Abstract:
A system and method are provided that preserve many of the advantages of traditional workups, including the ability to create a single deal extended in time, while avoiding aspects of prior art workup protocols that can be disadvantageous in particular trading environments and, particularly, avoiding the trading delays sometimes created by providing certain traders with exclusive trading privileges in highly-liquid, fast-moving trading environments. In a preferred embodiment, the present system comprises a distributed computer processing system programmed to provide a structured trading protocol that enhances trading efficiency and fairly distributes market opportunity to system users. More specifically, in a preferred embodiment, the present system is adapted to provide a plurality of workup phases each of which is designated a “public” phase and during which all trading is conducted on a first-come-first-served basis.

Description:
BACKGROUND OF THE INVENTION 
     In many markets, buy and sell orders at the same price are automatically matched. Thus, for example, a first order to buy an item at a price of 100 and a second order to sell the same item at a price of 100 will, in such markets, result in a transaction in which some quantity of the item is sold at the specified price. 
     But in some markets, most notably the secondary market for U.S. government treasuries, orders of equal price are not automatically matched. Rather, certain types of buy and sell orders, called “passive” orders, may co-exist at the same price without triggering a transaction. These passive orders do not trade unless “aggressed” against by a trader submitting a second type of order, called an “aggressive” order. Historically, a passive order to buy has been referred to as a “bid,” while a passive order to sell has been referred to as an “offer.” By contrast, an aggressive order to sell has been referred to as a “hit,” while an aggressive order to buy has been referred to as a “take” or “lift.” 
     This distinction between passive and aggressive orders is one of several characteristics of the secondary market in U.S. government treasuries that developed to encourage market liquidity. In particular, since it is impossible to generate liquidity in a market without having someone first make a price, inter-dealer brokers historically sought to encourage traders to submit bids and offers by not charging them a commission if their orders resulted in a trade. Thus, passive bids and offers could not be matched even at the same price since neither the passive buyer nor the passive seller would be required to pay a commission and the inter-dealer broker would not execute a transaction without a commission being paid. 
     In addition to commission-free trades, inter-dealer brokers in the secondary market for U.S. government treasuries also rewarded buyers and sellers by developing a number of trading protocols or conventions which granted certain buyers and sellers certain trading options or “rights.” One such convention is commonly referred to as “workup.” In general terms, this convention permits buyers and sellers to “work up” the size of a trade from the quantity traded as a result of an initial “hit” or “lift.” Historically, certain traders, including the first aggressive-side and passive-side traders, were granted an option or right to increase their size, and to trade that additional size ahead of other traders. 
     Conceptually, a workup is considered a single deal extended in time. This conception was reflected historically in several interesting aspects of workup trading. For example, because all trading during workup was considered part of a single deal, all such trading occurred at a single price point set by the initial hit or lift that triggered the workup. In addition, the initial aggressor&#39;s side of the market (i.e., the sell side in the case of a hit and the buy side in the case of a lift) was designated the “aggressive” side of the market for the duration of the workup. Similarly, the opposite side of the market was designated the “passive” side of the market for the entire workup. This designation played an important role in trading, including determining which entities would pay commission, historically paid only by the aggressive side of the market. 
     As electronic trading developed, electronic platforms were developed that provided for automated workup functionality. One such electronic platform is the BrokerTec® electronic trading platform operated by ICAP Electronic Broking which first included a workup functionality in May 2001. As originally launched, the BrokerTec workup functionality included two distinct phases, a private phase and a public phase. During the private phase, an aggressor that bought or sold all displayed volume at the best available price was granted an exclusive right to trade additional volume for the duration of the private phase. If the aggressor failed to buy or sell all displayed volume at the best available price, no exclusive trading privileges were granted on the aggressive side of the market, and all traders on that side of the market traded on a first-come-first-served basis even during the private phase. On the passive side of the market, the first position bidder or offeror that was hit or lifted was granted exclusive trading privileges for the duration of the private phase. 
     The private phase in the BrokerTec electronic trading platform automatically expired after a fixed, non-extendable number of seconds tracked by a timer. Upon expiration of the private phase, the public phase commenced. During the public phase, all trading on both sides of the market was conducted on a first-come-first-served basis. The duration of the public phase was also controlled by a timer. But unlike the private-phase timer, the public-phase timer was reset each time a new execution occurred during the workup. Thus, expiration of the public-phase timer indicated a sustained period of trading inactivity and caused the system to end the workup. 
     The BrokerTec electronic trading platform includes three types of aggressive orders: fill or kill (FoK), fill and store (FaS), and fill and kill (FaK). Generally speaking, a FoK order is executed only if it can be completely filled. Thus, for example, if a trader submits a FoK order to buy $10M of a particular security at par and only $8M of that security is available at that price, no trade occurs and the order is “killed,” i.e., not entered in the order book. 
     By contrast, FaK and FaS orders may be partially filled. When a FaS order is partially filled, the unfilled portion of the order is automatically converted to a new order for the unfilled size on what is called the “follow,” i.e., the period following completion of the trade. Thus, if a trader submits a FaS order to buy $10M of a particular security at par and only $8M of that security is available at that price, $8M of the order is filled, and the unfilled portion of the order is converted into a new passive order to buy $2M of the specified security at par. 
     When a FaK order is partially filled, the unfilled portion of the order is “killed” and does not result in an order for the unfilled size on the follow. Thus, if a trader submits a FaK order to buy $10M of a particular security at par and only $8M of that security is available at that price, $8M of the order is filled, and the order&#39;s unfilled portion is “killed.” 
     SUMMARY OF THE INVENTION 
     A system and method are provided that preserve many of the advantages of traditional workups, including the ability to create a single deal extended in time, while avoiding aspects of prior art workup protocols that can be disadvantageous in particular trading environments and, particularly, avoiding the trading delays sometimes created by providing certain traders with exclusive trading privileges in highly-liquid, fast-moving trading environments. 
     In a preferred embodiment, the present system comprises a distributed computer processing system programmed to provide a structured trading protocol that enhances trading efficiency and fairly distributes market opportunity to system users. More specifically, in a preferred embodiment, the present system is adapted to provide a plurality of workup phases each of which is designated a “public” phase and during which all trading is conducted on a first-come-first-served basis. 
     The first public phase preferably commences upon the occurrence of a hit or a lift and terminates upon: (1) the occurrence of a second trade execution; or (2) expiration of a non-extendable first-public-phase timer, whichever comes first. The second public phase preferably commences upon termination of the first public phase and terminates upon expiration of an extendable second-public-phase timer. The second-public-phase timer is reset each time that a trade execution occurs during the second public phase. In a preferred embodiment, the first public-phase-timer is set for a higher number of seconds than the second public-phase-timer, thus permitting a guaranteed duration to the workup that is longer than the extensions to the workup triggered by each subsequent trade execution. 
    
    
     
       BRIEF DESCRIPTION OF THE FIGURES 
         FIG. 1  is a block diagram depicting aspects of a preferred embodiment of the present system; and 
         FIGS. 2A-C  are flow diagrams illustrating aspects of system operation in processing a received order in a preferred embodiment. 
     
    
    
     DETAILED DESCRIPTION OF THE INVENTION 
     With reference to  FIG. 1 , there is shown a system  100  comprising a matching engine  102  and a plurality of customer terminals  104  connected via appropriate communication links  106 . Matching engine  102  is preferably adapted to receive orders to buy and sell securities from terminals  104 , to process trading orders in accordance with specified protocols, and to communicate market information concerning trading activity to terminals  104 , as described in more detail below. 
     Matching engine  102  preferably comprises one or more server computers and associated components programmed to implement the trading activity described below. As further shown in  FIG. 1 , matching engine  102  preferably maintains an order book  108  that stores orders received by matching engine  102  from terminals  104 , as described in more detail below. 
     Each terminal  104  may preferably be a computer workstation comprising a CPU, memory, a display, and input devices, such as a mouse, keyboard, or specialized trading keypad. Terminals  104  may be provided to customers for direct entry of buy and sell orders on their own behalf, or to brokers for entry of such orders on behalf of others. Communication links  106  may comprise any appropriate arrangement of wired or wireless communication lines or networks, such as the Internet or dedicated communication lines. 
     One preferred embodiment for processing trade orders in accordance with the present invention will now be described in connection with  FIGS. 2A-C . In step  202 , matching engine  102  receives an order to buy securities from a customer or broker entered via a terminal  104 . In step  204 , matching engine  102  determines whether there is a workup in progress. If there is a workup in progress (step  204 , Yes), processing proceeds to step  214 , described below. 
     If a workup is not in progress (step  204 , No), processing proceeds to step  206 , where matching engine  102  determines whether the order is a passive order (i.e., a bid or an offer) or an aggressive order (i.e., a hit or take). If the order is a passive order (step  206 , Passive), processing proceeds to step  208  where the passive order is added to the order book and published to the marketplace for display at trader terminals  104  (step  208 ). 
     Otherwise, if the order is an aggressive order (step  206 , Aggressive), processing proceeds to step  210  where the aggressive order is executed by matching it against one or more pending passive orders on the opposite side of order book  108 . In step  212 , a workup commences with a first public workup phase during which all trading is conducted on a first-come-first-served basis at the price specified by the initial transaction that triggered the workup, referred to hereafter as the workup price. More specifically, during the first public phase, only orders at the workup price are executed. Furthermore, orders at that price on both the aggressive and passive sides of the markets are matched on pure time priority and no exclusive rights are granted to either the aggressor that initiated the workup or any passive side traders hit or lifted by the aggressor. 
     Preferably, a workup is triggered whether the initial aggressive order is for all or any part of the shown size on the opposite side of the market. In addition, where the system comprises a hidden size feature allowing traders to display to the market less than all the size they have entered, all shown sizes trade before any hidden size and the hidden size of the first position buyer or seller on the passive side of the market take priority over the rest of the stack. Thus, for example, where the first passive side trader has a bid at a shown size of 5 mm showing and 25 mm hidden size and the second passive trader has a bid at a size of 10 mm showing and zero hidden, if an aggressor hits for 10 mm, the first buyer will buy 5 mm, the second buyer will buy 5 mm, a workup will commence, and the first buyer&#39;s size will be replenished from his or her hidden size and remain at the head of the queue. Any other additional shown or hidden size entered following commencement of the workup will be matched on pure price-time priority. 
     Commencement of the first public phase preferably comprises commencement of a non-extendable first-public-phase timer. The first public phase continues until this fixed timer expires or until a second transaction occurs during the workup, as described in more detail below. 
     Returning to step  204 , it will be recalled that matching engine  102  determined whether or not a workup is in progress in processing the incoming order. If a workup is in progress (step  204 , Yes), processing proceeds to step  214  where it is determined whether the order is able to cause an execution. More specifically, if the order comes in on the aggressive side of the market (as determined by the side of the market to which the aggressor that initiated the workup belonged), the system determines whether there is unexecuted volume available on the passive side of the market with which the new aggressive-side order may be matched. Similarly, if the order comes in on the passive side of the market, the system determines whether there is unexecuted volume available on the aggressive side of the market with which the new passive-side order may be matched. It will be noted, that as long as contraparty volume is available when an order is received during this first workup phase, a trade execution will occur since all trading is conducted in this phase on a first-come-first-served basis with no exclusive trading privileges. Thus, a trade execution will occur regardless of which trader submitted the order. 
     If the newly received order does not result in an execution because there is no contraparty volume available, processing proceeds to step  216  where the order is added to the order book to be held for potential subsequent matching during later stages in the workup. Notably, this is preferably true even if the submitted order is a FaK order since the workup is a single deal extended in time and such orders therefore may be filled at any time before the workup concludes. Otherwise, if the newly received order is one that does enable an execution, processing proceeds to step  218  where the order is executed. 
     In a preferred embodiment, FoK orders are not permitted during a workup. In addition, it should further be noted that, in a preferred embodiment, if the submitted order is a passive order at a price worse than the workup price it is entered in the order book by the system based on its time and price priority; if the submitted order is an aggressive order at a price worse than the workup price it is stored in the order book as a passive order if it was a FaS aggressive order, and otherwise killed; if the submitted order is a passive order at a price better than the workup price it is rejected. In addition, where a trader submits an aggressive order at a price better than the workup price it is preferably re-priced to the workup price for the duration of the workup and treated as an aggressive order entered at the workup price. After the workup concludes, where such order was entered by a human trader, it is kept at the workup price and the unexecuted portion is either stored, in the case of a FaS order, or killed in the case of a FaK order. Where such order was submitted by a non-human trader (e.g., an automated order generator), the price of the order is returned to the original submission price after the workup concludes, and the unexecuted portion of the order is treated as an aggressive order at the submitted price. Passive orders at the workup price from traders on the aggressive side of the market are preferably rejected. Passive orders at the workup price from traders on the passive side of the market are preferably matched to the extent possible. 
     In step  220 , matching engine  102  determines whether the workup is currently in the first public phase or the second public phase. If the workup is currently in the first public phase (step  220 , First), processing proceeds to step  222  where the first public phase is terminated and then to step  224  where the second public phase is commenced. Commencement of the second public phase preferably comprises commencement of a second-public-phase timer. The second public phase extends until this second-public-phase timer expires, as described below. 
     By contrast, if the workup is in the second public phase (step  220 , Second), processing proceeds to step  226  where the second-public-phase timer is reset thus extending the second public phase for at least the duration of that second-public-phase timer. In a preferred embodiment, the first public-phase-timer is set for a higher number of seconds than the second public-phase-timer, thus permitting a guaranteed duration to the workup that is longer than the extensions to the workup triggered by each subsequent trade execution. 
     When a first public-phase timer or a second public-phase-timer expires, the workup is preferably terminated and the order book is prepared for the follow, i.e., the passive market of bids and offers following conclusion of the workup. The system may preferably be adapted to implement any appropriate set of rules for establishing the follow. One preferred embodiment, however, for a system that accepts FaK, FoK, and FaS orders will now be described by way of illustration. In particular, once a workup concludes, any remaining unexecuted portions of a FaK order are preferably killed and not retained in the order book on the follow. By contrast, any remaining portion of a FaS order is retained as a passive order in the order book on the follow. Similarly, any remaining portions of passive bids or offers are retained in the order book on the follow. Any desired implementation may be selected to implement the timer functionality described above. For example, the system may be adapted to periodically poll any running timer to determine if it has expired or be implemented such that expiration of a timer causes an interrupt that drives further processing in accordance with the process described above. 
     While the present invention has been described in conjunction with specific embodiments, it is evident that numerous alternatives, modifications, and variations will be apparent to those skilled in the art in view of the foregoing description.