EP1181656A2

EP1181656A2 - A system and method for completing a transaction for an investment instrument

Info

Publication number: EP1181656A2
Application number: EP00928485A
Authority: EP
Inventors: Gary Sabot
Original assignee: Sabot Associates Inc
Current assignee: Sabot Associates Inc
Priority date: 1999-04-28
Filing date: 2000-04-28
Publication date: 2002-02-27
Also published as: WO2000065515A2; AU4672200A; WO2000065515A8; CA2367456A1

Abstract

The system and method herein provide a method for completing a transaction for an investment instrument. To that end, the method provided herein includes defining a set of conditions within which an order for an investment instrument may be executed, obtaining information regarding current conditions in a market for the investment instrument, either confirming or revising a set of conditions within which an order for an investment instrument may be executed, and executing the order. The system includes an agent, a server, and a mechanism for eliciting a confirmation of conditions within which an order for an investment may be executed, or a revised set of conditions within which an order for an investment instrument may be executed.

Description

A SYSTEM AND METHOD FOR COMPLETING A TRANSACTION FOR AN INVESTMENT INSTRUMENT

Background of the Invention

1. Field of the Invention

This application relates to the fields of financial markets and electronic commerce.

2. Description of Related Art

Traders and investors seeking to buy or sell an instrument, be it a stock, bond, commodity, future or other investment, submit orders to a market. These orders are matched with other buyers and sellers in order to allow the transaction to occur. The matching system may be manual, with brokers arranging the transactions, or the matching system may be computerized, so as to eliminate the need for a human intermediary. Orders commonly are placed in the form of a limit-order, or an offer to buy or sell an instrument at a given price.

One method of performing many transactions with greater efficiency is for an investor to submit several orders together in a bundle or basket order. Traditional basket orders allow the investor to indicate a desire to buy a set of objects, sell another set of objects, and to set a limit on the aggregate price of executing the entire basket, which may be positive or negative.

However, in current markets, the form of limit-orders is relatively inflexible. Current markets are designed around limit-orders that allow investors to, at most, name items that the investor desires to buy or sell each instrument, which may be a single instrument or a single basket of instruments, a trade direction, for example, whether to buy or to sell, a single limit price for the entire order, and a duration for which the offer is valid. In order to provide greater flexibility and efficiency in submitting limit-orders to a market, a system and method of completing a transaction for an investment instrument enabling the submission of multiple, alternative limit-orders, and of submitting such orders by means of a software agent, can greatly increase the efficiency of such markets.

Summary Of The Invention

In accordance with one aspect of the invention, a method for completing a transaction for an investment instrument is provided herein. The method includes defining a set of conditions within which an order for an investment instrument may be executed. The set of conditions may include the identity of a particular investment instrument, a quantity of the investment instrument, a value limit or range of the instrument, or it may include an algorithm or similar instruction for performing a calculation.

Once the set of conditions has been defined, information may be obtained regarding current conditions in a market for the investment instrument. Information may include items such as the price, yield, volatility, or other means of assessing the value of an investment instrument.

Then, based on current conditions, either a confirmation or a revised set of conditions within which an order for an investment instrument may be executed is elicited.

Finally, when there is a confirmation of the conditions, the order is executed. The execution can involve the buying or selling of the investment instrument or configuration of investment instruments, or it can involve an act which would accumulate or reduce the amount of the investment instrument available. Payment may be received for completing the transaction. Completing the transaction may include, for example, the request of information for which payment may be received. Such information may include any of the types of information discussed above.

In accordance with another aspect of the invention a system for completing a transaction for an investment instrument is provided herein. The system includes an agent, which is encoded with a set of conditions within which an order for an investment instrument may be executed.

The system may also include a server, which is configured to identify investment instruments available in a market having conditions matching those conditions for execution of the order and to execute the order. The server may be any suitable server, running any suitable operating system. The market may be any suitable exchange or market.

Finally, the system also includes a mechanism for eliciting a confirmation of conditions within which an order for an investment may be executed, or a revised set of conditions within which an order for an investment instrument may be executed.

Brief Description of Drawings The foregoing and other objects and advantages of the invention will be appreciated more fully from the following further description thereof, with reference to the accompanying drawings wherein:

Fig. 1 illustrates a system for completing a transaction for an investment instrument in accordance with an embodiment of the invention;

Fig. 2 illustrates an embodiment of an agent used in the system shown in Fig. 1; Fig. 3 illustrates an embodiment of a server which may be used for supporting the system of Fig 1;

Fig. 4 illustrates a data path through the system of Fig. 1.

Detailed Description of the Illustrated Embodiment

Fig. 1 illustrates, in accordance with one embodiment of the present invention, a system 100 for completing a transaction for an investment instrument. The system 100, as shown in Fig. 1, includes an agent 102, having a set of conditions within which an order for an investment instrument may be executed. The agent 102 may be any machine-executable set of instructions capable of providing a confirmation of conditions or a revised set of conditions within which an order for an investment instrument may be executed. Examples of the agent 102 may include an algorithm, a daemon, a "bot", or an expert system. The agent 102 is described in greater detail below.

The system may also include a server 104, which is configured to identify investment instruments available in a market 110 having conditions matching those conditions for execution of the order and to execute the order. In one embodiment of the invention, the agent 102 may be run on server 104. The server may be any suitable server, for example, an IBM clone workstation, an HP9000 server, an IBM RS/6000 server, a Sun SPARC server, or a Compaq AlphaServer. The server will typically run an operating system, examples of which include LINUX, Windows NT, UNIX, AIX, Solaris, Open VMS, or any such suitable operating system. The server 104 is described in greater detail below.

In one embodiment of the invention, the agent 102 may be run on a server, not shown, distinct from server 104. The connection between the agent and the server 104 in this embodiment may be secured by cryptographic protocols to protect information passed between the agent 102 and the server 104. Additionally, such cryptographic protocols may prevent modification of the set of conditions carried by agent 102 after they are communicated to the server 104.

Server 104 may be connected to a market 110 by means of any suitable connection which allows the exchange of information. Examples of such connections may include a direct connection such as a Tl or DSL connection, or it may be a remote connection, for example, a communications network such as the telephone system, or the Internet. Market 110 may be any market having information regarding the investment instruments. For example, the market may be NASDAQ, NYSE, AMEX, the Chicago Mercantile Exchange, the Pacific Exchange, the New York Mercantile Exchange, or the New York Commodities Exchange. The market 110 may also be, for example, a purely electronic market, configured to permit access to a system as described herein.

The system 100 may further include a mechanism 108 for eliciting a confirmation of conditions within which an order for an investment may be executed, or a revised set of conditions within which an order for an investment instrument may be executed. The mechanism 108 may be a machine-executable set of instructions. The mechanism 108 may also be any connection capable of carrying data such as a direct physical connection between the agent and the server, or it may be a connection over a communications network, such as the telephone system or the Internet. The mechanism 108 may be protected by various security protocols. Such security protocols may include cryptographic protocols, such as Message Authentication Codes, or 128-bit level encryption, to protect data from being read by an unauthorized third party. Such security protocols may also include message digests, such as HMAC, to protect the data from being manipulated by an unauthorized third party.

Fig. 2 is an example of an embodiment of an agent 200 for use in connection with the system 100. The agent 200 may be, for example, an algorithm, a daemon, a "bot", an expert system, or any machine-executable set of instructions capable of having a set of conditions 202 for which an order for an investment instrument may be executed. The set of conditions 202 can initially be defined before the agent 200 is in communication with the server, not shown, and may include a wide variety of parameters. For example, the set of conditions 202 may include the identity of an investment instrument for which an order may be executed. This may be a particular security, such as a stock or a bond. This may also be a future or commodity, such as those dealing with livestock and agricultural products or with mineral reserves or metals. The identity may also be a foreign currency.

In addition, the set of conditions 202 may also include a quantity of the investment instrument for which an order may be executed. Typically this quantity may be an amount of the investment instrument in whatever terms such amount is customarily specified.

Furthermore, the set of conditions 202 may also include specifying a value limit or value range for the investment instruments. The value of the investment instruments may be expressed in a plurality of ways. For example, it may be expressed as a monetary price, the yield of a bond, the volatility of a future, or the exchange rate of a foreign currency.

The set of conditions 202 may also include specifying whether the investment instrument is to be acquired or disposed of. Typically, and investment instrument may be bought, sold, or traded.

Additionally he set of conditions 202 may also include specifying a duration during which the order may be executed. The duration may include a length of time, but may also include a length of time associated with another value, for example, the duration of time in which a particular security remains above or below a certain price.

The set of conditions 202 may also include specifying a plurality of investment instruments in various configurations. The configurations may be expressed in many forms. In one embodiment, the set of conditions 202 carried by the agent 200 may include several alternatives, that is, several combinations of conditions within which an order for investment instruments may be executed. For example, the configurations for each alternative may, for example, vary as to the specific investment instruments, the quantity of investment instruments, or the value limit or range for each alternative for which an order may be executed. The configurations for such alternatives may also vary as to whether each investment instrument is to be bought, sold, or traded. Additionally, the set of configurations for such alternatives may vary as to the duration during which the order may be executed.

Furthermore, the set of conditions 202 may include an algorithm or other suitable instruction for performing a calculation, for the purpose of calculating a condition within which an order may be executed. The set of conditions 202 may also contain an algorithm or other suitable method of instruction for performing a calculation, which may allow the provision of a revised set of conditions in response to current market conditions and other information. This may allow far greater flexibility in the order, and can even provide for revisions in a previous set of conditions. For example, the set of conditions 202 may include an algorithm for calculating an expected value of an investment instrument in the future, for example, the implied volatility of a stock option as measured at a future time such as the end of the day, or a designated day in the future such as the trade settlement date. Additionally, the set of conditions 202 may include, for example, an overall price limit or satisfaction level calculated by means of an appropriate function or algorithm.

In addition, the set of conditions 202 may also contain an algorithm or other suitable instruction for performing a calculation, which may allow the provision of a revised set of conditions in response to current market conditions and other information. The revised set of conditions may vary as to the identities, values, limits, and quantities of investment instruments previously discussed. For example, the set of conditions 202 may include an algorithm or other suitable instruction for performing a calculation such as, for example, generalized portfolio optimization, which may allow the provision of a revised set of conditions in response to current market conditions and other information. As an additional example, in one embodiment of the invention, an agent 200 may be used in connection with a call market or non-continuous market, such as a bond market. Such an agent 200 may, for example, include a set of conditions containing the following equations: changes_in_future_price <- current price (bond_future_symbol) - initial price

(bond_future_symbol) changes_in_future_yield r changes_in_future_yield /BPN limit_yield - base-yield + pet * change_in_yield limit_price <- price_to_yield_converter (limit_yield)

Where: bond_future_symbol represents a symbol that is currently trading and has live prices, or it may be a method for selecting a symbol. In order to ensure that the price is accurate and current, the user may specify requirements such as, for example, that both a bid and an ask be available, or that the last trade price not be older than some length of time, or that the trading volume on the future must be above some threshold.

BPN represents basis points that relate to the ratio change in price : change in yield. BPN may be a calculated value or it may be supplied by the user.

Base-yield is a constant supplied by the user.

Pet is a percentage provided by the user representing the desired change in the pricing of the instrument in response to changes in the selected future.

The use of these algorithms allows flexibility in the structure of the conditions for which an order may be executed. The conditions in the above embodiment may allow the value of a bond to be associated with a bond yield curve. The bond yield curve describes yields at points in the future; by providing a set of conditions having such algorithms as indicated above, the value or value range of the order may be revised over time such that as the yield curve changes, the price of the order reflects that change. The bond yields for various future points may be indicated specifically when the conditions are initially defined, or they may be extrapolated from the yield curve. Fig. 3. is an example of an embodiment of a server 300 for use in connection with the system 100. The server 300 may include an operating system component 302, a processor component 304, and a security component 308. The platform of the server may be, for example, an IBM clone workstation, an HP9000 server, an IBM RS/6000 server, a Sun SPARC server, a Compaq AlphaServer, or any suitable server platform. The server will typically run an operating system, examples of which include LINUX, Windows NT, UNIX, AIX, Solaris, Open VMS, or any such suitable operating system.

It will be apparent to one of ordinary skill in the art that the server 300 can comprise conventional commercially available computer hardware that becomes configured according to the system of the invention by the operation of computer software, which configures the conventional computer hardware to operate as systems according to the invention.

The server is connected to a market 310 as described above, from which it obtains various information regarding the current state of the market. The information may reflect the conditions for which an order may be executed, as discussed above.

The server 300 may process the set of conditions provided by the agent and may control the availability of information and computational resources. Resources which the server 300 may make available may include processor time, for example, the amount of processor time devoted to a calculating a revised set of conditions as discussed above. The server 300 may also control access to certain types of information or certain amounts of information regarding the state of the market 310, for example, current or delayed market information, or information on other orders placed in the market 310. In addition, server 300 may allow a varying degree of information to flow to the agent, such as, for example, news, market forecasts, expert opinion regarding the market. Furthermore, the server 300 may allow a degree of control over the processing of the set of conditions, so that the run of an agent may be suspended, reactivated, or cancelled.

The server 300 may also control the process of price discovery, that is, the process by which the value of an instrument is determined. The server 300 may, for example, impose a price discovery period on the agent. The period may end at any time, determined by the market 310, at which point all orders being processed are considered final and are executed. The period may also be, for example, the close of trading of a particular investment instrument, or a specific time within a pre-determined range. Alternatively, the server 300 may restart the agent multiple times, varying the information supplied to the agent, and analyzing sets of conditions as they are revised in response to changing market conditions, in order to determine an optimum price for an instrument. This may be done by the server 300 in order to determine the optimum price for an instrument, possibly taking into consideration various agents running on the server 300.

Fig. 4 illustrates a data path through the system of Fig. 1. A set of conditions 402 within which an order for an investment instrument may be executed is defined. The set of conditions 402 may be carried by an agent, as discussed above. Next, market conditions 404 regarding current conditions for the investment instrument are obtained. If, based on the conditions 404, an order may not be executed, then a revised set of conditions 408 is elicited. If, however, based on the market conditions 404, a confirmation of the conditions 410 for which an order may be executed is elicited, then the order may be executed 412.

Furthermore, if the order is executed 412, then payment 414 may be received for such execution. Payment 414 may be received for the utilization of various resources. Examples of such resources may include information and computational resources, such as the amount of processor time devoted to a calculating a revised set of conditions, current or delayed market information, or information on other orders placed in the market. Additional examples of information may include varying degrees and levels of access to information, such as, for example, news, market forecasts, expert opinion regarding the market. Furthermore, payment 414 maybe received for processing the agent, so that payment may be received for running, suspending, reactivating, or canceling the run of the agent. Payment 414 may be in the form of currency, but it may also be specified in other terms, for example, the yield of a bond, or the implied volatility of a derivative such as an option on a stock, or any convention or formula used to translate prices to another form that more closely tracks the value of the investment instrument. Payment 414 may also be specified, for example, as a percentage of the transactions eventually executed through the use of the agent, as marked up prices on instruments, or as a reduction in how resources are supplied to the agent.

While the invention has been disclosed in connection with the preferred embodiments shown and described in detail, various modifications and improvements thereon will become readily apparent to those skilled in the art. Accordingly, the spirit and scope of the present invention is to be limited only by the following claims.

Claims

Claims:

1. A method for completing a transaction for an investment instrument, the method comprising: defining a set of conditions within which an order for an investment instrument may be executed; obtaining information in a market regarding current conditions for the investment instrument; eliciting, based on the current conditions, either a confirmation of the conditions within which an order for an investment instrument may be executed, or a revised set of conditions within which an order for an investment instrument may be executed; and executing the order when there is a confirmation of the conditions.

2. A method as set forth in claim 1, wherein the step of defining further includes identifying the investment instrument for which an order may be executed.

3. A method as set forth in claim 1, wherein the step of defining further includes specifying a quantity of the investment instrument for which an order may be executed.

4. A method as set forth in claim 1, wherein the step of defining further includes specifying a value limit or range for the investment instrument for which an order may be executed.

5. A method as set forth in claim 1, wherein the step of defining further includes specifying whether the investment instrument is to be acquired or disposed of.

6. A method as set forth in claim 1, wherein the step of defining further includes a specifying a duration during which an order may be executed.

7. A method as set forth in claim 1, wherein step of defining further includes specifying a plurality of investment instruments in various configurations.

8. A method as set forth in claim 1, further including the step of receiving payment for completing the transaction.

9. A system for completing a transaction for an investment instrument, the system comprising: an agent having a set of conditions within which an order for an investment instrument may be executed; a server configured to obtain information in a market regarding current conditions for the investment instrument, wherein the server executes the order when there is a confirmation of the conditions; and a mechanism for eliciting from the agent either a confirmation of conditions within which an order for an investment instrument may be executed, or a revised set of conditions within which an order for an investment instrument may be executed.

10. A system as set forth in claim 15, wherein the agent is a machine-executable set of instructions.