Patent Publication Number: US-8543491-B2

Title: System and method for managing trading orders with decaying reserves

Description:
CROSS-REFERENCE TO RELATED APPLICATIONS 
     The present application is a continuation of U.S. patent application Ser. No. 13/169,646, filed on Jun. 27, 2011 now U.S. Pat. No. 8,311,931, which is a continuation of U.S. patent application Ser. No. 12/950,111, filed on Nov. 19, 2010 (now U.S. Pat. No. 7,970,680, which issued on Jun. 28, 2011), which is a continuation of U.S. patent application Ser. No. 12/685,999, filed on Jan. 12, 2010 now U.S. Pat. No. 7,974,914, which is a continuation of U.S. patent application Ser. No. 12/106,494, filed on Apr. 21, 2008 (now U.S. Pat. No. 7,716,122, which issued on May 11, 2010), the disclosures of which are incorporated by reference herein in their entireties. 
    
    
     TECHNICAL FIELD OF THE INVENTION 
     The present invention relates generally to electronic trading and more specifically to a system and method for managing trading orders with decaying reserves. 
     BACKGROUND OF THE INVENTION 
     In recent years, electronic trading systems have gained wide spread acceptance for trading of a wide variety of items, such as goods, services, financial instruments, and commodities. For example, electronic trading systems have been created which facilitate the trading of financial instruments and commodities such as stocks, bonds, currency, futures contracts, oil, and gold. 
     Many of these electronic trading systems use a bid/offer process in which bids and offers are submitted to the systems by a passive side and then those bids and offers are hit or lifted (or taken) by an aggressive side. For example, a passive trading counterparty may submit a “bid” to buy a particular trading product. In response to such a bid, an aggressive side counterparty may submit a “hit” in order to indicate a willingness to sell the trading product to the first counterparty at the given price. Alternatively, a passive side counterparty may submit an “offer” to sell the particular trading product at the given price, and then the aggressive side counterparty may submit a “lift” (or “take”) in response to the offer to indicate a willingness to buy the trading product from the passive side counterparty at the given price. 
     SUMMARY OF THE INVENTION 
     In accordance with the present invention, the disadvantages and problems associated with prior electronic trading systems have been substantially reduced or eliminated. 
     In some embodiments, a system comprises a memory operable to store a trading order for a particular quantity of a trading product, wherein a first portion of the particular quantity is a displayed quantity and a second portion of the particular quantity is a reserved quantity. The system further comprises a processor communicatively coupled to the memory and operable to disclose the displayed quantity to one or more market centers. The processor is further operable to identify a decay rate associated with the trading order. The processor is further operable to cause the reserved quantity to decay based at least in part on the identified decay rate. 
     Various embodiments of the present disclosure may benefit from numerous advantages. It should be noted that one or more embodiments may benefit from some, none, or all of the advantages discussed below. 
     One advantage is that a trading system may allow a trader to submit a trading order comprising a displayed quantity and a reserved quantity. The trading system may disclose the displayed quantity to multiple market centers while preventing the disclosure of the reserved quantity. In some embodiment, the trading system causes the reserved quantity of the trading order to decay over time. The trading system may thereby reduce certain risks associated with market volatility. In particular, by causing the reserved quantity to decay, the trading system may reduce the trader&#39;s risk of having exposure for a stale trading order with a price that is no longer favorable for the trader. 
     Another advantage is that, by causing the reserved quantity of trading order to decay, the trading system may improve system efficiency. In particular, as trading orders with reserved quantities are not aggressed, trading system may gradually delete the reserved quantities of such trading orders from one or more order books. Deleting portions of such trading orders may free up memory and processing resources in the trading system. Trading system may thereby improve data throughput and/or conserve system resources. 
     Other advantages will be readily apparent to one having ordinary skill in the art from the following figures, descriptions, and claims. 
    
    
     
       BRIEF DESCRIPTION OF THE DRAWINGS 
       For a more complete understanding of the present invention and its advantages, reference is now made to the following description, taken in conjunction with the accompanying drawings, in which: 
         FIG. 1  illustrates one embodiment of a trading system in accordance with the present invention; 
         FIG. 2  illustrates decay of a trading order with a reserved quantity, according to certain embodiments; 
         FIG. 3  illustrates decay of a trading order with a reserved quantity, according to certain embodiments; and 
         FIG. 4  illustrates a flowchart for managing a trading order with a reserved quantity, according to certain embodiments. 
     
    
    
     DETAILED DESCRIPTION OF THE INVENTION 
       FIG. 1  illustrates one embodiment of a trading system  10 . Generally, trading system  10  comprises a trading platform  50  communicatively coupled to clients  20 , networks  30 , and market centers  40 . Trading platform  50  may receive and process trading orders  12  from traders  70 . In some embodiments, trading platform  50  may cause a portion of trading order  12  to decay over time. Trading platform  50  may thereby reduce certain risks associated with market volatility. In particular, by causing a portion of trading order  12  to decay, trading platform  50  may reduce the risks of having exposure to a stale trading order  12  with a price that has become unfavorable. 
     A given trading order  12  may comprise two parts—a “displayed quantity” and a “reserved quantity.” In placing trading order  12 , trader  70  may indicate that only a portion of the total quantity of trading order  12  should be displayed to other traders  70 . This portion of trading order  12  to be displayed to other traders  70  is referred to as the “displayed quantity.” The remaining portion of trading order  12  is referred to as the “reserved quantity.” Designating a portion of trading order  12  as a “reserved quantity” allows trader  70  to enter a large trading order  12  while only displaying a portion of that trading order  12  to other traders  70 . Trading platform  50  may incrementally fill a particular trading order  12  by first filling the displayed quantity of that trading order  12  and then using the reserved quantity to replenish the displayed quantity of that trading order  12 . 
     Trading orders  12  generally comprise orders  12   a  and counterorders  12   b . Orders  12   a  and counterorders  12   b  may be buy orders  14  and sell orders  16 . Orders  12   a  and counterorders  12   b  are complementary actions such as, for example, buying and selling. If an order  12   a  refers to a buy order  14 , then a counterorder  12   b  refers to a sell order  16 . Conversely, if an order  12   a  refers to a sell order  16 , then a counterorder  12   b  refers to a buy order  14 . A buy order  14  is a request to buy a particular quantity of a particular trading product (e.g., bid request). A sell order  16  is a request to sell a particular quantity of a particular trading product (e.g., offer request). In particular embodiments, trading order  12  may specify a target price (e.g., target bid price or target offer price) for the trading product. Although system  10  is exemplified below using equities as the trading product, the trading product that forms the basis of trading order  12  may comprise any goods, services, financial instruments, commodities, etc. Examples of financial instruments include, but are not limited to, stocks, bonds, and futures contracts. 
     Clients  20  are operable to receive trading orders  12  from traders  70  and to send trading orders  12  to trading platform  50  and/or market centers  40 . Clients  20  comprise any suitable local or remote end-user devices that may be used by traders  70  to access one or more elements of trading system  10 , such as trading platform  50 . A particular client  20  may comprise a computer, workstation, telephone, Internet browser, electronic notebook, Personal Digital Assistant (PDA), pager, or any other suitable device (wireless or otherwise), component, or element capable of receiving, processing, storing, and/or communicating information with other components of system  10 . Client  20  may also comprise any suitable user interface such as a display, microphone, keypad, keyboard, touch screen, or any other appropriate terminal equipment according to particular configurations and arrangements. It will be understood that there may be any number of clients  20  communicatively connected to trading platform  50 . In addition, there may be any number of clients  20  communicatively connected to market centers  40  without using trading platform  50 . 
     Although clients  20  are described herein as being used by “traders”  70 , it should be understood that the term “trader” is meant to broadly apply to any user of trading system  10 , whether that user is an agent acting on behalf of a principal, a principal, an individual, a legal entity (such as a corporation), or any machine or mechanism that is capable of placing and/or responding to trading orders  12  in system  10 . 
     According to certain embodiments, traders  70  may include market makers. A market maker may include any individual or firm that submits and/or maintains either or both bid and offer trading orders  12  simultaneously for the same instrument. For example, a market maker may include an individual or firm, such as a brokerage or bank, that maintains either a firm bid and/or offer price in a given security by standing ready, willing, and able to buy and/or sell that security at publicly quoted prices. A market maker generally displays bid and/or offer prices for specific numbers of specific securities, and if these prices are met, the market maker will immediately buy for and/or sell from its own accounts. According to certain embodiments, a single trading order  12  may be filled by a number of market makers at potentially different prices. 
     Networks  30  are communication platforms operable to exchange data or information between clients  20  and trading platform  50  and/or market centers  40 . According to certain embodiments, a particular network  30  may represent an Internet architecture which provides clients  20  with the ability to communicate trading or transaction information to trading platform  50  and/or market centers  40 . According to certain embodiments, network  30  comprises a plain old telephone system (POTS), which traders  70  may use to perform the same operations and functions. Transactions may be assisted by a broker associated with trading platform  50  or manually keyed into a telephone or other suitable electronic device to request that a transaction be executed. In certain embodiments, network  30  may be any packet data network (PDN) offering a communications interface or exchange between any two nodes in system  10 . Network  30  may comprise any combination of local area network (LAN), metropolitan area network (MAN), wide area network (WAN), wireless local area network (WLAN), virtual private network (VPN), intranet, or any other appropriate architecture or system that facilitates communications between clients  20  and trading platform  50  and/or market centers  40 . 
     Market centers  40  comprise all manner of order execution venues including exchanges, Electronic Communication Networks (ECNs), Alternative Trading Systems (ATSs), market makers, or any other suitable market participants. Each market center  40  maintains a bid and offer price for a given trading product by standing ready, willing, and able to buy or sell that trading product at publicly quoted prices, also referred to as market center prices. Different market centers  40  may provide different market center prices for particular trading products. For example, a particular market center  40  may offer a particular bid price and/or offer price for a particular trading product, while another market center  40  may offer a different bid price and/or offer price for the same trading product. A particular market center  40  may charge a transaction cost to execute trading orders  12  that remain in the order books of that market center  40  for more than a certain length of time. Different market centers  40  may have different policies regarding the disclosure of various details of trading orders  12 . For example, certain market centers  40  referred to as “cooperative” market centers may disclose both the displayed quantities and the reserved quantities of trading orders  12  to trading platform  50 . Other market centers  40  referred to as “non-cooperative” market centers may disclose only the displayed quantities of trading orders  12  to trading platform  50 . 
     Trading platform  50  is a trading architecture that facilitates the routing, matching, and otherwise processing of trading orders  12 . Trading platform  50  may comprise a management center or a headquartering office for any person, business, or entity that seeks to route, allocate, match, process, or fill trading orders  12 . Accordingly, trading platform  50  may include any suitable combination of hardware, software, personnel, devices, components, elements, or objects that may be utilized or implemented to achieve the operations and functions of an administrative body or a supervising entity that manages or administers a trading environment. In certain embodiments, trading platform  50  comprises client interface  52 , market interface  54 , processor  56 , and memory module  60 . 
     Client interface  52  of trading platform  50  is communicatively coupled to network  30  and supports communications between clients  20  and the various components of trading platform  50 . According to certain embodiments, client interface  52  comprises a transaction server that receives trading orders  12  communicated by clients  20  via network  30 . 
     Market interface  54  is communicatively coupled to market centers  40  and supports communications between market centers  40  and the various components of trading platform  50 . Market interface  54  may comprise a transaction server that receives trading orders  12  communicated by market centers  40 . Market interface  54  may be operable to send to market centers  40  trading orders  12  received from clients  20  connected directly to trading platform  50 . 
     Client interface  52  and market interface  54  are communicatively coupled to processor  56 . Processor  56  is operable to record trading orders  12  in memory module  60  and route trading orders  12  to market centers  40 . Processor  56  is further operable to execute logic  62  stored in memory module  60  to match buy orders  14  and sell orders  16  received by client interface  52  and market interface  54 . In addition, processor  56  is operable to incrementally fill a particular trading order  12  by using the reserved quantity of that trading order  12  to replenish the displayed quantity of that trading order  12 . In some embodiments, processor  56  may cause the reserved quantity of trading order  12  to decay over time. Processor  56  may comprise any suitable combination of hardware and software implemented in one or more modules to provide the described function or operation. 
     Memory module  60  comprises any suitable arrangement of random access memory (RAM), read only memory (ROM), magnetic computer disk, CD-ROM, or other magnetic or optical storage media, or any other volatile or non-volatile memory devices that store one or more files, lists, tables, or other arrangements of information such as trading orders  12 . Although  FIG. 1  illustrates memory module  60  as internal to trading platform  50 , it should be understood that memory module  60  may be internal or external to components of trading system  10 , depending on particular implementations. Also, memory module  60  illustrated in  FIG. 1  may be separate or integral to other memory devices to achieve any suitable arrangement of memory devices for use in trading system  10 . 
     According to certain embodiments, memory module  60  stores logic  62  and trader profiles  64 . Logic  62  generally comprises software instructions for routing, matching, processing, or filling trading orders  12 . Processor  56  is operable to execute logic  62  in memory module  60  to match buy orders  14  and sell orders  16  and to determine the priority of traders  70  associated with those buy orders  14  and sell orders  16 . 
     Memory module  60  may store a respective trader profile  64  for each trader  70  in trading system  10 . Trader profile  64  for a particular trader  70  may comprise the name, account information, trading preferences, trade history, and/or other suitable information associated with the particular trader  70 . In some embodiments, trader profile  64  comprises one or more decay rules  66 . Processor  56  may execute decay rule  66  to determine the rate and/or frequency at which to reduce the reserved quantity of trading order  12 . Decay rule  66  may specify an amount by which the reserved quantity of trading order  12  should decay over time. For example, decay rule  66  may direct processor to reduce the reserved quantity of trading order  12  by one thousand units per minute. By reducing the reserved quantity of trading order  12  over time, processor may reduce the risks associated with having a stale trading order  12  in a volatile market. In some embodiments, a particular decay rule  66  may be associated with a decay interval  68  and a decay rate  72  (described below with respect to  FIG. 2 ). 
     It should be understood that the internal structure of trading platform  50  and the interfaces, processors, and memory devices associated therewith is malleable and can be readily changed, modified, rearranged, or reconfigured in order to achieve the intended operations of trading platform  50 . 
     In operation, trading platform  50  is operable to receive trading order  12  from client  20 . Trading order  12  may be for a particular quantity of a particular trading product (e.g., equities, commodities, futures, currencies, bonds, and so forth). In some embodiments, trading order  12  designates a portion of the particular quantity as a displayed quantity. Trading order  12  may designate another portion of the particular quantity of trading order  12  as the reserved quantity. Trading platform  50  may disclose the displayed quantity of trading order  12  to market center  40 . In some embodiments, trading platform  50  prevents the disclosure of the reserved quantity of trading order  12  to market center  40 . 
     Upon receiving trading order  12 , processor  56  may identify decay rule  66  stored in memory module  60 . Decay rule  66  may instruct processor  56  to reduce the reserved quantity of trading order  12  over time. Reducing the reserved quantity of trading order  12  may comprise deleting a portion of trading order  12  from one or more order books  74  in memory module  60 . In some embodiments, the reduction of the reserved quantity of trading order  12  is based at least in part on decay rate  72  associated with decay rule  66 . 
       FIG. 2  is a table  200  that sets forth an example illustrating the decay of trading order  12 , according to certain embodiments. In this example, memory module  60  stores one or more decay rules  66  that cause the reserved quantity of trading order  12  to decay over time. As each successive interval of time expires, processor  56  may reduce the reserved quantity of trading order  12  by a configurable increment. The time intervals at which the reserved quantity decays may be referred to as decay intervals  68 . The rate at which the reserved quantity decays may be referred to as decay rate  72 . For example, decay rule  66  may specify that, at the expiration of each successive minute after trading platform  50  receives trading order  12 , processor  56  reduces reserved quantity of trading order  12  by five million units. In this example, decay interval  68  is one minute and decay rate  72  is five million units/minute. Although the foregoing example illustrates decay interval  68  of one minute, it should be understood that decay interval  68  may be ten seconds, two minutes, ten minutes, and/or any suitable interval of time. Although the foregoing example illustrates decay rate  72  of five million units/minute, it should be understood that decay rate  72  may be one hundred units/second, one million units/minute, and/or any suitable rate. 
     In some embodiments, once processor  56  uses counterorder  12   b  to fill the displayed quantity of order  12   a , processor  56  may replenish the displayed quantity of order  12   a . In particular, processor  56  may be configured to use a portion of the reserved quantity of order  12   a  to replenish the displayed quantity of order  12   a . In some embodiments, the filling and replenishing of the displayed quantity of order  12   a  occurs independently of the decay of the reserved quantity of order  12   a.    
     The example order  12   a  in table  200  illustrates certain embodiments. In this example, trading platform  50  comprises decay rule  66  to reduce the reserved quantity of trading order  12  by twenty million units per minute. In this example, at 10:26:02 a.m., trading platform  50  receives Bid A from Trader A. Bid A is for one hundred million units of Security X at a price of two dollars per unit. The trading product and price associated with Bid A is illustrated in columns  202  and  204 , respectively. Bid A has a displayed quantity of ten million units and a reserved quantity of ninety million units. The displayed quantity and reserved quantity of Bid A is illustrated in columns  206  and  208 , respectively. 
     Upon receiving Bid A, processor  56  discloses the displayed quantity (i.e., ten million units) of Bid A to market centers  40 . At 10:26:34 a.m., trading platform  50  receives Offer B, a matching counterorder  12   b . Offer B is for ten million units of Security X at two dollars per unit. Upon receiving Offer B, processor  56  uses the ten million units from Offer B to fill the displayed quantity of Bid A. Processor  56  then uses ten million units from the reserved quantity of Bid A to replenish the displayed quantity of Bid A. Thus, the reserved quantity of Bid A becomes eighty million units. 
     In this example, trading platform  50  does not receive any other matching counterorders  12   b  prior to 10:27:02 a.m.—one minute after trading platform  50  received Bid A. According to decay rule  66 , at 10:27:02 a.m., processor  56  reduces reserved quantity of Bid A from eighty million units to sixty million units. With the expiration of each successive minute, processor  56  continues to reduce reserved quantity of Bid A according to decay rule  66 . By decaying the reserved quantity of Bid A over time, processor  56  may reduce certain risks associated with market volatility. In particular, by reducing the reserved quantity of Bid A over time, processor  56  may reduce the risk of Trader A having exposure for a stale trading order  12  with a price that is no longer favorable for Trader A. 
     In some embodiments, trading platform  50  may comprise different decay rules  66  for different traders  70 . In particular, memory module  60  may store a respective trader profile  64  for each trader  70  in trading system  10 . Trader profile  64  for a particular trader  70  may comprise one or more decay rules  66  that are configurable by that trader  70 . In some embodiments, a particular trader profile  64  may comprise a first decay rule  66  for a first trading product, a second decay rule  66  for a second trading product, and so forth. Thus, a particular trader  70  may cause the reserved quantity of trading order  12  for a first trading product to decay at a different rate than the reserved quantity of trading order  12  for a second trading product. In some embodiments, upon receiving trading order  12 , processor  56  identifies the particular trader  70  that submitted trading order  12 . Processor  56  may then identify in memory module  60  trader profile  64  associated with the particular trader  70 . Processor  56  may then retrieve the appropriate decay rule  66  from the identified trader profile  64 . Thus, processor  56  may apply different decay rules  66  for different traders  70 . 
     In some embodiments, decay rule  66  may specify an initial decay interval  68  that is longer or shorter than successive decay intervals  68 . For example, a particular decay rule  66  may specify that, five minutes after trading platform  50  received trading order  12 , processor  56  begins decaying the reserved quantity of trading order  12 . After the initial five minute interval, the particular decay rule  66  may specify that processor  56  continue to decay the reserved quantity after each successive minute. 
     Decay rule  66  may comprise any suitable formula, table, algorithm, and/or instructions for reducing the reserved quantity of trading order  12 . In some embodiments, decay rule  66  may comprise a formula for a variable decay rate  72 . 
       FIG. 3  is a table  300  that sets forth an example illustrating variable rate decay of trading order  12 , according to certain embodiments. In this example, decay rule  66  instructs processor  56  to decay the reserved quantity of trading order  12  at a rate of “10 T” where “T” is the number of minutes since trading platform  50  received trading order  12 . At 11:42:12 a.m., trading platform  50  receives Bid A for one hundred units of Security Y. Bid A comprises a displayed quantity of ten units and a reserved quantity of ninety units. The trading product, displayed quantity, and reserved quantity associated with Bid A are illustrated in columns  302 ,  304 , and  306 , respectively. 
     In this example, processor  56  reduces the reserved quantity of Bid A according to decay rule  66 . In particular, at 11:43:12 a.m., processor  56  reduces the reserved quantity of Bid A by ten units (i.e., 10×1). At 11:44:12 a.m., processor  56  further reduces the reserved quantity of Bid A by twenty units (i.e., 10×2). With each successive minute, processor  56  reduces the reserved quantity of Bid A by an increasing amount according to decay rule  66 . The decay of the reserved quantity may continue until the reserved quantity is eliminated. Thus, decay rule  66  may specify a variable decay rate  72 . 
     Although the foregoing example illustrates decay rate  72  associated with a particular formula, it should be understood that decay rule  66  may comprise any suitable formula, table, algorithm, and/or instructions for reducing the reserved quantity of trading order  12  over time. 
       FIG. 4  illustrates a flowchart for managing trading orders  12 , according to certain embodiments. The method begins at step  402  where trading platform  50  receives order  12   a  from client  20 . Order  12   a  may be for a particular quantity of a trading product. A portion of the particular quantity of order  12   a  may be designated as a displayed quantity. The remaining portion of the particular quantity of order  12   a  may be designated as the reserved quantity. At step  404 , trading platform  50  discloses the displayed quantity of order  12   a  to market centers  40 . Disclosing the displayed quantity of order  12   a  may comprise transmitting data regarding the displayed quantity of order  12   a  to market centers  40 . 
     At step  406 , processor  56  determines whether trading platform  50  has received counterorder  12   b  that matches order  12   a . In some embodiments, the determination of whether counterorder  12   b  matches order  12   a  is based at least in part on whether counterorder  12   b  and order  12   a  are for the same product, the same price, and/or or crossing prices. If processor  56  determines at step  406  that trading platform  50  has not received counterorder  12   b  that matches order  12   a , then the method proceeds to step  414 . However, if processor  56  determines at step  406  that trading platform  50  has received counterorder  12   b  that matches order  12   a , then at step  408  processor  56  uses the counterorder  12   b  to fill the displayed quantity of order  12   a . At step  410 , processor  56  determines whether the reserved quantity of order  12   a  is greater than zero. If processor  56  determines at step  410  that the reserved quantity of order  12   a  is not greater than zero, then the method ends. However, if processor  56  determines at step  410  that the reserved quantity of order  12   a  is greater than zero, then at step  412  processor  56  uses a portion of the reserved quantity of order  12   a  to replenish the displayed quantity of order  12   a . The method then proceeds to step  414 . 
     At step  414 , processor  56  determines whether decay interval  68  associated with decay rule  66  has expired. If processor  56  determines at step  414  that decay interval  68  has not expired, then the method returns to step  406 . However, if processor  56  determines at step  414  that decay interval  68  has expired, then at step  416  processor  56  determines whether the reserved quantity of order  12   a  is greater than zero. If processor  56  determines at step  416  that the reserved quantity is not greater than zero, then the method returns to step  406 . However, if processor  56  determines at step  416  that the reserved quantity is greater than zero, then at step  418  processor  56  reduces the reserved quantity of order  12   a  by a configurable amount according to decay rule  66 . Decay rule  66  may comprise any suitable formula, table, algorithm, and/or instructions for reducing the reserved quantity of order  12   a  over time. Decay rule  66  may specify any suitable length of decay interval  68  and/or may specify any suitable decay rate  72 . After processor  56  reduces the reserved quantity of order  12   a  at step  418 , the method returns to step  406 . The method ends when, at step  410 , processor  56  determines that the reserved quantity of order  12   a  is not greater than zero. In some embodiments, the method may also end when order  12   a  expires and/or when trading platform  50  receives a cancel order associated with order  12   a.    
     Although the present invention has been described in several embodiments, a myriad of changes and modifications may be suggested to one skilled in the art, and it is intended that the present invention encompass such changes and modifications as fall within the scope of the present appended claims.