implementation
[0084] The invention may be implemented on two dual processor Intel
Pentium 4 servers, each with 1 gigabyte of memory using Microsoft
Windows 2003, Internet Information Server (IIS), .NET, and SQL
2003, and customized software that provides the auction management
features discussed above. The database is preferably capable of
storing and processing millions of records per simulation auction
as each participant may have multiple bids.
[0085] The system may be designed to integrate with a shopping cart
system and a secure credit card processing system such as
PayPal.
[0086] Because confidential user demographic and bid data is stored
in the SQL Server, this server may operate behind a firewall such
that the only access permitted to the SQL Server via the Internet
is pre-defined, specific SQL stored procedure calls from the "front
end" Web Server that is accessed by users over the Internet.
[0087] Further, the simulation auction system may be designed as a
high availability implementation by operating multiple systems for
each of the SQL server and the Web server. These can be run in a
load-balanced configuration at multiple data centers.
[0088] Attached as Appendix A is some SQL code that was developed
to determine the clearing price of a simulation auction.
[0089] Although the invention has been described with reference to
preferred embodiments, persons skilled in the art will recognize
that changes may be made in form and detail without departing from
the spirit and scope of the invention.
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