Patent Publication Number: US-2016232608-A1

Title: System for Processing Decomposing Futures Contracts

Description:
FIELD OF THE INVENTION 
     Aspects of the invention relate to computer implemented systems and methods for processing financial instruments. More particularly, aspects of the invention relate to processing financial instruments that decompose into other financial instruments. 
     BACKGROUND 
     Traders of financial instruments often trade combinations of financial instruments or instruments based on combinations of financial instruments. Financial instruments include equity instruments, bonds, debt instruments, option contracts and futures contracts. One common combination includes the near simultaneous trading of a physical position and an opposing futures position. The physical position may include buying or selling financial instruments for gold, silver, other precious metals or other commodities. The combination of financial instruments allows traders to explicitly trade the price differential and to create hedged positions. While some combinations of financial instruments are desirable, processing orders for such combinations with computer systems creates several challenges. 
     One approach to processing combinations of orders includes a broker arranging trades for each part of the combination in an off exchange environment. Transactions that occur away from an exchange create challenges relating to monitoring compliance with regulations and rules and ensuring that the best execution has taken place. There is no established method for determining prices of each element of the combination of elements from a single price of the combination of elements. 
     Another approach involves linking electronic order books hosted at different locations. When order books are hosted at different locations orders may not be filled correctly because of time delays associated with execution of the orders. Moreover, linking order creates a variety of technical challenges. 
     Accordingly, there is a need in the art for improved systems and methods for processing combinations of financial instruments involving physical elements and futures contracts. 
     SUMMARY OF THE INVENTION 
     Aspects of the invention overcome at least some of the problems and limitations of the prior art by providing systems and methods for processing financial instruments. Efficient computer trading systems and methods are utilized by creating a combination financial instrument that includes a spot delivery financial instrument and a futures financial instrument. At the end of a trading session, or at some other time, the combination financial instrument is decomposed into separate spot delivery and futures financial instruments. A closing price of the futures financial instrument may be used to calculate a price for the spot delivery financial instrument. 
     In other embodiments, the present invention can be partially or wholly implemented on a computer-readable medium, for example, by storing computer-executable instructions or modules, or by utilizing computer-readable data structures. 
     Of course, the methods and systems of the above-referenced embodiments may also include other additional elements, steps, computer-executable instructions, or computer-readable data structures. In this regard, other embodiments are disclosed and claimed herein as well. 
     The details of these and other embodiments of the present invention are set forth in the accompanying drawings and the description below. Other features and advantages of the invention will be apparent from the description and drawings, and from the claims. 
    
    
     
       BRIEF DESCRIPTION OF THE DRAWINGS 
       The present invention may take physical form in certain parts and steps, embodiments of which will be described in detail in the following description and illustrated in the accompanying drawings that form a part hereof, wherein: 
         FIG. 1  shows a computer network system that may be used to implement aspects of the present invention. 
         FIG. 2  illustrates a combination financial instrument processed by a financial instrument processing computer system, in accordance with an embodiment of the invention. 
         FIG. 3  illustrates a computer implemented method of processing financial instruments in accordance with an embodiment of the invention. 
     
    
    
     DETAILED DESCRIPTION 
     Aspects of the present invention are preferably implemented with computer devices and computer networks that allow users to exchange trading information. An exemplary trading network environment for implementing trading systems and methods is shown in  FIG. 1 . An exchange computer system  100  receives orders and transmits market data related to orders and trades to users. Exchange computer system  100  may be implemented with one or more mainframe, desktop or other computers. A user database  102  includes information identifying traders and other users of exchange computer system  100 . Data may include user names and passwords. An account data module  104  may process account information that may be used during trades. A match engine module  106  is included to match bid and offer prices. Match engine module  106  may be implemented with software that executes one or more algorithms for matching bids and offers. A trade database  108  may be included to store information identifying trades and descriptions of trades. In particular, a trade database may store information identifying the time that a trade took place and the contract price. An order book module  110  may be included to compute or otherwise determine current bid and offer prices. A market data module  112  may be included to collect market data and prepare the data for transmission to users. A risk management module  134  may be included to compute and determine a user&#39;s risk utilization in relation to the user&#39;s defined risk thresholds. An order processing module  136  may be included to decompose delta based and bulk order types for processing by order book module  110  and match engine module  106 . 
     The trading network environment shown in  FIG. 1  includes computer devices  114 ,  116 ,  118 ,  120  and  122 . Each computer device includes a central processor that controls the overall operation of the computer and a system bus that connects the central processor to one or more conventional components, such as a network card or modem. Each computer device may also include a variety of interface units and drives for reading and writing data or files. Depending on the type of computer device, a user can interact with the computer with a keyboard, pointing device, microphone, pen device or other input device. 
     Computer device  114  is shown directly connected to exchange computer system  100 . Exchange computer system  100  and computer device  114  may be connected via a T 1  line, a common local area network (LAN) or other mechanism for connecting computer devices. Computer device  114  is shown connected to a radio  132 . The user of radio  132  may be a trader or exchange employee. The radio user may transmit orders or other information to a user of computer device  114 . The user of computer device  114  may then transmit the trade or other information to exchange computer system  100 . 
     Computer devices  116  and  118  are coupled to a LAN  124 . LAN  124  may have one or more of the well-known LAN topologies and may use a variety of different protocols, such as Ethernet. Computers  116  and  118  may communicate with each other and other computers and devices connected to LAN  124 . Computers and other devices may be connected to LAN  124  via twisted pair wires, coaxial cable, fiber optics or other media. Alternatively, a wireless personal digital assistant device (PDA)  122  may communicate with LAN  124  or the Internet  126  via radio waves. PDA  122  may also communicate with exchange computer system  100  via a conventional wireless hub  128 . As used herein, a PDA includes mobile telephones and other wireless devices that communicate with a network via radio waves. 
       FIG. 1  also shows LAN  124  connected to the Internet  126 . LAN  124  may include a router to connect LAN  124  to the Internet  126 . Computer device  120  is shown connected directly to the Internet  126 . The connection may be via a modem, DSL line, satellite dish or any other device for connecting a computer device to the Internet. 
     One or more market makers  130  may maintain a market by providing constant bid and offer prices for a derivative or security to exchange computer system  100 . Exchange computer system  100  may also exchange information with other trade engines, such as trade engine  138 . One skilled in the art will appreciate that numerous additional computers and systems may be coupled to exchange computer system  100 . Such computers and systems may include clearing, regulatory and fee systems. 
     The operations of computer devices and systems shown in  FIG. 1  may be controlled by computer-executable instructions stored on computer-readable medium. For example, computer device  116  may include computer-executable instructions for receiving order information from a user and transmitting that order information to exchange computer system  100 . In another example, computer device  118  may include computer-executable instructions for receiving market data from exchange computer system  100  and displaying that information to a user. 
     Of course, numerous additional servers, computers, handheld devices, personal digital assistants, telephones and other devices may also be connected to exchange computer system  100 . Moreover, one skilled in the art will appreciate that the topology shown in  FIG. 1  is merely an example and that the components shown in  FIG. 1  may be connected by numerous alternative topologies. 
       FIG. 2  illustrates a combination financial instrument  202  processed by a financial instrument processing computer system  204  in accordance with an embodiment of the invention. Combination financial instrument  202  may include a spot delivery financial instrument  206  and a futures financial instrument  208 . Combination financial instrument  202  may be traded as a single transaction at a single order book and may reduce or eliminate failed order execution risks that exist when multiple orders are attempted to be executed at multiple order books, exchanges or other trading entities. Spot delivery financial instrument may call for the delivery of a commodity such as a precious metal, gold, silver, oil, Treasury securities or other commodities commonly purchased and sold by traders. Futures financial instrument  208  may be a futures contract based on the same commodity as spot delivery financial instrument  206 . 
     Financial instrument processing computer system  204  may be configured to decompose combination financial instrument  202  into separate spot delivery financial instrument  206  and futures financial instrument  208  at a predetermined time, such as at the end of a trading session. Financial instrument processing computer system  204  may include one or more memories that store computer-executable instructions, one or more processors and/or other conventional computer device components. Financial instrument processing computer system  204  may also be configured to communicate with other computer and electronic devices, such as the devices shown in  FIG. 1 . 
     Financial instrument processing computer system  204  may be operated by an exchange or other trading entity that will distribute market data for combination financial instrument  202  to provide transparency. Of course, an exchange or other trading entity may provide market data with other computer systems. 
       FIG. 3  illustrates a computer implemented method of processing financial instruments in accordance with an embodiment of the invention. The process may be used to process combination financial instruments, such as combination financial instrument  202  (shown in  FIG. 2 ). The combination financial instruments may be traded at an exchange or other trading entity. Some or all of the steps shown in  FIG. 3  may be implemented with computer systems executing computer-readable instructions that are stored in one or more tangible memory devices. 
     First, in step  302  a single closing price of a combination financial instrument is determined. The combination financial instrument includes a combination of a spot delivery financial instrument and a futures financial instrument and may have been listed for trading at an exchange or other trading entity. The closing price may be determined after a trading session has ended and may be determined by a committee or a computer system configured to determine closing prices. Next, an execution price for the combination financial instrument is retrieved in step  304 . The execution price is the price at which a trader purchased or sold the combination financial instrument. The execution price may be retrieved from a memory. 
     Next, in step  306  accounts may be settled after determining a difference between the closing price and the execution price for the combination financial instrument. Step  306  may be performed by a clearing house computer system or other computer system. After a trading session has ended, margin account requirements may be determined in step  308 . Step  308  may include requiring and account holder to deposit an additional amount of money or may include reducing an amount required to be maintained in a margin account. 
     After the end of a trading session and prior to the beginning of a subsequent trading session, in step  310  the combination financial instrument may be decomposed into a spot delivery financial instrument and a futures financial instrument. Step  310  may include creating spot delivery financial instrument  206  and futures financial instrument  208  and assigning long and short positions to traders of spot delivery financial instrument  206  and futures financial instrument  208 . In alternative embodiments step  310  may be performed during a trading session. 
     In some embodiments, the purchase of combination financial instrument  202  may correspond to a purchase of spot financial instrument  206  and a sale of futures financial instrument  208 . In other embodiments, the purchase of combination financial instrument  202  may correspond to a sale of spot financial instrument  206  and a purchase of futures financial instrument  208 . Step  310  may include decomposing combination financial instrument  202  accordingly. 
     Steps  312  and  314  may be used to determine prices of spot delivery financial instrument  206  and futures financial instrument  208  and may be performed by one or more exchange computer systems or other computer systems and may be performed after the ending of a first trading session and prior to the beginning of a subsequent trading session. In step  312  a closing price of futures financial instrument  208  is determined. Step  312  may include receiving a market data feed from a futures exchange. In step  314  a price of spot delivery financial instrument  206  is determined as a difference between the closing price of the combination financial instrument  202  and the closing price of the futures financial instrument  208 . 
     The steps shown in  FIG. 3  allow computer systems to transparently and efficiently process financial instruments. The use of a combination financial instrument reduces or eliminates execution risks that exist when multiple match engines or exchanges are used. The use of a combination financial instrument also reduces complex networking connections that may otherwise be required to link discrete match engines or exchanges. Programming a computer device to determine prices of financial instruments that were components of a combination financial instrument between trading sessions also optimizes the use of computing resources. Trading a single combination financial instrument also facilitates monitoring compliance with rules and regulations. 
     The present invention has been described in terms of preferred and exemplary embodiments thereof. Numerous other embodiments, modifications and variations within the scope and spirit of the invention will occur to persons of ordinary skill in the art from a review of this disclosure.