U.S. patent application number 12/035748 was filed with the patent office on 2009-08-27 for volatility detection in a non-trading security's price quotation.
Invention is credited to Adam Seth Nunes.
Application Number | 20090216674 12/035748 |
Document ID | / |
Family ID | 40999254 |
Filed Date | 2009-08-27 |
United States Patent
Application |
20090216674 |
Kind Code |
A1 |
Nunes; Adam Seth |
August 27, 2009 |
Volatility Detection in a Non-Trading Security's Price
Quotation
Abstract
To ensure that a security does not experience large fluctuations
in price after being released from a halt or an IPO, a volatility
detection process is used to monitor a pre-release stability of the
security based on pre-release orders to buy and orders to sell.
These pre-release orders to buy and orders to sell establish an
equilibrium price, a cross price. A security is released only when
the cross price has been stable for a predetermined period of time
prior to the release.
Inventors: |
Nunes; Adam Seth; (New York,
NY) |
Correspondence
Address: |
FISH & RICHARDSON PC
P.O. BOX 1022
MINNEAPOLIS
MN
55440-1022
US
|
Family ID: |
40999254 |
Appl. No.: |
12/035748 |
Filed: |
February 22, 2008 |
Current U.S.
Class: |
705/37 |
Current CPC
Class: |
G06Q 40/04 20130101 |
Class at
Publication: |
705/37 |
International
Class: |
G06Q 40/00 20060101
G06Q040/00 |
Claims
1. A computer implemented method for releasing securities for
trading, the method comprising: determining volatility in prices of
quotations for a security before the security is released for
trading; and releasing the security for trading when the determined
volatility is below a threshold.
2. The method of claim 1 further comprising: delaying the release
of the security if the detected volatility in the security's price
quotations exceeds the threshold.
3. The method of claim 1 further comprising: detecting volatility
in prices of quotations for an initial public offering issue before
the issue is released for trading.
4. The method of claim 1 further comprising: calculating the
volatility as a variance in the prices of quotations for the
security.
5. The method of claim 4 in which the variance is measured as a
percentage value.
6. The method of claim 4 in which the variance is measured in
absolute terms.
7. The method of claim 2 further comprising extending the time for
volatility detection if the detected volatility exceeds the
threshold.
8. The method of claim 2 comprising detecting volatility over a
defined period.
9. The method of claim 8 comprising releasing the security at the
end of the defined period.
10. The method of claim 8 comprising releasing the security during
the defined period if volatility is less than the threshold.
11. The method of claim 4 wherein the variance in the price
quotations of the security prior to the release of the security is
calculated at discrete intervals until the variance is less than
the threshold.
12. The method of claim 1 further comprising: releasing the
security if the detected volatility is below the threshold.
13. A computer program product embodied on a readable medium for
releasing securities for trading the computer program product
comprising instructions for causing a computer system to: determine
volatility in prices of quotations for a security before the
security is released for trading; and release the security for
trading when the determined volatility is below a threshold.
14. The computer program product of claim 13 wherein the computer
program product comprises instructions to: delay the release of the
security if the detected volatility in the security's price
quotations exceeds the threshold.
15. The computer program product of claim 13 wherein the computer
program product comprise instructions to: calculate the volatility
as a variance in the prices of quotations for the security.
16. The computer program product of claim 15 wherein the variance
is measured as a percentage value.
17. The computer program product of claim 15 wherein the variance
is measured in absolute terms.
18. The computer program product of claim 14 wherein the computer
program product comprises instructions to: extend the time for
volatility detection if the detected volatility exceeds the
threshold.
19. The computer program product of claim 14 wherein the computer
program product comprises instructions to: detect volatility over a
defined period.
20. The computer program product of claim 19 wherein the computer
program product comprises instructions to: release the security at
the end of the defined period.
21. The computer program product of claim 19 wherein the computer
program product comprises instructions to release the security
during the defined period if volatility is less than the
threshold.
22. The computer program product of claim 15 wherein the variance
in the price quotations of the security prior to the release of the
security is calculated at discrete intervals until the variance is
less than the threshold.
23. The computer program product of claim 13 wherein the computer
program product comprises instructions to release the security if
the detected volatility is below the threshold.
23. The computer program product of claim 13 wherein the computer
program product comprises instructions to detect volatility in
prices of quotations for an initial public offering issue before
the issue is released for trading.
25. An apparatus comprising: a computing device that is configured
to determine volatility in prices of quotations for a security
before the security is released for trading; and release the
security for trading when the determined volatility is below a
threshold.
26. The apparatus of claim 25 further comprising the computing
device facilitating a delay in the release of the security if the
detected volatility in the security's price quotations exceeds the
threshold.
27. The apparatus of claim 25 in which the computing device detects
volatility in prices of quotations for an initial public offering
issue before the issue is released for trading.
28. The apparatus of claim 25 in which the computing device
calculates volatility as a variance in the prices of quotations for
the security.
29. The apparatus of claim 28 in which the computing device
calculates the variance as a percentage value.
30. The apparatus of claim 28 in which the computing device
calculates the variance in absolute terms.
31. The apparatus of claim 26 in which the computing device extends
the time for volatility detection if the detected volatility
exceeds the threshold.
32. The apparatus of claim 26 in which the computing device detects
volatility over a defined period.
33. The apparatus of claim 32 in which the computing device
releases the security at the end of the defined period.
34. The apparatus of claim 32 in which the computing device
releases the security during the defined period if volatility is
less than the threshold.
35. The apparatus of claim 28 in which the computing device
calculates the variance in the price quotations of the security
prior to the release of the security at discrete intervals until
the variance is less than the threshold.
36. The apparatus of claim 25 in which the computing device
releases the security if the detected volatility is below the
threshold.
Description
BACKGROUND
[0001] Electronic equity markets collect, aggregate and display
trade information to market participants. Market participants
initiate trades of securities by sending trade information to the
electronic market on which the securities are traded. The trade
information includes continuous orders for execution during a
market trading session.
[0002] A halted security is a previously traded security for which
no trading occurs for a defined period of time. Halts are ordered
by a market regulator or are otherwise operationally initiated. For
example, Market Watch monitors securities and based on the new
dissemination of information may order a halt. An initial public
offering (IPO) issue is an initial offering of shares of a security
to the public. In some examples, an initial public offering is done
on an exchange but this need not necessarily be the case. For an
IPO issue, trading commences at the time of the IPO. A halt cross
is a process for determining the price for which a security is
executed at the opening of trading for a halted security or for an
IPO issue.
SUMMARY
[0003] Before a security is released for trading, the volatility in
prices of quotations for the security is determined and the
security is released for trading when the determined volatility is
below a threshold. The release of the security is delayed if the
detected volatility in the security's price quotations exceeds the
threshold. Additionally, volatility is detected in prices of
quotations for an initial public offering issue before the issue is
released for trading. The time for volatility detection is extended
if the detected volatility exceeds the threshold and volatility is
detected over a period of time. At the end of this period of time,
the security is released if volatility is less than the
threshold.
[0004] In some examples, the volatility is calculated as a variance
in the prices of quotations for the security. The variance is
measured as a percentage value or in absolute terms. The variance
in the price quotations of the security prior to the release of the
security is calculated at discrete intervals until the variance is
less than the threshold.
[0005] The details of one or more embodiments of the invention are
set forth in the accompanying drawings and the description below.
Other features, objects, and advantages of the invention will be
apparent from the description and drawings, and from the
claims.
DESCRIPTION OF DRAWINGS
[0006] FIG. 1 is a block diagram of a market system.
[0007] FIG. 2 is a logic view of functions in the in the
Quote/Order Collector Facility.
[0008] FIG. 3 is a diagram of a Pre-Cross Period.
[0009] FIG. 4 is a block diagram of the volatility detection
process.
[0010] FIG. 5 is a block diagram of periods within the volatility
detection process.
[0011] FIG. 6 is a diagram of a computing system that implements a
method of detecting volatility.
DETAILED DESCRIPTION
[0012] Referring to FIG. 1, an electronic market 10 is shown as an
example of a trading platform. Numerous other trading platforms are
used, including platforms that facilitate trading in markets and
exchanges. The electronic market 10 includes client systems 12 that
access a central quote/order collector facility 20. In some
examples, the client systems 12 are broker/dealer systems 12a,
electronic communication networks (ECN's) 12b, market-maker(s)
system(s) 12c, and other exchanges 12d. In one example, the
connections use Nasdaq.RTM. protocols such as SelectNet.RTM. and
Small Order Execution System.RTM. (SOES.RTM.) The client systems 12
include a processor, memory and a storage device, e.g., a client
workstation or personal computer (all not shown) that can include a
client process to enter quotes/orders into the electronic market
systems (e.g., SOES.RTM. and SelectNet.RTM.) to deliver executions
or orders to a market that is coupled to a clearing system 16 and a
reporting system 18. It also causes delivery of executions or
routing of orders to the ECN's 12b, depending on the status of the
ECN, and routing of orders to other markets and exchanges 12d. The
quote/order collector facility 20 is comprised of one or preferably
a plurality of server computers generally denoted as 22 including a
processor 22a, main memory 22b and storage 22c. The storage system
22c includes quote/order collector process 25 that is executed in
memory 22b.
[0013] The quote/order collector facility (OCF) 20 collects
pre-trade information in the form of quotes or orders. The
distinction between a quote and an order depends on several
factors. For example, each market maker typically sends a two-sided
proprietary quote, i.e., a quote that represents its own trading
interest for both buy and sell sides of a market, or an agency
quote that represents trading interest of a sponsored entity. If
one proprietary quote of a sponsored entity is sent it could be
considered one order. If one agency quote is sent it also could be
considered one order. If an agency quote reflects an aggregation of
more than one agency order, however, the aggregate agency order is
considered a quote. Entering quotes are limited to registered
market makers 12c and ECNs 12b and possible UTP Exchanges 12d.
[0014] For any given stock, a registered market maker or ECN
directly enters a non-marketable order i.e., quote into the
quote/order collector facility (OCF) 20 on behalf of its customer
account, or it sponsors the direct entry of an order by its
customer. All sponsored quotes are sent to the quote/order
collector facility 20 under the name of the sponsoring market maker
or ECN. In some embodiments, registered market makers or ECNs are
permitted to submit an unlimited number of non-marketable quotes to
the system 20.
[0015] The quote/order collector facility 20 receives quotes,
liability orders, (non-liability orders) and directed orders from
market participants. The quote/order collector facility 20 allows a
quote/order to be displayed in the market, and also allows for
marketable orders to be executed or routed to market
participants.
[0016] Referring to FIG. 2, the quote/order collector process (OCP)
25 is shown. The quote/order collector process 25 provides
transmission of multiple orders or quotes at multiple price levels
by Quoting Market Participants to a quotation manager 26a. The
quote/order manager 26a provides a unified point of entry of quotes
and orders from disparate delivery systems into the quote/order
collector facility 20 to access quotes/orders displayed (as either
attributable or non-attributable) in both the aggregate montage and
current quote montage. The quote/order manager 26a manages multiple
quotes/orders and quotes/orders at multiple price levels and uses a
montage manager 26b to display (either in the Aggregate montage or
in the current quote montage) the orders/quotes consistent with an
order's/quote's parameters. The order collector process 25 also
includes an internal execution process manager 26c to match off
executions for quoting market participants at the best bid/offer.
The order collector system 20 also includes an order
routing/execution manager 26d to provide a single point delivery of
executions or routing of orders, which substantially eliminates
potential for dual liability. That is, order collector process 25
maintains the order routing and executions functionality available
in the SOES.RTM. and SelectNet.RTM. systems. The order collector
process 25 also includes a lock/cross manager 26e, and an odd lot
execution manager 26f and a quote update manager 26g.
[0017] The Quote/Order Collector Facility 20 collects quotes and
orders during a period of nontrading, referred to as the Pre-Cross
Period 30, as illustrated in FIG. 3. During the times that the
markets are open, securities, such as halted securities and IPO
issues, are not traded for numerous reasons. In the case of a
halted security, trading is halted when marketplace events cause
volatility in the security's price, resulting in a trading halt.
During the trading halt, price quotations and orders of the
security are not generally monitored to calculate their volatility.
However, monitoring is resumed during the Quotation Only Period,
occurring towards the end of the Pre-Cross Period 30. When the
level of volatility is acceptable, the security is released and
trading resumes. Trading halts prevent large fluctuations in the
security's price, allowing the security's price to remain stable
during trading. For example, Federal Drug Administration (FDA)
approval of a company's product causes volatility in the company's
securities due to increased demand for the securities initially
after announcement of the approval. Then, as the market absorbs the
announcement, demand for the security drops, causing the security's
price to settle at a lower range. Therefore, trading will be halted
during the period of volatility. In this example, if the FDA makes
its announcement at 8:15 am, a trading halt for that company's
security could occur between 8 am and 10 am, if the market is able
to fully absorb the announcement in two hours such volatility will
have ceased upon trade resumption.
[0018] After a trading halt, the price at which the security opens
is determined by a halt cross process. The halt cross process
determines the security's equilibrium, re-opening price by
calculating an intersection of the security's price quotation
demand curve with its quotation supply curve.
[0019] In the case of an IPO issue, the halted security process is
replicated except that the IPO issue is not halted, because it has
not yet begun trading. Therefore, instead of monitoring quotations
for the security during the halt period, quotations for the IPO
issue are monitored prior to the IPO release. This is done to
ensure that once released, the IPO issue is stable and not subject
to price volatility. An IPO cross determines the price at which the
IPO issue opens using the procedure described above. Hereafter, the
term Halt Cross to refers to a cross that takes place for both a
halted security and an IPO issue.
[0020] Referring to FIG. 3, in some embodiments, for either a
halted security or an IPO issue, the Pre-Cross Period 30 has at
least three components: (1) the Pre-Quotation Period 32; (2) the
Quotation Only Period 34; and (3) Trade Resumption 38. In the case
of a halted security, the Pre-Quotation Period 32 is sometimes
referred to as the Halt Period, because trading is ceased (i.e.
"halted") during this time.
[0021] During the Pre-Quotation Period 32, the entry of quotations
and orders is prohibited. During the Quotation Only Period 34,
quotes and orders are entered, entered quotes and orders are
cancelable, and an indicative crossing price and imbalance
information are disseminated, but no executions occur. An event,
referred to as the Quote Resumption Event 36, triggers the start of
the Quotation Only Period 34 by communicating with a trading
platform when the appropriate time for quote resumption arrives.
The Quote Resumption Event 36 specifies the time during the
Pre-Cross Period 30 that the trading platform begins accepting
quotations and orders. In some embodiments, the Quote Resumption
Event 36 is measured with reference to the Pre-Cross Period 30,
such as 5 minutes after the beginning of the Pre-Cross Period 30,
or at a fractional point in time, such as after 2/3 of the
Pre-Cross Period 30 has elapsed. In some examples, the time set for
the Quote Resumption Event 36 depends on numerous factors and
whether an IPO issue or halted security is being released. For a
halted security, the time of news dissemination, the nature of the
disseminated news such as its subject matter or whether it concerns
a complex matter, and the amount of time necessary for analysts and
other market participants to consume the information factor into
the determination of the Quote Resumption time. For an IPO issue,
factors such as market health, potential market hostility to the
IPO issue, the amount of time an underwriting syndicate requires to
determine an IPO price, and the time of the day during which an IPO
can occur determine the Quote Resumption time.
[0022] With the start of the Quotation Only Period 34, the market
participants receive a message, alerting them to the platform's
acceptance of quotations and orders. In some examples, the
Quotation Only Period 34 for IPO issues and halted securities
differs. In some examples, the Quotation Only Period 34 for IPO
issues is 15 minutes and for halted securities is 5 minutes. In
some embodiments, quotations and orders placed during the Quotation
Only Period 34 are collected and stored in the quote/order
collector facility 20.
[0023] The time at which a halted security or an IPO issue resumes
or begins trading is referred to as Trade Resumption 38. Trade
Resumption 38 marks the end of the Pre-Cross Period 30, because
once the security begins trading it is no longer in a halted or IPO
state. The time for Trade Resumption 38 is determined by numerous
factors and is variable. In some examples, Trade Resumption 38
occurs at a pre-defined period of time after Quote Resumption and
varies based on the type of security, such as a halted one or an
IPO issue. However, such variation need not occur. In some
examples, time for Trade Resumption 38 is generated automatically
based on automatic monitoring of market conditions. In other
examples, it is manually calculated and entered into the trading
platform. Additionally, for either a halted security or an IPO
issue, price volatility and an imbalance of shares in an IPO/Halt
cross delays the time for Trade Resumption.
[0024] For a halted security, in one example, the time set for
Trade Resumption is 5 minutes after Quote Resumption. However,
other Trade Resumption times exist if more or less time accurately
reflects the length of time for volatility to subside. In the above
FDA example, the pharmaceutical company decides that 30 minutes is
an appropriate length of time to allow the market to absorb the new
information. Therefore, Trade Resumption 38 has a value of either
8.30 am or 30 minutes after the halt began. For an IPO issue, in
one example, the trading begins 15 minutes after Quote Resumption,
because this is sufficient time to accurately assess an IPO's
volatility. However, other factors affect the Trade Resumption time
such as whether an underwriter determines that a delay is necessary
or price dislocation has occurred. Additionally, in one IPO
example, the issuer of the IPO, such as an investment bank or the
underlying company, determines the Trade Resumption time.
[0025] Trading resumes when real time equals the time specified for
Trade Resumption 38. In some examples, a Trade Resumption 38 event
communicates with the trading platform that trading should begin
and the platform sends a message to market participants signaling
the resumption of trading.
[0026] At the end of the Quotation Only Period 34, the trading
platform performs a volatility analysis based on all quotes and
orders entered for the halted security or the IPO issue,
calculating the equilibrium price for buy and sell quotations at
varying points of time during the Quotation Only Period 34. This
volatility analysis determines whether the halted security of IPO
issue resumes or begins trading. Volatility is detected through
calculations based on data contained in an electronic message
referred to as the Net Order Imbalance Indicator (NOII). During the
Quotation Only Period 34, the NOII is generated and contains
information about the halted security or IPO issue, such as paired
volume, imbalance volume, the far indicative opening price and the
near indicative opening price, as shown in Table 1 and Table 2
(below). The NOII is disseminated to NADAQ members, service bureaus
and data vendors, who redistribute the information to their
customers and broker dealers. The frequency of the NOII's
dissemination is predefined. In one example, the NOII is
disseminated every five seconds. However, its dissemination
frequency varies based on the amount of time market participants
require to react to the information. For example, if the market is
largely electronic, then the reaction time to such information is
small and market participants can consume frequent dissemination of
information. Conversely, if the market is largely non-electronic,
then participants require more time to consume information and
therefore frequent dissemination of information is not properly
consumed.
[0027] In some examples, the NOII for the Halt Cross is
disseminated every five seconds throughout the Quotation Only
Period 34 by NASDAQTRADER.com, NASDAQ Total View and the NASDAQ
application programming interface. The NOII for the Halt Cross
contains data elements reflecting the current state of the market
leading into the Cross.
[0028] Table 1 below shows an exemplary IPO/Halt Net Order
Imbalance Indicator Message Format. The Halt Cross data elements
reflect the current state of the market. These elements include (1)
the Inside Match Price, which is the price at which the maximum
number of shares of eligible quotes and orders are paired; (2) the
number of shares represented by eligible quotes and orders that are
paired at the Inside Match Price; (3) the number of shares in any
imbalance at the Inside Match Price; and (4) the buy/sell direction
of that imbalance at the Inside Match Price.
TABLE-US-00001 TABLE 1 Number of Paired Number of Shares Cross Type
Issue Symbol Shares of Imbalance Imbalance Side Inside Match Price
Far Indicative Near Indicative No Indicative Price Variation
Clearing Price Clearing Price Clearing Price Indicator
[0029] In one example, table 2 below depicts details of the NOII
that contains an indicative clearing price range at which the Halt
Cross would occur if the Halt Cross were to occur at that time. The
two indicative prices in that range and the Inside Match Price have
identical values because, in the absence of order types unique to
the IPO and Halt Cross, the Inside Match Price and indicative price
range are calculated based upon the same order set, resulting in
the same price output. Table 2 depicts an exemplary IPO/Halt Order
Imbalance Indicator Message Dissemination Record.
TABLE-US-00002 TABLE 2 Field Format Description Code Value Cross
Type 1 byte This 1-byte alphanumeric field will O Regular Opening
Alphanumeric denote the type of NASDAQ cross Cross event for which
the NOII message is I Intra-day Opening being generated. for Single
Security (IPO and Halt Situations) C Regular Closing Cross Issue
Symbol 7 bytes, The Issue Symbol field identifies Alphanumeric. the
symbol assigned by NASDAQ for a given security. Number of 12 bytes,
This field indicates the total number Shares Paired Numeric. of
shares that are currently eligible to be matched at the Inside
Match Price. Number of 12 bytes, This field will only be populated
Shares of Numeric. when there is a Market Buy or Imbalance Market
Sell condition, indicating that there are unexecutable Market
Priced shares on one side or the other. If all Market Priced shares
will be executed, this field will be zero as defined by the
Imbalance Shares Computation section below. Imbalance 1 byte, This
field indicates the market side B Buy Side Side Alphanumeric. of
the imbalance. The allowable Imbalance values are as follows: S
Sell Side Imbalance N No Imbalance O No marketable Orders in
SuperMontage, thus no imbalance. Inside Match 10 bytes, This field
indicates the NASDAQ Price Numeric. Inside Price at which the
Number of Paired Shares and the Number of Shares of Imbalance were
calculated. this price will be identical to the Near and Far
Indicative Clearing Prices. Far Indicative 10 bytes, This field
indicates the price level at Clearing Numeric. which the order book
would clear Price based on the current quotes and orders. The
format of will be $$$$$.dddd. Near 10 bytes, This field indicates
the price level at Indicative Numeric. which the order book would
clear Clearing based on the current quotes and Price orders. The
format of will be $$$$$.dddd. No Indicative 1 byte; This field
indicates when Market B Market Buy Clearing Alphanumeric. orders
cannot be fully paired against A Market Sell Price offsetting
orders at either the Near Space Not applicable, Indicative Clearing
Price or the Far Indicative Clearing Indicative Clearing Price. The
Prices are present allowable values are as follows: Price 1 byte,
Indicates the absolute value of the Code Value Variation
Alphanumeric percentage of deviation of the Near Space Price
Variation Indicator Indicative Price to the projected Indicator
cannot be Inside Match Price. Since there is calculated no
difference between Inside Match Price and the Near Indicative
Price, this indicator cannot be accurately calculated.
[0030] The NOII disseminated prior to the Halt Cross differs in
several ways from those disseminated prior to the Opening and
Closing Crosses, as described in U.S. patent application Ser. No.
11/077,503 pertaining to opening crosses in an electronic market
and U.S. patent application Ser. No. 10/835,510 pertaining closing
crosses in an electronic market. The Halt Cross NOII is based on
different order types. The NOII for the Opening and Closing Crosses
include information about On Open and On Close order types, in
addition to quotations and regular and extended hours orders for
each time in force (Total Day, Day, Good-till-Canceled, and
Immediate or Cancel). The NOII for the Halt Cross includes
quotations, regular hours orders, and extended hours orders. The
NOII for the Halt Cross disseminates the same value for the Inside
Match Price, Near Indicative Clearing Price and Far Indicative
Clearing Price. The Inside Match Price is the price at which the
Number of Paired Shares and the Number of Shares of Imbalance are
calculated, and is discussed further below. The Far Indicative
Clearing Price and the Near Indicative Opening Price are the
clearing prices for all orders in the book at a moment in time.
That is, unlike during opening and closing of trading, during a
trading halt, there is no firm inside quotation (firm bid and firm
offer prices) and the inside can be locked (the bid being equal to
the offer) or crossed (the bid being higher than the offer). In
addition, the Halt Cross does not include On Open and On Close
orders. On Open and On Close orders are available to absorb
liquidity during the Opening and Closing Crosses and do affect the
Near and Far Indicative Clearing Price data elements prior to the
Opening and Closing Crosses. Due to these differences, calculating
the Near and Far Indicative Clearing Prices provides ambiguous
data. Thus, Near and Far Indicative Clearing Price fields are
disseminated with identical values to the Inside Match Price in
order to avoid requiring market participants to re-program their
systems to accept a different NOII.
[0031] The Inside Match Price (and thus the Near and Far Indicative
Clearing Prices) are calculated as follows. The system determines
the price(s) that maximize the number of shares paired. If more
than one such price exists, the system selects the price that
minimizes the imbalance of shares unpaired, and that does not leave
unexecuted shares at a superior price. If more than one price
satisfies both conditions, the type of trading halt necessitating
the Halt Cross, such as an IPO, is determinative. When the Halt
Cross is for an IPO halt, if more than one such price satisfies the
above conditions, the system selects the price that minimizes the
price differential from the Issuer's Initial Public Offering price,
which is found in the previous day's close field. For any other
halt, if the stock has already been opened for that day and more
than one price satisfies the above conditions, the system selects
the price that minimizes the price differential from the last
market center execution prior to the halt. If the security has not
been opened for that day yet and more than one such price exists,
the system selects the price that minimizes the price differential
from the previous Official Closing Price.
[0032] Referring to FIG. 4, in order to facilitate the orderly
opening of a halted security or IPO issue, the volatility in its
price quotations are monitored and Trade Resumption 38 occurs when
the volatility reaches an acceptable level. Numerous computing
environments support such volatility detection and monitoring, such
as the computing environment illustrated in FIG. 6. Therefore, the
volatility of the security's price quotations are measured against
a specified threshold 46, and Trade Resumption 38 is delayed if
volatility exceeds the threshold 54. The volatility detection and
delay are based upon the data contained in the NOII, which is
disseminated every five seconds throughout the Quotation Only
Period 34.
[0033] Volatility detection occurs during the Quotation Only Period
34. In some examples, volatility detection takes place at a time
closely preceding the time for Trade Resumption 38. An event
referred to as the Volatility Detection Event 40 is programmed with
the time that volatility detection begins. Volatility detection
starts when real time equals the value of the Volatility Detection
Event 40. In some examples, the Volatility Detection Event 40 has a
value of, e.g., five seconds prior to the time scheduled for Trade
Resumption 38. Because volatility is calculated by examining the
value of data points 42, 44 at varying times during the Quotation
Only Period 34, the Volatility Detection Event 40 also sets the
times for sampling of data points 42, 44. In some examples, these
times are defined with reference to the time for Trade Resumption
38. In some embodiments, the data points are the Inside Match
Prices disseminated every five seconds with the NOII and the
Volatility Detection Event 40 specifies which Inside Match Prices
are sampled. Therefore, in this example, the Volatility Detection
Event 40 specifies the data points are the Inside Match Price from
the third to last NOII before Trade Resumption 38 (T-15 seconds to
Trade Resumption) and the Inside Match Price from the NOII
immediately prior to Trade Resumption 38 (T-1 seconds to Trade
Resumption).
[0034] Volatility of price quotations of the security is calculated
by determining the price differential in the security's price
quotations between the two data points 42, 44. In some examples,
the price differential is calculated as a percentage value or as an
absolute value. The price differential is compared to a threshold
value indicative of an acceptable level of volatility in the price
quotations. In some examples, the threshold is a predetermined
absolute price change or a percentage variance, such as 10% or 50
cents. The threshold is adjustable based on numerous market
conditions such as large point drops in indices and overall market
volatility. In some examples, after a threshold adjustment, market
participants are notified, allowing them to gauge the relative
stability of stock after it has opened. In one example, market
participants are notified using email alert systems. However, the
amount of the threshold adjustment need not be listed in the email.
Instead, exchange associates could communicate the threshold
adjustment directly to market participants. If the price
differential exceeds the threshold value, the halted security's or
IPO issue's price quotations are too volatile and trading does not
resume. Instead, the halt is prolonged and the Trade Resumption 38
is delayed 54 to allow monitoring of the quotations of the security
over an extended period of time until volatility has dropped to an
acceptable level. The period of time that the Quote Resumption
Event 36 is extended for is referred to as "Volatility Delay" 52.
Monitoring time is increased by extending the time for the Quote
Resumption Event 36 by the Volatility Delay, thus giving the market
more time to absorb new market information. In this case,
additional volatility detection is performed during the length of
the Volatility Delay. The Volatility Delay also extends the time
for the Trade Resumption 38. In some examples, when a Volatility
Delay occurs, a Delay Notification is issued to market
participants.
[0035] The length of the Volatility Delay depends on many factors
such as whether volatility is detected in a halt or IPO issue and
relative market volatility in comparable indices or related
sectors. In some embodiments, the Volatility Delay for an IPO is
five minutes, because the underwriting syndicate group requires
time to ensure that the IPO issue is accurately priced. In some
embodiments, the Volatility Delay for a halted security is one
minute, because the pricing of a halted security is a reaction to
market participants' supply and demand and is not dependent on an
underwriting component. In some embodiments, the Volatility Delay
is automatically machine generated based on market factors or in
other embodiments it is set by an analyst examining market indices
such the NASDAQ Composite, the Dow Jones Industrial Average, the
Commodity Research Bureau Index and the Goldman Sachs Commodity
Index to determine if market volatility has increased.
[0036] During a Volatility Delay, volatility is calculated using
data points generated within the volatility delay or a mixture of
datapoints, some from the Volatility Delay period and some from the
prior Quotation Only Period 34. The volatility detection process
described above is repeated, comparing calculation volatility to
the threshold. After detection, trading is further delayed 54 if
the volatility level still exceeds the threshold. Analogously,
trading resumes 38 if the volatility level is below the
threshold.
[0037] In some examples, no Volatility Delay occurs. For example,
when the calculated volatility is below the threshold, trading
resumes at the scheduled Trade Resumption 38 time and no extension
in the Quote Resumption Event 36 or Trade Resumption 38 is
triggered.
[0038] In some examples, the number of Volatility Delays is
limited, ensuring that the security is eventually released. This
limitation is referred to as the Maximum Volatility Sampler. A
counter, referred to as the Volatility Sampler, tracks each
occurrence of Volatility Detection 46. After every Volatility
Detection 46, the value of the Volatility Sampler is incremented by
one 48. After incrementing 48, the value of the Volatility Sampler
is compared to the value of the Maximum Volatility Sampler 50. Once
the Maximum Volatility Sampler 50 is reached, Trade Resumption 38
begins, even if volatility in the security's price quotations
exceeds the threshold. However, if the value of the Volatility
Sampler is less than the value of the Maximum Volatility Sampler 50
then both the Quotation Only Period 34 and Trade Resumption 38 are
extended by the Volatility Delay 52, 54. In some examples, the
value of the Maximum Volatility Sampler differs for an IPO issue
and a halted security or based on the company underwriting the
halted security or IPO issue. This is because different
underwriters have varying sensitivities to volatility or perhaps
volatility is less of a concern in certain industry sectors or is
more problematic in an IPO issue situation than in a halted
security situation.
[0039] In one example, referring to FIG. 5, the value of the
Volatility Sampler for an IPO issue is three. Therefore, volatility
is sampled at most three times (60, 62, 64) before the IPO issue is
released. After the initial Quotation Only Period 34 (Quotation
Only Period 1), the price quotations of the IPO issue are sampled.
If volatility of quotations for the IPO issue exceeds the
threshold, then the Volatility Delay extends the Quotation Only
Period 34, producing a new Quotation Only Period 2 and a new Trade
Resumption 2. Concurrently, the value of the Volatility Sampler is
incremented by one 48 to a value of one. Volatility detection is
repeated at the end of the Quotation Only Period 2 62 and a second
Volatility Delay occurs if volatility still exceeds the threshold.
The second Volatility Delay extends the time of Quotation Only
Period 2, producing a Quotation Only Period 3 64, and the value of
the Volatility Sampler is incremented by one to a value of two. If
volatility exceeds the threshold value at the end of the Quotation
Only Period 3 64, the Volatility Sampler is incremented to a value
of three, equaling the value of the Maximum Volatility Sampler.
Therefore, after the third volatility detection cycle, volatility
detection stops and trading resumes.
[0040] In some examples of a halted security, the value of the
Maximum Volatility Sampler is two, allowing for two Volatility
Detection Cycles. In some examples, the value of the Volatility
Delay is one minute. Thus, if after the first cycle, detected
volatility exceeds the threshold value, then the Volatility Sampler
is incremented to a value of one and a Volatility Delay occurs.
Therefore, at the end of the one minute Volatility Delay,
volatility is again detected and the Volatility Sampler is
incremented to a value of two. After this second cycle, if
volatility still exceeds the threshold value, trading resumes,
because volatility detection has occurred twice.
[0041] When the Quotation Only Period 34 ends, a Trade Resumption
message is sent to market participants, notifying them of the
opening of the IPO issue or halted security. To discourage gaming
by market participants, the trade is executed at a random time
point during a 15 second period following Trade Resumption. This
ensures that market participants do not manipulate the security's
price, such as by inflating it, immediately prior to trade
execution, because market participants do not know when during the
15 second period the trade will actually execute. When the Trade
Resumption notification has been sent, the system conducts the Halt
Cross. The Halt Cross is the process for determining the price at
which a security is executed at the open of trading for a halted
security or an IPO issue.
[0042] The Halt Cross finds the price that maximizes the number of
shares executed. If more than one price satisfies this condition,
the price that minimizes the imbalance of shares unexecuted and
does not leave unexecuted shares at a superior price is determined.
If more than one price satisfies this condition also, the type of
cross, such as an IPO or another halt, is determinative. For an
IPO, if more than one price satisfies the above conditions, the
price that minimizes the price differential from the Issuer's
Initial Public Offering price, found in the previous day's close
field, is selected. For any other halt, if the security has already
been opened for that day and more than one price satisfies the
above conditions, the price that minimizes the price differential
from the last Nasdaq market center execution prior to the halt is
selected. If the security has not opened for that day and more than
one such price satisfies the above conditions, the price that
minimizes the price differential from the previous Closing Price is
selected.
[0043] All orders are executed in strict price/time priority
starting with the displayed quotation size and then the reserve
quotation size at the most aggressive price level, and then moving
to successive price levels. All executable orders are executed at
the Halt Cross price. Orders and quotations subject to automatic
execution participate in the Halt Cross.
[0044] For IPOs and other halts where a security has not previously
opened during the trading day, the Halt Cross execution is reported
to Nasdaq's trade reporting system with SIZE as the contra party on
both sides of the trade, and then transmitted to the consolidated
tape. SIZE is a special MPID (market participant identifier) that
represents the aggregate size of all non-attributable quotes/orders
at the best bid/best offer displayed in a quote montage (not shown)
for the market/exchange or other trading venue along with the other
MPIDs for quoting market participants that are also displaying
attributable size at the inside price in the market/exchange or
other trading venue The Halt Cross price and the associated paired
volume are disseminated via the UTP Trade Data Feed ("UTDF") as a
bulk print and on the Nasdaq Index Dissemination Service ("NIDS")
and the Nasdaq Application Program Interface as the Nasdaq Official
Opening Price ("NOOP"). For halts where a security has already
opened during the trading day, the Halt Cross is reported as a
single trade, but is not identified as a bulk print and is not
disseminated as the NOOP. When the Halt Cross is complete, the
execution functionality opens for regular trading.
[0045] Referring to FIG. 6, a computing system that implements
volatility detection includes a processor 70, memory 72, disk
controller 74 and an input/output (I/O) controller 76 all linked by
a common bus. In some examples, the computing system also includes
a disk drive 78, a monitor or other communication output device or
interface 80 and a keyboard or other communication input device or
interface 80.
[0046] A number of embodiments of the invention have been
described. Nevertheless, it will be understood that various
modifications may be made without departing from the spirit and
scope of the invention. Accordingly, other embodiments are within
the scope of the following claims. It is to be understood that
using volatility detection as described herein occurs across
different types of markets, such as securities, bonds, derivatives,
futures, commodities markets and other financial markets.
* * * * *