U.S. patent application number 16/154948 was filed with the patent office on 2019-09-12 for method and apparatus for improved electronic trading.
This patent application is currently assigned to ITG Software Solutions, Inc.. The applicant listed for this patent is ITG Software Solutions, Inc.. Invention is credited to Scott Charles Larison, David Walter Mortimer.
Application Number | 20190279299 16/154948 |
Document ID | / |
Family ID | 40524110 |
Filed Date | 2019-09-12 |
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United States Patent
Application |
20190279299 |
Kind Code |
A1 |
Mortimer; David Walter ; et
al. |
September 12, 2019 |
METHOD AND APPARATUS FOR IMPROVED ELECTRONIC TRADING
Abstract
A method and apparatus for outputting data that represents the
change in value of an options premium that would have resulted if
the options traded in a direct linear volume relationship with its
underlying security is provided. Input values utilized include a
delta value, a gamma value, a value-weighted average price of an
underlying stock, a reference price of the underlying stock, and an
original order premium value.
Inventors: |
Mortimer; David Walter;
(Carversville, PA) ; Larison; Scott Charles;
(Marlton, NJ) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
ITG Software Solutions, Inc. |
Culver City |
CA |
US |
|
|
Assignee: |
ITG Software Solutions,
Inc.
Culver City
CA
|
Family ID: |
40524110 |
Appl. No.: |
16/154948 |
Filed: |
October 9, 2018 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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14294020 |
Jun 2, 2014 |
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16154948 |
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12285394 |
Oct 3, 2008 |
8744952 |
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14294020 |
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60977710 |
Oct 5, 2007 |
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Current U.S.
Class: |
1/1 |
Current CPC
Class: |
G06Q 30/0283 20130101;
G06Q 40/04 20130101; G06Q 40/00 20130101 |
International
Class: |
G06Q 40/04 20060101
G06Q040/04; G06Q 30/02 20060101 G06Q030/02; G06Q 40/00 20060101
G06Q040/00 |
Claims
1-18. (canceled)
19. An automated electronic matching system for automatically
matching electronic records based on a benchmark generated from
external input data, said automated electronic matching system
being separate from and coupled to an electronic exchange via an
electronic data network, said automated electronic matching system
comprising: a communications module electronically in communication
with said electronic data network, coupled to at least one
electronic exchange, and to a plurality of electronic trading
interfaces, configured to send and receive communications thereto
and therefrom via an electronic communications protocol; an input
module coupled with said communications module so as to receive
input data from said at least one electronic exchange and said
plurality of electronic trading interfaces; an order module coupled
with said communications module so as to receive order data from
said at least one electronic exchange and said plurality of
electronic trading interfaces; a calculation module coupled with
said input module and configured to execute an algorithm for
determining a first matching parameter; a matching module coupled
with said order module, said input module and said calculation
module, said matching module being configured to execute a matching
algorithm to match a maximum number of electronic order records
based on said input data and said first matching parameter; and an
output module coupled with matching module and said communications
module, configured to output, via said communications module,
execution data to said at least one electronic exchange, said
execution data being based on the results of executing said
matching algorithm.
20. The automated electronic matching system according to claim 19,
wherein the input data includes a first delta value, a gamma value,
a value-weighted average price value of an underlying stock, a
reference price value of the underlying stock, and an original
order premium value, the first delta value is a measure of the rate
of change in an option's theoretical value for a one-unit change in
the price of the underlying stock, the gamma value is a measure of
the rate of change in an option's first delta value for a one-unit
change in the price of the underlying stock, and the original order
premium value is a value set for the order with corresponding
values based on the first delta value, gamma value, and reference
price value; wherein said calculations module performs
calculations, including: calculating a master rate of change value
based on the value-weighted average price and the reference price
values; calculating an adjusted delta value based on the first
delta value, the master rate of change value, and the gamma value;
and calculating a gamma-weighted average price value based on the
original order premium value, the master rate of change value, and
the adjusted delta value; and wherein, the first matching parameter
is based on the gamma-weighted average price value.
21. The automated electronic matching system according to claim 19,
wherein the order module is further configured to receive order
data only during a first time period, to store said order data;
wherein said matching module executes the matching algorithm during
a second time period that begins after the first time period ends;
wherein said input module receives real-time market data during a
third time period that begins after the second time period ends;
wherein said calculation module calculates a gamma-weighted average
price value based on the received real-time market data, the
gamma-weighted average price being based on an original order
premium value, a master rate of change value, and an adjusted delta
value; and wherein said output module is configured to use said the
gamma-weighted average price value as an estimate of a trading
price for each match.
22. The automated electronic matching system according to claim 19,
wherein the communications module is configured to communicate
electronically via a FIX protocol.
23. The automated electronic matching system according to claim 19,
wherein the communications module is configured to communicate
electronically with an automated options exchange via a FIX
protocol.
24. The automated electronic matching system according to claim 19,
wherein the order data comprises order data relating to derivative
instruments being electronically traded on said at least one
electronic exchange.
25. The automated electronic matching system according to claim 21,
wherein the order data comprises order data relating to derivative
instruments being electronically traded on said at least one
exchange, said first time period is during a time when said at
least one electronic exchange is closed and said third time period
is during a time when said at least one electronic exchange is
open.
26. A system for automatically matching electronic records based on
a benchmark generated from input data, said said system comprising:
a plurality of electronic trading terminals coupled with an
electronic data network and configured to send and receive
electronic communications according to an electronic communications
protocol; and an automated electronic matching system being
separate from at least one electronic exchange, said automated
electronic matching system comprising a communications module
electronically in communication with said electronic data network,
to said at least one electronic exchange, and to said plurality of
electronic trading interfaces and being configured to send and
receive communications thereto and therefrom via an electronic
communications protocol, an input module coupled with said
communications module so as to receive input data from said at
least one electronic exchange and said plurality of electronic
trading interfaces, an order module coupled with said
communications module so as to receive order data from said at
least one electronic exchange and said plurality of electronic
trading interfaces, a calculation module coupled with said input
module and configured to execute an algorithm for determining a
first matching parameter, a matching module coupled with said order
module, said input module and said calculation module, said
matching module configured to execute a matching algorithm to match
a maximum number of order records based on said input data and said
first matching parameter, and an output module coupled with
matching module and said communications module, configured to
output, via said communications module, execution data to said at
least one electronic exchange, said execution data being based on
the results of executing said matching algorithm.
27. The system according to claim 26, wherein the input data
includes a first delta value, a gamma value, a value-weighted
average price value of an underlying stock, a reference price value
of the underlying stock, and an original order premium value, the
first delta value is a measure of the rate of change in an option's
theoretical value for a one-unit change in the price of the
underlying stock, the gamma value is a measure of the rate of
change in an option's first delta value for a one-unit change in
the price of the underlying stock, and the original order premium
value is a value set for the order with corresponding values based
on the first delta value, gamma value, and reference price value;
wherein said calculations module performs calculations, including:
calculating a master rate of change value based on the
value-weighted average price and the reference price values;
calculating an adjusted delta value based on the first delta value,
the master rate of change value, and the gamma value; and
calculating a gamma-weighted average price value based on the
original order premium value, the master rate of change value, and
the adjusted delta value; and wherein, the first matching parameter
is based on the gamma-weighted average price value.
28. The system according to claim 27, wherein the order module is
further configured to receive order data only during a first time
period, to store said order data; wherein said matching module
executes the matching algorithm during a second time period that
begins after the first time period ends; wherein said input module
receives real-time market data during a third time period from said
at least one electronic exchange, that begins after the second time
period ends; wherein said calculation module calculates a
gamma-weighted average price value based on the received real-time
market data, the gamma-weighted average price being based on an
original order premium value, a master rate of change value, and an
adjusted delta value; and wherein said output module is configured
to use said the gamma-weighted average price value as an estimate
of a trading price for each match.
29. The system according to claim 26, wherein the communications
module is configured to communicate electronically via a FIX
protocol.
30. The system according to claim 26, wherein the communications
module is configured to communicate electronically with an
automated options exchange via a FIX protocol.
31. The system according to claim 26, wherein the order data
comprises order data relating to derivative instruments being
electronically traded on said at least one electronic exchange.
32. The system according to claim 28, wherein the order data
comprises order data relating to derivative instruments being
electronically traded on said at least one exchange, said first
time period is during a time when said at least one electronic
exchange is closed and said third time period is during a time when
said at least one electronic exchange is open.
33. The system according to claim 26, wherein said plurality of
electronic trading terminals include options trading
interfaces.
34. The system according to claim 26, wherein said plurality of
electronic trading terminals include order management systems.
Description
PRIOR APPLICATION
[0001] This application claims the benefit of priority to U.S.
Provisional Patent Application No. 60/977,710, filed Oct. 5, 2007,
the entire contents of which are hereby incorporated by reference
in their entirety.
BRIEF DESCRIPTION
Technical Field
[0002] The present invention is related to electronic trading and,
more particularly, to electronic trading of equity derivatives.
Background
[0003] An equity derivative is a class of financial instruments
whose value is derived in part from one or more underlying equity
securities. Options are a common type of equity derivatives. An
option purchaser obtains the right, but not the obligation, to
engage in a future transaction on some underlying security. The
option seller collects a premium and is obligated to perform if the
holder exercises his right under the option contract.
[0004] Generally, there are two types of options: call options and
put options. A call option provides the option holder the right to
buy an agreed quantity of a particular security from a seller at a
certain time for a set price. In contrast, a put option provides
the holder with the right to sell an agreed quantity of a
particular security to the seller at a certain time for a set
price. The seller has the obligation to purchase the underlying
security at that price, if the holder exercises the option.
[0005] When securities are traded, a trader will generally receive
a request or "order" to buy or sell a number of shares of the
security, and the trader will then execute the trade in the
appropriate market or markets. Orders that occur between
institutional parties are called "block" trades. A block equity
trade is for 250,000 shares or more and a block equity option trade
is for at least 500 contracts. However, the average execution size
in the markets for these securities is substantially smaller than
"block" size. The average equity execution is between 300 and 200
shares and the average equity option execution is between 20 and 10
contracts. In some cases, orders often cannot be executed in a
single transaction between one buyer or seller and must be executed
as multiple transactions and at multiple prices often spread out
over a period of time.
[0006] Many equity traders use a Volume Weighted Average Price
(VWAP) benchmark to evaluate how well a trade is executed. VWAP is
the average of the price of every trade, weighted by the size of
the trade over a period of time. In layman's terms, VWAP defines a
fair price--what the market, as a whole, paid, as an average. In
recent years, the use of VWAP in the equities markets has developed
further, and traders can achieve a VWAP price through a variety of
mechanisms: many broker-dealers offer guaranteed VWAP pricing to
their clients; there are systems, algorithms and firms available
that target VWAP on an agency basis; and there are products, such
as Instinet's VWAP cross, that are designed for bringing together
block trades at a fair price. These trades are forward-priced,
meaning that when the trade is agreed to, the price is unknown--it
must be determined later. At the end of the VWAP interval, when the
price can be calculated, the trade is reported through any number
of regulated channels. This type of order is generally known as a
"benchmark order."
[0007] Because of the way VWAP trades are priced, the execution
price of a VWAP trade is likely to be different from the price that
is available in the market at the time the trade is reported.
Because of this discrepancy between the VWAP price and the current
price and because of the accepted fairness of the forward-pricing
mechanism, the rules and regulations governing the trading of
equity securities trading clearly allow for these sorts of
execution mechanisms.
[0008] Though VWAP is common in the equities market, it is not used
in the equity derivatives market. The many reasons for this
include: 1) the fact that derivatives often do not trade
consistently throughout the day. They are "chunkier" and more
random in occurrence, therefore there are fewer relevant price
points to use in determining a VWAP price; 2) much of the
derivatives volume is done in multi-leg trades--spreads and other
complex orders--where one derivative's contingent trading price is
based on the price of another asset with simultaneous contingent
execution. These trades must be priced to fit inside the current
available and displayed prices (at or between the National Best Bid
and Offer or NBBO), but do not necessarily reflect the accurate
price of each individual option series; and 3) most importantly,
there exists no mechanism today to report, to or through the
derivatives exchanges, a VWAP (or any other forward-priced) trade.
Today all listed equity option trades must take place on an
exchange and must be at or between the best available prices on all
exchanges (NBBO), therefore an average priced trade may not take
place.
[0009] Accordingly, there is a need for improved systems and
methods for exchange-traded equity derivatives.
BRIEF SUMMARY
[0010] Consistent with the present invention, there is provided a
computer-readable storage medium having instructions which, when
executed on a processor, perform a method for generating a
benchmark price for an exchange-traded equity derivatives order,
the method comprising: receiving a first delta value, a gamma
value, a value-weighted average price value of an underlying stock,
a reference price value of the underlying stock, and an original
order premium value; where the first delta value is a measure of
the rate of change in a theoretical value of an option for a
one-unit change in the price of the underlying stock; the gamma
value is a measure of the rate of change in a delta of an option
for a one-unit change in the price of the underlying stock; and the
original order premium value is an agreed value; calculating a
master rate of change value based on the value-weighted average
price and reference price values; calculating an adjusted delta
value based on the first delta value, the master rate of change
value, and the gamma value; calculating a gamma-weighted average
price value based on the original order premium value, the master
rate of change value, and the adjusted delta value; and outputting
the gamma-weighted average price value as a benchmark price for the
order.
[0011] Consistent with the present invention, there is provided an
apparatus for generating a benchmark trading price for an
exchange-traded equity derivatives order, comprising: an input
module for receiving input values, the input values comprising a
first delta value, a gamma value, a value-weighted average price
value of an underlying stock, a reference price value of the
underlying stock, and an original order premium value; where: the
first delta value is a measure of the rate of change in an option's
theoretical value for a one-unit change in the price of the
underlying stock; the gamma value is a measure of the rate of
change in an option's delta for a one-unit change in the price of
the underlying stock; and the original order premium value is a
value set for the order with corresponding values based on the
first delta value, gamma value, and reference price value; a
processor for performing calculations, including: calculating a
master rate of change value based on the value-weighted average
price and the reference price values; calculating an adjusted delta
value based on the first delta value, the master rate of change
value, and the gamma value; and calculating a gamma-weighted
average price value based on the original order premium value, the
master rate of change value, and the adjusted delta value; and an
output module for outputting the gamma-weighted average price value
as a benchmark trading price for the order.
[0012] Consistent with the present invention, there is provided a
computer-readable storage medium having instructions which, when
executed by a processor, perform a method for matching pre-open
orders using a gamma-weighted average price, the method comprising:
receiving pre-open orders from a trader during a first time period,
the pre-open orders including a seller amount and price or a buyer
amount and price; storing the pre-open orders in an order module;
matching the pre-open orders during a second time period that
begins after the first time period ends, the orders being matched
when the seller amount and price of a pre-open order matches the
buyer amount and price of a pre-open order; receiving market data
during a third time period that begins after the second time period
ends; calculating a gamma-weighted average price value based on the
received market data, the gamma-weighted average price being based
on an original order premium value, a master rate of change value,
and an adjusted delta value; and outputting the gamma-weighted
average price value as an estimate of a trading price for the
order.
[0013] Consistent with the present invention, there is provided an
apparatus for conducting forward-price trades in the equity
derivatives market, the apparatus comprising: a communications
module for receiving pre-open orders from a trader during a first
time period, the pre-open orders including a seller amount and
price or a buyer amount and price; an order module for storing the
pre-open orders; a matching module for matching the pre-open orders
during a second time period that begins after the first time period
ends, the pre-open orders being matched when the seller amount and
price of a pre-open order matches the buyer amount and price of a
pre-open order; an input module for receiving market data during a
third time period that begins after the second time period ends; a
calculation module for calculating a gamma-weighted average price
based on the received market data, the gamma-weighted average price
being based on an original order premium value, a master rate of
change value, and an adjusted delta value; and a display module for
outputting the gamma-weighted average price a benchmark price for
the order.
[0014] Consistent with the present invention, there is provided a
computer-readable storage medium having instructions which, when
executed on a processor, perform a method for calculating the level
of trading interest of derivative instruments at a gamma-weighted
average price and incremental prices around the gamma-weighted
average price, the method comprising: receiving pre-open orders
from a trader during a first time period, each pre-open order
including (1) a seller amount value at a gamma-weighted average
price value or a second price value, or (2) a buyer amount value at
the gamma-weighted average price value or the second price value;
calculating the level of buyer trading interest at the
gamma-weighted average price value by adding the buyer amount value
in each pre-open order at the gamma-weighted average price value;
calculating the level of buyer trading interest at the second price
value by adding the buyer amount value in each pre-open order at
the second price value; calculating the level of seller trading
interest at the gamma-weighted average price value by adding the
buyer amount value in each pre-open order at the gamma-weighted
average price value; calculating the level of seller trading
interest at the second price value by adding the buyer amount value
in each pre-open order at the second price value; and outputting
values representing the level of buyer trading interest at the
gamma-weighted average price value, the level of buyer trading
interest at the second price value, the level of seller trading
interest at the gamma-weighted average price value, and the level
of buyer trading interest at the second price value.
[0015] It is to be understood that both the foregoing general
description and the following detailed description are exemplary
and explanatory only and are not restrictive of the invention, as
claimed.
[0016] The accompanying drawings, which are incorporated in and
constitute a part of this specification, illustrate embodiments
consistent with the invention and together with the description,
serve to explain the principles of the invention.
BRIEF DESCRIPTION OF THE DRAWINGS
[0017] FIG. 1 is a data flow diagram consistent with an exemplary
embodiment of the present invention;
[0018] FIG. 2 is flow diagram showing an exemplary operation of an
imbalance module;
[0019] FIG. 3 is a graphical depiction of an example illustrative
of calculations of the imbalance module depicted in FIG. 2;
[0020] FIG. 4 is a flow diagram showing an exemplary operation of a
calculation module; and
[0021] FIG. 5 is a diagram of an exemplary embodiment of a computer
system that may implement the embodiments of the present
invention.
DETAILED DESCRIPTION
[0022] Reference will now be made in detail to the exemplary
embodiments consistent with the present invention, an example of
which is illustrated in the accompanying drawings. Wherever
possible, the same reference numbers will be used throughout the
drawings to refer to the same or like parts. It is apparent,
however, that the embodiments shown in the accompanying drawings
are not limiting, and that modifications may be made without
departing from the spirit and scope of the invention.
[0023] Embodiments of the present invention may include a
Gamma-weighted Options Pricing (GWAP) methodology that brings to
the exchange traded equity derivatives market a benchmark that can
be used the way VWAP is used in the equities market. Using a
Convexity Measurement (Gamma) in an equation where the VWAP of the
underlying security (stock, index, or the like) can be calculated,
the GWAP factor may accurately and equitably estimate the change in
value of the options premium that would have resulted if the
options traded in a direct linear volume relationship with its
underlying security.
[0024] FIG. 1 is a data flow diagram of an exemplary embodiment
consistent with the invention. As shown in FIG. 1, a GWAP system
200 may include a display module 210, an input module 220, an order
module 230, a matching module 240, a calculation module 250, a
communication module 260, an imbalance module 270, a memory 280,
and a processor 290.
[0025] Traders 100 can submit pre-open orders to the GWAP system
200 during an order entry period via communication module 260. The
communication module 260 may communicate using the Financial
Information eXchange (FIX) protocol or any other acceptable
electronic communications protocol for the exchange of information.
The pre-open orders can include one or more pieces of information
such as, for example, a trader's interest in executing a trade at
the GWAP price and/or incremental prices around the GWAP price.
These pre-open orders are received by the GWAP system 200 and are
maintained in order module 230 until the order entry period expires
and orders are matched by matching module 240 during a matching
period. In addition, the imbalance module 270 of the GWAP system
200 may use the pre-open orders to calculate the level of trading
interest of derivative instruments at the GWAP price and
incremental prices around the GWAP price, and report that interest
through the communication module 260 to, for example, the traders
100, in the event that the traders 100 want to modify their
pre-open orders. However, during the matching period no new orders
are accepted and no order modification may take place.
[0026] During the matching period, the matching module 240
calculates the maximum match quantity and pairs off, or matches,
pre-open orders to achieve the maximum match quantity. For example,
buyers who want to buy x number of contracts of a security at GWAP
are matched with sellers who want to sell x number of contracts of
a security at GWAP. In addition, the matching module 240 may also
use a priority system to match pre-open orders if there are
multiple pre-open orders that could be filled to achieve an optimum
match quantity. For example, pre-open orders in the same series may
be ranked using size priority, and pre-open orders in the same
series that are the same size may be ranked using time
priority.
[0027] After the pre-open orders have been matched and the matching
period has expired, the traders 100 who submitted orders may
receive match confirmations that their order has been filled.
Unmatched orders or any unmatched portion of an order will be
cancelled, and cancel notifications may be transmitted to the
trader 100 whose order was not filled. The communications module
260 is responsible for distributing order confirmation and/or
cancelation notifications. Generally, both the order entry period
and the matching period begin and conclude before the market opens
for trading. Thus, following the matching period, the market opens
and executes trades which determine the data used to calculate the
GWAP execution price.
[0028] After the conclusion of trading, the input module 220 may
receive input values from, for example, an exchange 300. These
input values can include, but are not limited to, public market
data obtained during the trading day (as discussed above) including
a delta value, a gamma value, a value-weighted average price of an
underlying stock, a reference price of the underlying stock, and an
order original premium value. The input module 220 may transmit the
input values to the calculation module 250, which in turn uses the
input values to calculate the GWAP execution price as discussed in
more detail below.
[0029] Subsequently, a communication module 260 of the GWAP system
200 may report the GWAP trades to an exchange or SRO 300, such as
the Chicago Board of Options Exchange (CBOE), and through the
exchange or SRO to the public and other required industry
dissemination services such as, for example, the Options Price
Reporting Authority (OPRA) 401 and the Options Clearing Corporation
(OCC) 402. The exchange or SRO 300 may also send an acknowledgement
of receipt of the report of the GWAP trades. In addition, the
communication module 260 may transmit the GWAP execution price to a
number of individuals or entities, including the traders 100 who
submitted orders, and preferably only to the traders 100 who
submitted orders that were filled or partially filled. Furthermore,
the GWAP system 200 may include a display module 210 that can
display the GWAP execution price and/or well as the trades that
occurred at the GWAP price and incremental prices around the GWAP
price.
[0030] FIG. 2 is flow-chart demonstrating an exemplary method used
by the imbalance module 270 to calculate the level of trading
interest of derivative instruments at the GWAP price and
incremental prices around the GWAP price. After receiving the
pre-open orders S271 for price points, the imbalance module 270 may
calculate the total interest of the buyers S272 and/or the sellers
S273. In addition, the imbalance module may calculate the buy
clearing price and/or the buy clearing size S274, the sell clearing
price and/or the sell clearing price S275, and/or the indicative
crossing price, indicative crossing size, and/or indicative price
imbalance S276. After one or more of the above calculations are
complete, the imbalance module 270 may transmit one or more of the
results of these calculations S277 through the communications
module 260 of the GWAP system 200.
[0031] FIG. 3 is a graphical depiction of an example illustrative
of calculations of the imbalance module 270 as depicted in FIG. 2.
As shown in FIG. 3, Buyer A is willing to buy 30,000 contracts at
GWAP or 15,000 contracts at GWAP+0.50 VEGA.sup.1 while Buyer B is
only willing to buy 25,000 contracts at GWAP. Conversely, Seller A
is willing to sell 30,000 contracts at GWAP+1.00, 20,000 contracts
at GWAP+0.75 VEGA, 10,000 contracts at GWAP+0.50 VEGA, 7,500
contracts at GWAP+0.25 VEGA, or 5,000 contracts at GWAP. In
addition, Seller B is willing to sell 15,000 contracts at GWAP+1.00
VEGA or 10,000 contracts at GWAP+0.50 VEGA. There are no buyers or
sellers at GWAP -0.25 VEGA or GWAP+1.25 VEGA. Vega is a derivative
of the option value with respect to the volatility of the
underlying option.
[0032] The imbalance module 270 calculates the interests of the
buyers and sellers at the GWAP price and the incremental prices
around the GWAP price, the results of which are shown in Table 1
below.
TABLE-US-00001 TABLE 1 Total Contracts Total Contracts Price Point
(Sellers) (Buyers) GWAP - 0.25 VEGA 0 0 GWAP 5,000 55,000 GWAP +
0.25 VEGA 7,500 0 GWAP + 0.50 VEGA 20,000 15,000 GWAP + 0.75 VEGA
20,000 0 GWAP + 1.0 VEGA 45,000 0
[0033] In this case, the interest of the buyers at the GWAP price
is 55,000 contracts (Buyer A's interest of 30,000 contracts at
GWAP+Buyer B's interest in 25,000 contracts at GWAP) and the
interest of the sellers at the GWAP price is 5,000 contracts
(Seller A's interest of 5,000 contracts at GWAP+Seller B's interest
of 0 contracts at GWAP). Additionally, the interest of the buyers
at the GWAP+0.25 VEGA is 0 contracts (Buyer A's interest of 0
contracts at GWAP+0.25 VEGA+Buyer B's interest of 0 contracts at
GWAP+0.25 VEGA) while the interest of the sellers at GWAP+0.25 VEGA
is 5,000 contracts (Sellers A's interest of 5,000 contracts at
GWAP+0.25 VEGA+Seller B's interest of 0 contracts at GWAP+0.25
VEGA).
[0034] In addition to calculating the interest of the buyers and
the sellers, the imbalance module 270 may calculate the clearing
prices and sizes (i.e. the maximum number of buys or sells at GWAP
or at each incremental price around GWAP if each order was filled).
In this example, the maximum number of buys occurs at GWAP because
if each order was filled there would be 55,000 contracts as opposed
to only 15,000 contracts at GWAP+0.50. Thus, the buy clearing price
is GWAP and the buy clearing size is 55,000. Conversely, the
maximum number of sells occurs at GWAP+1.00 because if each order
was filled there would be 45,000 contracts.
[0035] The imbalance module 270 may also calculate the indicative
crossing price and size, as well as the indicative price imbalance.
Here, there are no sellers or buyers at GWAP-0.25 VEGA, and there
are no buyers at GWAP+0.25 VEGA or GWAP+0.75 VEGA. Thus, in this
example, if the buyers and sellers were matched, the maximum number
of orders would be filled at GWAP+0.50 VEGA and the number of
orders filled would be 15,000, leaving sellers with an additional
5,000 contracts that they were willing, but were unable to sell.
Thus, the indicative crossing price in this example is GWAP+0.50
VEGA, the indicative crossing size is 15,000 and the indicative
price imbalance is 5,000 to sell.
[0036] While the pricing increments described herein and shown in
FIG. 3 are relative increments, such as .+-.0.5 VEGA, the pricing
increments may be absolute increments such as .+-.0.5 and may be
any number or fraction thereof.
[0037] FIG. 4 is a flow diagram showing an exemplary operation of
the calculation module 250. The calculation module 250 receives the
input values S251 and may calculate the Rate of Change S252 by
subtracting the Stock Reference from the VWAP of the underlying
stock, as represented by equation (1)
Rate of Change=VWAP of the Underlying Stock-Stock Reference (1)
[0038] As shown in FIG. 4, the calculation module 250 may also
calculate the Adjusted Delta S253 by adding or subtracting (for
calls and puts, respectively) the Rate of Change multiplied by the
Gamma of the options contract to/from the Delta of the option
contract, as represented by equations (2) and (3):
Adjusted Delta=Delta+(Rate of Change.times.Gamma) for call options
(2)
Adjusted Delta=Delta-(Rate of Change.times.Gamma) for put options
(3)
[0039] The calculation module 250 may also calculate the GWAP S254
by adding (for call options) or subtracting (for put options) the
Rate of Change of the underlying stock multiplied by an Adjusted
Delta to/from the Original Order Premium, as represented by
equations (4) and (5):
GWAP=Original Order Premium+(Rate of Change.times.Adjusted Delta)
for call options (4)
GWAP=Original Order Premium-(Rate of Change.times.Adjusted Delta)
for put options (5)
[0040] The Original Order Premium may be an input value set by the
pre-sale order with corresponding values based on the First Delta,
Gamma, and the Stock Reference, where First Delta is a measure of
the rate of change in an option's theoretical value for a one-unit
change in the price of the underlying stock, Gamma is a measure of
the rate of change in an option's First Delta for a one-unit change
in the price of the underlying stock, and the Stock Reference is
the actual last trade of the underlying stock and/or the price of
the stock at the time of order arrival.
[0041] After calculating the GWAP, the calculation module may
transmit the results of the GWAP calculation to the communication
module 260. The GWAP above is calculated using a straight
delta-adjusted formula. However, variations of the GWAP formula and
trading process can be used such as a second-order Taylor expansion
version, or any similar n-order variation that smooths an option
price over a period of time based on the delta, gamma, and VWAP of
the underlying security. For example, assuming that the First Delta
of call options is positive and the First Delta of put options is
negative, the GWAP may be calculated using equation 6.
GWAP=Original Order Premium+(First Delta.times.Rate of
Change)+0.5.times.(Gamma.times.(Rate of Change).sup.2) (6)
[0042] The following example is illustrative of a calculation using
an exemplary formula of an embodiment of present invention:
EXAMPLE 2
[0043] A customer sells 10,000 contracts of XYZ at the GWAP, a
price to be determined later. The following criteria are used to
compute the GWAP.
[0044] When [0045] First Delta=30% [0046] Gamma=6% [0047] Original
Order Premium=2.00 [0048] Stock Reference=$130.50 [0049]
VWAP=131.26
[0050] The calculations are as follows:
GWAP=Original Order Premium+(First Delta.times.Rate of
Change)+0.5.times.(Gamma.times.(Rate of Change).sup.2)
VWAP-Stock Reference=Rate of Change
131.26-130.5=0.76
GWAP=2.00+(0.30.times.0.76)+0.5.times.(0.06.times.(0.76).sup.2)
GWAP=2.00+0.228+0.017
GWAP=2.245
[0051] The calculations completed by the imbalance module 270 and
the calculation module 240 are only exemplary, and the imbalance
module 270 need not complete each and every one of those
calculations in order to calculate the level of trading interest of
derivative instruments and the calculation module 240 need not
complete each and every one of the calculations to calculate the
GWAP price. Indeed, the calculation module 240 and the imbalance
module 270 may complete more or less calculations than those
described above. Furthermore, the order of the calculations
discussed above are not limited to the exemplary orders shown in
FIGS. 2 and 4.
[0052] Referring now to FIG. 5, exemplary embodiments consistent
with the invention may be implemented on a computer system 500.
Computer system 500 may comprise a computer 510, a memory 520, a
graphics processing unit 530, an input/output unit 540, and a mass
memory unit 550, such as a hard disk, interconnected by a bus 560.
Computer system 500 may further include communications unit 565 for
connection to a network 568 such as a LAN or the Internet; a
display unit 570, such as a liquid crystal display (LCD); and one
or more input devices, such as a keyboard 580 and CD-ROM drive 590
for reading a computer-readable medium which is encoded with
instructions. The instructions may then be read into memory 280,
thereby forming modules 210, 220, 230, 240, 250, 260, and 270. When
the instructions are executed by processor 510, the computer system
500 may perform the methods described above.
[0053] Other embodiments of the invention will be apparent to those
skilled in the art from consideration of the specification and
practice of the invention disclosed herein. It is intended that the
specification and examples be considered as exemplary only, with a
true scope and spirit of the invention being indicated by the
following claims. For example, while in this exemplary embodiment,
the GWAP system 200 includes a single memory and processor,
multiple processors and memories could be used. As another example,
each module can communicate with the traders 100, the exchange 300,
and the like themselves without requiring a transmission to the
communication module 260.
* * * * *