Abstract:
A method for operating an exchange where financial instruments are traded that includes applying a discriminant to trade transactions, dividing the trade transactions into groups and then routing trade transactions to selected exchanges for handling. The method also allows transactions to be matched within each exchange and allows qualified traders to make manual trades within the various exchanges.

Description:
[0001]     This application claims the benefit of U.S. provisional Ser. No. 60//701,724, filed Jul. 22, 2005, the disclosure of which is hereby incorporated by reference in its entirety. 
     
    
     REFERENCE REGARDING FEDERALLY SPONSORED RESEARCH OR DEVELOPMENT  
       [0002]     Not applicable  
       SEQUENTIAL LISTING  
       [0003]     Not applicable  
       BACKGROUND OF THE INVENTION  
       [0004]     1. Field of the Invention  
         [0005]     The present invention relates generally to a system and method for handling trade transactions. More particularly, this invention relates to separating the trade transactions into various groups and automatically routing some of the groups to an alternate exchange that may include a matching engine where the trade transactions can be executed thereby improving the overall efficiency of a market.  
         [0006]     2. Description of the Background of the Invention  
         [0007]     In a typical exchange, traders will make trade transactions by utilizing face-to-face communication techniques in an open outcry market environment. Financial instruments include stocks, bonds, futures, options, cash, and other similar instruments. The concept of a financial instrument in today&#39;s marketplace can include a wide variety of items that have extended far beyond what was originally considered a financial instrument. This includes contracts for the future delivery of agricultural and other commodities, including metals, oils, and the like. Also, the financial instrument can be a derivative instrument that includes options of all types and instruments that are based on a basket of other instruments such as options based on the Dow Jones Industrial Average, currency exchange baskets and the like. A trade transaction can be the buying and selling of any of the above financial instruments and similar instruments as well as similar rights and obligations.  
         [0008]     At most exchanges, brokers receive orders from their respective firms. These orders may arrive at a firm&#39;s order entry desk and may be entered into an order desk computer. The order desk computer may be integrated with the exchange&#39;s network infrastructure and order routing systems. The order entered into the order desk computer can be routed to a trading pit on the floor of the exchange to a broker workstation. Some of these orders are small or may be for a transaction that is outside the current market. One example is a limit order to buy or sell at a price below or above the current active market price range. Forwarding these out of market or small trades to the floor broker interferes with the operation of the exchange, especially during very busy periods on the floor.  
         [0009]     Within the open outcry environment, brokers use hand signals to indicate their willingness to execute a trade transaction at or near the prevailing bid/offer in the open outcry pit. When a broker successfully executes a trade transaction, the execution data related to the trade transaction is entered into the broker workstation by the broker or by a clerk on behalf of the broker. The data from the broker workstation is then transmitted to the order routing system of the exchange for clearing. This data may be enhanced by including customer information, billing or delivery information that does not impact the key market data that underlies the trade transaction.  
         [0010]     In addition to brokers, the pit also includes traders who trade financial instruments for themselves. Traders can have computer systems for recording their trade transactions. These computer systems can also be integrated into the exchange&#39;s network infrastructure and order routing systems. Upon execution of a trade, trade execution data is transmitted to an order routing system of the exchange to be forwarded to a clearing system.  
         [0011]     During periods of very high market activity, the open outcry pit may be very congested. At these times, a broker/trader may be unable to successfully communicate his willingness to execute a trade transaction with other market participants. This results in the broker&#39;s/trader&#39;s inability to execute a trade transaction at the optimum bid/offer price. Because these markets can be highly volatile, the inability to execute a trade transaction at the broker&#39;s/trader&#39;s preferred price point may lead to significant market inefficiencies. The system of one embodiment of the present invention allows an exchange to set one or more thresholds, evaluate incoming trade transactions on the basis of the threshold and automatically route the trade transaction to the open outcry exchange or an alternate market, such as an electronic trading engine.  
         [0012]     This system will significantly alleviate congestion in a trading pit and thereby increase market efficiency. Because an exchange can base its choice of threshold on the level of activity on a trading floor at any particular time, the system can adjust to periods of high or low market activity.  
         [0013]     Some exchanges currently use various electronic systems to drive the markets. Some systems allow small investors to create and manage a complex portfolio of financial instruments in a cost effective basis. Additionally, this system improves the small investor&#39;s ability to execute trade transaction by aggregating the small investor&#39;s trade orders with other market participants orders at various times. This provides the small investor with efficient access to the markets at a lower cost than would have been achieved if the small investor&#39;s order were executed individually.  
         [0014]     Also, some exchanges have established a system for routing certain orders, depending on the size of the order, to specific trading firms in a round robin-fashion. Such systems allow automatic execution of those orders routed to a trading firm assuming the trading firm has sufficient exposure to fill the order.  
         [0015]     Additionally, other exchanges employ systems that allocate commissions and fees to individual traders and/or trading firms while the trader or trading firm is trading financial instruments at accelerated levels. Such systems reward traders who participate in the market or their involvement and also minimize the likelihood of erroneous assignment of commission and fees to the wrong trader and/or trading firm in a situation where there is a frenzy of activity on a trading floor.  
         [0016]     Other exchanges also have a system that enables direct interaction between a user and a trader in a trading pit who is using an electronic trading desk. Such systems are designed for use in parallel with an existing order delivery electronic system to provide uninterrupted access to a market when the existing system fails.  
         [0017]     The small order exchange system “SOES” is also used in some exchanges. SOES provides individual or small investors who generally trade on their own accounts quick access to the markets. SOES significantly decreases the advantages of market makers and larger institutional investors over small investors in the markets. Small investors can enter their orders directly into SOES. The SOES automatically executes such orders against corresponding matching orders that are available in the market.  
       SUMMARY OF THE INVENTION  
       [0018]     One embodiment of the present invention is directed to a method of handling trade transactions based on at least one discriminant. This method includes the step of separating the trade transactions into a plurality of groups of trade transactions using the discriminant. The method also includes the step of automatically routing the trade transactions that are within a first group to a first exchange, where the trade transactions outside the first group are sent to a second exchange. The method also includes the step of matching an individual trade transaction that has been sent to the first exchange either with other trade transactions that have been sent to the first exchange or with a manual trade transaction entered by a qualified trader.  
         [0019]     Another embodiment of the present invention is directed to a method of handling trade transactions based on at least one discriminant. This method includes the step of associating a trader with a trade transaction. The method also includes the step of separating the trade transactions into a plurality of groups of trade transactions using the discriminant. The method further includes the step of automatically routing the trade transactions that are within a first group to a first exchange, where the trade transactions outside the first group are sent to a second exchange. The method also includes the step of matching an individual trade transaction that has been sent to the first exchange either with other trade transactions that have been sent to the first exchange or with a manual trade transaction entered by a qualified trader. In addition, the method includes the steps of crediting the associated trader with a matched trade transaction and also routing the matched trade transaction to a clearing system. 
     
    
     BRIEF DESCRIPTION OF THE DRAWINGS  
       [0020]      FIG. 1  is a schematic view of one embodiment of a system architecture of the present invention;  
         [0021]      FIG. 2  is a flow diagram illustrating one embodiment of the present invention;  
         [0022]      FIG. 3  is a table showing various discriminants that may be used along with possible routing actions an exchange might choose;  
         [0023]      FIG. 4  illustrates a user interface that a trader/broker may use to view available bids and offers in the alternate exchange;  
         [0024]      FIG. 5  is a flow diagram illustrating yet another embodiment of the present invention;  
         [0025]      FIG. 6  is a flow diagram of still another embodiment of the present invention; and  
         [0026]      FIG. 7  is a flow diagram of a still further embodiment of the present invention.  
     
    
     DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS  
       [0027]      FIG. 1  shows an overview of a system architecture of a trading system  40  of the present invention. The trading system  40  is a system for separating trade transactions into different groups based on one or more chosen discriminants. These different groups of trade transactions are routed to an alternate exchange or to a trading floor. Depending on the system, there may be a second alternate exchange to which a further group of trade transactions is routed.  
         [0028]     A clerk enters a trade transaction into the trading system  40  via an order entry computer  42 . The order entry computer  42  can be any type of computer typically used in an exchange environment including computers located near the trading floor or pit including the order desk computer, custom programmed computers using an API provided by the exchange or computers running software used by the exchange to record and enter orders into the exchange&#39;s computer system. A trader may use a hand held device  44  to enter a trade transaction into the trading system  40 . The hand held device  44  is programmed to enable traders to enter key data about a trade, such as the nature of the financial instrument traded, i.e., July 2007 Corn, the type of transaction, i.e., buy or sell, the price, and the quantity. There can be multiple order entry computers  42  or multiple hand held devices  44  connected to the trading system  40  at any one time. The order entry computer  42  and the handheld device  44  are connected to an order entry server  46  by interfaces  48  and  51 , respectively.  
         [0029]     One aspect of the order entry server  46  separates trade transactions based on a chosen discriminant or discriminants and determines where the trade transaction should be routed for handling. Based on the discriminant, certain trade transactions will be sent to an alternate exchange  62  or routed to the trading floor face-to-face trading. Trade transactions to be traded on the trading floor are sent by the order entry server  46  to a broker workstation  49  or to the same hand held device  44  or a different hand held device  44  from one that is associated with or entered the trade transaction through interfaces  50 , or  51 , respectively. In this case, the broker will trade the order in the customary manner in open outcry floor or pit. It should be apparent that the order entry computer  42  and the broker workstation  49  may be part of the same system and in some instances may even the same computing device. Interfaces  48 ,  50 , and  51  may provide two-way communication between the appropriate device and order entry server  46 .  
         [0030]     In the open outcry environment, individuals use hand signals to indicate willingness to make a trade at a particular price point. When the trade is concluded, the trade data will be sent to the primary exchange computer  52  through interfaces  54  or  56  depending on whether the order was initially entered via the workstation  49  or the hand held device  44 . The primary exchange computer  52  may include a matching engine to pre-match certain trade transactions prior to the trade transaction being sent to a clearing system  58 . In addition, the primary exchange computer  52  will enable the broker&#39;s or the trader&#39;s firm to add enhancement data to the basic trade transaction data that has been entered into the primary exchange computer  52 . Eventually, the trade transaction data will be sent to the clearing system  58  through interface  60  for matching processing, and balancing. It should be noted that in some environments, the order entry server  46  and the primary exchange computer  52  can be the same computer.  
         [0031]     Trade transactions that meet the requirements of the discriminant in the order entry server  46  are routed to the alternate exchange  62  that may include a matching engine  64 . At this point, the matching engine  64  will automatically match the trade transaction using well known matching algorithms. In some cases, an immediate match may occur within alternate exchange matching engine  64  if an opposite trade transaction that has not been matched exists on the alternate exchange matching engine  64 . For example, electronic matching may occur in the alternate exchange matching engine  64  when there is an opposite trade transaction that matches the price and quantity. Also, qualified individuals may be able to access trade transactions that are not automatically matched at the alternate exchange matching engine  64  through the broker workstation  49  or the hand held device  44  and interfaces  66  and  68 , respectively. The threshold for the qualification of individuals to access the alternate exchange matching engine  64  may be specified by an exchange. Trade transactions that are matched automatically by the alternate exchange matching engine  64  or matched by orders directly placed on the alternate exchange matching engine  64  by individuals who access the alternate exchange matching engine  64  through interfaces  66  and  68  are also sent to the clearing system  58  for processing.  
         [0032]     With reference to  FIG. 2 , an order for a trade transaction is entered into order workstation  49  or hand held device  44 . The order is received within the order entry server  46 . Within the order entry server  46 , an optional block  88  associates the received trade transaction with a trader and/or brokerage firm who would have filled the order in the open outcry environment. Thereafter, control then passes to a block  90  that compares a discriminant to the order, for example, the discriminant is the size of the order and the discriminant value is 10 contracts. If the order is greater than or equal to the discriminant value, in the above example orders of 10 contracts or more, the order will be routed via the “No” branch to a block  92  that sends the order to the broker associated with the order for handling on the exchange floor. However, if the order is less than the discriminant value, in the above example the order is for less than 10 contracts, control will pass via the “Yes” branch to the alternate exchange  94 . Some embodiments of the present invention include a display device  96  that displays orders for trade transactions that have been routed to alternate exchange  94 . Display device  96  displays all the pertinent information regarding the orders that are available on the alternate exchange  94 .  
         [0033]     Alternate exchange  94  may include matching engine  98 . Matching engine  98  will use well known algorithms to automatically match trade transactions. In some cases, an immediate match may occur within matching engine  98  when there is an opposite trade transaction that matches the price and quantity of the entered order. Additionally, qualified individuals may be able to access trade transactions that are not automatically matched within matching engine  98 . Based on thresholds set by an exchange, qualified individuals may be able to match trade transactions within matching engine  98  via their broker workstations  49  and hand held devices  44  through interfaces  100  and  102 . Trade transactions that are matched automatically by matching engine  98  or by matched orders directly placed on the matching engine  98  by individuals who access the matching engine  98  through interfaces  100  and  102  are sent to a clearing system  104  for immediate or end of day processing. In some embodiments of the present invention, processing includes crediting the traders/brokers on the buy side and the sell side of a trade transaction with trade transactions that were entered by them and matched within the alternate exchange  94 .  
         [0034]     In some embodiments of the present invention, alternate exchange  94  also may employ the method of separating trade transactions based on various discriminants as described above to further route trade transactions to other additional alternate exchanges.  
         [0035]     In  FIG. 3 , a series of potential discriminants that could be used in the present invention are listed and along with how an order might be routed using these discriminants. Other discriminants are also possible. For discriminants based on the size of the order, those orders that are larger than the discriminant will be sent to the trading floor while those that are smaller will be sent on to the alternate exchange. Another discriminant that may be used is price. For example, an individual may enter an order for a trade transaction to be executed at a certain price or with a range of prices. An exchange may choose to route orders at prices within a certain price range with respect to the prevailing market price to the alternate exchange while orders outside of the specified price range are routed to the trading floor.  
         [0036]     The contract date of orders is yet another discriminant that may be employed by the present invention. Contracts that are for deferred or illiquid months may be routed to the alternate exchange while orders to be delivered at an earlier date may be routed to the trading floor and vice-versa. For instance, if an exchange is experiencing high volumes of trade transactions with respect to September corn, the exchange may choose to route all orders for January corn to an alternate exchange to enable more efficient trading of September corn on the trading floor.  
         [0037]     Another discriminant that may be used by the present invention is the individual type. Individuals can be separated into various groups using several classifications. Some classifications that may be used to separate individuals are net assets, individual traders or funds, hedgers or speculators, sophisticated individuals or unsophisticated individuals, and retail or professional traders. Type of orders may also be used as a discriminant by separating them into outright orders or spread orders. An exchange may choose to route outright orders to the alternate exchange and route spread orders to the trading floor. Also, an exchange could choose to route different types of spread transactions such as straddles, condors, and other strategies to separate exchanges. The geographical origin of an order may also be used as a discriminant. Orders entered by traders within a certain radius of the exchange facility may be routed to an alternate exchange while orders originating outside the specified radius may be routed to the trading floor and vice-versa. In other embodiments of the present invention, orders pending in the order entry server  46  for a configurable period of time can be routed to the alternate exchange  62 . Another example of a discriminant is the use of hours of trading. In this instance, a trade that has not been executed at the close of trading at a first exchange, and had not been indicated as good only for that trading session could be routed for trading to a second exchange for possible execution. It should be apparent that other discriminants can be used to select an exchange for a trade transaction. Similarly, other characteristics can be used to separate trades into different groups.  
         [0038]      FIG. 4  shows a screen shot of another embodiment of the present invention. The display device  120  shows the market available on the alternate exchange  48 . The display  120  can be an integrated display on the hand held device  44  or some portion or all of the display of the broker workstation  49 . A display screen  122  had arrayed a series of orders for September 2005 Corn including the amount  124  of contracts that market participants are willing to buy or sell at the various prices  126 . The display can be programmed to show a certain level of market depth.  
         [0039]     In  FIG. 5 , a further embodiment of the present invention is illustrated as system  140 . A block  142  within the order entry server  46  receives an order for a trade transaction. Block  142  associates broker A with the received order. Control then passes to a block  144  that applies a discriminant to the order. If the order does not meet the requirements of the discriminant, the order will be routed via the “No” branch to a block  146  that sends the order to broker A for handling on the exchange floor. However, if the order meets the requirements of the discriminant, control will pass via the “Yes” branch to the alternate exchange  148 . The alternate exchange  148  may include an alternate exchange matching engine  150 . In this instance, the alternate exchange  148  will send the order to the alternate exchange matching engine  150 . If there is a corresponding opposite trade transaction within alternate exchange matching engine  150 , an automatic match will occur within matching engine  150 . The alternate exchange  148  may also be a secondary trading floor where orders are processed in a face-to-face environment. If the match is made using an alternate exchange matching engine, the matching engine  150  credits broker A with his side of the matched trade transaction and hands over control to clearing system  154  for processing. In a similar fashion the face-to-face trades are also sent to the clearing system  154  for processing.  
         [0040]     However, if an automatic match did not occur within matching engine  150 , Broker B may access matching engine  150  through broker workstation  49  or hand held device  44  via interfaces  66  and  68 , respectively. Broker B may choose to match broker A&#39;s order by making a corresponding opposite entry into matching engine  150  through broker workstation or hand held device  44 . At this point, a match occurs and broker A and broker B both get credited for their respective side of the trade transaction. The matched trade is sent by a block  152  to the clearing system  154  for processing.  
         [0041]     With reference to  FIG. 6 , an embodiment is shown where two discriminants are applied sequentially. A trade transaction  170  is received by an exchange. A first discriminant  172  is applied to the trade transaction  170 . If the trade transaction  170  is greater than the first discriminant  172 , for instance the size of the trade transaction  170  is greater than 5 units, the trade transaction  170  is routed via the “Yes” branch to the first exchange  174  and then on to a trading floor  176  for normal handling on the trading floor  176 . Once the trade transaction  170  is match on the trading floor  176 , the trade transaction  170  is sent to a clearing system A  178 . The clearing system A will process the trade transaction  170  in the normal fashion for a matched trade transaction.  
         [0042]     If the trade transaction  170  is less than the first discriminant  172 , then the trade transaction  170  is routed via the “No” branch to a second exchange  180 . At the second exchange  180 , a second discriminant  182  is applied to the trade transaction  170 . As an example, the second discriminant might look to see if the price of the trade transaction  170  is within a certain number of ticks, for example 5 ticks, of the market. If the price of the trade transaction  170  is within 5 ticks, the trade transaction  170  is routed via the “Yes” branch to a second exchange match engine  184 . At the second exchange match engine  182 , the trade transaction  170  can be matched with other trade transactions that have been sent to the second exchange match engine  184 . In addition as above, a qualified broker or trader for the first exchange  174  can also query the second exchange match engine  184 , and place orders directly on the second exchange match engine  184  using a broker workstation  186  or a hand held device  188 . Once the trade transaction  170  is matched by the second exchange matching engine  184 , the trade transaction is also sent to the clearing system A  178  where the trade transaction  170  is processed in the normal fashion.  
         [0043]     If the trade transaction  170  is smaller than the first discriminant  172  and also more than 5 ticks outside the market, then the trade transaction  170  is routed via the “No” branch to a third exchange  190 . Because the third exchange is an electronic exchange, the trade transaction  170  is sent to a third exchange matching engine  192 . At the third exchange matching engine  192 , the trade transaction  170  can be matched by other similar orders or the third exchange matching engine  192  can be queried and accessed directly by qualified brokers and traders as above using a broker workstation  194  or a hand held device  196 . If the trade transaction  170  is matched at the third exchange matching engine  192 , the trade transaction is sent to a clearing system B  198  for post trade processing. In some environments, the clearing system A  178  and the clearing system B  198  can communicate so that trade transactions at either of the clearing systems A or B  178 ,  198  can be offset against each other. In other embodiments, the clearing system A  178  and the clearing system B  198  will be separate.  
         [0044]      FIG. 7  shows an embodiment where multiple discriminants are applied at the same time. A trade transaction  200  is compared against multiple discriminants  202 . For example, if an exchange is particularly busy, only trades for financial instruments with certain delivery dates will be trade on the exchange floor. All other trade transactions  200  will be routed for handling in other exchanges. If D 1  is for corn with a September 2006 delivery date and D 2  is for orders of more than 5 contracts, then in a situation where D 1  is true or Yes, that is trade transaction  200  is a contract for September 2006 corm, the multiple discriminants  202  will send trade transactions  200  via the branch where “D 1 =Yes” to a first group  204  that will be traded on a first exchange trading floor  206 . In this instance, the discriminants D 1  and D 2  are being tested sequentially. Therefore as long as D 1  is true, the trade transaction will be routed by the “D 1 =Yes” branch. In other instances, each discriminant can be tested independently. For this situation, there would be both a “D 1 =Yes and D 2 =Yes” and a “D 1 =Yes and D 2 =No” branch. As trade transactions  200  are matched on the first exchange trading floor  206 , the matched trade transactions re sent for post trade processing to a clearing system A  208 . For situations where D 1  is false or No, i.e., the contract is not for September 2006 corn, and where D 2  is true or Yes, the order is for more than 5 contracts, the trade transaction  200  will be sent via the “D 1 =No and D 2 =Yes” branch to a second group  210 . The second group  210  is then routed to a second exchange match engine  212  for matching as above. In this instance, qualified brokers and traders can also participate in the market using broker workstations  214  or hand held devices  216 . Once the trade is matched, the matched trades are sent to a clearing system B  218 . For situations where D 1  and D 2  are both false, then the trade transaction  200  is routed via the “D 1 =No and D 2 =No” branch to a third group  220 . At the third group  220  the trade transaction  200  is sent to a third exchange matching engine  222 . Because the third exchange is an electronic exchange, qualified brokers and traders can participate in the market broker workstations  224  or hand held device  226 . If the trade transaction  200  is match, the match transaction is sent to a clearing system C  228 . Either or both of the second and third exchanges could also be face to face exchanges with a trading floor. In fact all three exchanges can be electronic, or face-to-face. Further, some or all of the clearing system A  208 , clearing system B  218 , or clearing system C  228  can cooperate or be totally independent.  
       INDUSTRIAL APPLICABILITY  
       [0045]     Numerous modifications to the present invention will be apparent to those skilled in the art in view of the foregoing description. Accordingly, this description is to be construed as illustrative only and is presented for the purpose of enabling those skilled in the art to make and use the invention and to teach the best mode of carrying out same. The exclusive rights to all modifications, which come within the scope of the appended claims, are reserved.