U.S. patent application number 17/150002 was filed with the patent office on 2021-05-13 for trading system with price improvement.
The applicant listed for this patent is BGC PARTNERS, INC.. Invention is credited to Howard W. LUTNICK, Michael SWEETING.
Application Number | 20210142410 17/150002 |
Document ID | / |
Family ID | 1000005347332 |
Filed Date | 2021-05-13 |
United States Patent
Application |
20210142410 |
Kind Code |
A1 |
LUTNICK; Howard W. ; et
al. |
May 13, 2021 |
TRADING SYSTEM WITH PRICE IMPROVEMENT
Abstract
A computer trading system has price improvement features.
Inventors: |
LUTNICK; Howard W.; (New
York, NY) ; SWEETING; Michael; (London, GB) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
BGC PARTNERS, INC. |
New York |
NY |
US |
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|
Family ID: |
1000005347332 |
Appl. No.: |
17/150002 |
Filed: |
January 15, 2021 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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13366956 |
Feb 6, 2012 |
10896463 |
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17150002 |
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12412119 |
Mar 26, 2009 |
8112348 |
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13366956 |
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10171009 |
Jun 11, 2002 |
7574395 |
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12412119 |
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10826779 |
Apr 16, 2004 |
8019672 |
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10171009 |
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11238422 |
Sep 28, 2005 |
8301540 |
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12412119 |
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60463835 |
Apr 16, 2003 |
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60613830 |
Sep 28, 2004 |
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Current U.S.
Class: |
1/1 |
Current CPC
Class: |
G06Q 40/04 20130101 |
International
Class: |
G06Q 40/04 20060101
G06Q040/04 |
Claims
1. (canceled)
2. A method comprising: managing, by at least one processor, a
stack of data in a memory coupled to the at least one processor,
the stack of data representing a plurality of orders for a
financial instrument, each order having a side, a price, and a
timestamp; maintaining, by the at least one processor, a trading
priority in the stack of data in the memory such that at least some
orders are traded against opposite-side orders based at least
partially on a primary trading priority by price and a secondary
trading priority by timestamp; varying, by the at least one
processor, a price of at least some of the orders that are
designated as price-improvement orders over time until a
contra-matching order is detected; transmitting commands to
graphical user interfaces of computing devices to prevent display
indicia of price improvement used on a standard price level and
indicia of other price improved orders; and deleting, by the at
least one processor, an order from the stack of data; transmitting,
by the at least one processor, the order removed from the stack to
an electronic trading market; inserting, by the at least one
processor, received neutral orders into the stack of data in the
memory, wherein the received neutral orders are not subject to the
trading priority; and varying, by the at least one processor, the
price of the neutral orders in the stack.
3. The method of claim 2, wherein the price improvement orders are
either an offer to sell at a price lower that a lowest price offer
to sell currently in the stack or a bid to buy at a price higher
than a highest price bid to buy currently in the stack.
4. The method of claim 2, further comprising: configuring, by the
at least one processor, a standard price increment for prices of
the plurality of orders in the stack and a price improvement
protocol for improving prices in the stack.
5. The method of claim 4, further comprising: configuring, by at
least one processor, a size limit for a received neutral order
based at least partially on a cumulative size of same-side order in
the stack with a higher priority that the received neutral order,
when the at least one processor inserts the received neutral order
into the stack; and maintaining, by the at least one processor, a
trading priority of the received neutral order in the stack against
subsequently received orders that have a higher trading priority
than the received neutral order; and in response to determining
that the received neutral order has reached a position size limit,
maintaining, by the at least one processor, the received neutral
order at a current priority in the stack.
6. The method of claim 5, further comprising: reducing, by the at
least one processor, the position size limit of the received
neutral order by a traded size of at least one higher priority
order.
7. The method of claim 2, further comprising: in response to
removing a price-improvement order with a higher priority than a
given neutral order and the given neutral order having reached a
position size limit, moving a price-improvement order with a
priority lower than that of the given neutral order to a position
in the stack that is higher than the given neutral order.
8. The method of claim 7, further comprising splitting, by the at
least one processor, a given price improvement order into at least
a first price improvement order and a second price improvement
order; and setting, by the at least one processor, a priority of
the first improvement order or the second improvement order higher
that the neutral order.
9. The method of claim 2, further comprising in response to
removing an order with a higher priority than a given neutral order
from the stack, reducing, by the at least one processor, a size
limit of the given neutral order by a size of the remove order.
10. The method of claim 2, preventing a total size of the orders
with a higher priority than a given neutral order from exceeding a
position size limit.
11. An apparatus comprising: a memory; at least one processor to:
manage a stack of data in the memory, the stack of data
representing a plurality of orders for purchase and sale of a
financial instrument, each order having a side, a price, and a
timestamp maintain a trading priority in the stack of data in the
memory such that at least some orders are traded against
opposite-side orders based at least partially on a primary trading
priority by price and a secondary trading priority by time stamp;
transmit commands to graphical user interfaces of remoted computing
devices to prevent display of indicia regarding price improvement
used on a standard price level and prevent indicia of other price
improved orders; and, vary a price of at least some of the orders
that are designated at price-improvement orders over time until a
contra-matching order is detected; remove an order from the stack;
transmit the order removed from the stack to an electronic trading
market; insert received neutral orders into the stack of data in
the memory, wherein the received neutral orders are not subject to
the trading priority; and vary the price of the neutral orders in
the stack.
12. The apparatus of claim 11, wherein price improvement orders are
either an offer to sell at a price lower than a lowest price offer
to sell currently in the stack or a bid to buy at a price higher
than a highest price bid to buy currently in the stack.
13. The apparatus of claim 11, wherein the at least one processor
is further configured to generate a standard price increment for
prices of the plurality of orders in the stack and a price
improvement protocol for improving prices in the stack.
14. The apparatus of claim 13, wherein the at least one processor
is further configured to generate a size limit for a received
neutral order based at least partially on a cumulative size of
same-side orders in the stack with a higher priority than the
received neutral order, when the at least one processor inserts the
received neutral order into the stack; and maintain a trading
priority of the received neutral order in the stack against
subsequently received orders that have a higher trading priority
than the received neutral order; and in response to determining
that the received neutral order has reached a position size limit,
maintain the receive neutral order at a current priority in the
stack.
15. The apparatus of claim 14, wherein the at least one processor
is further configured to reduce the position size limit of the
received neutral order by a traded size of at least one higher
priority order.
16. The apparatus of claim 11, wherein the at least one processor
is further configured to move a price-improvement order with a
priority lower than that of a given neutral order to a position in
the stack that is higher than the given neutral order, in response
to removing a price-improvement order with a higher priority than a
given neutral order and the given neutral order having reached a
position size limit.
17. The apparatus of claim 16, wherein the at least one processor
is further configure to: split a given price improvement order into
at least a first price improvement order and a second price
improvement order; and set a priority of the first price
improvement order or the second price improvement order higher that
the neutral order.
18. The apparatus of claim 11, wherein the at least one processor
is further configured to reduce a size limit of a given neutral
order by a size of the removed order, in response to removing an
order with a higher priority than the given neutral order from the
stack.
19. The apparatus of claim 11, wherein the at least on processor is
further configured to prevent a total size of the orders with a
higher priority than a given neutral order from exceeding a
position size limit.
Description
CROSS REFERENCE TO RELATED APPLICATIONS
[0001] This application is a continuation of U.S. patent
application Ser. No. 13/366,956 filed Feb. 6, 2012 which is a
continuation of U.S. patent application Ser. No. 12/412,119 filed
Mar. 26, 2009 (now U.S. Pat. No. 8,112,348) which is a
continuation-in-part of U.S. patent application Ser. No. 10/171,009
filed Jun. 11, 2002 (now U.S. Pat. No. 7,574,395). U.S. patent
application Ser. No. 12/412,119 filed Mar. 26, 2009 is a
continuation-in-part of U.S. patent application Ser. No. 10/826,779
filed Apr. 16, 2004 (now U.S. Pat. No. 8,019,672) which claims
priority to U.S. Provisional Application No. 60/463,835 filed Apr.
16, 2003. U.S. patent application Ser. No. 12/412,119 filed Mar.
26, 2009 is a continuation-in-part of U.S. patent application Ser.
No. 11/238,422 filed on Sep. 28, 2005 (now U.S. Pat. No. 8,301,540)
which claims priority to 60/613,830 filed Sep. 28, 2004, all of
which are incorporated by reference.
BACKGROUND
[0002] This application relates to electronic trading systems.
[0003] Electronically based trading systems have gained widespread
popularity over the years. Such trading systems are frequently used
for trading items ranging from financial instruments (such as
stocks, bonds, currency, futures, contracts, etc.) to used
household goods (such as old records, antiques, etc.). In many of
these trading systems, bid/offer-hit/lift processes are used to
negotiate a sale of a given item. In such processes, bids and/or
offers for items are entered into a trading system and a hit or
take is submitted in response to a bid or offer, respectively, to
agree to a sale, or a purchase.
[0004] A typical exchange that uses bid/offer-hit/lift process is
the NASDAQ Stock Market. In the NASDAQ, traders are able to submit
bids/offers to a market specialist. The market specialist examines
the bids/offers received and sets a price for buying and selling a
particular share. For example, assume that the market specialist is
collecting offers for a particular stock. After the specialist
receives all the offers, the trade closes and the specialist may
pick the lowest priced offer as the selling price. Thus, every
offer submitted without a limit order is sold at that price. The
price of orders is fixed between the times they are submitted and
the time that trades are executed. That is, when the buyers or
sellers submit their offers to the market specialist, they cannot
submit an improved bid/offer until the next open trade. In
addition, the buyers/sellers are not informed of the market price
until after the market specialist selects a price. Thus, sellers
may not be provided with the opportunity to gain improved prices
over the current market price while the trade is active.
SUMMARY
[0005] In general, in a first aspect, the invention features a
method for providing price improvement on an item being traded in
an active market. A touch price for said item is provided. At least
one price-improved order is received, the order having a price and
a size, wherein said at least one price-improved order improves on
said touch price. A price improvement indicator is displayed while
said at least one price-improved order is available for trade in
said active market. Each price-improved order is prioritized based
on predetermined criteria. At least one transaction order is
received, wherein said at least one transaction order is an order
to buy or sell said item. The transaction order is filled based on
the prioritization of said at least one price-improved order. At
least a portion of the difference between said touch price and said
price of said at least one price-improved order used to fill said
at least one transaction order is distributed to (a) a trader
associated with said at least one price-improved order, (b) a
trader associated with said at least one transaction order; and (c)
a system host.
[0006] In general, in a second aspect, the invention features a
system for providing price improvement on an item being traded in
an active market. Computer equipment is configured to (a) provide a
touch price for said item; (b) receive at least one price-improved
order having a price and a size, wherein said at least one
price-improved order improves on said touch price; (c) display a
price improvement indicator while said at least one price-improved
order is available for trade in said active market; (e) prioritize
each said at least one price-improved order based on predetermined
criteria; (f) receive at least one transaction order, wherein said
at least one transaction order is an order to buy or sell said
item; (g) fill said at least one transaction order based on the
prioritization of said at least one price-improved order; and (h)
distribute at least a portion of the difference between said touch
price and said price of said at least one price-improved order used
to fill said at least one transaction order to (1) a trader
associated with said at least one price-improved order; (2) a
trader associated with said at least one transaction order; and (3)
a system host.
[0007] Embodiments of the invention may include one or more of the
following features. The computer equipment may be further
configured to use a priority price-improved order to fill at least
a portion of said at least one transaction order, wherein said
first priority price-improved order is one of said at least one
price-improved order that has been prioritized above all other said
at least one price-improved order. At least one transaction order
includes a specified volume for said item. The touch price may be
set when a trader initiates trading for said item. The touch price
may be an active market price of said item. A first trader may be
provided with priority rights, wherein said first trader is the
trader that provided said touch price. The priority rights may
provide the first trader with an opportunity to temporarily stop
said filling and allow said first trader to submit a new order. The
computer equipment may be further configured to allow a trader to
submit said at least one price improved order having said price
that improves on said touch price by a predetermined price
improvement level. The predetermined price improvement level may
comprise a level that improves on a best price for said item
currently available in said active market. The predetermined price
improvement level may comprise a level that improves on the touch
price by a user-defined quantity. The price-improved order may
improve on other price-improved orders. The price-improved order
may improve on a price of said item based on said market in which
said traders are participating by decreasing the sale price,
decreasing the buy price, increasing the sale price, increasing the
buy price of said item, decreasing the offer price, decreasing the
bid price, increasing the offer price, or increasing the bid price
of said item. The computer equipment may be further configured to
determine a difference between said at least one price-improved
order price and said touch price to determine whether said at least
one price-improved order is acceptable. The price-improved order
price may be acceptable if said difference between said at least
one price-improved order price and said touch price is below a
maximum delta value. The computer equipment may be further
configured to cease display of said price improvement indicator
when none of said at least one price-improved order is available
for said filling. The predetermined criteria may enable said
prioritizing according to price of said at least one price-improved
order. The predetermined criteria may enable said prioritizing
according to a time in which each said at least one price-improved
order was received. The computer equipment may be further
configured to display said at least one price-improvement order
based on said prioritizing. The may be further configured to remove
one of said at least one price-improved order when all of said size
of said at least one price improved order is used to fill said at
least one transaction order. The size of said at least one
price-improved order may be displayed.
[0008] In general, in a third aspect, the invention features a
method for improving the price of an item, said method being
implemented in an electronic trading system. A trading stack is
provided. A dynamic price improvement order to trade said item at
an improved price is received. One of a plurality of price
improvement levels is assigned to said order, said assigned price
improvement level defining said improved price of said order such
that said order is placed in a predetermined position within said
trading stack. The position of said order in said stack is
maintained until said order is matched or cancelled.
[0009] In general, in a fourth aspect, the invention features an
electronic trading system for improving the price of an item, said
system comprising a server that is configured to (a) provide a
trading stack; (b) receive a dynamic price improvement order to
trade said item at an improved price; (c) assign one of a plurality
of price improvement levels to said order, said assigned price
improvement level defines said improved price of said order such
that said order is placed in a predetermined position within said
trading stack; and (d) maintain said position of said order in said
stack until said order is matched or cancelled.
[0010] In general, in a fifth aspect, the invention features an
apparatus for implementing an electronic trading system. A
plurality of workstations each comprise (a) a workstation storage
device; (b) a workstation processor connected to said workstation
storage device, said workstation storage device storing a
workstation program for controlling said workstation processor;
said workstation processor operative with said workstation program
to receive a dynamic price improvement order to trade on an item at
an improved price, and to display said order. A server is operative
to communicate with said plurality of workstations and receive said
dynamic price improved order. The server comprises (c) a server
storage device; (d) a server processor connected to said server
storage device, said server storage device storing a server program
for controlling said server processor. The server processor
operative with said server program to (e) provide a trading stack;
(f) assign one of a plurality of price improvement levels to said
order, said assigned price improvement level defines said improved
price of said order such that said order is placed in a
predetermined position within said trading stack; and (g) maintain
said position of said order in said stack until said order is
matched or cancelled.
[0011] Embodiments of the invention may include one or more of the
following features. The server may be operative to adjust the price
improvement level of said order to maintain said predetermined
position. The server may be operative to increase or decrease the
price improvement level. The server may be operative to adjust the
price improvement level of said order to maintain said
predetermined position. The predetermined position may be the front
of said trading stack The adjusting may comprise decreasing the
price improvement level. A timestamp may be assigned to said order,
and the order position may be maintained based on said timestamp.
In the event two or more said dynamic price improvement orders are
received, the orders with older timestamps may be matched prior to
orders with newer timestamps. Each one of said price improvement
levels may represent a fraction of a predetermined pricing
increment for which the price of said item is improved upon.
Maintaining may comprise adjusting the price improvement level such
that it is one level higher than the next best order in the stack,
wherein the price improvement level can be adjusted up to a maximum
price improvement level. Each price improvement level may represent
a fraction of a predetermined pricing increment for which the price
of said item is improved upon. The predetermined position may be
position relative to other orders in said stack. The server may be
operative to: (a) determine the price improvement level of a best
order in said stack; and (b) assign a price improvement level to
said dynamic price improvement order that exceeds the price
improvement level of said best order by one price improvement level
when the price improvement level of said best order is not a
maximum price improvement level. The maximum price improvement
level may be assigned to said dynamic price improvement order when
the price improvement level of said best order is at said maximum
price improvement level. The dynamic price improvement order may be
the default price improvement order type for a predetermined number
of traders. The dynamic price improvement order may be one of
several price improvement order types selected by a trader using
said electronic trading system. The price improvement level of at
least one price improved order submitted subsequent to a dynamic
order may be decreased, such that the price improvement level of
the at least one price improved order does not exceed the price
improvement level of the dynamic order. The price improvement level
of the at least one price improved order may be decreased to a
price improvement level one level below a maximum price improvement
level when the at least one price improved order is submitted
having the maximum price improvement level as its price improvement
level.
[0012] In general, in a sixth aspect, the invention features a
method for trading an item in an electronic market, the system
operative to receive a plurality of orders. A trading stack is
provided. A neutral order to trade an item at a standard increment
price is received. A position size limit is assigned to the
received neutral order. The received neutral order is maintained in
a position in the stack based on the position size limit.
[0013] In general, in a seventh aspect, the invention features a
method for trading an item in an electronic market. A trading
environment is provided, capable of receiving a plurality of
different types of orders to trade the item. A neutral order to
trade at a predetermined pricing interval is received, the received
neutral order having a position size limit that is equal to the
total size of orders existing in a stack prior to receiving the
received neutral order. The received neutral order is maintained in
a position relative to other orders in the stack based on the
position size limit.
[0014] In general, in an eighth aspect, the invention features a
method for trading an item in an electronic market. A trading stack
is provided. A plurality of orders of different types is received,
including neutral orders, that are placed in the trading stack
Predetermined trading rules are applied to all orders in the stack
except for the neutral orders.
[0015] Embodiments of the invention may include one or more of the
following features. Maintaining position of the neutral price
improvement order in relative position may comprise preventing the
total size of the orders existing in front of the received neutral
price improvement order from exceeding the position size limit. The
position size limit may be the total size of orders existing in the
stack prior to receiving the received neutral price improvement
order. A traditional order to trade the item at a standard
increment price may be received. A price improvement order to trade
the item at an improved price may be received. At least one order
may be received prior to receiving the neutral order. The position
size limit may be determined by summing together the size of each
prior received order. The prior received orders may include
traditional, price improvement, and neutral orders. The position
size limit may be reduced by the size, or portion thereof, of an
order in front of the neutral order when that order is matched. The
total size of orders in front of the received neutral order may be
prevented from exceeding the reduced position size limit. At least
a portion of the size of an order received after the neutral order
may be switched to be switched with at least a portion of the size
of an order received prior to the neutral order, the switching
being commenced within the confines of the position size limit.
Market transactions of orders in the stack may be governed
according to price improvement rules while preserving the position
size limit of the neutral order. The price improvement order may be
an order having a predetermined price improvement level or a
dynamic price improvement order.
[0016] The above advantages and features are of representative
embodiments only, and are presented only to assist in understanding
the invention. It should be understood that they are not to be
considered limitations on the invention as defined by the claims.
Additional features and advantages of embodiments of the invention
will become apparent in the following description, from the
drawings, and from the claims.
DESCRIPTION OF THE DRAWINGS
[0017] FIG. 1A is a block diagram of a computer system.
[0018] FIG. 1B is a more detailed block diagram of the system shown
in FIG. 1A.
[0019] FIG. 2A is an illustration of a dialog window.
[0020] FIG. 2B is an illustration of another dialog window.
[0021] FIG. 3 is an illustration of a market cell.
[0022] FIG. 4 is an illustration of a market cell showing price
improvement.
[0023] FIG. 5 is a flow diagram of a process that may be used to
provide price improvement.
[0024] FIG. 6 is an illustration of a market cell in which unfilled
price improved orders from the trade state are about to be returned
to a bid/offer state.
[0025] FIG. 7 is an illustration of a market cell in which price
improvement is applied to a bid/offer state.
[0026] FIG. 8 is an illustration of a dialog window.
[0027] FIG. 9 shows a flowchart of submitting a dynamic price
improvement order in a trading system.
[0028] FIG. 10 shows a flowchart of how the trading system
maintains a dynamic order in a particular location in a trading
stack.
[0029] FIG. 11 shows an alternative illustrative flowchart of how
the trading system maintains a dynamic order in a particular
location in a trading stack.
[0030] FIG. 12 shows an illustration of a market cell.
[0031] FIGS. 13A and 13B show an illustration of different modes of
trading stacks that may occur.
[0032] FIGS. 14-19 show examples of trading operations using
neutral PI orders.
[0033] FIG. 20 illustrates a graphical interface for submitting
trading commands.
[0034] FIG. 21 shows an illustrative flowchart of a process for
handling neutral orders.
[0035] FIGS. 22A and 22B show an alternative flowchart of a process
for handling orders received by an electronic trading system.
[0036] FIG. 23 shows an illustration of a market cell.
DESCRIPTION
I. System Overview
[0037] While there are markets that provide substantially direct
trading between buyers and sellers, these markets do not provide an
opportunity for buyers and sellers to improve prices on an actively
traded item. Rather, these markets require traders to submit
improved price orders in inactive markets.
[0038] Traders may want to submit price improved orders on an item
currently being traded in a particular market. Traders may not want
to wait until the trade closes before they can submit a bid.
Accordingly, traders may be enabled to improve the current market
price for a selected item in an active market. In particular, price
improvement facilitates trading because the financial incentive for
trading with price improvement benefits both the seller and the
buyer.
[0039] Electronic trading systems provide a platform for which
traders can trade items such as financial instruments (e.g.,
stocks, bonds, securities, futures, contracts, currency, etc.) or
household goods (e.g., old records, antiques, sports cards, etc.).
In many of these trading systems, bid/offer-hit/lift processes are
used to negotiate a sale of a given item. In connection with such
processes, traders may submit bids (i.e., prices they are willing
to purchase an item) and/or offers (i.e., prices they are willing
to sell an item). A trader may respond to bids or offers by
submitting sell (or hit) or buy (or lift or take) commands to the
trading system. A trade is executed when a trader issues a hit or
lift (or take) command in response to a bid or offer, respectively.
In other trading systems bids and offers may be automatically
matched when at the same price.
[0040] The prices at which bids and offers can be submitted usually
conform to some sort of fixed interval or increment, where the
interval conforms to an established or agreed practice and is set
by the trading system, or dictated by the type or price of item
being traded. For example, if a trader is trading United States
Treasuries in a brokerage trading system, that trader can submit
bid or offer prices that some trading systems vary by 1/4 of 1/32nd
of a point in Treasuries up to a maturity of under 10 years, and
1/2 of 1/32nd of a point for maturities over 10 years and over. In
trading systems for stocks and equities, for example, traders can
submit bids and offers that vary by a penny. In some trading
systems, if traders desire to submit bids or offers that are more
competitively priced than other prices, they are limited to
submitting bids or offers at the predetermined pricing
intervals.
[0041] An electronic trading system may allow traders to submit
orders with price improvement, the improvement being at an amount
less than a predetermined pricing increment. The price improvement
may be dynamic price improvement.
[0042] Trading systems have been developed that permit traders to
submit bids or offers that improve on the price of a particular
item by improving on the price within the predetermined pricing
increments. Such trading systems employ a trading method commonly
referred to as price improvement. Examples of trading systems that
use price improvement can be found in U.S. patent application Ser.
No. 10/826,779, filed Apr. 16, 2004 (hereinafter "the '779
application") and in U.S. patent application Ser. No. 10/171,009,
filed Jun. 11, 2002 (hereinafter "the '009 application"), both of
which are hereby incorporated by reference herein in their
entireties.
[0043] In general, price improvement enables one or more traders to
improve on a price for an item being traded in a market, without
having to improve on the price using the predetermined pricing
increment. Traders can improve on the price of an item using
different price improvement levels. This allows traders to select
among different aggressive price improvement increments to price
improve, for example, on a bid, offer, buy, or sell price. For
example, the trading system may provide several price improvement
levels (e.g., four levels) for which the trader can improve the
price. The trading system may use these price improvement levels to
determine priority of orders in a stack of bids and offers, but not
such that they warrant movement to a new standard predetermined
trading price increment.
[0044] A price improvement level may improve on a particular price
at a fraction of the predetermined pricing increment of the item
being traded, with the particular price improvement level being a
multiple of the fraction. The fraction of the standard increment
may depend on the particular price improvement level chosen (e.g.,
a price improvement level of one, two, three, etc.). For example,
the two-year United States government bond may trade at standard
increments of 1/4 of 1/32 of a nominal value. Thus, trading
two-year U.S. government bonds with price improvement enables a
trader to submit an order that slightly improves on a price at a
fraction of the (1/4 of 1/32 for a 2 year maturity) predetermined
pricing increment. Assuming for example that the price improvement
increment is equivalent to one eighth of the predetermined pricing
increment, a price improvement level of one may improve the price
by one eighth of the (1/4 of the 1/32) predetermined pricing
increment, and a price improvement level of three may improve the
price by three eighths of the (1/4 of the 1/32) standard
increment.
[0045] An order having a dynamic price improvement level may enable
the order to change its price improvement level (e.g., the level
may change from one to three to two) depending on market
conditions. The dynamic price improvement level does not have a
fixed price improvement level--it is dynamic. The price improvement
level of the dynamic order can vary from a price improvement level
of zero to the maximum price improvement level available. Thus,
depending on market conditions, a dynamic price improvement level
order may, for example, have a price improvement level of one at a
first instance and a price improvement level of four at a second
instance.
[0046] The dynamic nature of the price improvement level enables a
dynamic order to maintain a predetermined position in a trading
stack. A trading stack typically includes orders that have not been
matched with a contra order. Generally, orders at the top of the
stack are matched before orders at the bottom of the stack. Using
price improvement, traders are able to submit price improved orders
in an attempt to "jump" to the top of the stack so that their order
will be matched before other orders in the stack.
[0047] Dynamic orders can modify their price improvement levels
such that they maintain a predetermined position relative to other
orders in the stack. For example, if a dynamic order is initially
placed at the top of the stack, the dynamic order can change (e.g.,
increase) its price improvement level to maintain its position at
the top of the stack when new orders are submitted with price
improvement levels that exceed or match that of the dynamic
order.
[0048] Dynamic orders may have a timestamp indicating the time at
which the order is submitted to the trading system. The timestamp
may be used to determine the dynamic order's position in the stack
when its price improvement level is the same as another order and
its price improvement level cannot be increased beyond the maximum
price improvement level.
[0049] A known consequence of using price improvement is that it
may result in situations in which all bids or offers in the stack
use price improvement, resulting in a stack arrangement that is the
same as if the system does not have price improvement
functionality. In some situations, traders may prefer to trade at
standard pricing increments and not pay any price improvement
increments to retain a certain position in a trading stack.
[0050] In other situations, traders may wish to participate in a
trading system that uses a new feature such as price improvement,
but would like to have an option to opt out of participating in the
trading rules and/or scheme governing the new feature.
[0051] Traders may be enabled to improve on the price of a
particular item within the predetermined pricing increments.
Certain traders may be allowed to trade at the predetermined
pricing increments, but also do not have their orders automatically
passed over by price improved orders in a trading system that uses
price improvement functionality. Traders may be allowed to opt out
of being subjected to the trading rules and/or scheme governing a
particular feature, yet still permitted to engage in competitive
trading.
[0052] A trading system may allow traders to buy and/or sell items
with price improvement and to submit price improved bids and/or
offers.
[0053] Price improvement may enable one or more traders to improve
on an existing market trading price. For example, consider a market
in which several buyers and sellers are submitting bids and offers
for a selected item at a predetermined price. Then one of those
traders hits or lifts a bid/offer posted by another trader, thereby
activating the active trader's side of the market for that item.
The price at which the trader hit or lifted the bid becomes the
"touch" price of the market. The touch price is the active market
price for a selected item. Once a trade has been initiated, other
traders may submit orders that improve on the touch price. When a
trader submits a price improved order on a selected item, that
trader may "jump in front" of other traders in a buying or selling
stack. When an order is put on top of the stack, that order is in
position to be executed (e.g., used to fill an order) first when a
buyer decides to buy, or a seller decides to sell. A stack lists
various order sizes for a particular item, and is typically
arranged according to a predefined set of parameters.
[0054] Traders can submit price improvement orders that improve on
the touch price by a predefined increment. A user may be able to
improve prices at non-traditional increments. Markets typically
trade goods at prices that can be exchanged in standard increments.
For example the two-year United States government bond may trade at
standard increments of 1/4 of 1/32 of a percentage point of a
nominal value. A trader may submit a price improved order having a
price that increases/decreases the touch price in some ratio
smaller or other than the standard increment.
[0055] Traders may be allowed to price improve an item at price
improvement levels. This allows traders to select among different
aggressive price improvement increments for price improving a bid,
offer, buy price, or sell price. In a buying/selling market, when a
trader that submits an order with a price improvement level, the
order improves on the touch price by that price improvement level.
If desired, the trader can choose a BEST price improvement level.
Submitting an order with a BEST price improvement level may
automatically allow the order to jump in front of other prices in
the market, including other price improved prices.
[0056] The maximum increment size of improved price orders may be
limited. The delta (e.g., difference) between the touch price and
the price improved price should be less than a maximum delta set by
a trading system. If the delta is too big, then the trader's price
improvement order is rejected. The maximum delta feature may be
useful for preventing mistakes in which a trader may submit an
erroneous order.
[0057] When traders begin price improvement of an item in an active
market, a specified indicator may be displayed in a display screen
to indicate to all traders participating in that market that price
improvement is commencing. The indicator shows that a trader is
trading a publicly known number of selected items at a price
improved over the original first trader's price. Market
participants, except the trader that submitted the price
improvement order, may not be informed of the price of any price
improved items listed in the stack. Market participants do know,
however, that at least one item in the stack is price improved over
the touch price. Therefore, if a trader places an order for at
least the number of the items displayed on top of the stack, that
trader will get that order at the touch price with price
improvement.
[0058] When a trade is executed based on a price improvement order,
the buyer and the seller may each receive a predetermined
percentage (e.g., about half) of the difference between the touch
price and the improved price. In addition, the system host (e.g.,
broker) may charge a nominal fee for providing the price
improvement service.
[0059] The trader that initiated the first trade is awarded
priority rights for activating a market. Priority rights may
provide the first trader with an option to "hold up" the market
after the first trader's order is cleared. That is, the trader is
provided an opportunity to submit an order, if desired, before the
system automatically proceeds down the stack to fill additional
orders. Thus, priority rights may provide an incentive for a trader
to initiate trading.
[0060] Traders may submit price improved bids and offers. That is,
traders may be permitted to submit price improved bids and offers
without having to buy or sell items substantially immediately.
[0061] Traders may be able to submit competitive prices during an
active market. Because price improvement enables a trader to post a
price that can obtain "priority" over other traders in the market,
price improvement may provide an incentive for traders to trade
their goods at more competitive prices.
[0062] An electronic trading system may permits traders to submit
price improvement orders that are traded at predetermined pricing
increments and that maintain a position in a trading stack based on
the size of other orders already existing in the stack at the time
the order is submitted. This type of price improvement relates to
neutral price improvement.
[0063] Generally, neutral price improvement represents an option
that permits a trader to opt out of being subjected to the trading
rules and/or scheme governing a particular feature (e.g., price
improvement), yet still permit traders to engage in competitive
trading. For example, assume that a trader is participating in a
trading system implementing the price improvement feature. In such
a system, the price improvement rules may be applied generally to
all orders in the system, except for orders submitted with the
neutral price improvement option. That is, the neutral price
improvement order operates according to non price improvement
rules, but operates within a trading system that applies price
improvement rules to other orders.
[0064] Neutral price improvement guarantees an order's position,
with respect to size, in a trading stack regardless of the
subsequent submission of any other order (e.g., price improved
orders). Moreover, neutral price improvement enables a trader to
also submit a neutral price improvement style order (or neutral
order) that trades at the predetermined pricing increment, not at
one of the price improvement levels used in connection with other
price improvement orders.
II. Price Improvement in an Active Trading Market
[0065] FIG. 2A illustrates a graphical interface for submitting
trading commands using, for example, a workstation as shown in FIG.
1. As shown, the graphical interface comprises a dialog window 200
with various buttons and entry fields 202-254. Using these buttons
and entry fields, a trader may submit a bid command, an offer
command, a buy command, or a sell command for an item corresponding
to a market cell. A market cell is illustrated in FIGS. 3 and 4.
Preferably, each traded item uses a unique dialog window 200.
Dialog window 200 may be opened automatically and/or manually
before, during, and/or after a trade, and may allow a trader to
submit a trade command at any time. The dialog window may be
repositioned on a trader's display and/or fixed in place. The
trader, preferably, will keep the window associated with a
particular instrument below the market cell 100 for the same
tradable item. The number of dialog windows 200 that can be kept
open at any one time is preferably unlimited.
[0066] As shown in FIG. 2A, dialog window 200 may comprise a
variety of on-screen buttons and entry fields. Generally, a button,
as displayed in box 200, may be "pushed" by placing a pointing
device's pointer over the button and pressing a switch on the
pointing device, as is commonly known in the art. At the center of
window 200, a numeric keypad 202 may be displayed. The numeric
keypad 202 may provide buttons for numbers zero through nine, and
may contain buttons for numbers ten, twenty-five, fifty, and one
hundred or any other suitable or desirable values. The numeric
keypad 202 may also contain a plus button ("+"), a minus button
("-"), a decimal point button ("."), a backspace button ("BKS"),
and a delete button ("DEL").
[0067] In addition to displaying a numeric keypad as described
above, dialog window 200 may also provide a user with a buy button
204, a sell button 206, a cancel buys button 208, a cancel sells
button 210, a bid button 212, an offer button 214, a cancel bids
button 216, a cancel offers button 218, cancel all buttons 220,
cancel all for all instruments button 222, a price entry field 224,
price up and down buttons 226, bid price up and down buttons 228,
offer price up and down buttons 234, a size entry field 230, and
size up and down buttons 232. Finally, dialog window 200 may
contain a preference field 236 that allows a user to specify
preferred types of orders, a close-on-action box 238 that causes
dialog window 200 to be automatically closed after specified
actions are performed, a configure keypad button 240 that allows a
user to arrange the keypad for dialog window 200, a close button
242 that closes the dialog window 200 on demand, a settings button
241, and a display history button 243 that causes a history list of
order entries to be display when pressed.
[0068] Preference field 236 may be used to indicate the user's
preferred trade type and may allow the user to select any type of
trade that a particular exchange or trading system supports.
Although FIG. 2A provides specific examples of trade types (e.g.,
good-till-canceled (GTC), limit, all-or-none (AON), stop, and
market-if-touched (MIT)), price improvement may be implemented with
any type of trade.
[0069] Configure keypad button 240 may allow a trader to arrange
buttons appearing in dialog window 200 to be anywhere a trader
prefers by first pressing the configure keypad button 240, by then
dragging the buttons to new positions, and finally by clicking on
button 240 again. Also, the configuration or re-configuration of
buttons can change the function of those buttons depending on the
type of trading desired or what type of item is being traded.
[0070] Dialog window 200 also may include price improvement field
250. Price improvement box 250 may be selected by a user by moving
a pointer over box 250 and pressing a button. As illustrated in
FIG. 2A, price improvement is active because box 250 contains a
checkmark. When price improvement box 250 is selected, a trader may
be able to submit price improvements orders for items traded in a
particular market. [02-1067 p. 10 line 28] If price improvement is
enabled, a trader may enter an increment (e.g., a fraction)
suitable for price improvement in field 252 using up and down
buttons 254. The number provided in field 252 may be used as an
increment to improve the price of an known price currently traded
in a market. For example, if a current selling price is 106.06, a
trader may improve the price by adjusting field 252 such that a
price improvement of 106.056 is obtained.
[0071] A user may submit price improvement orders using dialog
window 200. In particular, a user may enter desired values in price
improvement field 252 and size field 230 when executing price
improvement orders. The value entered in price improvement field
252 represents the fraction of a market's standard increment that
is used to provide price improvement of a touch price. (A touch
price is price at which a trader initiated trading for a selected
item.) For example, assume that the user is trading in a market
that provides standard increments of 1/128 of a point (e.g., "1").
Depending on the value entered in field 252, the user can improve
prices at a ratio of the standard increment. Thus, if a user enters
1/4 in field 252, the user has configured dialog window 200 to
submit an order that has a price improvement of 1/512 (i.e., 1/4 of
1/128) of a point. Non-traditional increments to enable price
improvement may be enabled.
[0072] In addition, the user may also select a desired number of
selected items for trading by entering a value in size field 230.
After a user has entered desired values in price improvement field
252 and size field 230, the user may submit an order by pressing,
for example, buy 204, sell 206 or any other suitable key in dialog
window 200. Once the order is submitted and approved, the price
improvement order is displayed in a market cell for a particular
market.
[0073] United States patent application publication No.
2002-0029180 published Mar. 7, 2002, which is hereby incorporated
by reference in its entirety, provides further description of
dialog window 200.
[0074] Traders may be permitted to price improve an item at
different price improvement levels within a defined price range.
This provides the traders with an opportunity to submit bids,
offers, buy orders, and/or sell orders that enables a trader to
"jump in front of" other traders by improving on an existing price.
As defined herein, a price can be associated with a sell price, a
buy price, a bid price, and/or an offer price. For example, assume
that the defined price range for an item is 1.00 (i.e., the price
of an item can vary in increment of 1.00 such as 3.00, 4.00, 5.00,
etc.). Also assume that traders can price improve at levels such as
BEST, 0.25, 0.5, and 0.75, which is shown in FIG. 2B at price
improvement box 262.
[0075] If the trader submits an order with a price improvement
level of BEST, the system submits a price improved price that
improves on the best price currently available in market. The BEST
price improvement level allows a trader to automatically jump in
front of the other traders. The BEST price improvement order may
increase the order price at any suitable improvement level (e.g.,
0.25, 0.50, 0.75, etc.) that is more aggressive (i.e., has a better
price) than the price at the top of the stack. The BEST price
improvement may increase the order price up to a predetermined
limit.
[0076] If the trader submits an order with a price improvement
level of 2/16, then the system submits a price improvement bid that
improves on touch price by 2/16th. This type of price improvement
submission, however, may not put the trader in front of the stack
because the submitted price may not improve on the price listed at
the top of the stack.
[0077] The above discussion related to FIGS. 2A and 2B can also be
applied to price improving bids and offers in a non-trade state.
That is, instead of price improving a buy or sell price, a trader
can price improve on a bid or offer. Traders can use, for example,
the dialog windows of FIGS. 2A and 2B to price improve bids and/or
offers at non-standard increments and at different price
improvement levels.
[0078] With reference now to FIGS. 3 and 4, price improvement is
described in context of market cells 300 and 400 for a selected
item. FIGS. 3, 4, and 5 are described primarily in the context of a
trade state in which traders are actively buying and selling an
item by submitting buy and sell orders. FIGS. 6 and 7 are described
primarily in context of a bid/offer state in which traders submit
bids and offers for an item. Price improvement features can be used
in conjunction with trade states and bid/offer states.
[0079] FIG. 3 shows an exemplary market cell 300 in which a trader
has initiated trading. Market cell 300 shows that the user is
participating in a market in which selected item 302 is being
traded. Selected item 302 may be any suitable type of commodity
such as, for example, securities, bonds, coupons, etc. Price 304
indicates the current selling and/or buying price of selected item
302. Trade status 306 provides an indication of what type of
trading activity is taking place with respect to selected item 302.
Item indicator 308 provides an indication of the quantity of
selected item 302 available in the market. If, for example, sellers
are operating in the active side of the market, the item indicator
308 informs market participants the total number of items 302 that
are available for sale in the market. Market ticker 310 provides an
indication of the price at which selected item 302 was previously
being bought or sold. Seller stack 312 informs market participants
the quantity of selected items 302 a particular seller is prepared
to sell. Likewise, buyer stack 314 informs market participants the
quantity of selected items 302 a particular buyer is prepared to
buy. Market spread indicator 316 provides information regarding the
depth of the market (i.e., the price and quantity of items
available in the market, at prices different to the touch
price).
[0080] As discussed herein, an improved price is a price that is
better than the touch price. A better price, however, is dependent
on whether the participant is a buyer or seller. If the participant
is a buyer, then a better (more aggressive) price is higher. If the
participant is a seller, a better (more aggressive) price is lower.
Both the buyer's market and the seller's market can be active
simultaneously. "Improved prices" can be dependent on a particular
type of market. In a yield market, for example, a seller's action
can be improved on by submitting a price higher then the touch
price.
[0081] As mentioned above, FIG. 3 provides an illustrative display
of market cell 300 after a trader initiates a trade in a market. In
connection with the following discussion of FIG. 3, sellers are
participating in the active side of the market. Therefore, the
discussion of FIG. 3 is presented from a sellers point-of-view.
Price improvement need not be limited to only improving selling
prices; price improvement features may be provided for both buying
and selling prices.
[0082] Prior to the initial trade, market participants are aware of
the bids and offers available in the market for selected item 302.
If desired, a trader may "HIT" a bid or "LIFT" an offer to start
trading. FIG. 3 shows that a trader "HIT" a bid, as indicated by
trade status 306, at price 304. In this example, assume that this
seller HIT a bid for 10 million (hereinafter "M") by selling 20 m
into that bid. Because this trader is selling 10 m more items than
the buyer bid, the extra items are displayed in seller stack 312.
After this trade commences, all market participants are aware that
a seller sold 10 m selected items 302 at price 304. Market
participants also know that there is an additional 30 m selected
items 302 available for purchase, as indicated by item indicator
308. There are 30 m items 302 available because another trader (or
the first trader) has submitted an order to sell 20 m items 302 at
a predetermined price.
[0083] After a trader initiates trading for selected item 302,
other traders may submit price improved orders that improve prices
with respect to the touch price. FIG. 4 illustrates a market cell
400 in which price improvement is commencing. Market cell 400 has
substantially all the same features of market cell 300. In addition
to the features of market cell 300, market cell 400 displays price
improvement indicator 420 when price improvement is taking place in
the market. Price improvement indicator 420 may be any suitable
distinguishing character such as, for example, a diamond, a carrot,
text (e.g., PI) or other distinguishing mark. Price improvement
indicator 420 informs all market participants that at least one
seller is selling a specified number of items at an improved price.
That is, the seller is selling items slightly cheaper than price
404. But market participants (except the trader who submitted a
price improved order) do not know how much cheaper the items are
being sold.
[0084] As shown in FIG. 4, a second trader placed a price improved
order for 20 m items. This 20 m is shown at the top of seller stack
412, which is on top of the first trader's 10 m. Price improvement
may enable the second trader to submit an order that takes
precedence over the first trader because the second trader is
offering items at an improved price. Thus, when a buyer decides to
purchase a specified number of items, the second trader's items are
used first to fill the buyer's order. For example, if a buyer
decides to place a relatively small order, this provides an
incentive for sellers, especially when there are several sellers,
to submit price improved orders.
[0085] During price improvement, market participants may not be
aware which items in stack 412 are price improved. Granted, a price
improved item may be displayed on the top line of the stack (when
the stack is arranged according to price priority) when price
improvement display 420 is displayed. This is because the seller is
offering the cheapest price. But most market participants do not
know if other items in stack 412 are price improved.
[0086] Although FIG. 4 shows three orders of items in stack 414,
price improvement need not be limited to permitting only one other
trader to submit a price improved order. Any suitable number of
traders may submit price improved orders when the trade is working.
If desired, the same trader may submit several price improved
orders in the same market. For example, the same trader may use
different price improvement levels to submit different price
improved orders.
[0087] Price improvement process 500 may be used to provide price
improvement as illustrated in FIG. 5. As shown in FIG. 5, process
begins at step 510 when a trader initiates (e.g., sells or buys an
item). It should be noted that prior to step 510, traders are
posting bids and offers for a particular item, thereby attempting
to provide a favorable trading environment to initiate trading.
[0088] A trader that initiates trading in a market may be awarded
priority rights during an active trade. Priority rights may provide
the first trader with the ability to "hold up" the market for a
specified period of time such that the first trader has the option
to sell more items. This "hold up" option is advantageous because
it enables the first trader to submit a new order after the first
order is cleared. Regardless of whether the first trader takes any
action, the first trader's rights may be revoked after a
predetermined period of time. [02-1067 p. 18 line 3] After a trader
initiates a trade (e.g., trader HITS a bid as in FIG. 3), process
500 proceeds to step 520. At step 520, a new trader may submit a
price improvement order using, for example, dialog window 200 of
FIG. 2A. As mentioned above, any suitable number of traders may
submit price improvement orders at any time during process 500.
That is, a trader may submit a bid at any time trading is open in
that particular market. Moreover, a trader may submit more than one
price improvement order for a particular market.
[0089] After a price improvement order is submitted, it may be
scanned to determine whether it is acceptable before it is
displayed in a market cell. At step 530, process 500 may determine
if the proposed price is acceptable. In particular, the difference
between the price improvement price and the touch price (e.g.,
price at which trading was initiated) is compared to a maximum
delta limit. Maximum delta limits are imposed to minimize potential
trader mistakes. If a trader submits a price improvement order that
aggresses too far from the touch price, the order may be rejected
at step 535. If the price improvement order is acceptable, it is
accepted at step 540. An accepted order is an order that is deemed
to be acceptable by the system processing the orders. Once
accepted, the trader's order may be displayed in a market cell
(e.g., market cell 400 of FIG. 4). In addition, if the price
improvement order is accepted, a price improvement indicator may be
provided in a market cell to indicate to market participants that
price improvement is occurring in a particular market.
[0090] After a price improvement order is accepted, the process
determines how the order is displayed in a market cell. At step
550, the process arranges the accepted order in an existing stack
according to a set of parameters. For example, new orders may be
arranged according to price of the order and time the order was
submitted. The better the price, the higher in the stack the order
is placed. If an order includes the best price, then the order is
place in the top of the stack. If an order has the same price as an
existing order, then the order is arranged according to the time it
was it was submitted by the trader. Older orders may have
precedence over newer orders (i.e., older orders are arranged above
newer orders having the same price). The aggregation of orders
enables the trading system to determine which orders should be used
first to fill a buyer's order. Thus, orders on top of the stack are
used first and other orders are used in a top-down approach.
[0091] At step 560, when a buyer places a buy order for a specified
number of items, a trading system automatically fills that buy
order with accepted orders in the prioritized aggregated stack.
Accepted orders that are used to fill a buyer's order are cleared
and the remaining orders are pushed up the stack.
[0092] At step 570, if a buyer bought a price improved order (e.g.,
a price improved order), the process determines how the difference
between the touch price and the improved price is distributed. In
general, the process may determine the midpoint of the difference
and provide about one half of the difference to both the buyer and
seller, respectively. The system host may charge both the buyer and
the seller a nominal fee for providing this service (e.g., price
improvement trading). The difference may be divided up in any
suitable manner. For example, the fee charged by the system host
may also vary.
[0093] The process may determine how to distribute the difference
with respect to each order cleared from the stack. For example,
assume that a buyer placed an order to buy 30 million items
(hereinafter million is referred to as "m") in a market that had a
selling stack of at least a 20 m order and a 10 m order. To fill
the buyer's order, both the 20 m and 10 m orders are used. But the
prices for the 20 m and the 10 m items may be different due to
price improvement on only one of them. With respect to the 20 m
order, an improvement in price may be distributed between the buyer
and the seller of the 20 m order. With respect to the 10 million
order, there may be no improvement between prices or may be a
different improvement than the improvement for the 20 m order. This
different improvement may be distributed between the buyer and the
seller of the 10 m lot. After the difference in price is
distributed to the respective parties, process 500 may return to
step 520.
[0094] Certain steps of process 500 may be repeated while the
market is active. For example, several traders may submit new
orders and buyers may place orders any time the market is
active.
[0095] Traders may be allowed to submit price improved bids and
offers without having to buy or sell items substantially
immediately. FIG. 6 shows an illustrative display of market cell
600 in which bids and offers worse than the touch price may be
present. A price improved bid 611 and price improved offer 612 may
be displayed in a stack 610 below and above the touch price trading
615. Touch price 615 itself may be subject to price improvement in
the trading state as indicated by indicator 620. If more than one
price improvement bid or offer is displayed in bid/offer stack 610,
then the best bids and offers are aggregated at the top of their
respective stacks. Likewise, as described above, all bids and
offers may be prioritized according to price.
[0096] FIG. 7 shows illustrative market cell 700 in which a
bid/offer state is being implemented. Price improvement can also be
present when unfilled price improved orders from the trade state
are returned to a bid/offer state. Certain price improvement orders
may not be filled in the trade state. Such price improvement orders
may be returned above the bid/offer stack 720 as the best bid and
offer display 710. In addition, the price improvement indicator may
also be displayed to indicate that a bid or offer is available that
is price improved on the touch price. Moreover, any order
properties such as preferences (e.g., Good until cancelled, Limit,
etc.) may be carried over to the bid/offer state.
[0097] For example, price improved bid and offer 710 indicates that
an improved bid and offer is available. In particular offer 720 is
available at a price improved offer (e.g., an offer that improves
on 100.06) that has size 722 (e.g., 20). Each trader participating
in market cell 700 knows that is an offer with price improvement.
The traders also know the size of the price improved offer, but
other traders may not know whether other sizes in the size
breakdown stacks 730 and 732 are associated with a price improved
offer or bid.
III. Dynamic Price Improvement
[0098] As defined herein, price improvement refers to the ability
to submit orders that improve on a price for a particular item at
an amount less than a predetermined pricing increment. A
predetermined pricing increment is typically defined by the
instrument being traded. For example, the two-year United States
government bond may trade at predetermined pricing increments of
1/4 of 1/32 of a nominal value. Thus, in conventional trading
systems, a user has to submit a traditional order, which varies in
price only by the predetermined pricing increment.
[0099] In a trading system that uses price improvement, traders can
submit price improved orders that improve on the price at fractions
of the pre-determined pricing increment. For example, a trading
system may include three levels of price improvement in which a
trader can improve the price. If a trader submits an order with a
price improvement level of one (e.g., the first level of price
improvement), that order improves on a predefined price (e.g.,
price at which an item is being traded or a price submitted in
response to a request for quote) by a predefined fraction of the
predetermined pricing increment. A price improved order with a
price improvement level of two (e.g., the second level of price
improvement) improves on the predefined price by twice the
predefined fraction of the predetermined pricing increment. Note
that the number of price improvement levels is not limited to a
particular number of levels, and that a predetermined number of
levels can be used.
[0100] The foregoing discussion is not meant to be thorough
discussion of price improved orders, but merely an illustrative
discussion that sets forth the framework in which dynamic price
improved orders may operate. A detailed description of price
improved orders can be found, for example, in U.S. patent
application Ser. No. 10/171,009, filed Jun. 11, 2001.
[0101] Another price improvement level includes use of dynamic BEST
price improvement level (hereinafter "dynamic price improvement").
Orders submitted using dynamic price improvement maintain a
predetermined position within a trading stack until matched or
cancelled. For example, if the dynamic order is placed on top of
the stack, it remains at the top of the stack until it is matched
or cancelled. A dynamic price improvement order has a price
improvement level and a timestamp. The price improvement level is a
non-traditional price improvement on a traditional price increment
such as the level one, two, or three price improvement level, as
discussed above. The timestamp indicates the time at which the
dynamic order is submitted, and may be used to establish priority
over other orders that have the same price improvement level,
including other dynamic orders.
[0102] FIG. 8 illustrates a graphical interface 800 for submitting
trading commands using, for example, a workstation as shown in FIG.
7. Interface 800 includes price improvement trading box 810, which
has first, second, and third price improvement level options and a
dynamic best price improvement option that can be selected by the
trader. If a trader wishes to trade with dynamic price improvement,
the dynamic price option in box 810 can be selected.
[0103] In trading systems where the dynamic price improvement is
default, the dynamic price option in box 810 may be selected
automatically. Alternatively, price improvement box 810 may not be
displayed when the dynamic price improvement level is default.
[0104] The above description with respect to FIG. 8 is not intended
to be an exhaustive description of various features that can be
included with dialog window 800. United States patent application
publication No. 2002-0029180 published Mar. 7, 2002, which is
hereby incorporated by reference in its entirety, provides a
substantial description of dialog window 800.
[0105] Price improvement trading can be implemented with a variety
of trading schemes such as, for example, Direct Dealing
(hereinafter "DD") (sometimes referred to as "Request for Quote"
style trading) and traditional market style trading. In DD style
trading, there are requestors and responders. The requestors can
enter a request for prices on a particular item or instrument. A
responder may submit prices in response to that request. The
requestor may then choose to trade with one of the responders.
Responders may be enabled to use dynamic price improvement to
improve on the prices submitted in response to the request, thereby
enhancing the position of the improving trader relative to the
other responding traders (i.e., the requesting trader may be more
likely to accept the dynamically improved quote over the other
responder's non price-improved quotes).
[0106] Traditional market style of trading enables traders to
submit bids and offers for a particular item. Traders can hit a bid
or lift an offer to commence trade. Traditional market style of
trading may also enable traders to submit buy and sell orders
Traders may use dynamic price improvement to improve on bids and
offers, and buy and sell orders that are being traded in a
market.
[0107] A dynamic price improved order can increase or decrease its
price improvement level depending on market conditions. This
creates a trading scheme in which the dynamic order changes its
price improvement level to maintain its position relative to the
other orders in the stack, thereby maintaining its position in the
stack. For example, if a trader submits a dynamic order and that
order is placed at the top of the stack, this order maintains its
position at the top of the stack, while the price of the item being
traded is maintained at its predetermined price increment price, by
adjusting its price improvement level (e.g., increase its price
improvement level such that it exceeds the price improvement level
of the next best order by one level) until it is matched with a
contra order or cancelled.
[0108] The dynamic order may increase its price improvement level
up to a maximum available price improvement level, at which point
it may use its original timestamp to maintain its position at the
top of the stack where the timestamp is older than subsequent
orders.
[0109] The presence, or not, of dynamic price improvement (PI)
orders in the stack may cause the system to decrease the price
improvement level of certain price improved orders submitted
subsequent to dynamic PI orders such that the price improvement
level of the dynamic PI orders are not inflated when such inflation
is not needed to maintain their respective positions in the stack.
Thus, this avoids using unnecessary price improvement levels on
orders that cannot improve their position in the stack by virtue of
the pre-existing dynamic price improvement order. For example,
assume that a dynamic order is in a stack with a price level of
two. Then a trader submits a new price improved order with a price
improvement level of three, which in this case is assumed to be the
maximum price improvement level. Instead of increasing the price
level of the dynamic PI order to three, the system may decrease the
price level of the new price improved order to two. This way, the
dynamic PI order still maintains its position in the stack, but
does not have its price improvement level increased to three. Thus,
such functionality prevents unnecessary inflation of price
improvement levels.
[0110] The trading system may or may not provide traders with the
option of selecting which price improvement level they wish to
trade. For example, users may be permitted to select a specific
price improvement level such as a price improvement level of one or
the dynamic best price improvement level. This results in orders
being arranged in a stack according to their respective price
improvement levels and timestamps by default without user
intervention.
[0111] In some cases, price improvement orders being submitted by
predetermined traders may, by default, be dynamic price improved
orders. The system may select which traders' orders are default
price improved orders or the traders themselves may choose to have
their price improved orders by dynamic price improved orders by
default.
[0112] FIG. 9 shows a flowchart 900 that illustrates use of a
dynamic price improvement order. Starting at step 910, a user
submits a dynamic price improvement order using, for example, a
dialog window 800 of FIG. 8. At step 920, the trading system
assigns a price improvement level to the dynamic order. The
assigned price improvement level may depend on factors including,
but not limited to, orders currently in the stack, the price
improvement level of orders in the stack, other dynamic orders in
the stack, and the timestamps of orders in the stack.
[0113] For example, if the dynamic order is the first order to be
submitted, the system may initially assign that order a price
improvement level of zero. In the case where orders already exist
in the stack, but the orders are not dynamic orders, the system may
assign a price improvement level that is one level higher than the
highest price improvement level associated with any of the existing
orders. For example, if the stack has an order with a price
improvement level of one (but is not a dynamic order), the dynamic
order may be assigned a price improvement level of two. If the
price improvement level of the best order in the stack is at the
maximum price improvement level, then the maximum price improvement
level is assigned to the dynamic order.
[0114] If a dynamic order already exists in the stack, the trading
system may assign the price improvement level of the existing
dynamic order to the newly submitted dynamic order. This suppresses
the price improvement level of a newly submitted dynamic order to
prevent inflation of the price improvement level of the dynamic
order already present in the stack. The price improvement level is
suppressed because the new dynamic order cannot jump in front of an
existing dynamic order because of the existing order's timestamp.
However, in the event the existing dynamic order is the lone order
in the stack, in which case the price improvement level of the
existing order is zero, the price improvement level of the existing
dynamic order and the new dynamic order is increased to one,
thereby promoting the advantageous use of dynamic price improvement
to reward the counter party and to promote dynamic price
improvement. (The reward provided to a trader for trading with
dynamic price improvement is discussed below.)
[0115] At step 930, the system may assign a timestamp to the
dynamic order. The timestamp indicates the time at which the
dynamic order is submitted to the system and may be used to
determine the particular position an order has in a stack. For
example, in instances where two or more dynamic orders are
submitted, the timestamp determines which order takes precedence.
Note that dynamic orders may retain their original timestamp even
if its price improvement level changes.
[0116] Proceeding to step 940, the system places the dynamic order
in a predetermined position of a trading stack according to its
assigned price improvement level and timestamp. The predetermined
position may be relative and may change depending on market
conditions such as submission of new orders (e.g., dynamic orders
and price improvement orders), and the matching of orders, and
cancellation of orders. A predetermined position is defined herein
as the position a dynamic order has in a stack with respect to
previously submitted orders and to subsequently entered orders. For
example, if a price improved order having a maximum price
improvement level is submitted before a dynamic order, the dynamic
order is assigned a maximum price improvement level and may be
placed below the price improved order because the price improved
order has an earlier timestamp.
[0117] At step 950, the system maintains the dynamic order in the
predetermined position with respect to previously submitted orders
and to subsequently submitted orders. For example, if a dynamic
order's predetermined position is second from the top of the stack,
that order will remain second until the first order is cancelled or
matched with a contra order. At this point, the predetermined
position of the dynamic order shifts from being second to first
(e.g., its new predetermined position). This order preferably
remains first until matched or cancelled.
[0118] To maintain the dynamic order in a predetermined position,
the trading system may change the price improvement level. The
trading system may increase the price improvement level to maintain
the order's position in the stack when an order having a price
improvement level higher than the level of the dynamic order is
submitted. If the price improvement level increases to the highest
available level, then the system may use time priority to keep the
dynamic order in its predetermined position.
[0119] FIG. 10 shows a flowchart illustrating steps that may be
taken to maintain the position of a dynamic order when a new order
(e.g., either a dynamic order or price improved order) is
submitted. In the context of this flowchart and for the purpose of
clarity, the existing dynamic order is referred to as the original
(dynamic) order.
[0120] Beginning at step 1010, the system checks if a new dynamic
or price improved order is submitted to the system. The system may
continue to perform this check (as indicated by the feedback loop)
until a new order is actually submitted, at which point the process
advances to step 1014. At step 1014, a determination is made as to
whether the new order is a dynamic order. If the new order is a
dynamic order, the process proceeds to step 1016, which preserves
the price improvement level of the original order and uses the
timestamp of the original order to maintain its position in the
stack.
[0121] If the new order is not a dynamic order, the process
proceeds to step 1020. At step 1020, the process determines whether
the price improvement level of the price improved order is equal to
or greater than the price improvement level of the original order.
If not, then the system does not change anything with respect to
the original order and it maintains its position in the stack, as
indicated by step 1022. However, if the price improvement level of
the improved order equals or exceeds that of the dynamic order, the
process proceeds to step 1024. At step 1024, the system may
increase the price improvement level of the original order to a
level (e.g., one level) above the level of the price improved
order, if possible. Increasing the price improvement level of the
original order ensures that the original order maintains its
position in the stack. If the price improvement level of the
original order cannot be increased to a level above the improved
order's level, the system may match the price improvement level of
the original order to the improved price order's level and use the
timestamp of the original order to maintain its position in the
stack.
[0122] FIG. 10 is merely illustrative, and additional steps may
added or some steps may be omitted.
[0123] There may be instances when the trading system decreases the
price improvement level of the dynamic order. In these instances,
the dynamic order maintains its position in the stack while at the
same time decreasing its price improvement level. Decreasing the
price improvement level puts the dynamic order in a position to
provide a more advantageous execution price than if the price
improvement level remained at the higher price improvement level
than necessary to maintain its position in the stack.
[0124] FIG. 11 shows a flowchart illustrating steps that may be
taken when an order is cancelled or matched with a contra order.
Particularly, FIG. 11 illustrates how the system maintains a
dynamic order in its predetermined position while at the same time
possibly reducing the price improvement level of the dynamic order
when orders are removed from the stack. In the context of this
flowchart and for the purpose of clarity, the dynamic order
potentially having its price improvement level reduced is referred
to as the original (dynamic) order.
[0125] Beginning at step 1110, the system determines whether an
order is cancelled or matched to a contra order. The system may
continue to perform this check (as indicated by the feedback loop)
until an order is cancelled or matched, at which point the process
proceeds to step 1114. At step 1114, the system determines whether
the cancellation or matching of the order results in a "price
improvement level decreasing" condition.
[0126] A price improvement level decreasing condition occurs when
the original order has a price improvement level that exceeds the
price improvement level of the next best order by at least two
price improvement levels. By way of example assume that the
original order has a price improvement level of three and the next
best order has a price improvement level of one. Here the
difference in price improvement levels is two, thus resulting in a
price improvement level decreasing condition because the price
improvement level of the original order can be reduced to two and
still maintain its position in the stack.
[0127] If there is no price improvement level decreasing condition
present, the process proceeds to step 1118. At step 1118, the
system does not change the price improvement level of the original
order, but continues to maintain the original order's position in
the stack. If there is a price improvement level decreasing
condition present, then the process proceeds to step 1120.
[0128] At step 1120, the system may decrease the price improvement
level of the original order so that it exceeds the price
improvement level of the next best order by one level. Although
FIG. 11 is discussed in the context of one dynamic order, the
discussion can be applied to several dynamic orders. For example,
if two or more dynamic orders are in the stack, each having the
same price improvement level, a cancellation of an order having a
price improvement level below that of the dynamic orders may create
a price improvement level decreasing condition. If the condition
exists, then the price improvement level may be decreased in both
dynamic orders.
[0129] The steps shown in FIG. 11 are merely illustrative and
additional steps may be added or steps may be omitted.
[0130] With reference now to FIG. 12, dynamic price improvement is
described in context of market cell 1200 for a selected item. FIG.
12 is described primarily in the context of a trade state in which
traders are actively buying and selling an item by submitting buy
and sell orders. Although FIG. 12 is being described in the context
of a trade state, dynamic price improvement may be used in
conjunction with a bid/offer state in which traders submit bids and
offers for an item.
[0131] FIG. 12 illustrates a market cell 1200 where users are
participating in a market in which selected item 1202 is being
traded. Selected item 1202 may be any suitable type of commodity
such as, for example, securities, bonds, coupons, etc. Price 1204
indicates the current selling and/or buying price of selected item
1202. Trade status 1206 provides an indication of what type of
trading activity is taking place with respect to selected item
1202. Item indicator 1208 provides an indication of the quantity of
selected item 1202 available in the market. If, for example,
sellers are operating in the active side of the market, the item
indicator 1208 informs market participants the total number of
items 1202 that are available for sale in the market. Seller stack
1212 informs market participants the quantity of selected items
1202 a particular seller is prepared to sell. Likewise, buyer stack
1214 informs market participants the quantity of selected items
1202 a particular buyer is prepared to buy. Market depth indicator
1216 provides information regarding the depth of the market (i.e.,
the price and quantity of items available in the market, at prices
different than the current price).
[0132] When a trader submits a dynamic order or a price improved
order, a price improvement indicator 1220 may be displayed to
indicate that price improvement is taking place. Price improvement
indicator 1220 may be any suitable distinguishing character such
as, for example, a diamond, a carrot, text (e.g., PI) or other
distinguishing mark. In FIG. 12, the presence of price improvement
indicator 1220 indicates that at least one of the orders (e.g., the
size 20, 30 or 40 orders) is price improved.
[0133] Price improvement indicator 1220 informs all market
participants that at least one trader is prepared to trade a
specified number of items at an improved price, regardless of
whether the improved price is a price improvement order or a
dynamic order. But traders (except the traders who submit price
improved or dynamic orders) do not know what the price improvement
level is.
[0134] With reference now to the trading state diagram of FIGS. 13A
and 13B, an example of how dynamic orders operate is now discussed.
FIGS. 13A and 13B shows several sell stacks (e.g., the sell stack
of FIG. 12) disposed along an axis representing time. Each stack
includes orders, with each order having an order type (e.g.,
dynamic, price improvement, or traditional), a price improvement
level (e.g., PI=1), and a timestamp (e.g., 10:03). The legend in
FIG. 13B defines the attributes associated with the orders. Time
progresses from left to right. Trade commands, which are shown
below the time axis, may cause the trade system to modify the
position of the orders in the stack. Several "snapshots" of the
stack, which are shown above the time axis, are shown to illustrate
how the trade system maintains the position of the dynamic
orders.
[0135] Stack 1302 represents an arbitrary trading stack that may
occur at a particular time. Stack 1302 includes a dynamic order, a
price improved order, and a traditional order. When trade commands,
such as those shown in trade step 1305 are issued, the trading
system may arrange the orders as shown in stack 1306. As shown,
submission of the price improved order with a price improvement
level of two causes the price improvement level of the dynamic
order in stack 1302 to increase to a price improvement level of
three. At trade step 1307, the cancellation of the price improved
order having the price improvement level of two results in a stack
as shown in stack 1308. Stack 1308 shows that the price improvement
level of both dynamic orders dropped down to a level of two because
the next best order only has a price improvement level of one.
[0136] At trade step 1311, a price improved order and a dynamic
order are submitted. Stack 1312 illustrates the positions of the
orders after trade execution at trade step 1311. Note that for the
purpose of this example, the maximum price improvement level is
three. Thus, when the price improved order having a price
improvement level of three is submitted, this forces the price
improvement level of all the dynamic orders to three. Note,
however, that the dynamic order of size 55 is positioned behind the
size 45 order because its timestamp is after that of the size 45
order.
[0137] Stack 1316 shows the stack after the size 30 and size 35
orders are matched to a contra order submitted at trade step 1315.
Trade step 1321 shows that a contra order of size 45 and price
improved order with a price improved level of one are submitted.
The contra order is matched with the price improved order of size
45, resulting in stack 1322. Note that the price improvement level
of the dynamic order dropped down to two from three because the
next best order has a price improvement level of one.
[0138] Dynamic orders can improve on orders of different types,
such as limit, stop, good-till-canceled, all-or-none,
market-if-touched, and is not limited to improving only on orders
of the same type as the dynamic improved order. These different
order types are known to those with skill in the art and need not
be discussed with particularity.
[0139] Note that if a trader submits a traditional order using the
next predetermined pricing increment, the type (e.g., stop, limit,
etc.) of the order may determine whether the dynamic or price
improved order remains in the stack.
[0140] One advantage is that it provides a monetary incentive for
traders to trade items when price improvement orders for that item
are available. For example, a trader may be provided with a rebate
(e.g., a predetermined quantity of money), the quantity of which
may depend on several factors (e.g., level of price improvement
used and the size being traded). The size of the rebate may
correspond to the level of price improvement used in matching
orders. For example, a trader may receive a larger rebate for an
order traded at a price improvement level of three than for an
order traded at a price improvement level of one. For a dynamic
order, the rebate awarded to the trader may be based on the price
improvement level of the order when matched. Alternatively, the
rebate awarded to a trader using a dynamic order may be fixed,
irrespective of the price improvement level of the order when
matched.
[0141] Alternatively, a rebate may be provided to the trader that
decides to trade on a price improved order, but an order in the
stack has a price improvement level of zero (i.e., the price
improved order is the lone order in the stack). Because the price
improvement level of the lone order is zero, the trader may not
receive a rebate that corresponds to a particular level of price
improvement. Rather, the trading system may provide the trader with
the alternative rebate (e.g., a rebate that may be less than a
rebate that would otherwise be received if the price improvement
level is one or higher).
[0142] The trading system may send messages to traders to indicate
what price improvement level is associated with their order. For
example, when a user submits a dynamic price improvement order, the
trading system may inform the trader which price improvement level
is being used. Thereafter, if the price improvement level of the
dynamic price improvement order changes, the system may transmit
updated price improvement level information to the user.
IV. Neutral Price Improvement
[0143] An electronic trading system and method is provided that
permits traders to submit price improvement orders that are traded
at predetermined pricing increments and that maintain a position in
a trading stack based on the size of other orders already existing
in the stack at the time the order is submitted.
[0144] A predetermined pricing increment is typically defined by
the instrument being traded. For example, the two-year United
States government bond may trade at predetermined pricing
increments of 1/4 of 1/32 of a nominal value. If a stock is being
traded, the stock may be traded at predetermined pricing increments
of one penny. As another example, certain Exchange Traded US Stock
Options may trade at a pre-determined standard price increment of
five cents in price. In certain trading systems, a user may submit
a traditional order, which has a price corresponding to a
predetermined pricing increment. Traditional orders are sometimes
referred to herein as PI(0) (orders at standard price increments
without price improvement).
[0145] In trading systems, such as those disclosed in the '779 and
'009 applications, traders may submit orders that improve on a
price for a particular item at an amount less than a predetermined
pricing increment. For clarity and ease of presentation, such
orders are referred to herein as price improvement orders. For
example, in such trading systems as detailed in the '779 and '009
applications, price improvement orders include dynamic price
improvement orders (e.g., PI(dynamic)) and orders having a specific
price improvement level such as one (e.g., PI(1)), two (e.g.,
PI(2)), or three (e.g., PI(3)). The price improvement levels of
price improving orders can also be set to ever decreasing economic
values, to allow more price improvement levels to be utilized in a
trading system.
[0146] In other trading systems, such as certain Exchange Traded US
Stock Option trading systems, that use price improvement, such use
of price improvement (i.e., price improvement levels) may be
implemented only in certain trading scenarios (e.g., trading or
price improvement states). Such trading systems may be referred to
as an auction style of trading that uses price improvement. Such
trading systems may permit traders to price improve on "active"
orders, thereby enabling traders to submit price improved orders
(using price improvement levels) to improve the price of the
"active" order. For example, assume that a trader submits an order
to sell a predetermined number of options at a particular price.
Further assume that a contra-trader is prepared to buy those
options at that particular price. Before the order is executed,
other traders may submit orders to buy the options at an improved
price (i.e., a price that price improves on the predetermined price
using a price improvement increment). If such a price improved
order is submitted, then the price improving trader takes
precedence over the contra-trader.
[0147] Trading systems may permit traders to submit traditional
orders, price improvement orders (PI), and neutral price
improvement orders. Neutral price improvement orders may sometimes
be referred to herein as PI(neutral), neutral PI order, or neutral
order. A neutral PI order is an order that trades at the
predetermined pricing interval and maintains a position in the
trading stack based on the total size of orders existing in the
stack prior to submission of the particular neutral PI order. An
advantage of neutral PI orders is that they provide traders with
yet another price improvement trading option. Yet, this particular
option permits orders to be traded at non-price improved
increments, while at the same time are not automatically trumped
(e.g., overtaken or bettered) by necessarily all subsequently
submitted price improvement orders, (whereas a traditional order
would be automatically trumped and move down the pricing stack to
allow the price improving order to improve its position).
[0148] Neutral PI orders may be handled by a trading system as
follows. Upon receipt of a neutral PI order, the trading system may
assign a timestamp to the order. This timestamp may be similar to
the timestamps associated with other types of orders such as
traditional and price improving orders. The trading system may
place the neutral PI order behind all orders already existing in
the trading stack. If the neutral PI order is the only order in the
stack, then the neutral PI order is placed at the front of the
stack.
[0149] A neutral PI order is not assigned a price improvement level
even though neutral PI may be facilitated as a "price improvement
option" on the system. As will be explained in more detail below,
certain orders may be switched from being in front (or above) of
the neutral PI order to be placed behind (or below) the neutral PI
order.
[0150] When the neutral PI order is placed in the stack (at a
certain regular predetermined pricing interval), it is assigned a
position size limit. This position size limit is calculated by
adding up the size of each order in front of the neutral PI order
on entry of said PI neutral order into the trading stack. This
position size limit is used by the electronic trading system to
prevent the combined size of all orders in front of the neutral PI
order from exceeding the noted position size limit of that
particular neutral PI order, regardless of orders submitted
subsequently thereafter, for the life of the neutral PI order, or
some predetermined time, or such time as may be ended by a
predetermined event. Thus, the position of a neutral PI order
within the stack is determined as a function of the combined size
of the orders in front of the neutral PI order, at its point of
entry in the stack. That is, no matter how many subsequent price
improving orders are submitted that would price improve on the
neutral PI order, the combined size of orders in front of the
neutral PI order may not exceed the position size limit.
[0151] In some cases, the position size limit may be a fraction or
a multiple of the size existing in front of the PI neutral order on
its entry to the stack. By preventing the combined size in front of
the neutral PI order from exceeding the position size limit of that
neutral PI order, the neutral PI order maintains a position in the
stack based on its position size limit and the size of the orders
in front of it.
[0152] Although the combined size of orders in front of a
particular neutral PI order may not exceed the neutral PI order's
position size limit, this position size limit may in time become
smaller than the original position size limit associated with the
neutral PI order. That is, the position size limit associated with
a particular neutral PI order can be decreased. Such a decrease may
occur when an order in front of the neutral PI order is matched
with a contra order and/or in some cases when an order in front of
the PI neutral order is cancelled.
[0153] In some cases the position size limit may be increased due
to the end of a time period, or on a predetermined event affecting
the trading system such as an economic figure or other external
market moving event. The use of neutral PI orders may be governed
by the trading system by increasing the position size limit to
dilute or remove the neutral PI functionality by allowing other PI
order size to then be promoted in front of PI Neutral.
[0154] In some cases, the position size limit may be decreased when
an order (e.g., an older timestamp order or a newer timestamp order
with a price improvement level of greater than zero) is cancelled
or traded. In some cases, in the event of a cancellation of an
order originally in front of the neutral PI order, the position
size limit may decrease if there is no size from another order
(e.g., dynamic PI order) behind the neutral PI order that can
occupy the cancelled order's position in front of the neutral PI
order.
[0155] The following explains by way of example how the trading
system maintains the position of a neutral PI order in the trading
stack with respect to size. In one example, if a neutral PI order
is the first order in the stack, the trading system assigns a
position size limit of zero to the order. Thus, no orders are
permitted to jump in front of the neutral PI order because this
would exceed the position size limit of the order. In some cases, a
neutral PI order may still be trumped by other orders retaining
special privileges such as a last trader privilege. A last trader
privilege may permit a trader who was the last trader to have an
order traded in the system to have the opportunity to jump in front
of a trader submitting such a neutral PI order.
[0156] In another example, if the neutral PI order is preceded by
at least one other order, the trading system assigns a position
size limit equal to the combined size of each order in front of the
neutral PI order. Regardless of subsequently submitted price
improving orders, the combined size of the orders in front of the
neutral PI order may not exceed its position size limit.
[0157] Although the combined size of order(s) existing in front of
the neutral PI order may not be permitted to exceed the position
size limit, price improving orders (e.g., PI(dynamic) or PI(2))
submitted subsequent to the neutral PI order may be switched in
whole or in part with orders in front of the neutral PI order that
have a lower PI level. This permits price improvement to commence
within the confines of the position size limit set by a particular
neutral PI order.
[0158] A portion of or all of a subsequently entered "superior"
price improving order can improve on and displace a portion of or
all of a pre-existing order residing in front of the neutral PI
order in a trading stack. This "superior" price improving order may
displace up to the full size of one or more "lesser PI level"
orders that are in front of the neutral PI order, while still
maintaining the position size limit of the neutral PI order being
jumped. In certain trading situations, such a displacement may
result in a split of the "superior" order into two or more sizes.
For example, a "superior" PI order may be split in two, with one
portion displacing an order in front of the neutral PI order and
the other portion taking a position behind the neutral PI order
(the position size limit of the PI neutral order having not been
increased). Regardless of how a "superior" order is split, both
portions may retain the same price improvement level or the order
may have its price improvement levels split to show different price
improvement levels in each position. Other trading situations may
result in a split of "lesser PI" orders, where only a portion of
that order is displaced behind a neutral PI order by a "superior"
order.
[0159] If the "superior" price improving order is a dynamic order,
the price improvement level may increase to improve on the price
improvement level of any "lesser PI" order in the stack. For
example, if the order being displaced has a price improvement level
of one, the dynamic order may adjust its price improvement level to
two to improve on the (older timestamp) order in front of the
neutral PI order.
[0160] In the event an improving order (e.g., dynamic PI order)
cannot get in front of a neutral PI order, the improving order may
use a price improvement level to obtain the best position possible
behind the neutral PI order. For example, in some cases of dynamic
PI use, if the only order in front of the neutral PI order is a
PI(dynamic) order, a subsequently entered PI(dynamic) order may not
increase its price improvement level to match or exceed that of the
first PI(dynamic) order. However, in the alternative, it may adjust
its price improvement level to only improve on orders behind the
neutral PI order.
[0161] FIGS. 14-19 show examples of trading operations using
neutral PI orders. Each example shows the time sequence in which
orders are submitted to the trading system. Each example also shows
how orders are sorted in the stack. The examples also show the
price improvement level of orders in the stack, if applicable.
Referring now to FIG. 14, this example shows that the trading
system receives orders A, B, and C before sorting. Order A is a
traditional order (e.g., PI(0)) of size 5 m, where "m" may
represent "million" and a size of "5 m" may represent 5,000,000.
Order B is neutral PI order (e.g., PI(neutral)) of size 4 m. After
order B is submitted, the trading system may assign a position size
limit of 5 m to order B. Order C is a price improving order (e.g.,
PI(dynamic)) of size 3 m.
[0162] After order C is entered, the trading system may sort the
stack. As shown, the full size (e.g., 3 m) of order C displaces 3 m
of order A because order C price improves on order A. In this
particular example, the price improvement level of order C
increases to PI level one to improve on order A. Order A splits,
causing 2 m of order A to remain in front of the neutral PI order
(i.e., order B) and the remainder of 3 m to be placed behind order
B. Thus, it is seen that order B maintains its position in the
stack with respect to size. That is, the combined size of the
orders in front of order B does not exceed 5 m.
[0163] Referring now to FIG. 15, this example shows that a
traditional order (e.g., order A) of size 5 m, a neutral PI order
(e.g., order B) of size 4 m, and a dynamic price improving order
(e.g., order C) of size 40 m are received by the trading system.
Once received, the trading system sorts the orders. As shown, the
price improving order improves on and displaces the traditional
order by increasing its price improvement level to one. Only 5 m of
the price improving order is placed is front of the neutral PI
order because the position size limit of the neutral order is 5 m.
Thus, the price improving order is split, with 5 m in front of the
neutral PI order and 35 m behind the neutral PI order. Note that 35
m of the price improving order takes precedence over the
traditional order because it is price improved over the traditional
order.
[0164] Referring now to FIG. 16, this example shows that a dynamic
price improving order of size 5 m, neutral order of size 4 m, and a
dynamic price improving order of size 40 m are submitted to the
trading system. Once received, orders A, B, and C maintain their
position because order C cannot improve on order A. Note, that the
price improvement level of order A increases to one, while the
price improvement level of order C remains at zero because order C
did not achieve a better stack position.
[0165] FIG. 17 shows an example in which a neutral PI order is
submitted first followed by a price improving order (e.g., a
dynamic order). The trading system prevents the price improving
order from jumping in front of the neutral PI order because the
position size limit of the neutral PI order is zero. The price
improvement level of the price improving order is kept at zero.
[0166] Cancellation of order(s) in front of a neutral PI order may
result in a rearrangement of orders in the stack. For example, if
an order having a timestamp older than the timestamp of a neutral
PI order is cancelled, the stack may be sorted according to the
price improvement levels and timestamps of all orders in the stack.
Thus, when an order having an earlier timestamp than that of a
neutral order is cancelled, this does not automatically reduce the
position size limit. The price improvement levels and timestamps of
the orders may be taken into account before effecting a change in
the position size limit. FIG. 18 shows an example of this
particular situation. FIG. 18 shows that a price improving order
having a price level of one and size of 5 m is submitted first,
followed by a neutral PI order of size 4 m and dynamic price
improving order of size 40 m. These orders are sorted as shown. The
price improvement level of the dynamic price improving order
increases to a PI level of two to improve on and displace the level
one price improvement order.
[0167] When order A is cancelled, the trading system may re-sort
the stack according to price improvement levels and timestamps. In
some cases, with order A removed, 5 m of order C may remain in
front of order B because order C has a superior PI level (e.g.,
PI(2)), even though order A has an older timestamp than order B. As
shown, the price improvement level of order C may drop down to
level one because a price level of two is not needed to maintain
its position in the stack when order A is cancelled.
[0168] As another example, if an order having a timestamp younger
than the timestamp of the neutral PI order is cancelled (it may be
in front of a PI neutral order due to a superior PI level
displacing a lower PI level order), the stack may be sorted such
that the order(s) that were previously in front of the neutral PI
order are restored to their previous position to the maximum size
possible, respective to the position size limit of each neutral PI
order. FIG. 19 illustrates such an example. FIG. 19 is similar to
FIG. 18 except that order C is cancelled, as opposed to order A.
With the cancellation of order C, order A is restored to its
original position in the stack.
[0169] When an order in front of the neutral PI order is executed
or matched with a contra order, the position size limit associated
with that neutral PI order may be decreased by the size of the
execution or match. For example, if the position size limit of a
particular neutral PI order is 5 m, an execution or match of 3 m in
front of this neutral PI order may reduce the position size limit
of the neutral PI order to 2 m. Consider, for example, the trading
scenario shown in FIG. 14. If the dynamic order C is executed or
matched entirely, it would be removed from the stack. The 3 m of
the traditional order behind the neutral PI order may not be
allowed to entirely move back in front of the neutral order because
the position size limit of order B has been reduced to 2 m. Thus,
only the 2 m of order A remains in front of order B. However, if a
new dynamic PI order of size 5 m were to be submitted, 2 m of this
new dynamic PI order may displace the 2 m of the order A.
[0170] In some cases, either the cancellation or matching of an
order may result in a decrease in the position size limit.
Considering, for example, the trading scenario shown in FIG. 14. If
the traditional order A is matched or cancelled for 2 m, the
position size limit may be reduced to 3 m (from 5 m) because 2 m of
the traditional order in front of order B is removed. In some
cases, the position size limit of a particular neutral PI order may
be decreased only when (a) an order is cancelled and (b) there is
no order (e.g., dynamic order) behind the neutral PI order that can
take the place of the cancelled order. Consider, for example, the
trading scenario in FIG. 16. If order A is cancelled, the position
size limit of neutral PI order B is maintained at 5 m because 5 m
of dynamic order C can occupy the position vacated by the 5 m of
order A that was cancelled. However, if order C was a traditional
order, for example, the position size limit of order B may decrease
to zero when order A is cancelled because the traditional order C
cannot jump in front of order B.
[0171] Neutral PI orders may not be traded/executed at improved
prices. As a result, traders that use neutral PI orders may not
have to pay fees (e.g., fees paid to contra trader and/or to the
electronic trading system host) or benefit from trading against
other contra orders executed at a price improved price. Rather,
traders that use neutral PI may pay a predetermined fee, which may
be determined irrespective of the price at which an order is
traded.
[0172] FIG. 20 illustrates a graphical interface 2000 for
submitting trading commands using, for example, a workstation as
shown in FIG. 1A. Interface 2000 includes price improvement trading
box 2010, which has first, second, and third price improvement
level options, a dynamic price improvement option, and a neutral
price improvement option that can be selected by the trader. If a
trader wishes to trade using neutral price improvement, the neutral
price improvement option in box 2010 can be selected. Selection of
this box can change the nature of the application pertaining
specifically to the instrument being traded such as, for example,
not displaying indicia that indicates existence of price
improvement used on a standard price level, and preventing a trader
from receiving a financial benefit of trading with other price
improved orders. Traders may also select PI neutral to be a default
application for all instruments in any particular market sector, or
all instruments in general.
[0173] The above description with respect to FIG. 20 is not
intended to be an exhaustive description of various features that
can be included with dialog window 2000. United States patent
application publication No. 2002-0029180 published Mar. 7, 2002,
which is hereby incorporated by reference in its entirety, provides
a substantial description of dialog window 2000.
[0174] Price improvement trading can be implemented with a variety
of trading schemes such as, for example, Direct Dealing
(hereinafter "DD"--sometimes referred to as "Request for Quote"
style trading) and traditional market style trading. In DD style
trading, there are requestors and responders. The requestors can
enter a request for prices on a particular item or instrument. A
responder may submit prices in response to that request. The
requestor may then choose to trade with one of the responders.
[0175] A traditional market style of trading may be one that
enables traders to submit bids and offers for a particular item.
Traders can hit a bid or lift an offer to commence a trade. Other
traditional market styles of trading may also enable traders to
submit bid and offer orders for automatic matching where possible,
such as in a futures market. Further traditional styles of market
trading may be an auction style where a bid or an offer for an
amount of an instrument is introduced to a marketplace for
participants to offer or bid in an auction process, thereby
determining a trade price for that amount of the instrument.
[0176] FIG. 21 shows a flow chart of illustrative steps that may be
taken by a system using neutral price improvement. Beginning at
step 2102, a trading stack capable of receiving many different
types of orders is provided. The various types of orders may
include, but are not limited to, traditional orders, neutral
orders, RFQ orders, direct dealing orders, and price improvement
orders such as price level price improvement orders, dynamic price
improvement orders.
[0177] After a neutral order is received at step 2104, a position
size limit is assigned to the received neutral order, as indicated
by step 2106. As discussed above, the position size limit may be
used to limit the total size of orders in front of the neutral
order, thereby allowing price improvement rules to govern the
operation of orders in the stack, yet still enable the neutral
order to remain competitive. The received neutral order may remain
competitive by preventing the total size of order(s) in front of
the received neutral order from exceeding the position size limit,
as indicated in step 2108. At step 2110, the orders in the stack
may be sorted according to a predetermined trading scheme (e.g., a
price improvement trading scheme) while maintaining the received
neutral order in a position relative to other orders in the stack
based on the position size limit. Several examples relating to step
2110 are discussed above in connection with FIGS. 1-19.
[0178] FIGS. 22A and 22B show a flow chart illustrating steps that
may be taken by a system using neutral price improvement. Starting
at step 2202, a trading stack capable of receiving many different
types of orders is provided. At step 2204, an order is received and
a determination is made at step 2206 as to whether the received
order is a neutral order. If the received order is a neutral order,
the process proceeds to step 2210, which assigns a timestamp to the
neutral order. A position size limit is assigned to the neutral
order at step 2212. At step 2214, the neutral order is positioned,
at least initially, in the stack based on the timestamp. For
example, if three orders exist in the stack at the time the neutral
order is received, the neutral order may be placed in the fourth
position in the stack. After the neutral order is positioned in the
stack, the process proceeds to step 2270, where the system awaits
receipt of the next order. When an order is received, at step 2272,
the process loops back to step 2206.
[0179] If at step 2206, it is determined that the received order is
not a neutral order, the process proceeds to step 2220, which
determines if the received order is a traditional order. If the
received order is a traditional order, a timestamp is assigned to
the traditional order (at step 2222) and it is positioned in the
trading stack according to its timestamp (at step 2224). After the
traditional order is placed in the stack, the process proceeds to
step 2270. If it is determined that the received order is not a
traditional order, the process proceeds to step 2230, which
determines if the received order is a price improvement order.
[0180] If the received order is a price improvement order, then at
step 2231, a time stamp is assigned to the order and it is placed
in the stack according to that timestamp. Then at step 2232, a
determination is made if the price improvement order can price
improve on at least one order in the stack. If price improvement is
possible, a determination is made to see if the price improvement
order can price improve on an order in front of a neutral order, at
step 2234. If price improvement is not possible at step 2232, the
process proceeds to step 2270.
[0181] If the determination at step 2234 indicates that the price
improvement order can price improve on an order in front of the
neutral order, then at step 2236, the trading system may switch at
least a portion of the size of the price improvement order for at
least a portion of the order in front of the neutral order, with
any switching being commenced within the confines of the position
size limit of each neutral order in the stack. The price
improvement order cannot substitute any portion of a neutral order.
The examples described above in connection with FIGS. 1-16 relate
to step 2236. After switching of orders is complete at step 2236,
the process proceeds to step 2270. If the determination at step
2234 is NO, the process proceeds to step 2270.
[0182] At step 2250, a determination is made if the received order
is a contra order. A contra order may be an order that can be
matched or traded with an order in the stack. For example, if the
orders in the stack are buy orders, a contra order would be a sell
order. If the order is a contra order, the contra order is matched
with at least the first order in the stack, as shown in step 2252.
The contra order may match a portion of an order in the stack, in
which case the portion may just be a portion of the order because
the contra order is smaller than the size of the order in the stack
or because the contra order fully matches the size of the order in
a particular location in the stack, with a remaining portion of
that order existing elsewhere in the stack. In other cases, the
contra order may be matched with the entire size of an order and
not just a portion thereof. A portion of the contra order may be
matched, at least initially, if orders existing in the stack are
not large enough to fully fill the contra order.
[0183] After the contra order, or portion thereof, is matched and
if a neutral order, or portion thereof, is not matched, the
position size limit for each neutral order may be reduced by the
size of the order(s) matched in front of the neutral order(s). This
step is shown in step 2254. If a neutral order, or portion thereof,
is matched with the contra order, the position size limit of the
other neutral orders in the stack is reduced by the portion of the
size of the neutral order that is matched. When the position size
limit or limits have been properly reduced, the process proceeds to
step 2270.
[0184] If at step 2250 it is determined that the received order is
not a contra order, the process proceeds to step 2260, which
determines if the received order is a cancel order. If so, the
order to be cancelled in the stack is cancelled at step 2262. An
example of this is discussed above in connection with FIG. 19. If
possible, various orders may be rearranged in accordance with
predetermined trading rules at step 2264. An example of this is
discussed in connection with FIG. 18. After step 2264 or if the
received order is not a cancel order, the process proceeds to step
2270.
[0185] The steps shown in FIGS. 22A and 22B are merely illustrative
and additional steps may be added or one or more steps may be
omitted. For example, additional steps may be added to show how the
system handles an erroneously entered order. As another example,
additional steps may be added to indicate how the price improvement
level of various price improvement orders is increased or decreased
depending on market conditions.
[0186] With reference now to FIG. 23, neutral price improvement is
described in context of market cell 2300 for a selected item. FIG.
23 is described primarily in the context of a trade state in which
traders are actively buying and selling an item by submitting buy
and sell orders. Although FIG. 23 is being described in the context
of a trade state, neutral price improvement can be used in
conjunction with a bid/offer state in which traders submit bids and
offers for an item, any automatic matching thereof, and any auction
style matching thereof.
[0187] FIG. 23 illustrates a market cell 2300 where users are
participating in a market in which selected item 2302 is being
traded. Selected item 2302 may be any suitable type of commodity
such as, for example, securities, bonds, coupons, etc. Price 2304
indicates the current selling and/or buying price of selected item
2302. Trade status 2306 provides an indication of what type of
trading activity is taking place with respect to selected item
2302. Item indicator 2308 provides an indication of the quantity of
selected item 2302 available in the market. If, for example,
sellers are operating in the active side of the market, the item
indicator 2308 informs market participants the total number of
items 2302 that are available for sale in the market. Seller stack
2312 informs market participants the quantity of selected items
2302 a particular seller is prepared to sell. Likewise, buyer stack
2314 informs market participants the quantity of selected items
2302 a particular buyer is prepared to buy. Market depth indicator
2316 provides information regarding the depth of the market (i.e.,
the price and quantity of items available in the market, at prices
different than the standard predetermined increment price).
[0188] When a trader submits a price improving order, a price
improvement indicator 2320 may be displayed to indicate that price
improvement is taking place. Price improvement indicator 2320 may
be any suitable distinguishing character such as, for example, a
diamond, a carrot, text (e.g., PI) or other distinguishing mark.
Price improvement indicator 2320 may be displayed if a neutral PI
order is the only order in the stack, so subsequent price improving
traders are made aware that a neutral PI order or a price improving
order is already in the stack. In some cases, price improvement
indicator 2320 may not be displayed on account of a neutral PI
order, and may only be displayed if at least one other price
improving order (e.g., PI(dynamic)) already exists in the stack. If
a neutral PI order is matched with a contra order, then in certain
situations the system may compensate the contra trader in
accordance with price improving rules, but the neutral trader may
still only trade at the standard price increment.
[0189] Neutral PI orders may be applied to different types of
orders, such as limit, stop, good-till-canceled, all-or-none,
market-if-touched.
V. Hardware
[0190] Referring to FIG. 1A, exemplary system 100 for implementing
price improvement may include one or more trading workstations 101.
Workstations 101 may include a mouse 106, a keypad 107, and a
display 108. Workstations 101 may be local or remote, and are
connected by one or more communications links 102 to computer
network 103 that is linked via communications links 105 to server
120. Server 120 is linked via communications link 110 to back
office clearing center 130.
[0191] In system 100, server 120 may be any suitable server,
processor, computer, or data processing device, or combination of
the same. Server 120 may be used to process the transactions
entered into by one or more traders.
[0192] Computer network 103 may be any suitable computer network
including the Internet, an intranet, a wide-area network (WAN), a
local-area network (LAN), a wireless network, a digital subscriber
line (DSL) network, a frame relay network, an asynchronous transfer
mode (ATM) network, a virtual private network (VPN), or any
combination of any of the same. Communications links 102 and 105
may be any communications links suitable for communicating data
between workstations 101 and server 120, such as network links,
dial-up links, wireless links, hard-wired links, etc.
[0193] Workstations 101 may be personal computers, laptop
computers, mainframe computers, dumb terminals, data displays,
Internet browsers, Personal Digital Assistants (PDAs), two-way
pagers, wireless terminals, portable telephones, etc., or any
combination of the same.
[0194] Back office clearing center 130 may be connected to server
120 of the trading system via communications link 110. Back office
clearing center 130 may be any suitable equipment, such as a
computer, a laptop computer, a mainframe computer, multiple
processors, etc., or any combination of the same, for causing the
proposed transaction, and other transactions such as trades with
neutral PI orders, to be cleared and/or verifying that transactions
are cleared. Communications link 110 may be any communications
links suitable for communicating data between server 120 and back
office clearing center 130, such as network links, dial-up links,
wireless links, hard-wired links, etc.
[0195] The server, the back office clearing center, and one of the
workstations, which are depicted in FIG. 11, are illustrated in
more detail in FIG. 1B. Referring to FIG. 1B, workstation 101 may
include processor 109(a), display 108, input devices 106, 107, and
memory 109(b), which may be interconnected. Memory 109(b) may
contain a storage device for storing a workstation program for
controlling processor 109(a). Processor 109(a) uses the workstation
program to present on display 108 information relating to the
proposed transaction to a user of workstation 101. Furthermore,
input device 106, 107 may be used to enter such information and to
enter into the proposed transaction or execute a trade through, for
example, entering a command that may be received by processor
109(a) and communicated to server 120.
[0196] Server 120 may include processor 121, display 122, input
device 123, and memory 124, which may be interconnected. Memory 124
may contain a storage device for storing the information relating
to the transactions entered into by one or more traders. The
storage device further contains a server program for controlling
processor 121. Processor 121 may use the server program to process
the transaction information and commands displayed to and received
from the trader. Processor 121 may use the server program to
process the proposed transaction. Processor 121 may include
calculation processor 121 that determines, for example, the
monetary quantity provided to a price improving trader that
executed an order using price improvement. Processor 121 may
include transaction processor 126 that processes the transaction
entered into by the trader. Processor 126 may, for example, match
potential buyers and sellers by matching their credit risks or the
bid/offer prices they have entered.
[0197] Back office clearing center 130 may include processor 131,
display 132, input device 135, and memory 134, which may be
interconnected. Memory 134 may contain a storage device for storing
a clearing program for controlling processor 131. Processor 131
uses the clearing program to complete the transactions that are
entered into by the trader. Processor 131 uses the clearing program
to further verify that the transactions and trades are completed
and cleared.
[0198] For the convenience of the reader, the above description has
focused on a representative sample of all possible embodiments, a
sample that teaches the principles of the invention and conveys the
best mode contemplated for carrying it out. Throughout this
application and its associated file history, when the term
"invention" is used, it refers to the entire collection of ideas
and principles described; in contrast, the formal definition of the
exclusive protected property right is set forth in the claims,
which exclusively control. The description has not attempted to
exhaustively enumerate all possible variations. Other undescribed
variations or modifications may be possible. Where multiple
alternative embodiments are described, in many cases it will be
possible to combine elements of different embodiments, or to
combine elements of the embodiments described here with other
modifications or variations that are not expressly described. In
many cases, one feature or group of features may be used separately
from the entire apparatus or methods described. Many of those
undescribed variations, modifications and variations are within the
literal scope of the following claims, and others are
equivalent.
* * * * *