U.S. patent application number 12/147972 was filed with the patent office on 2008-10-16 for derivative securities and system for trading same.
This patent application is currently assigned to Delta Rangers, Inc.. Invention is credited to Bradley J. McGill.
Application Number | 20080256001 12/147972 |
Document ID | / |
Family ID | 25326117 |
Filed Date | 2008-10-16 |
United States Patent
Application |
20080256001 |
Kind Code |
A1 |
McGill; Bradley J. |
October 16, 2008 |
Derivative Securities And System For Trading Same
Abstract
The present invention provides a derivative security whose value
is determined by whether an underlying instrument will trade above
or below a given price at or by a given time. The price of the
underlying instrument in the inventive instrument must move a
certain amount in a certain direction in a limited amount of time.
If it does, that trade yields a fixed amount of money for the
acceptor of the contract. If it does not, that acceptor loses the
premium he paid for the contract. The inventive derivative
securities may have a short-term expiry. The underlying instrument
of the inventive derivative may be a stock or other security, or an
index or interest rate. The present invention also provides for a
system to trade the inventive security that allows any participant
to post offers or fill orders from posted offers, with order flow
coming from individual investors, institutions, specialists and
market makers.
Inventors: |
McGill; Bradley J.;
(Birmingham, AL) |
Correspondence
Address: |
MORGAN, LEWIS & BOCKIUS LLP
1701 MARKET STREET
PHILADELPHIA
PA
19103-2921
US
|
Assignee: |
Delta Rangers, Inc.
Birmingham
AL
|
Family ID: |
25326117 |
Appl. No.: |
12/147972 |
Filed: |
June 27, 2008 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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09857496 |
Jun 5, 2001 |
7409367 |
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PCT/US01/11748 |
May 4, 2001 |
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12147972 |
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Current U.S.
Class: |
705/36R ;
705/37 |
Current CPC
Class: |
G06Q 40/04 20130101;
G06Q 40/06 20130101 |
Class at
Publication: |
705/36.R ;
705/37 |
International
Class: |
G06Q 40/00 20060101
G06Q040/00 |
Claims
1. A method of creating and trading a group of at least first and
second related financial products, comprising: (a) identifying an
underlying instrument, said underlying instrument having a first
price corresponding to a market price of the underlying instrument
at a first time; (b) identifying an expiry and a payout; (c)
identifying a first premium to be paid by a buyer of the first
financial product when the first financial product is issued; (d)
selecting a first value change in the underlying instrument,
wherein the first value change comprises an absolute chance in
value of the underlying instrument and a direction of change in
value of the underlying instrument; wherein said first financial
product is worth the payout amount to a buyer of the first
financial product if, between the first time and expiry, the market
price of the underlying instrument meets a first strike price,
wherein the first strike price is a sum of the first price and the
first value change; and wherein said first financial product is
worth nothing to the buyer if, between the first time and expiry,
the market price of the underlying instrument fails to meet the
first strike price; (e) identifying a second premium to be paid by
a buyer of the second financial product when the second financial
product is issued, wherein the second premium is different from the
first premium; (f) selecting a second value change in the
underlying instrument, wherein the second value change is different
from the first value change, and the second value change comprises
an absolute change in value of the underlying instrument and a
direction of change in value of the underlying instrument; wherein
said second financial product is worth the payout amount to a buyer
of the second financial product if, between the first time and
expire, the market price of the underlying instrument meets a
second strike price, wherein the second strike price is a sum of
the first price and the second value change; and wherein said
second financial product is worth nothing to the buyer if, between
the first time and expiry, the market price of the underlying
instrument fails to meet the second strike price; and (g) providing
a common electronic platform for trading each of the related
financial products in the group.
2. The method of claim 1, further comprising the step of
identifying a type of said financial product.
3. The method of claim 2, wherein said identifying a type comprises
selecting either call or put.
4. The method of claim 2, wherein said type is a call, and the
change in value is a positive amount.
5. The method of claim 2, wherein said type is a put, and the
change in value is a negative amount.
6. The method of claim 1, wherein said expiry is comprised of a
date and time.
7. The method of claim 6, wherein said time is one of the group of
open, noon and close.
8. The method of claim 6, wherein said time is an hour.
9. The method of claim 1, wherein said underlying instrument is a
stock.
10. The method of claim 1, wherein said underlying instrument is a
futures contract.
11. The method of claim 1, wherein said underlying instrument is an
index.
12. (canceled)
13. The method of claim 1, additionally comprising identifying a
quantity of the financial products.
14. The method of claim 1, wherein said financial product is
offered for sale in an online trading exchange.
15. The method of claim 1, wherein said first time is the time the
financial product is bought by a buyer.
16. The method of claim 1 comprising the additional step of
identifying the first time.
17. The method of claim 16, wherein said identifying the first time
comprises specifying a date and time.
18. The method of claim 16, wherein said identifying, the first
time comprises specifying, a time gap.
19. A machine-readable medium for creating and trading a group of
at least first and second financial products the medium having
instructions stored thereon which when executed by a processor,
cause the processor to: identify an underlying instrument said
underlying instrument having a first price corresponding to a
market price of the underlying instrument at a first time; identify
an expiry and a payout; identify a first premium to be paid by a
buyer of the first financial product when the first financial
product is issued; select a first value change in the underlying
instrument, wherein the first value change comprises an absolute
change in value of the underlying instrument and a direction of
change in value of the underlying instrument; wherein said first
financial product is worth the payout amount to a buyer of the
financial product if, between the first time and expiry, the market
price of the underlying instrument meets a first strike price,
wherein the first strike price is a sum of the first price and the
first value change; and wherein said first financial product is
worth nothing to the buyer if between the first time and expiry,
the market price of the underlying instrument fails to meet the
first strike price; identify a second premium to be paid by a buyer
of the second financial product when the second financial product
is issued, wherein the second premium is different from the first
premium; select a second value change in the underlying instrument,
wherein the second value change is different from the first value
change, and the second value chance comprises an absolute change in
value of the underlying instrument and a direction of chance in
value of the underlying instrument; wherein said second financial
product is worth the payout amount to a buyer of the second
financial product if, between the first time and expiry, the market
price of the underlying instrument meets a second strike price,
wherein the second strike price is a sum of the first price and the
second value change; and wherein said second financial product is
worth nothing to the buyer if, between the first time and expiry,
the market price of the underlying instrument fails to meet the
second strike price; and provide a common electronic platform for
trading each of the related financial products in the group.
20. The machine-readable medium of claim 19, further comprising
instructions stored thereon that cause the processor to identify a
type of said financial product.
21. The machine-readable medium of claim 20, wherein said
instructions stored thereon which cause the processor to identify a
type further comprises instructions which cause the processor to
select either call or put.
22. The machine-readable medium of claim 20, wherein said type is a
call, and the change in value is a positive amount.
23. The machine-readable medium of claim 20, wherein said type is a
put, and the change in value is a negative amount.
24. The machine-readable medium of claim 19, wherein said expiry is
comprised of a date and time.
25. The machine-readable medium of claim 24, wherein said time is
one of the group of open, noon and close.
26. The machine-readable medium of claim 24, wherein said time is
an hour.
27. The machine-readable medium of claim 19, wherein said
underlying instrument is a stock.
28. The machine-readable medium of claim 19, wherein said
underlying instrument is a futures contract.
29. The machine-readable medium of claim 19, wherein said
underlying instrument is an index.
30. (canceled)
31. The machine-readable medium of claim 19, additionally
comprising instructions which cause the processor to identify a
quantity of the financial products.
32. The machine-readable medium of claim 19, wherein said financial
product is offered for sale in an online trading exchange.
33. The machine-readable medium of claim 19, wherein said first
time is the time the financial product is bought by a buyer.
34. The machine-readable medium of claim 19, additionally
comprising instructions which cause the processor to identify the
first time.
35. The machine-readable medium of claim 34, wherein said
instructions which cause the processor to identify the first time
comprises instructions identifying a specific date and time.
36. The machine-readable medium of claim 34, wherein said
instructions which cause the processor to identify the first time
comprise instructions for specifying a time gap.
37-64. (canceled)
Description
FIELD OF THE INVENTION
[0001] The present invention generally relates to a computer-based
method and system for trading derivative securities. In particular,
the present invention provides for a new type of derivative
security whose value is determined by whether an underlying
instrument will trade above or below a given price at a given time.
The present invention also provides a platform for trading the
derivative security.
BACKGROUND OF THE INVENTION
[0002] The advent of the Internet and electronic trading has
completely changed how people invest in the stock market. While
once the stock market was almost exclusively the domain of powerful
businessmen with only a very small percentage of the public
actually owning stock, today the stock market is part of everyday
life for the vast majority of Americans. More people own equities,
either directly or indirectly through mutual funds and pension
funds, than at any time before.
[0003] In the first half of the twentieth century, a stockbroker
was typically the intermediary between the investing public and the
stock market. These brokers would "read the ticker tape" as it came
out on long ribbons, and would then convey this information to
their clientele at opportune moments. As technology has advanced,
the ticker tape has been replaced by electronics, greatly enhancing
the efficiency of price dissemination and lowering the learning
curve needed to trade on the stock market.
[0004] With the advances in technology, the brokerage industry has
also changed. Technological advances such as Electronic
Communications Networks (ECNs) and the Small Order Execution System
(SOES) and new and better access to research information have come
together to empower the individual investor. The self-motivated
investor does not need a brokerage firm to get research
information, it is all available over the Internet. While once
brokerages were almost exclusively full-service, offering
investment advice and a multitude of financial services, today
people have the choice of using discount brokers and online brokers
to invest in the market. A discount broker offers access to the
markets without all the advice a client typically gets from a
full-service firm. As a result, those using a discount broker pay
less to conduct transactions than a person doing business at a
full-service firm does. Reduced trading commissions, sometimes more
than 50% less than traditional full-service brokerage firms, are
available to individual investors through discount brokers.
[0005] The automated systems associated with trading on the Web
have reduced the broker's cost of executing trades, and therefore
deep-discount online brokerages have been developed. These online
brokers have enabled a large number of do-it-yourself investors to
trade securities completely independent of financial advisors and
stockbrokers. The Internet brokerage industry is currently
executing more than 800,000 trades a day. The largest online
brokerage firms have nearly 2 million accounts, and at least one
stock trade in seven is executed over the Internet.
[0006] There are basically two types of people that participate in
the stock market--the "investor" and the "trader". The buy and hold
investor has a long-term view of the market and buys securities
with the intention of holding them through market ups and downs.
The "institutional investor" makes investments and trades stocks on
behalf of other people. Institutional investors buy and sell large
quantities of stocks and may qualify for preferential treatment and
lower commissions by trading large enough quantities. In the past,
almost all trades made on the stock market were made through
institutional investors. However thanks to the advent of discount
and online brokerages, individuals who wish to invest in the market
now have an abundance of information and electronic trading
services available to them to make their own transactions.
[0007] A "trader", as opposed to the buy-and-hold investor, is a
person who buys and sells often, even intraday, with the objective
of short-term profit. A trader looks for price swings and
situations for profitable trading. Traders constantly monitor
market moves, looking for trends, trend reversals, breakouts and
all manner of stock movements.
[0008] Increasingly, individuals ("retail traders") are speculating
in different types of securities using online brokerages. Retail
traders may be individuals who actively follow the financial
markets, and like the excitement of speculating. Typically, these
investors are young and have relatively high incomes, but have a
lower net worth than traditional, full-service brokerage clients.
They tend to trade frequently; at least a few times a week. A "day
trader" is a retail trader who buys and sells stocks or options
intraday, looking more for quick profits than long-term capital
appreciation.
[0009] Several types of existing securities and trading methods are
currently popular with retail traders speculating in the financial
market, including financial futures contracts, exchange-based
options, trading on margin and selling a stock short. Each of these
types of traditional securities or trading methods has significant
disadvantages to the retail trader.
[0010] A futures contract is an agreement from a buyer to accept
delivery (or for a seller to make delivery) of a specific
commodity, currency or financial instrument for a predetermined
price by a designated date. Most futures contracts are bought on
speculation about future prices, and most futures traders are
speculators (i.e., they do not expect to take delivery of the
product). Speculators intend to buy low and sell high. They make
money by forecasting price movement. In the futures markets,
speculators not only have to forecast price movement, but they also
need to predict when a price will be higher or lower. This makes
trading in futures more risky than trading in stocks. Owning a
futures contract exposes the trader to theoretically unlimited risk
if the position moves against him and he is unable to close it out
due to market circumstances. In addition, many retail traders
cannot invest in futures contracts because of the significant net
worth required to trade futures.
[0011] An option is a trading instrument that represents the right
to buy (call) or sell (put) a specified amount of underlying
security at a predetermined fixed price within a specified time.
The underlying security can be stock, indexes, bonds, currencies or
futures contracts. The fixed price, or "strike price", is the price
at which the security underlying an option can be purchased (call)
or sold (put).
[0012] The option purchaser pays a premium for the right, but not
the obligation, to exercise the specifics of the option contract.
An option is worthless upon expiration, and the premium paid for
the option cannot be recouped. The option seller assumes a legal
obligation to fulfill the specifics of the contract if the option
is assigned to him or her, however the premium is the extent of the
potential risk to the option buyer. It is a payment to the seller
of the option to tie up the obligation on the security for the
requisite time period--the longer the period, the higher the
premium. Options lose value with time. This "time decay" is part of
the premium paid for the option. Time value will decay, or
disappear, as the option approaches the expiration date.
[0013] Options can be used in a variety of ways to profit from a
rise or fall in the market. Buying an option offers limited risk
and unlimited profit potential. Selling an option, however, comes
with an obligation to complete the trade if the party buying the
option chooses to exercise the option. Selling an option therefore
presents the seller with limited profit potential and significant
risk unless the position is hedged in some manner.
[0014] There are two types of options--calls and puts. A call
option contract gives the holder the right, but not the obligation,
to buy a specified amount of an underlying security at a specified
price within a specified time in exchange for a premium. The call
option buyer hopes the price of the underlying stock will rise by
the call's expiration, while the call option seller hopes that the
price of the underlying stock will decline or remain stable.
[0015] A put option contract gives the owner the right, but not the
obligation, to sell a specified amount of an underlying security at
a specified price within a specified time in exchange for a
premium. The put option buyer hopes the price of the underlying
stock will drop by a specific date, while the put option seller
hopes the price of the underlying stock will rise or remain
stable.
[0016] The strike price is the fixed price at which the security
underlying an option can be purchased (call) or sold (put) at any
time prior to the option's expiration date if the option is
exercised. An option's expiration date designates the last day on
which an option may be exercised. American-style options can be
exercised at any time before the expiration day, while
European-style options can be exercised only on the expiration
date. Exchange traded options have an expiration month, and
American-style options expire on the third Saturday of the
expiration month.
[0017] An option's premium denotes the actual price a trader pays
to buy an option or receives from selling an option. The "bid" is
the highest price a prospective buyer is prepared to pay for a
specified time and the "ask` is the lowest price acceptable to a
prospective seller. Together, the bid and ask prices constitute a
quote and the difference between the two prices is the bid-ask
spread.
[0018] Option pricing is a complex process. There are several major
components that affect the premium of an option, including the
current price of the underlying security, the type of option, the
strike price as compared to current market price (the option's
intrinsic value), the amount of time remaining until expiration
(the option's time value) and the volatility of the underlying
security.
[0019] In general, an option's premium is its intrinsic value plus
its time value. "Intrinsic value" measures the amount by which the
strike price of an option is in-the-money in relation to the
current price of the underlying stock. A call option whose strike
price is above the current market price of the underlying security
has no intrinsic value. A put option whose strike price is below
the current market price of the underlying security has no
intrinsic value. The time value is simply the option value less the
intrinsic value. As the option approaches expiration, the time
value goes to zero. At expiration the only value in an option, if
any, is its intrinsic value.
[0020] The time value portion of the option premium depends on
volatility. "Volatility" is a percentage that measures the amount
by which an underlying security is expected to fluctuate in a given
period of time. Basically, it is the speed of change in a market.
Options often increase in price when there is a rise in volatility
even if the price of the underlying security doesn't change.
Options of a high-volatility stock generally command a higher
premium because they have a greater chance of making a big move and
being in-the-money by expiration.
[0021] Historical volatility measures a stock's propensity for
movement based on the stock's past price action during a specific
time period. Implied volatility is a computed value that measures
an option's volatility, rather than that of the underlying
security. The fair value of an option is frequently calculated by
entering the historical volatility of the underlying security into
an option-pricing model, such as the Black-Scholes for stocks. The
computed fair value may differ from the actual market price of the
option. Implied volatility is the volatility needed to achieve the
option's actual market price. For example, if the market price of
an option rises without a change in the price of the underlying
security, implied volatility will have risen.
[0022] Exchange-traded options are not efficient for a retail
trader for a number of reasons. First, exchange-traded options tend
to have a wide bid/ask spread. The market maker or specialist at
the exchange prices a significant markup into the two-way quote he
offers to the market. This spread, which covers his hedging costs
and profit, can make short-term options trading costly and
generally inefficient. Traditional exchange-traded options have
significant levels of time value and implied volatility, the
movement of which can cost a speculator returns even if he is right
on the movement of the underlying index or stock. This can make
options trading extremely expensive for traders speculating on
relatively small moves in the market. For example, the transaction
costs on a representative at-the-money call on the S&P 500,
including commissions and bid/ask spread, may be close to 15% of
the premium, while the minimum trade size may average approximately
$1500 per contract. The implied volatility of an option fluctuates,
which can cost the trader potential gains even if the market moves
in the predicted direction. In addition, the minimum trade size may
be an obstacle for many retail traders.
[0023] Over-the-counter options and contracts have the same types
of limitations as do exchange-traded options, and are additionally
limited to institutional investors in blocks typically of $1
million or more. Therefore, they are also inadequate for retail
traders to speculate in the market.
[0024] Retail traders may also speculate by buying on the margin.
Buying stocks on margin is limited by Federal Reserve regulations.
In addition, the risk of a margin call makes this type of trading
risky. Short selling stocks is also risky, and requires substantial
margin.
[0025] Meanwhile, new regulations at the Securities and Exchange
Commission (SEC) have spawned the development of the Alternative
Trading System (ATS)--an ATS is a new method of trading financial
instruments (stocks, bonds, currencies, option, etc.) on an
electronic platform that directly connects buyers and sellers.
Trades on an ATS bypass exchanges and dealer networks. The
development of Alternative Trading Systems has led to greater
parity between institutional and retail investors. However, these
systems are still limited to traditional securities.
[0026] In view of the foregoing, it can be appreciated that a
substantial need exists for a financial instrument that provides
for speculating in the market with a small minimum trade size, no
required net worth and limited risk, while still providing high
leverage capabilities. In addition, a need exists for a trading
system designed to trade such a new financial instrument.
SUMMARY OF THE INVENTION
[0027] The present invention solves these problems by providing a
derivative security whose value is determined by whether an
underlying instrument will trade above or below a given price at or
by a given time. Basically, the price of the underlying instrument
in the inventive instrument must move a certain amount in a certain
direction in a limited amount of time. If it does, that trade
yields a fixed amount of money for the buyer or acceptor of the
contract. If it does not, that acceptor has lost only the premium
he paid for the contract. Unlike traditional futures and options,
the inventive instrument is keyed to a change in value of an
underlying instrument, not its absolute value.
[0028] In addition, the present invention provides for a system to
trade the inventive derivative security that allows any participant
to post offers or fill orders from posted offers, with order flow
coming from individual investors via online brokerages,
institutions, and specialists and market makers.
[0029] Accordingly, the present invention provides for a method of
creating a financial product, wherein said method comprises:
identifying an underlying instrument, said underlying instrument
having a first price corresponding to a market price of the
underlying instrument at a first time; identifying an expiry;
identifying a premium to be paid by a buyer of the financial
product; identifying a payout; identifying a value change in the
underlying instrument; wherein said financial product is worth the
payout amount to a buyer of the financial product if, between the
first time and expiry, the market price of the underlying
instrument meets a strike price, wherein the strike price is a sum
of the first price and the value change; and wherein said financial
product is worth nothing to the buyer if, between the first time
and expiry, the market price of the underlying instrument fails to
meet the strike price.
[0030] With these and other advantages and features of the
invention that will become hereinafter apparent, the nature of the
invention may be more clearly understood by reference to the
following detailed description of the invention, to the appended
claims and to the several drawings attached herein.
BRIEF DESCRIPTION OF THE DRAWINGS
[0031] The accompanying drawings, which are included to provide a
further understanding of the invention and are incorporated in and
constitute a part of this specification, illustrate embodiments of
the invention and together with the description serve to explain
the principles of the invention.
[0032] FIG. 1 illustrates a trading network according to one
embodiment of the present invention;
[0033] FIG. 2 is an example of a matrix that may be shown to a user
upon entering the trading platform of the present invention;
[0034] FIG. 3 is screenshot of an example marketplace for DELTA
contracts in one embodiment of the present invention. In this
example, each DELTA contract uses Cisco common stock as its
underlying instrument;
[0035] FIG. 4 is an interface that may be used to design and offer
a DELTA contract in one embodiment of the present invention;
[0036] FIG. 5 is a screenshot illustrating an updated marketplace
once the contract designed in FIG. 4 has been entered into the
marketplace of FIG. 3;
[0037] FIG. 6 is an interface for buying available DELTA contracts
in one embodiment of the present invention;
[0038] FIG. 7 is a screenshot illustrating an updated marketplace
once the contracts in FIG. 6 have been purchased from the
marketplace of FIG. 5;
[0039] FIG. 8 is an example marketplace for DELTA offers in a
second embodiment of the present invention;
[0040] FIG. 9 is an example marketplace for DELTA offers in a third
embodiment of the present invention; and
[0041] FIG. 10 illustrates the life cycle of a DELTA contract.
DETAILED DESCRIPTION
[0042] Reference will now be made in detail to the embodiments of
the invention, examples of which are illustrated in the
accompanying drawings. Wherever possible, the same reference
numbers will be used throughout the drawings to refer to the same
or like components.
[0043] It is worthy to note that any reference in the specification
to "one embodiment" or "an embodiment" means that a particular
feature, structure or characteristic described in connection with
the embodiment is included in at least one embodiment of the
invention. The appearances of the phrase "in one embodiment" in
various places in the specification are not necessarily all
referring to the same embodiment.
[0044] Retail traders encounter significant obstacles when
speculating in the market using traditional securities. The minimum
trade size, bid/ask spread and risk involved when trading futures
and options deters many retail investors from trading in these
traditional securities. However, many retail investors closely
follow the markets, and can successfully predict market movements.
Yet, they are unable to capitalize on their insight as current
securities and trading systems do not easily allow for such
speculative activity from retail traders.
[0045] DELTA Contract
[0046] The present invention solves these problems by introducing a
financial instrument that is intended to be used to speculate on
market movements. Unlike many current financial instruments, the
financial instrument of the present invention is a pure derivative
with no intrinsic value.
[0047] The inventive financial instrument is a derivative contract,
the Derivative Electronically Linked Trading Auction (DELTA)
contract, whose value is determined by whether an underlying
instrument will trade above or below a given price at or by a given
time. Basically, the price of the underlying instrument in the
inventive instrument must move a certain amount in a certain
direction in a limited amount of time. If it does, that trade
yields a fixed amount of money for the buyer or acceptor of the
contract. If it does not, that acceptor has lost only the premium
he paid for the contract. Unlike traditional futures and options,
the inventive instrument is keyed to a change in value of an
underlying instrument, not its absolute value. In addition, unlike
traditional instruments, the contract of the present invention
settles in cash instead of stock or other underlying security.
[0048] There is no limit to the number of DELTA contracts that may
be offered, because the DELTA contract is a pure derivative. The
value of the DELTA contract is directly correlated to the value of
the underlying instrument by the time of expiry. There is no
ownership of the underlying instrument at any time. This is in
contrast to the exchange traded options market, which is limited by
the underlying instrument.
[0049] The underlying instrument in the DELTA contract may be any
type of instrument. The underlying instrument may be a security,
such as stock or futures contracts. Other examples of instruments
that may be used as the underlying instrument in the present
invention include currencies, commodities, market indices, mutual
funds, interest rates and insurance contracts. The underlying
instrument may even be based on risk measurements, real estate or
even sporting events. Any instrument that can demonstrate a
measurable difference in value or price over a set period of time
can be used as the underlying instrument in the present
invention.
[0050] The inventive financial instrument is a contract that a
trader designs himself. When designing a contract, the trader may
set the type of the contract, strike change in value, expiration
and number of contracts to offer, as well as the premium, and
whether he wishes to be an offeror or acceptor. Any participant in
the inventive trading system can design and offer a DELTA contract,
and any participant can accept an offer of a DELTA contract,
whether an institutional investor or retail trader. These functions
allow a degree of customization not offered by exchange traded
options, or any other type of listed derivative.
[0051] The strike price in the inventive financial instrument is
determined not by an absolute value, rather it is determined by the
amount of change in value of an underlying instrument from a
predetermined time prior to execution. The amount of change can be
a positive or negative amount. In addition, as time passes--the
strike price may change for contracts that have been offered but
not yet accepted. The strike price is determined by the price of an
underlying instrument a specific time prior to or at the time the
contract is accepted and the strike change in value specified in
the offered contract.
[0052] Basically, the formula for determining the strike price
is:
Strike price=price of the underlying instrument at a specific time
prior to or at execution+the strike change in value specified in
the contract.
[0053] As described, the determination of the strike price depends
on the price of the underlying instrument at a specified time. In
one embodiment, the specified time is the time the contract is
executed. However, the specified time may be a time before the
contract is offered. For example, the contract may specify that it
will use the closing price of the underlying instrument on the day
the contract is offered. As another example, the specified time may
be correlated to the contract's expiry. As will be obvious to one
skilled in the art, there are many different ways of specifying a
time, and it is intended that the scope of the present invention
cover these various methods.
[0054] In one embodiment, there are two types of DELTA
contracts--put and call. If the offered contract is a put contract,
the trader who buys the contract believes that the price of the
underlying instrument will decline from the price of the underlying
instrument at the time of execution of the put contract or some
other specified time, to a price that is less than the strike price
at or by the time of expiry of the put contract. In the case of a
put DELTA contract, the buyer of the put contract pays the offeror
or writer of the put contract a contract premium and, in exchange,
the buyer will earn the contract payout amount (e.g. $100 or other
set amount) if the contract expires "in the money." More
particularly, if the price of the underlying instrument falls below
the strike price between execution or some other specified time,
and expiry of the put contract, the contract is deemed to have
expired "in the money", and the trader who wrote the contract will
pay the trader who accepted the contract the contract payout amount
(e.g. $100 in the current example). If the value of the underlying
instrument fails to fall below the strike price between the time of
execution or some other specified time and expiry, the contract is
not deemed to be "in the money," and the offeror of the contract
pays the acceptor of the contract nothing upon expiry. In either
case, the trader that offered the contract keeps the premium paid
to accept the contract.
[0055] If the offered contract is a DELTA call contract, the trader
who accepts the contract believes that the price of the underlying
instrument will rise from the price of the underlying instrument at
the time of execution of the call contract, or some other specified
time, to a price that is greater than the strike price at or by the
time of expiry of the call contract. In the case of a call DELTA
contract, the acceptor of the call contract pays the offeror of the
call contract a contract premium and, in exchange, the acceptor
will earn the contract payout amount (e.g. $100 or other set
amount) if the contract expires "in the money." More particularly,
if the value of the underlying instrument rises above the strike
price between execution, or some other specified time, and expiry
of the call contract, the contract will pay the trader who accepted
the contract the contract payout amount (e.g. $100 in the current
example). If the underlying instrument price fails to rise above
the strike price between the time of execution, or some other
specified time, and expiry, the contract will be deemed to not have
expired "in the money," and the offeror of the contract will be
deemed not to have expired "in the money," and the offeror of the
contract pays the acceptor of the contract nothing upon expiry. In
either case, the trade that offered the contract keeps the premium
paid to purchase the contract.
[0056] In another embodiment, the contracts do not have a type. In
this embodiment, the strike change in value is either a positive or
negative number. If the strike change in value is a positive
number, the contract acts like a call contract, wherein the strike
price is determined by adding the price of the underlying
instrument at the time of execution or some other specified time to
the strike change in value specified in the contract. If the price
of the underlying instrument rises to meet or exceed this price
before expiry, the contract is "in the money." Alternatively, if
the strike change in value is a negative number, the contract acts
like a put contract, wherein the strike price is determined by
subtracting the strike change in value from the price of the
underlying instrument at the time of execution or some other
specified time. If the price of the underlying instrument falls to
or below the strike price before expiry, the contract expires "in
the money."
[0057] In addition, the contracts described thus far are similar to
"American-style" options, in that a contract is "in the money" if
it meets the strike price at any time before expiry, regardless of
the price of the underlying instrument at the exact time of expiry.
In an alternative embodiment, the DELTA contracts could follow
"European-style" contracts, wherein they are only "in the money" if
the price of the underlying instrument meets or exceeds the strike
price at the time of expiry (in the case of call contracts), or if
the price of the underlying instrument meets or is below the strike
price at the time of expiry (in the case of put contracts).
[0058] The inventive financial instrument may have several choices
available for expiry, including multiple expiries per day. For
example, a contract may expire at open, noon or close. As another
example, the contracts may have hourly expiries available. By
allowing expiration at different times of the day, the inventive
financial instrument enables a trader to capitalize on short-term,
intraday price swings. Multiple daily expiries allow for trading
around specific events, such as earnings releases. In addition, it
enables the financial instrument of the present invention to be
used as an innovative hedging tool.
[0059] The inventive contracts are binary. That is, they expire at
either full value or no value. The value of the contract is
directly correlated to the value of the underlying instrument at
the time of expiry. For example, in the case of a call that expires
at close on a particular day, if the underlying instrument is a
stock that is trading above the strike price at closing time, the
contract expires at a fixed dollar amount (referred to above as the
"contract payout amount."). If the stock closes below the strike
price, the contract is worth $0.
[0060] An investor pays a premium for a contract with the knowledge
that it will be worth either the contract payout amount ($100 in
the above example) or $0 upon expiration. The premium is based upon
the magnitude of the move the value of the underlying instrument
must make at expiry in order to equal or exceed the strike price.
For example, if an investor believes that Cisco stock will close up
today, he may choose to pay $50 to receive $100 if Cisco stock does
close up 1 point or more, $35 if he believes it will close up 2
points or more; or $10 is he believes Cisco stock will close up 5
points or more. In general, the greater the move of the underlying
instrument needed to reach the strike price, the cheaper the
premium.
[0061] Any participant in the trading platform of the present
invention can design and offer his own contract, or accept any
offered contract. All participants have equal access to information
and data regarding the market, regardless of whether the
participant is a retail trader or an institutional market maker. In
the present invention, institutions, market makers and individual
traders access the system and post offers on the same basis, with
either eligible to buy or sell at any time, to any other trader in
the network.
[0062] Trading System for Trading the DELTA Contract
[0063] The embodiments of the invention include an electronic
trading platform that supports the trading of the financial
instrument of the present invention. The trading platform of the
present invention allows participants to post offers or fill orders
from posted offers, with order flow coming from individual
investors via online brokerages, institutions, and specialists and
market makers. It is important to note that the order flow moves in
both directions--any trader can buy from or sell to any other
trader at any time. This is different from the current, linear
structure, where orders are sent into market makers--a closed
universe of institutions--executed on a basis inherently favorable
to these institutions and specialists, then sent back out to
individual traders.
[0064] It is a feature of the present invention that both retail
investors and market makers benefit from using the inventive
trading system. Retail investors benefit from the ability to trade
directly with institutions on equal footing. Market makers can use
their expertise in pricing derivatives and hedging market exposure
to operate profitably. This profitability should encourage
specialists and market makers to bring their capital to the
inventive system, thereby creating liquidity in the
marketplace.
[0065] All participants in the trading platform of the present
invention trade on an equal footing. Retail traders can trade
directly with other retail traders, or can sell directly to an
institution. In these situations, trading is being conducted
without any intermediate market makers. This is unlike any
traditional securities exchange.
[0066] FIG. 1 illustrates the various elements of the trading
system of the present invention. As shown, retail traders 10 may
participate in the trading system 40 through online brokerages 20.
Institutional investors 30 may be directly connected with the
trading platform 50 of the present invention, subject to certain
regulatory guidelines.
[0067] Trading platform 50 is typically a server, or set of
servers, that maintains a universe of contracts that are available
for trading. Traders submit contracts to the trading platform to be
offered and accepted, the trading platform maintains a set of live
offered contracts, and executes contract purchases. The trading
platform may be implemented on a server that maintains a database,
or set of databases, in which information about the contracts is
stored and updated in real-time.
[0068] In one embodiment, traders submit contracts and purchase
contracts through a registered broker-dealer. If the trader is an
institutional investor or a market maker, the institution could
have direct connection with the trading platform of the present
invention, as shown by the connection 15 between Institutional
Investor 30 and Trading Platform 50. Retail traders 10 generally
must go through an online broker 20 to connect to the trading
platform to offer and trade contracts. For instance, a retail
trader may log into his account with Schwab, and Schwab may then
offer the trading platform of the present invention as an available
marketplace for the trader. The trader accesses the trading
platform of the present invention directly through Schwab.
Alternatively, the trader may use an ECN on a portal such as
yahoo.com to connect to his online broker. While the trader will
still have to enter his broker's account information, he will not
necessarily have to go through the online broker to access and
trade on the trading platform of the present invention. However, an
account with a broker/dealer is needed to clear and settle
transactions, and therefore to offer and purchase contracts.
[0069] In addition, there may also be viewers 60 that can display
information about the universe of available contracts that do not
require a trader to go through a broker to view information about
the marketplace. For example, a financial or general purpose
website, such as yahoo.com, may offer a viewing portal into the
marketplace. In this portal, the user may view such information as
volume of trades, currently offered contracts, etc. Any person will
generally be able to view such information about the present
marketplace whether he has an online trading account or not.
Generally traders cannot offer or trade contracts through a viewer,
but can only view information about the marketplace through a
viewer.
[0070] As contracts are offered and executed, the trading platform
maintains a universe of what is currently available and at what
price. The trading platform dynamically and reflexively updates the
universe in real-time. The universe of live contracts that are
available for trading is preferably shown as a matrix. The matrix
may first be sorted by underlying instrument, then by type of
contract, strike price and expiry, for example.
[0071] There are many known ways to implement a user interface that
will allow the user to conduct trading. In addition, in one
embodiment traders that access the trading platform through
different brokers may encounter different interfaces as each broker
may implement its own interface to the trading platform. In this
embodiment, the brokers are given interface parameters and
standards, and they develop their own interface to the trading
platform. The matrix server will send out various set fields of
data and require data to be sent in a specified format. In an
alternative embodiment, the trading platform may also be accessed
through dedicated kiosks and/or terminals. In addition, retail
traders may be able to buy and sell DELTA contracts through their
brokers by telephone, in-person visits and through other
traditional means currently available as well. However, the primary
method of accessing the trading platform is through a website.
FIGS. 2-7 illustrate example screens and interfaces that may be
used to conduct trading on the trading platform of the present
invention.
[0072] There may also be features to the trading interface that are
not shown in FIGS. 2-7. For example, the interface may offer
derivatives pricing calculator, such as Black-Scholes, for example.
Other features and add-ons are known to those skilled in the art
and are intended to come within the scope of the present
invention.
[0073] FIG. 2 illustrates an example of a matrix that may be shown
to a user upon entering the trading platform in one embodiment of
the present invention. In this example, there are twenty securities
or indices that may be used as the underlying instrument for the
inventive derivative contract. In alternative embodiments, more or
fewer instruments may be available. As discussed above, it is
possible to use other types of instruments, such as mutual funds,
futures contracts or options, as the underlying instrument. Many
different types of instruments, and combinations of instruments,
are known to those skilled in the art, and use of such other types
of instruments (and combinations thereof) as the underlying basis
for a DELTA contract is intended to come within the scope of the
present invention. For example, as shown in FIG. 2, market indexes
may also be used as the underlying basis for a DELTA contract.
[0074] The matrix interface shown in FIG. 2 illustrates one
possible interface for entering the trading platform of the present
invention. Other interfaces are possible, and are intended to come
within the scope of the present invention. For example, the entry
screen may resemble a traditional list of securities with their
trade data. As another example, the entry screen may contain
pulldown menus as a method of writing and offering contracts
without entering a separate trading platform interface.
[0075] In the example shown in FIG. 2, the trader selects Cisco
(CSCO) as the underlying instrument of interest. FIG. 3 illustrates
an example of the marketplace of available inventive derivative
contracts for CSCO stock. The screenshot shown in FIG. 3 displays
such basic information as current price 305 of CSCO stock, the
day's opening price 308 of CSCO stock, and the previous day's
closing price 309 for CSCO stock. Price information 305, 308, 309
is gathered from real-time market data sources. This type of
real-time market data is a standardized, regulated commodity known
to those skilled in the art. The current price shown is typically
the price of the last executed trade. In FIG. 3, the current price
305 is the price of the most recent trade for CSCO stock. This
information is constantly being updated.
[0076] In the example shown in FIG. 3, there are a number of DELTA
call contracts 330 and DELTA put contracts 320 available. Each of
the call contracts 330 and put contracts 320 shown in FIG. 3 use
CSCO stock as the underlying instrument upon which the contract is
based. In an alternative embodiment, the marketplace may display
available contracts that have different underlying instruments.
[0077] A number of parameters are shown for each available
contract. First each available contract has an expiration date and
time. As discussed earlier, the trading platform of the present
invention may allow for many different expiries, from long-term
monthly expirations to hourly expirations. In the example shown in
FIG. 3, the contracts may expire at open, noon or close on a given
trading day. The specific expiration date and time for any given
contract is shown in the "expiry" column 340 in FIG. 3.
[0078] The strike price of the contract is calculated from the "A
Change" parameter, shown in the "A Change" column 345. The "A
Change" associated with a given contract is the amount that the
price of the underlying instrument must move up or down by expiry
from its specific prior price for that contract to be "in the
money." The "Premium" column 350 lists the premium that a trader
who accepts a contract is required to pay the offeror of the
contract. As mentioned above, a contract offeror retains the
premium for the contract, regardless of whether the contract
expires "in the money." In the embodiment shown in FIG. 3, each
contract shown has a contract payout amount of $100, i.e., the
contract offeror pays the contract acceptor $100 if the contract
expires in the money. As will be obvious to those skilled in the
art, contracts could be set up to pay out at different amounts. In
one embodiment, every contract in the trading platform has the same
payout amount. In an alternative embodiment, the contract payout
amount is dependent on the underlying instrument. In yet another
embodiment, the contract offeror may determine the payout amount of
a contract. The "# of contracts offered" column 360 shows how many
contracts are available for each different contract in the
market.
[0079] In the embodiment shown, the trader may choose to write and
offer his own contract to the marketplace, or trade available
contracts using buttons 380 and 390. As will be obvious to one
skilled in the art, it is possible to use alternative types of
interfaces to select contract writing and trading functionality.
For example, in an alternative embodiment, the trader may click, or
double-click, on a particular line in the matrix to proceed to the
contract trading interface. It is intended that the scope of the
present invention cover such alternative embodiments.
[0080] FIG. 4 illustrates an example interface that may be used to
design and offer a contract into the marketplace, should the user
click on "Write DELTA Contract" button 380. As shown in FIG. 4, in
this embodiment the user (or contract offeror) must enter or select
values for several parameters. First, the user selects whether he
wishes the contract to be a put or call contract. In the embodiment
shown in FIG. 4, the user has selected "Put" from the pulldown menu
410. The user also selects an expiration date and time for the
contract. In this embodiment, the user is given the option of
selecting current, next day and second day expiration times of
open, noon and close. In this example, the user is designing the
contract on 10-16-2000, and therefore the system determines that
the available options for expiration are those shown in the
pulldown menu 420. As is obvious to those skilled in the art, there
are many different ways of determining valid expiration times to
offer to the user designing the contract. In an alternative
interface, the user could enter an expiration date and time. The
system could then confirm the validity of the entered date and
time.
[0081] Although not shown in FIG. 4, in an alternative embodiment
the user may also be given the option of entering or selecting a
secondary expiry value. This secondary expiry value determines how
long the contract may be listed as an available contract. In other
words, the secondary expiry acts as a "timeout" value. If the
contract is not accepted before the secondary expiry, the contract
will timeout_that is, it will be delisted and will no longer be
available for another trader to accept. The timeout expiry may be
an absolute time, for example, the user may select that the
contract timeout at market close on 10-17-2001 if it is not
accepted. Alternatively, the timeout may be a certain amount of
time after contract creation. For example, if the contract is
accepted within 24 hours from the time is created, or offered into
the marketplace, it will be delisted and will no longer be
available for another trader to accept. In addition, a trader may
offer a certain quantity of contracts. If some of the contracts are
accepted before the timeout expiry, only those that are still
available will be delisted from the marketplace at timeout
expiry.
[0082] In yet another alternative embodiment, the user may also
select or enter an expiration value. In this embodiment, if the
current market value of the underlying instrument reaches this
value before the contract is accepted, it will be delisted. The
expiration value may be an absolute amount, such that if the price
of the underlying instrument reaches this value at any point before
expiry, it will be delisted. Alternatively, the expiration value
could represent a shift in the underlying value during the life of
the offered contract. For example, the user may choose an
expiration value of 10%. In this case, if the value of the
underlying instrument increases or decreases more than 10%, it will
be delisted. In addition, the timeout expiry may also be used in
conjunction with the expiration value, such that an offered
contract will be delisted if it reaches a certain value within a
certain amount of time. Other methods of creating and calculating
timeout expiries, expiration values, and combinations thereof, will
be obvious to one skilled in the art, and are intended to come
within the scope of the present invention.
[0083] In addition, contracts may have parameters that control how
the contract is traded after hours. In the hours the market is
closed, a different set of rules that control how the DELTA
contracts are traded may be implemented. For example, the timeout
procedure may be implemented in a different way during after-market
hours. These after-market hours trading rules may be set by the
trader, or may be system-wide rules. In particular, there may be
specific after-hour trading rules that consider the contract
creation time and timeout values to ensure that contracts do not
outlive the contract offeror's expectations.
[0084] In FIG. 4, the user also selects a "$ Change" at pulldown
menu 430. For the CSCO derivative contract in this example, the
user is given the option of selecting changes from $0.25 to $4.00
in $0.25 increments. The "$ Change" is the "strike change in
value", and corresponds to the amount by which the price of the
underlying instrument must move up or down for the contract to be
"in the money." The options available for "$ Change" may be
different for different underlying instruments. Alternatively, the
user may enter a "$ Change", and the system will determine the
validity of the entered value.
[0085] The user also enters a premium for a contract in FIG. 4. In
this example, the user can enter any dollar amount. The system may
perform error-checking on the entered value. For example, the
system may disallow values less than $0.25 and greater than
$100.00. The user also enters the number of contracts with these
parameters that he wishes to offer. Again, the system may perform
error-checking on the entered value.
[0086] In the embodiment shown in FIG. 4, each contract shown has a
contract payout amount of $100. As will be obvious to those skilled
in the art, contracts could be set up to pay out at different
amounts.
[0087] In the example shown in FIG. 4, the system builds the
contract in section 480 as the user enters values for the contract
parameters. Once the user has entered or selected values for each
required parameter, he then clicks the Confirm button to confirm
that he wants to offer these contracts into the marketplace.
[0088] After the contract is offered into the marketplace, the
universe of available contracts is updated, and the matrix that is
displayed to the traders is updated. FIG. 5 illustrates the
marketplace matrix that has been updated to include the contracts
designed in FIG. 4. These contracts are shown by contracts 510 in
FIG. 5.
[0089] After the contract is offered, there are three possible
outcomes to the offeror of the contract. In the first outcome, the
offeror wins, i.e., the offeror is not required to pay the contract
payout amount to the acceptor. In the second outcome, the offeror
loses, i.e., the offeror is required to pay the contract payout
amount to the acceptor. In either of these outcomes, the offeror
keeps the premium paid by the trader who accepts the contract. In
the third outcome, the contract is offered on the exchange, but
times out without a sale, or the offeror terminates the offering.
In this case no premium is paid and no payout is made.
[0090] FIG. 6 illustrates an example of an interface that may be
displayed to a user when he accepts a contract. In this example,
the user has selected contract line 545 in FIG. 5 for purchase.
Contract information for contract line 545 is shown. In section
620, the user enters the number of contracts he wishes to purchase.
The system calculates the total cost (number of contracts X
premium), and displays it to the user in section 625. As the user
is purchasing ten contracts in this example, and the system in the
example is set up for $100 payouts on every contract that expires
in the money, the potential return for the user in this example is
$1,000.00, as shown in section 630.
[0091] Once the user has confirmed the purchase of ten of the
selected contracts by clicking the confirm button 635, the system
adjusts the matrix of available contracts. As shown in FIG. 7, the
number of these contracts has been reduced by 10, to 66, as shown
by contract line 710. As is illustrated by this example, it is not
required that every offered contract be bought in a single order.
The trading platform allows subsets of offered contracts to be
purchased.
[0092] As illustrated by this example, traders select specific
contracts to purchase. This is different from traditional
exchanges, where a trader sends in an order, and the market maker
determines which securities to purchase to fulfill the order. In
these traditional exchanges, a market maker buys at one price and
sells at another. There is no visible bid/ask spread in the trading
platform of the current invention, as contracts are sent straight
to the market. A two-way quote is not offered. Participants
purchase contracts at the given price.
[0093] It is possible that different participants in the present
trading system may offer identical contracts. As is known to those
skilled in the art, there are many ways of handling this situation.
The contracts may be listed on the same line with a total number of
contracts set to the cumulative value of the number of identical
contracts from the different participants. In this case, the
contracts may be filled in the order that they were submitted to
the trading system. Alternatively, participants who offer the
largest block of contracts may have their orders filled first.
Other methods are known to those skilled in the art and are
intended to come within the scope of the present invention.
[0094] FIG. 10 illustrates the logical steps taken to keep the
marketplace up-to-date as contracts are offered and accepted. As
shown by step 1005, traders design and offer contracts into the
marketplace. This process was described in connection with the
example interface shown in FIG. 4. At step 1010, the marketplace is
updated to include the offered contracts. This step was illustrated
by the example updated marketplace shown in FIG. 5. If a contract
has a timeout expiry, the marketplace periodically checks to see if
an available contract should timeout and be removed from the
marketplace at step 1015. If a contract should timeout, it is
delisted from the marketplace, as shown by steps 1040 and 1010. The
system also periodically checks any value expirations, as shown by
step 1020. If the value of the underlying instrument for a contract
has exceeded the contract's value expiration, it is also delisted
from the marketplace, as shown by steps 1040 and 1010. In addition,
the offeror of the contract may be given the option to terminate an
offer. For example, if the offeror sees market activity that makes
him reevaluate his position, he may choose to terminate the offered
contract as shown by step 1021. In this case, when the system
receives the termination, it will delist the offered contracts, and
update the marketplace, as shown by steps 1040 and 1010. If a
contract is accepted, the system arranges for payment of the
premium from the acceptor to the offeror, determines whether the
acceptor should receive the payout, and if so, arranges for payment
of the payout from the offeror to the acceptor in the "Process
Accepted Contracts" step shown by step 1030. If a contract is
accepted, the system also checks to see whether all available
contracts having the same parameters that were accepted at step
1035. If there are no remaining contracts with these parameters,
the contracts are delisted from the marketplace, as shown by steps
1040 and 1010. If there are any remaining contracts, i.e., a subset
of the available contracts was accepted, the available quantity is
updated at step 1060 and the marketplace is updated at step 1010 to
reflect the updated quantity. This was illustrated by the example
updated marketplace in FIG. 7. If only a subset of available
contracts was accepted, or if no contracts were accepted during
this cycle, the marketplace information, such as current price, is
updated at step 1070, and the marketplace is updated to reflect any
changes at step 1010. For example, the current price of CSCO stock
in FIG. 5 was $56.20. After a user accepted ten contracts as shown
in FIG. 6, the marketplace is updated to reflect the updated
quantity of available contracts, and the current price of CSCO
stock is updated to $56.15 to reflect current market conditions, as
shown in FIG. 7.
[0095] When processing accepted contracts in step 1030, if the
contract offeror loses on a given contract, i.e., the contract ends
up in the money, the payout amount of the contract (i.e. $100 in
the example discussed above) is deducted from his brokerage
account. The broker then sends the payout amount of the contract to
the trading coordinator. The coordinator then sends the payout
amount of the contract to the broker of the trader who accepted the
contract. The acceptor of the contract then has the payout amount
of the contract credited to his account with his broker.
[0096] When a trader accepts contracts, the premiums are deducted
from his brokerage account. The actual settlement and clearing may
take place immediately. In another embodiment, settlement and
clearing may take place on a daily basis after accumulating all
trade information. In this embodiment, all premiums for contracts,
and proceeds from contracts that the trader accepted that hit the
strike price before expiration, are cumulated such that only the
net is deducted from or added to the trader's account on a daily
basis. Other time settlement and clearing time periods, such as
hourly, and methods of clearing are known to those skilled in the
art and are intended to come within the scope of the present
invention.
[0097] The trader's brokerage typically ensures that its clients
have the resources at the net clearing at the end of the trading
period. After the trading platform closes out with the brokers, the
brokers then close out the net with its clients.
[0098] The entity operating the trading platform may charge
transaction fees. This fee may be a fixed fee charged for each
transaction, regardless of the number of contracts in the
transaction. As an example, a transaction fee may be charged for
every set of contracts accepted. Alternatively, a transaction fee
may be charged for every contract offered. The transaction fee may
act as a surrogate for the bid/ask spread on an options contract.
The transaction fee is typically separate from the commissions
collected by brokerage firms from their client to enter orders into
the inventive system. Other methods of charging trading transaction
fees are known to those skilled in the art, and are intended to
come within the scope of the present invention.
[0099] Using the trading platform of the present invention, the
inventive financial instruments trade without a visible bid/ask
spread. This is an appealing feature as compared to Exchange Traded
Options, which frequently trade with a significant markup from bid
to ask. Traders can price contracts accordingly to effectively
build in a profit margin.
[0100] The embodiments of the present invention discussed above
encompass a trading system whereby traders can offer contracts that
may be accepted by other traders. In an alternative embodiment,
traders may also make offers to accept contracts. That is, not only
may a trader offer to sell a contract, but he may also offer to
buy, or accept, a contract.
[0101] One possible interface for a marketplace in this embodiment
is shown in FIG. 8. As shown in this example, instead of only
having put 810 and call 820 contracts available, the marketplace
also has put 850 and call 860 offers available. The put and call
contracts 810, 820 work as described in connection with FIGS. 2-7.
However, if a trader accepts an offer to buy a contract listed in
850 and 860, he is agreeing to write the contract. For example, by
accepting the put offer 855, the trader agrees to write the put
contract stipulated in put offer line 855. In this case, the trader
accepting the offer agrees to payout $100, or other set amount, if
the contract expires in the money as defined by the expiry 840,
.DELTA. Change 841 and Premium 842 parameters in exchange for the
$30.00 premium. The trader accepting the offer and thereby writing
the contract is agreeing to the terms stipulated by the offeror.
Additional terms, such as timeout expiry, value expiration, etc.
may also be stipulated. Typically, the trader accepting the offer
can choose how many of the contracts he wishes to write, up to the
quantity available limit 843.
[0102] Another possible interface for a marketplace that allows
contracts to be written and bought, and offered and accepted, is
shown in FIG. 9. In this embodiment, the trader can choose to offer
a contract where he selects whether he wants to be on the writer's
side (collects the premium, and pays the payout if the contact
expires in the money), or on the accepting side (pays the premium,
and collects the payout if the contract expires in the money). As
shown in FIG. 9, the marketplace of available contracts includes a
"Side" parameter 930, 935 for the available contracts that shows
which side of the transaction the offeror desires.
[0103] The trading platform of the present invention may also be
used to collect valuable data. As all traders in the trading
platform of the present invention use online brokerage accounts,
the transactional data generated by the traders provides valuable
insight into the online trading community only as opposed to entire
trading community. Other statistics that may be calculated may
include a ratio of puts versus calls, or average size of trade. A
market indicator or index could be derived from the data.
[0104] There is a need for a new type of limited-risk high-leverage
financial instrument. There is a need for a financial instrument
that can be used by all retail traders. There is a need for a
trading platform to trade this new type of financial instrument.
The system and method of the present invention provides such a
financial instrument and trading platform
[0105] Although various embodiments are specifically illustrated
and described herein, it will be appreciated that modifications and
variations of the present invention are covered by the above
teachings and within the purview of the appended claims without
departing from the spirit and intended scope of the invention.
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