Classifications

• • G—PHYSICS
  • G06—COMPUTING; CALCULATING OR COUNTING
  • G06Q—INFORMATION AND COMMUNICATION TECHNOLOGY [ICT] SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES, NOT OTHERWISE PROVIDED FOR
  • G06Q40/00—Finance; Insurance; Tax strategies; Processing of corporate or income taxes
  • G06Q40/04—Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange

Definitions

• TECHNICAL FIELD This invention relates to the field of Internet computer systems and processes. More specifically, the invention is a method and apparatus for pricing and allocation of commodity or security issues through use of an Internet based control system.
• “securities” include equity securities, commodities (as traded on a licensed commodity exchange), fixed income or debt securities including, for example and without limitation, corporate bonds, municipal bonds, mortgage backed bonds, emerging market bonds, junk bonds, treasury bonds, convertible bonds, gold, and the like. These will be generally referred to as "securities.” While the following describes the technical problem in terms of debt securities, the general issues relate to the sale of regulated securities, commodities and other similar assets. Those skilled in these arts will recognize that the technical problem described specifically is a general one which may be solved within the letter and spirit ofthe invention disclosed herein. It is typical for a municipality, corporation, or other non-US treasury issuer to sell its securities by having an investment bank, or other broker, underwrite an offering.
• corporate bond syndications use an investment bank's salesmen to convey the terms of a pending offering to potential investors along with some preliminary, unofficial "price talk.” In this way, a dialogue is initiated with investors that is intended to garner feedback concerning pricing and investor interest. This feedback is shared with the issuer and other investors.
• Book building is iterative and filtered: a sort of oral history ofthe "book,” listing interested investors and the quantity of securities in which they are ostensibly interested, is told, retold and modified until the offering or "deal" is as big and as cheap as the issuer will tolerate.
• the deal is then priced by the syndicate and the issuer enters into a written agreement with the underwriter to make the offering.
• no written commitment to actually make the offering is made by the issuer until after the offering is priced and subscribed.
• the securities are freed to trade in the
• Secondary market that is, the market in which securities other than new issues are traded.
• the issuer ofthe securities will typically pay fees to the underwriter for its marketing, pricing and allocation services.
• market size and market price are controlled by the syndicate.
• the syndicate may wish to massage market size and price in order to accomplish a set of objectives which may belong to the underwriter or some subset of participants rather than the issuer and the market at large.
• Certain investors may be favored by an underwriter, such that other investors who express an interest in purchasing such bonds in an initial offering will have no certainty that they will be allocated any bonds by the syndicate desk.
• a deal will typically become several times oversubscribed, that is, more securities will be desired by investors than are being offered by the issuer.
• Potential investors are typically aware of this and, so, will indicate a quantity of securities to the syndicate which may be many times the actual amount of securities desired by the investor. Because investors understand that, in this traditional book building process, information can be filtered and massaged by the underwriter to achieve objectives that may differ from their own, investors tend to view this process with suspicion and caution. Thus, investors may attempt to manipulate the system in their favor in a number of ways. For example, as noted above, potential investors may pad their orders, indicating interest in a greater volume of securities than they truly desire. Potential investors may also stipulate that an order will fall away if the price is increased when, in fact, this simply represents posturing. The deal is then managed to the "proper" price and size by the syndicate, often to maximize fees and to please one constituent or another, but rarely to please the market as a whole or to achieve the most efficient price and distribution profile.
• Recent conditions in the marketplace for debt securities amplify the need for a change in how these securities are bought and sold. For example, technology has become easily available to conduct electronic sales (by auctions, etc.) that promotes unfiltered price discovery on a low-cost, real-time basis.
• debt investors and issuers have become financially more sophisticated in their knowledge of markets, their ability to analyze credit quality and their ability to recognize value in the market. This means that they are less dependent on financial intermediaries for research and advice than they were in the past.
• the present invention overcomes the disadvantages ofthe above described systems by providing an economical, high performance, adaptable system and method (designated "The OpenBook system”) for conducting an auction of securities to institutional and individual investors on the Web.
• the OpenBook system auction In the OpenBook system auction:
• the OpenBook system thus creates a transparent and low-cost new issue market; offers all bidders equal access to securities; and gives both investors and issuers a "seat on the syndicate desk.”
• Bidders are rewarded for anonymously revealing their bids early. All winners pay a single market-clearing price that sells out the securities. All participants can monitor the auction in real time.
• Bidders are rewarded for anonymously revealing their bids early. All winners pay a single market-clearing price that sells out the securities.
• a network node in the Openbook system which is an auction server node in a network having a user node including a browser program coupled to the network, the user node providing requests for information and providing bidding input commands on said network, the network node comprising:
• an auction server node in the Openbook system responsive to a request from the user node to participate in a securities auction as a qualified bidder, whereby the openbook system auction server node provides a bid mechanism through which bidders are rewarded for anonymously revealing their bids early, and provides an allocation of securities which allows winning bidders to pay a single market-clearing price that sells out the offered securities, and provides a system whereby all participating users can monitor the securities auction at the user node.
• Figure 1 is a flow chart illustrating a securities pricing and allocation system in accordance with a prefe ⁇ ed embodiment ofthe present invention.
• Figure 2 is a flow chart illustrating processes which occur during an auction portion ofthe securities pricing and allocation system illustrated in Figure 1.
• Figure 3 is a flow chart illustrating an initial bidding process which takes place during an auction portion of the securities pricing and allocation system illustrated in Figure 1.
• Figure 4 is a flow chart illustrating a bid modification and final bidding process which takes place during an auction portion ofthe securities pricing and allocation system illustrated in Figure 1.
• Figure 5 is a flow chart illustrating a bond allocation process which is part ofthe securities pricing and allocation system illustrated in Figure 1.
• Figure 6 is a high level view of the internet architecture.
• Figure 7 is a screen shot ofthe user interface showing the log-on screen.
• Figure 8 is a screen shot ofthe user interface showing an exemplary set of Initial Terms for a sample offering.
• Figure 9 is a screen shot ofthe user interface showing an exemplary set of auction details.
• Figure 10 is a screen shot of the user interface showing an exemplary set of in-progress auction details.
• Figure 11 is an additional screen shot ofthe user interface showing an exemplary set of in-progress auction details.
• Figure 12 is an additional screen shot ofthe user interface showing an exemplary set of in-progress bids and related time-stamps.
• Figure 13 is an additional screen shot ofthe user interface showing an exemplary Bid confirmation set of in-progress auction details.
• Figure 14 is an additional screen shot ofthe user interface showing an exemplary set of cmxent bid status data with in-progress auction details.
• Figure 15 is an additional screen shot ofthe user interface showing an exemplary request for confirmation of a bid modification entry with a set of in- progress auction details.
• Figure 16 is an additional screen shot ofthe user interface showing an exemplary warning screen indicating a time-stamp may be revised.
• Figure 17 is an additional screen shot ofthe user interface showing an exemplary successful purchase-auction over screen.
• Figure 18 is an additional screen shot ofthe user interface showing an exemplary unsuccessful purchase-auction over notice screen.
• Figure 19 is an additional screen shot ofthe user interface showing an exemplary details of a completed auction.
• Figure 20 is an additional screen shot ofthe user interface showing an exemplary error message relating to an improper bid size selection during an auction.
• Figure 21 is an additional screen shot ofthe user interface showing an exemplary attention message related to an attempt to cancel a bid during an auction.
• Figure 22 is a flow chart ofthe high level physical layout architecture of the system containing the present invention.
• Figure 23 is a flow chart showing the details ofthe auction server architecture ofthe system containing the present invention.
• Figure 24 is a flow chart showing further exemplary details ofthe systems architecture ofthe preferred embodiment ofthe present invention.
• the present invention overcomes the disadvantages ofthe above described systems by providing an economical, high performance, adaptable system and method (designated "the OpenBook system”) for conducting an auction of securities to institutional and individual investors on the Web.
• the OpenBook system auction In the OpenBook system auction:
• the OpenBook system thus creates a transparent and low-cost new issue market; offers all bidders equal access to securities; and gives both investors and issuers a "seat on the syndicate desk.”
• a system in accordance with the present invention is a system of price determination and allocation of securities that can result in substantial benefits for both companies seeking to raise capital through the sale of such securities and investors wishing to purchase such securities.
• securities includes equity securities, debt vehicles such as, without limitation, corporate or municipal bonds, mortgage backed bonds, emerging market bonds, junk bonds, commodities, gold, and money market instruments such as, without limitation, US treasury bills, bank certificates of deposit, commercial paper, repurchase agreements and the like.
• An investment vehicle offering using a pricing and distribution system in accordance with a prefe ⁇ ed embodiment ofthe present invention differs substantially from either traditional underwritten or Dutch auction security offerings.
• investment vehicles will generally be sold by an offering company at a price determined by investors bidding for the vehicles using a Dutch auction type scheme.
• a Dutch auction is described in Exxon Corp.. 1977-78 Fed. Sec. L. Rep. (CCH) para. 81 ,198 at 88, 159 (avail. May 9, 1977) which explains:
• the Dutch Auction differs in certain material respects from the practice of competitive bidding. Principally, the bids which are submitted need not cover the entire amount ofthe offering in order to be accepted. Each bidder, including institutions and individuals as well as registered broker- dealers, indicates the amount of the offering which is wanted, and the yield. Each bid received will, on the final date designated for entry of bids, become an irrevocable offer to purchase the amount of bonds indicated unless the bid is withdrawn.
• the offering price is based upon the yields specified in the bids.
• the bids are listed in ascending order of yields. The bid with the lowest yield is accepted first, and then other bids at successively higher yields are accepted up to those bids with the highest yield required to reach the total amount ofthe offering. The highest accepted yield is the yield at which all the bonds are awarded.
• the interest rate and price are fixed by the issuer. The securities will be awarded to the successful bidders at a uniform price based upon the accepted yield.
• not all difficulties are alleviated using the Dutch auction method.
• the issuer Using either a traditional book building or a Dutch auction technique, the issuer generally does not enter into any type of binding agreement to issue the bonds until after investors have demonstrated interest or the auction has run and pricing takes place. Thus, even after expressing interest or, in a Dutch auction, placing a bid, the issuer could still decide not to issue any bonds, leaving investors uncertain that they would receive any bonds until after final pricing.
• the value of a security is an almost exclusive function ofthe market for the security.
• both the traditional book building method and the Dutch auction method described above provide an imperfect indication of what the actual market value of a particular fixed income security might be because of the closed nature ofthe process.. For example, there is no quote system for the bond market to allow potential investors to gain an idea of what a new issue might be worth. Additionally, there is no mechanism for a potential purchaser to gain information about what the issuer or other potential purchasers believe the particular security is worth or the amount of securities that an issuer will offer until after a price has been set and the security has been purchased. Finally, similar deal sizes for similar grade securities may have different demand at different points in time depending on any number of outside factors.
• Information concerning the offering such as a range in which the final yield will be set and a range of total offering size is preferably provided prior to the auction. Additionally, potential investors will be able to receive feedback concerning what other potential investors are bidding for the offering during the course of an auction.
• an Auction Advisor provides a system upon which the auction portion ofthe offering is run and assist the issuer ofthe securities in marketing the offering and running the auction.
• step 110 of Figure 1 is a flow chart showing an overview of a securities pricing and allocation system in accordance with a preferred embodiment ofthe present invention
• an issuer communicates a mandate to the auction advisor that the issuer wishes to conduct a bond offering using a pricing and allocation system in accordance with the present invention.
• the issuer enters into an agreement with the auction advisor to price and sell the issuer's offering.
• this agreement is legally binding on the issuer contingent only on completion of a successful auction.
• the issuer and/or auction advisor are able to determine a number of auction parameters, discussed in detail below, preferably including parameters which limit the price and total size ofthe offering. These auction parameters are preferably publicized to potential auction participants.
• bidder's can preferably place two types of bids, a competitive bid and a non-competitive bid.
• bids include both a price component and a quantity component.
• Non-competitive bids are given in terms of the dollar amount of securities desired by the bidder and are automatically assigned a price component equal to a minimum yield for the offering as set by the auction parameters
• Competitive bids preferably have both a quantity component and a price component chosen by the bidder which may be above a minimum yield as set by the auction parameters.
• competitive bids preferably have a private component, used for pricing and allocation, and a public component, which is preferably made available to other bidders while an auction is in progress and which is preferably related to the private component.
• a public and private component competitive bids can be used to provide bidders and issuers with information about the market value of an offering without requiring the bidder to reveal exactly what his or her bid is.
• a pricing and allocation auction is conducted by the auction advisor.
• a clearing price is determined by arranging bids received during the auction in order from best to worst and pricing the offering at the bid price at which all the bonds offered can be allocated. Bonds are then allocated to all bidders bidding inclusively between the best bid price and the clearing price. Preferably, pricing achieved at this stage is set relative to the yield of a benchmark Treasury bond at a time after the auction has ended.
• a securities distribution system in accordance with the present invention provides a number of significant advantages over a traditional fixed income securities offering.
• issuers preferably enter into an agreement to sell bonds before pricing or allocation of bonds occurs, investors are provided with a relatively higher degree of certainty that bonds will be issued.
• the auction system also can provide greater exposure to the retail market as individual investors preferably have the ability to bid on offerings on substantially equal footing with institutional investors.
• individual retail investors can gain access to new fixed income offerings, including high-grade corporate bond offerings, whereas they may not have had such access under previous security distribution schemes.
• the ability for retail investors to bid along side institutional investors may have the additional effect of increasing demand over that of a typical underwritten offering where the retail market is largely ignored relative to institutional buyers.
• the issuer ofthe securities does not have to pay as much of a premium to an investment bank or other broker for selling the securities because if the inherent efficiencies ofthe electronic system. This can advantageously result in substantial savings to the issuer in making a security offering.
• the auction system provides greater certainty that the allocation of securities are awarded to those that desire them the most. Allocation is based on the aggressiveness of an investor's bid and their time stamp. The higher the price an investor is willing to pay for a security and the earlier they place their bid, the more likely they are to be awarded securities.
• offerings utilizing an auction in accordance with the present invention will be conducted through the use of a software system developed by the assignee, W. R. Hambrecht, Inc., which is described in more detail below. This system will handle multiple aspects ofthe offering process, including subscription, pricing and allocation. It is to be understood, however, that a securities pricing and allocation system in accordance with the present invention my be achieved by any number of similar web-based software and hardware modules.
• pricing and distribution system ofthe present invention can be applied to any type of security, a preferred embodiment, discussed below, will be described with respect to bonds or, more specifically, corporate bonds. Additionally, pricing for bonds herein will be referred to in terms of interest rate paid on the bond or yield. Specifically, pricing will be refe ⁇ ed to with respect to the interest rate paid on the auctioned bonds relative to the interest rate paid on a selected benchmark treasury bond. This quantity will be refe ⁇ ed to herein as the "spread.” It is to be noted that the lower the spread, the lower the interest rate the issuer must pay on the bond. Consequentially, the lower the spread of a given bid, the more attractive it is to the issuer. Subscription
• investment vehicle offerings are preferably accessible to both institutional and retail investors.
• investors In order to participate in any given offering investors must be registered with a designated Underwriter. It is expected that institutional investors will be able to register directly with such Underwriter, but that retail investors will typically participate via on-line brokerage firms.
• the bonds become available for sale by the issuing company registered investors can submit bids on the offering.
• bids are submitted electronically through a web-based interface maintained by the Assignee, W. R. Hambrecht Inc., as the Auction Advisor.
• any investor making a bid will indicate the number of bonds such investor would be willing to purchase (“Bid Quantity") and the spread the investor would be willing to accept (“Spread”).
• an issuer of securities contacts the auction advisor at least a week prior to the date the issuer would like to sell the bonds and a ⁇ anges to have the auction advisor offer and sell the bond issue through the auction process of the present invention.
• an issuer and/or the auction advisor determine a number of auction parameters, listed below. Then, preferably, these parameters are announced to potential bidders prior to the start of the auction. This feature advantageously provides a potential investor with far more information about a bond offering than was traditionally available through the previously used bond sales techniques discussed in the Background section.
• the Minimum and Maximum deal size This provides a potential investor with concrete information concerning the total size of an offering prior to bidding.
• the precise dollar amount of bonds to be issued is preferably set midway between the start and finish of an auction (which preferably would have a duration of from 1 to 4 hours) and will be between the Minimum and Maximum deal size.
• the midpoint of an auction a substantial amount of pricing and demand information will preferably have been collected by the auction advisor and disseminated to both the issuer and the bidders.
• the issuer is advantageously provided with valuable pricing and demand information which can be used in determining a final dollar amount ofthe offering.
• a reference Treasury security of comparable maturity to bonds being issued (the "Benchmark Treasury"). Bids are expressed in terms of a yield above the yield ofthe Benchmark Treasury, or the spread. As discussed below, the auction process determines a spread at which the offered bonds will be sold (the "clearing spread " '). The final yield, however, is based on the yield ofthe Benchmark Treasury', which can continue to fluctuate after a clearing spread has been determined. The final yield is preferably set based on the yield ofthe Benchmark Treasury 30 minutes after the close ofthe auction.
• Benchmark Treasury The issuer and/or the auction sponsor has the right, but not the obligation, to cancel an auction if the actual treasury rate is greater than the Maximum Benchmark Treasury Rate.
• a minimum dollar size for competitive bids and non-competitive bids This is the lowest dollar amount a bidder can bid in either a competitive bid or a non-competitive bid. These parameters are set to prevent a proliferation of undersized bids which could add unnecessary administrative complexity to an auction. Additionally, an individual investor may use these parameters to determine whether he or she wishes to participate in the auction at all.
• the minimum dollar size for competitive bids may, but need not, equal the minimum dollar size for non-competitive bids.
• the minimum dollar increment for competitive bids may be, but does not need to be, the same as the minimum dollar increment for non-competitive bids.
• a maximum dollar bid quantity (the "Maximum Bid Size"). This is the maximum dollar amount that any single bidder can bid after combining the bidder's competitive bid and non-competitive bid. This parameter is set to prevent any single bidder from having a dominating influence on the spread set by the auction. Setting this parameter, then, can allow the clearing spread to better reflect a true market valuation ofthe offered bonds.
• the Protected Spread Range is the maximum amount, expressed in terms of basis points, which the private spread component can be below the public spread component without requiring cancellation and re-entry ofthe entire competitive bid. For example, if a Protected Spread Range is set at .04 (expressed in basis points) and a potential investors competitive initial (public) bid is .75, then the final (private) bid cannot be below .71 without canceling and re-entering the competitive bid. As discussed below, the protected spread range tends to cause the pricing information provided publicly during an auction to reflect the private bid information upon which the final pricing ofthe offering will be based.
• auction duration is preferably between 1 and 4 hours.
• potential investors can receive far more information about a fixed income offering than was typically made available in past offering techniques.
• the Minimum and Maximum Deal Size, the Benchmark Treasury and the Minimum and Maximum Spread potential investors will receive information about both the size and pricing of a bond offering prior to the sale ofthe bonds. This information can advantageously be used by investors to make relatively more certain investment decisions.
• FIG. 2 is a flow chart illustrating a prefe ⁇ ed embodiment ofthe major processes which take place during the auction portion of a system in accordance with the present invention.
• the auction begins at a predetermined and published time.
• the auction there are three major processes which take place.
• the auction advisor monitors the progress ofthe auction. In a preferred embodiment, this includes, for example, activities such as allowing only one competitive bid and one non- competitive bid per auction participant, monitoring the Benchmark Treasury Rate to see if it exceeds the Maximum Treasury Rate, and policing the authenticity of placed bids.
• bids are taken by the auction advisor and the public component ofthe bids are publicized. It is to be understood that preferably, bids taken during an auction are not necessarily accepted. That is, simply because the auction advisor takes a bid from a bidder, it does not necessarily mean that the bidder will receive bonds. As discussed below, only successful bidders will receive bonds.
• the deal size is set, preferably midway through the auction.
• the auction is ended and no more bids are taken.
• a pricing and allocation system in accordance with the present invention determines the yield which the bonds being offered will generate based on bids received by potential investors.
• An potential investor's auction bid preferably indicates two things: the number of bonds the potential investor wishes to purchase and the yield the potential investor wishes to receive for the bonds.
• the number of bonds is preferably expressed as the total value of the bonds the potential investor wishes to buy, for example, an investor might indicate a desire to purchase $200,000 worth of bonds.
• the yield the potential investor would like to receive on the purchased bonds is preferably indicated in terms of spread between the yield ofthe Benchmark Treasury at the time of final pricing and the desired yield of bonds being bid for in one basis point increments. For example, if the Benchmark Treasury has a yield of 7%, the auction participant would bid 1.5% to indicate a willingness to accept an 8.5% yield on the purchased bonds.
• whether a bid is successful depends generally on two factors: the size ofthe bid spread and the relative time at which the bid was placed. Generally, the lower the bid spread and the relatively earlier the bid is placed, the more likely the auction participant will receive the full amount of bonds desired.
• a "time stamp" is associated with the bid which indicates when a bid was received relative to other bids received during an auction.
• a bidder When first entering a competitive a bid, a bidder preferably enters both a public competitive bid, or "initial bid,” and a private competitive bid, or "final bid.”
• the initial bid will not be part of a firm offer from the potential investor at the time ofthe auction close, however, the final bid will be part of such a firm offer. Additionally, the spread and quantity of the initial bid is made available to other potential investors while the auction is taking place (though the identity ofthe bidder is preferably not revealed).
• the initial bid becomes the final bid by default.
• the private, final bids are preferably related to the public, initial bids.
• the issuer sets a Protected Spread Range which indicates the maximum amount a bidder's final bid can be below his or her initial bid from the final bid spread without altering the time stamp ofthe bid. For example, if an issuer set a protected spread range of .35 basis points, a bidder's final bid spread could not be more that .35 below the bidders initial bid without losing the time stamp ofthe bid.
• the original time stamp for the bid is lost and a new time stamp co ⁇ esponding to the time the final bid outside the protected spread range was made is assigned to the new bid.
• a new initial bid is preferably created by default to match the final bid which is outside the protected spread range ofthe original initial bid. " Preferably, the final bid is not allowed to be above the initial indication This provides bidders viewing publicly provided bid information with the knowledge that the information provided reflects the largest spreads that other bidders are bidding This can provide greater certainty for bidders viewing publicly provided bid information As noted above and explained m detail below, bonds are preferably allocated partially based on the time stamp corresponding to the bid Thus, a competitive auction, it is to a bidder's benefit to both bid early and retain the time stamp of his or her bid by not placing a final bid outside the protected spread range This provides a motivation for bidders to make final bids which are mside the protected spread range with respect to the bidder's initial bid This, in turn, provides a motivation for bidders to make their initial bids reflect the bidder's genuine beliefs about the market value of the offe ⁇ ng Thus, advantageously, there is impetus to make publicly provided bid information available relatively early in the auction
• bidders can also place non-competitive bids instead of or m addition to competitive bids
• a Non-competitive bids the bidder enters a bid for the amount of bonds desired, such as $200,000
• the spread component is set at the Minimum Spread as determined by the issuer p ⁇ or to the auction
• this means that non- competitive bids are the first bids "filled" or allocated the requested quantity of bonds
• a bidder who wants a certain amount ofthe offered bonds, but is not highly concerned about the yield can simply indicate how many bonds he or she desires and the bid will likely be filled at clea ⁇ ng spread
• retail investors are limited to submitting only non-competitive bids while institutional investors can submit either competitive or non-competitive bids This advantageously allows savvy, institutional investors to retain substantial control over the final p ⁇ ce ofthe bonds thereby reducing the possible l ⁇ ationahty which may be introduced into the market if retail investors were substantially
• FIG. 3 is a flow chart illustrating a prefe ⁇ ed embodiment for placing an initial bid in accordance with the present invention.
• an investor places an initial bid.
• steps 210 and 216 the investor will have to enter quantity and, if the bid is competitive, will also have to enter a spread.
• steps 212 and 214 two checks are performed by the system. First, in step 212, it is determined whether the bid quantity is greater than the minimum bid size and in the co ⁇ ect bid increment. If either one or both of these conditions is not met, the investor is returned to step
• step 214 the system checks to be sure that the entered quantity is less than or equal to the investor's credit limit or the maximum bid size. If the entered quantity is not less than or equal to either one or both of these parameters than the invest or is asked to reenter the bid quantity. If the quantity is less than or equal to the investors credit limit and the maximum bid size, then the quantity component ofthe bidder's initial bid is approved.
• a spread is also associated with the initial bid.
• the system first determines whether the bid is competitive or not. If the bid is not competitive then, in step 222 the spread for the bid is set equal to the minimum bid spread. If the initial bid is part of a competitive bid then a shown in step 220, it is determined whether the spread is below the maximum spread and above the minimum spread. If the spread is outside this minimal/maximum spread range, the bidder is returned to step 216 and asked to enter another spread. If the spread is within the minimum/maximum spread range, then the spread component ofthe bid is approved. Finally in step 224, if both the quantity component and the spread component ofthe initial bid are approved, the bid is displayed to the public and given a time stamp.
• FIG. 4 is a flowchart illustrating how a system in accordance with the present invention allows a bidder to modify the quantity component of either a competitive bid or a non-competitive bid and enter and modify a final bid (of a competitive bid).
• an investor modifies the quantity component of either competitive bid or non- competitive bid.
• the system checks whether the modification is greater than the minimum bid size and in the co ⁇ ect bid increment. If the modified bid violates either parameter, then the bidder is returned to step 300 and asked to enter a new modification.
• step 312 the system checks whether the modified bid quantity component is greater or equal to the current bid quantity component. Thus, if the new quantity component is less than the original quantity component, as shown in step 316, the bidder is asked whether he or she would like to place a new bid, that is, a bid having a new time stamp.
• step 300 If the bidder does not wish to lose the time stamp ofthe original bid, he or she is returned to step 300 to make an appropriate bid modification. If the bidder does wish to enter a new bid he may do so but only up to the pegged amount.
• Changing a bid quantity by a relatively large amount can have a relatively large effect on the bid information that is provided to bidders during the auction.
• bid quantity could introduce greater uncertainty into the auction process.
• bidders are preferably discouraged from changing their bid quantities by such a large amount.
• a bidder changes his or her original bid quantity by 50% or more the original bid is cancelled and the bidder must enter a new bid with a new time stamp. Therefore, if the new quantity component ofthe modified bid is greater than or equal to the current bid quantity component then, at step 314, the system checks whether the new quantity is less than 50% more than the original quantity component.
• a competitive bid also has a final bid component which is not made public during the auction.
• a bidder enters or modifies the final bid component of a competitive bid. As shown at step 400, the final bid component of a competitive bid is set to the initial bid component by default.
• a bidder preferably is able enter a final bid which is different from the initial bid if the final bid is less than the initial bid and within the Protected Spread Range from the initial bid. Accordingly, as shown at step 410 the system checks whether the entered final bid is less than the initial bid by no more than the Protected Spread Range. If it is not, at step 420, the bidder is given the opportunity to enter a new bid.
• the bidder is returned to step 400. If the bidder does wish to enter a new bid, as shown in step 414, a new time stamp is assigned to the modified bid and the initial bid component ofthe modified bid is by default set equal to the new final bid component. If the bidder desires, however, an initial bid different from the new final bid can be entered as long as it is greater than the new final bid and within the protected spread range of the final bid. Returning to step 410, if the new final bid entered at 400 is less than the original initial bid by no more than the Protected Spread Range, then at step 416, the new final bid is accepted with no change in the time stamp ofthe bid.
• FIG. 5 is a flow chart showing the process which is used to price and allocate bonds in the offering. As shown at step 500, non-competitive bids and final bid components of competitive bids are a ⁇ anged in an a ⁇ ay from lowest spread to highest spread.
• non-competitive bids are automatically assigned the Minimum Spread as determined in the auction parameters. Accordingly, non-competitive bids will be collected at the lowest level ofthe a ⁇ ay of arranged bids. Bids having the same spread are arranged in the array in ascending order from the earliest time stamp to the latest time stamp. Bids having the same time stamp and spread are placed at the same level in the a ⁇ ay.
• the lowest bid or bids are "accepted. " ' Subject to there being sufficient quantity demand to fill the deal size, bidders of accepted bids will receive bonds at the clearing spread.
• the system checks whether the aggregate quantity of accepted bids equals or exceeds the deal size. If not 511, then the next highest bid or bids in the array are accepted. The system loops through steps 510 and 512 until the aggregate quantity of accepted bids is equal to or greater than the deal size 513. Then, as shown in step 514, the system checks whether all of the accepted bids are non-competitive bids. If not 515, that is, if there is at least one competitive bid accepted, then as shown in step 516, the clearing spread is set equal to the spread ofthe last accepted bid or bids (having the same spread and time stamp).
• step 518 the clearing spread is set at either one of two values. If the aggregate dollar quantity of bonds requested by the accepted bids exactly equals the deal size, bonds will be awarded at the mid-point between the Minimum Spread and the Maximum Spread. If, however, the aggregate quantity of bonds requested by the accepted bids is greater than the deal size, bonds will be awarded at the Minimum Spread.
• step 520 if there are multiple bids with the same time stamp and which spread component equals the clearing spread, then bonds are allocated among these bids on a pro-rate basis. Then, in step 522, the system determines whether the aggregate quantity component ofthe accepted bids is greater than the deal size. If it is not 523, that is, if the aggregate quantity component of the accepted bids is equal to the deal size, then, as shown in steps 524 and 526, investors are awarded bonds at the clearing spread according to the quantity component bid. As shown in step 528, if the aggregate quantity component ofthe accepted bids is greater than the deal size, the accepted bids with the highest spread and the latest time stamp will be awarded only a portion of desired quantity indicated by the bid.
• the portion awarded is preferably equal to the difference between the deal size and the aggregate quantity of bonds requested by all accepted bids minus the quantity of bonds requested by the accepted bid with the highest bid and the latest time stamp. Additionally, as shown in step 526, bonds will be awarded at the clearing spread. Closing Bond pricing occurs approximately 30 minutes after an auction terminates. The auction yield is preferably determined by adding the clearing spread to the
• Benchmark Treasury Rate The coupon rate on the bond will be set at the auction yield rounded down to an increment determined by the issuer and auction advisor.
• the bond price that co ⁇ esponds to the auction yield and coupon rate is preferably rounded to three decimal places.
• the OpenBook auction system builds on the design and architecture developed for W. R. Hambrecht's proprietary OpenlPOTM equity underwriting platform. This is described in the related pending application serial number 09/347,949 filed July 6, 1999 which is inco ⁇ orated fully herein by reference.
• the auction engine employs a modular, client-server architecture that can be partitioned across several processors using standard network protocols.
• the core ofthe system is the Order Management Server (OMS) which utilizes a commercial, off-the-shelf relational database to provide transaction-oriented persistent storage.
• OMS Order Management Server
• Other components ofthe system interact with the OMS via a distributed messaging system to handle administration, bid management, and securities allocation.
• the following rules govern the participation of buyers and sellers of securities and are consistent with cu ⁇ ent Federal and State Regulations governing the sale of such securities.
• Minimum Competitive Bid Size a minimum dollar increment for Competitive Bids (the “Minimum Competitive Bid Increment”); a minimum dollar size for Non-Competitive Bids (a “Minimum Non- Competitive Bid Size”); a minimum dollar increment for Non- Competitive Bids (the “Minimum Non-Competitive Bid Increment”); a maximum dollar bid quantity (the “Maximum Bid Size”); a maximum Spread under an Initial Bid that Investors can modify a Final Bid without canceling their Competitive Bid (the "Protected Spread Range”); a maturity date for the issue; a coupon frequency for the issue; an auction starting time; an auction ending time; and a time that the Deal Size will be announced.
• An Issuer and / or WRH may select any additional terms deemed relevant to an auction.
• the Issuer and / or WRH has the right, but not the obligation to cancel an auction on the OpenBook system if the actual treasury rate is greater that the Maximum Benchmark Treasury Rate.
• the Issuer and / or WRH will announce the exact dollar size of an issue (the "Deal Size") at some pre-specified point during an auction.
• the auction will start and end at times determined by the Issuer and / or WRH. Investors may not place bids prior to the start or after the end of the auction.
• Bid may not be less than the Initial Bid by more than the Protected Spread Range.
• the Initial Bid will not be part of a firm offer on the part ofthe Investor at the time ofthe auction close.
• the Final Bid and quantity component of a Competitive Bid will comprise a firm offer on the part ofthe Investor at the time ofthe auction close.
• the quantity component of a Competitive Bid must be greater than or equal to the Minimum Competitive Bid Size and in an increment evenly divisible by the Minimum Competitive Bid Increment.
• the quantity component of a Non-Competitive Bid must be greater than or equal to the Minimum Non-Competitive Bid Size and in an increment evenly divisible by the Minimum Non-Competitive Bid Increment.
• the OpenBook system will automatically offer the Investor the opportunity to enter a new Competitive Bid with the following values set by default but subject to change by the Investor: a quantity component equal to the quantity component ofthe previous Competitive Bid and an Initial Bid and Final Bid equal to the Disqualified Final Bid.
• the OpenBook system will automatically offer the Investor the opportunity to enter a new Competitive Bid with the following values set by default but subject to change by the Investor: a quantity component equal to the Competitive Bid Disqualified Quantity Component and an Initial Bid and Final Bid equal to the Initial Bid and Final Bid components ofthe previous Competitive Bid. 5.3.
• Non-Competitive Bid Disqualified Quantity Component a value that is (1) less than the cu ⁇ ently existing quantity component of that Non-Competitive Bid or (2) that is greater than 50% more than the first quantity component that an Investor entered for that Non-Competitive Bid,the OpenBook system will automatically offer the
• Non-Competitive Bid Investor the opportunity to enter a new Non-Competitive Bid with the following values set by default but subject to change by the Investor: a quantity component equal to the Non-Competitive Bid Disqualified Bid Quantity Component and a Spread component equal to the Minimum Spread over the Benchmark Treasury.
• WRH has the right, but not the obligation to cancel the auction and reject all submitted bids. If the total quantity of bonds requested by all Competitive and Non-Competitive bids is less than the Deal Size and WRH decides not to cancel the auction, the underwriting syndicate will place a Non-Competitive Bid with a quantity component equal to the difference between the Deal Size and the total quantity of bonds requested by all Competitive and Non-Competitive bids.
• Bond pricing occurs approximately 30 minutes after an auction terminates.
• the auction yield (the "Auction Yield") is determined by adding the Clearing Spread to the Benchmark Treasury Rate.
• the coupon rate on the bond will be set at the Auction Yield rounded down to an increment determined by WRH and the Issuer.
• the bond price that co ⁇ esponds to the Auction Yield and coupon rate is rounded to three decimal places.
• an end user ofthe auction method and system ofthe present invention uses a standard web browser 601 to access via a network, such as the Internet 602, both an information website 603 and the auction server 604.
• the information website 603 may be associated to a published URL and contains information about offerings and the auction process ofthe method and system ofthe present invention.
• the auction server 604 may contain the auction engine itself, where the auctions are run.
• FIG 22 shows an exemplary embodiment ofthe physical network for the method and system ofthe present invention.
• a router 2202 such as a Cisco router is connected to a network, such as the Internet 2201.
• an auction application ofthe method and system ofthe present invention is deployed at a co-location facility that provides a 100Mbps connection to the Internet 2201.
• Router 2202 is connected to switch 2203, which may be a lOMpbs/lOOMpbs switch associated with a public network.
• Switch 2203 is connected to production auction server 2204, which may be designated as the hot production server.
• Switch 2203 is also connected to backup server 2206, which may be designated as a warm backup server.
• Production auction server 2204 and backup server 2206 are connected to switch 2205, which may be designated a private network switch and may be associated with a private network.
• switch 2205 may be designated a private network switch and may be associated with a private network.
• digital streams to and from the Internet 2201 pass through router 2202 and then switch 2203, which directs auction-related bit traffic over the associated public network to production auction server 2204.
• Backup server 2206 may also be on the same associated public network and serves as the fail-over for the production auction server 2204.
• Switch 2205 serves as a connection to the associated private network that contains other non-Internet related applications.
• FIG 23 shows an overview of an embodiment of an auction server 2301 ofthe method and system ofthe present invention.
• Auction server 2301 may contain one or more databases 2302, an OMS 2305, a bid manager 2306, an auctioneer 2303, and an administrator 2304.
• Auctioneer 2303, administrator may contain one or more databases 2302, an OMS 2305, a bid manager 2306, an auctioneer 2303, and an administrator 2304.
• Order manager 2305 is an order management system that is associated with one or more databases 2302.
• Bid manager 2306 is connected to web server 2307, which is in turn connected to a network, such as the Internet 2308.
• Figure 24 shows a more detailed view of an exemplary systems architecture for the method and system ofthe present invention.
• Order Management System 2410 is responsible for tracking the principal objects ofthe system, which may include information associated with users, accounts, auctions, positions, and fills.
• Order Management System 2410 may implement user-based authentication and role- based authorization.
• Order Management System 2410 may also implement a Java RMI-based API/SPI for client access and is the locus for timing and events throughout the system.
• Order Management System 2410 uses Relational Backing Store 2407 to locate and keep the principal objects available in a persistent storage device.
• Relational Backing Store 2407 is responsible for mapping the principal objects ofthe system onto a relational schema, locating and keeping the principal objects ofthe OpenBook system available in a persistent storage, and for obeying referential integrity constraints ofthe data model.
• Relational Backing Store 2407 implements a Java JDBC interface to the vendor Relational Database System 2408, such as the Sybase Adaptive Server Ente ⁇ rise.
• OpenBookManager 2406 is responsible for bidder account management, multiplexing a bidder-role based interface to the Order Management System 2410, and position management for authorized accounts and to provide a single listener interface for state changes in active auctions.
• the OpenBookManager 2406 makes state and position information available to clients for use by any user interface system that does not use the Order Management System 2410 API/SPI directly.
• the OpenBook system Servlet Interface 2405 provides programmatic execution linkage between the Java Servlet Engine 2404 API Specification and the OpenBookManager 2406 module. Servlet invocations are mapped to OpenBookManager 2406 interfaces to allow user interfaces to be constructed for HTML.
• the OpenBook Servlet Interface 2405 is invoked and controlled by Java Servlet Engine 2404, which may be a 3 rd party Java Servlet Engine such as JRun from Allaire. JRun is in turn utilized by the 3 rd party HTTP web server 2402, which may be Zeus from Zeus Technology. HTTP web server 2402 is in turn connected to Web Browser User Interface 2401.
• HTML Templates 2403 are provided to allow for the separation of functionality between the OpenBook Servlet Interface 2405 module and the HTML designer.
• Server Side Include template mappings may be provided for the principal objects ofthe system and all their attributes, as well as system attributes such as time and date. Multiple browser products may be supported and accommodated.
• an auctiondb database may represent the Relational Backing Store (RBS) 2407, as shown in Figure 24. This database is associated with the auction server ofthe method and system ofthe present invention.
• RBS Relational Backing Store
• a users table defines static information about entities that are allowed access to parts ofthe system.
• a user may be an administrator 2304, an auctioneer 2304, a bid manager 2306, an entity in an auditor role, or an entity that sets up accounts.
• the degree of access to various components may be determined by the UserRoles table.
• Each user is assigned a unique UserlD which is used to refer to the user from other tables.
• An embodiment is as follows:
• a userLog table relates to security and e ⁇ or checking for users in the method and system ofthe present invention. Whenever an action is taken, the userlog is updated to catalog the action.
• An embodiment is as follows:
• An accounts table is used to record information associated with end users, such as investors associated with the method and system ofthe present invention. Examples of end users are institutional buyers, individual investors, and retail users. An embodiment is as follows:
• An accountLog table is used to record and catalog all actions taken by given account.
• An embodiment is as follows:
• a roles table provides a convenient repository for security roles defined by the auction system. Each role is assigned a unique RolelD. This RolelD is refe ⁇ ed to by a UserRoles table. Semantics of roles are defined by the application. The roles of users may be checked to determine if a user has access to certain resources or is allowed to perform various tasks.
• An embodiment is as follows: create table openbook.. roles ( roleld numeric( 18,0) not null, roleName varchar(20) not null, unique (roleld), unique (roleName)
• the userRoles table enumerates all ofthe roles that are associated with a particular user.
• An embodiment is as follows:
• a userRoleLog table represents the complete transaction history of each role change for each user known to the system. Each transaction is assigned a unique userRoleTxID.
• An embodiment is as follows:
• view userRoleNames is associated with the same data as userRoles but provides user and role names instead of ids.
• An embodiment is as follows:
• An auctions table defines actual auctions that are run. Each auction is associated with a set of parameters defining that auction. Click-through parameters may also be used. Table values for parameters may be stored. In an embodiment ofthe invention, parameters that are required and must be provided are the ones listed as "not null" in the following exemplary embodiment:
• auctions tStamp datetime not null, ownerld numeric(18,0) not null references openbook.. users(id), id numeric(18,0) not null, cusip varchar(12) not null, description varchar(255) null, status int not null, totalAvailable int not null, minValue float not null, max Value float not null, valuelncrement float not null, lotSize int not null, openTime datetime not null, closeTime datetime not null, alert varchar(255) null, announcedSize int not null, minAuctionSize int not null, maxAuctionSize int not null, auctionFormat varchar(80) null, benchmarkDesignationTime int not null.
• benchmarkTreasury varchar(15) null benchmarkCusip varchar(12 ⁇ ) null, bondsFreeToTradeAt int not null, clearingSpread float not null, jointManagers varchar(80) null, compSizelncrement int not null.
• 'view deals' allows users to see views for report generation and reporting pu ⁇ oses, such as for those who monitor an auction. Views may be created so that databases do not have to be queried each time a report needs to be run.
• data is already assembled and fed into reporting structures associated with method and system of the present invention. An embodiment is as follows:
• An auctionLog table is used to catalog and record all actions taken for a particular auction.
• user changes are recorded in the auctionLog table.
• parameters may be changed by a user.
• auctionLog editld numeric(l 8,0) not null references openbook.
• auctions cusip varchar(12) not null, description varchar(255) null, status int not null, totalAvailable int not null, minValue float not null, max Value float not null, valuelncrement float not null, lotSize int not null, openTime datetime not null, closeTime datetime not null, alert varchar(255) null, announcedSize int not null, minAuctionSize int not null, maxAuctionSize int not null, auctionFormat varchar(80) null, benchmarkDesignationTime int not null, benchmarkDollarPriceAtPricing float not null, benchmarkRateAtPricing float not null, benchmarkRateMax float not null, benchmarkTreasury varchar(l 5) null, benchmarkCusip varchar(12) 1 null, bondsFreeToTradeAt int not null, clearingSpread
• view dealLog shows views for a particular deal.
• View dealLog may be used for reporting or other pu ⁇ oses.
• An embodiment is as follows:
• a positions table records the structures for bids, including such objects as sizes, timestamps, initial bid spreads, and final bid spreads.
• a size and a timestamp is logged.
• a size, a final bid spread, an initial bid spread, and a timestamp are logged.
• user accounts may be referenced.
• the positions table may also index by account and/or by auction. An embodiment is as follows:
• treasuries float null, priority tStamp datetime null, priority size int null, nonCompPriority tStamp datetime null, nonCompPriority size int null, unique (id), unique (account, dealld)
• table positionLog records changes that are made to a positions table.
• examples of changes are changes in spread, changes in size, and changes in timestamp. All actions for accounts may be logged.
• Table positionLog may be indexed per auction, via unique auctionlDs for each auction, and/or cross-referenced with user
• An embodiment is as follows:
• dealld numeric(l 8,0) not null references openbook.. auctions (id), account varchar(80) not null, size int not null, minFillSize int not null, status int not null, value float not null, initialValue float not null, nonCompSize int not null, treasuries float null, priority tStamp datetime null, priority size int null, nonCompPriority_tStamp datetime null, nonCompPriority size int null, unique (txld)
• a fills table may store information about bonds that are awarded.
• An end user may set up a position. The end user may or may not get a fill, based on the other positions in the auction and other factors.
• An embodiment is as follows: create table openbook.. fills ( tStamp datetime not null, ownerld numeric( 18,0) not null references openbook.. users(id), id numeric(18,0) not null, indicationld numeric( 18,0) not null references openbook..positions (id), value float not null, size int not null, status int not null, softDollarAllocation float not null, unique (id)
• a fillLog table catalogs and records changes to fills. Examples of changes include changes made by an administrator due to mistakes, suspect bids, and/or decisions to sell a lesser quantity or otherwise modify bids. In an embodiment ofthe invention, an administrator or other party may change bids.
• the method and system of the present invention is associated with a co ⁇ orate bond origination via a single-price auction.
• states of the auction may include NOT OPEN, OPEN, WITHDRAWN, PRICING, CLOSED, RUNNING, ALLOCATED, and FILLED.
• time is a required component ofthe auction, and each phase may be captured in the system as a state.
• each state is strictly independent from the rest: the auction is in exactly one state at any given time, no two states overlap, and there is no period of time that is not covered by exactly one state.
• the transition from one state to the next is atomic.
• the auction is not yet open. In an embodiment of the invention, this state begins at the instant the auction is first created in the system and continues until the transition to the OPEN state. No positions may be created, modified, or cancelled. All auctions are created in this state, and this is a state into which a transition from another state may not be made. The method and system ofthe present invention may only transition to the OPEN state from the NOT_OPEN state.
• the auction is open, and positions from qualified accounts and authorized users can be created, modified, or cancelled.
• this state begins at the moment the auction is opened and continues until the transition to the PRICING state or the WITHDRAWN state. Due to vagaries of system timing, this state may not be used as the definitive control over when position operations are accepted by the method and system ofthe present invention. It may be expected that the duration of this state will be from the openTime auction attribute through the closeTime auction attribute. See discussion below about timing.
• the auction is withdrawn. This state begins at the moment the auction is withdrawn and continues indefinitely, or until it is reset to the OPEN state. It is used to signal that an auction has been suspended or cancelled. In an embodiment ofthe invention, no position operations are accepted, though some positions may already exist in the method and system of the present invention.
• the system In the PRICING state, the system is being prepared to accept final pricing items. This state begins at the moment as close as possible to immediately following a close time and ends at the transition to the CLOSED state or the
• WITHDRAWN state During this state, position operations are only allowed by those users with a syndicate role authorized.
• a new position for the syndicate may be entered in order to effect a syndicate long position; a total available auction attribute may be modified during this state. This amount may be different from the auction attribute announced size, and can be used to effect a syndicate short position.
• the auction In the CLOSED state, the auction is closed, and no further position operations are allowed.
• the state begins at the moment the syndicate manager closes the auction and ends when the auctioneer transitions the auction to the RUNNING state.
• the auctioneer In the RUNNING state, the auctioneer, is in the process of calculating the clearing value and generating allocations. In an embodiment ofthe invention, queries to the book may produce intermediate results. If an e ⁇ or occurs in the RUNNING state, the auction is reverted to the CLOSED state and all allocations are cancelled. At the successful conclusion of allocation generation, the state is changed to ALLOCATED.
• the auction has been allocated, and executions have been created and are available.
• the final auction attributes such as coupon, price, and other attributes, may be computed and published by users who have the syndicate role authorized.
• the treasuries position attribute may be modified for positions that received a fill; this time ends at a close time + final pricing time but does not start until this state is entered.
• the auction In the FILLED state, the auction is filled, and no position operations or auction operations are allowed. Fills may be transmitted to third parties, such as clearing brokers, winning bidders, and/or other parties.
• This state begins when the auctioneer has finished generating fills, and the FILLED state may continue indefinitely.
• time in an auction may be handled as follows. Normal position operations may be allowed at certain times. When a position operation is attempted, the position is given a timestamp by the order management system ofthe method and system ofthe present invention. In an embodiment ofthe invention, this timestamp is assigned the earliest possible time in the order management system to allow for the earliest value to be used. This timestamp improves fairness and consistency, in that different operations may take differing amounts of time, so obtaining a proposed timestamp reduces this variation. In an embodiment ofthe invention, this timestamp is then rounded down to the nearest hundredth of a second.
• a proposed timestamp may be checked against an open time; if the timestamp is greater than or equal to the open time, the timestamp is checked against the close time; if the timestamp is less than the close time, then the state ofthe auction is checked; if the state ofthe auction is not
• time issues are also addressed with regards to priority for competitive and non-competitive bids.
• a timestamp is recorded by the order management system for auditing pu ⁇ oses. If the operation results in a priority timestamp being reset, the timestamp ofthe last change for the position is used.
• timing of evaluation for an auction may be associated with an auction attribute evallnterval, which is expressed in seconds.
• specific times of evaluation may be calculated by working backwards from the close time, so that the final evaluation interval ends precisely at the close time.
• those who define auctions may be cautioned against using an evallnterval that makes for confusing timestamps.
• an end user may initiate an auction ofthe method and system of the present invention by logging into the auction server 604 in order to identify the end user to the server.
• Data transmitted to and from the website may be secured via a well-known encryption mechanism.
• Figure 7 shows an exemplary login screen for the present invention.
• An end user such as an investor, enters the investor's account number 701 and password 702. The user may receive an account number 701 and password 702 after registering with the method and system ofthe present invention.
• an investor in order to register with the method and system ofthe present invention, an investor may open an account by filling out a customer application form, signing a customer agreement and participation agreement, and receiving approval from a customer account staff associated with the method and system ofthe present invention.
• an investor may use an existing account with a third party broker-dealer designated by staff associated with the method and system ofthe present invention as bidder conduits.
• the end user is also prompted to enter an auction key 704.
• each auction is announced one to two days ahead of time. Registered participants are notified of an auction electronically. Auctions move rapidly, usually lasting two hours. When registered participants are notified electronically, they may receive an auction key 703 for that given auction.
• Figure 8 shows details for the auction, including a title 801 and initial terms 802, which may include such terms as the issuer, an issue size, a maturity date, a coupon rate, a settlement date, settlement terms, a type of issue, coupon dates, a structure, a format, a quality rating, a benchmark treasury, a maximum benchmark rate, a minimum/maximum spread, a protected spread, an auction date and time, a pricing date and time, a maximum purchase limit, a minimum and multiple investment, a listing designation, soft dollar terms, names of co-managers, and a selling concession.
• the method and system of the present invention checks a security database to match the account number 701 and password 702 information entered by the end user. If the information entered matches an end user registered in the system, the system checks the auction key 703 entered by the end user. If the end user is properly registered and the auction key 703 entered is correct, the end user is shown a pre- auction screen as exemplified in Figure 9.
• auction start 903 shows the start time for the auction
• auction finish 904 shows the ending time for the auction.
• Min/max spread 905 shows a largest and smallest bid spread in basis points over a benchmark Treasury allowed during the auction.
• Protected spread range 906 shows a maximum spread range, under an initial bid, that an end user may modify a final bid, without canceling the end user's existing competitive bid. Improving an initial bid by more than the protected spread range results in cancellation ofthe original bid and entry of a new bid with a new timestamp.
• the protected spread range 906 is a 4 basis point spread.
• Benchmark Treasury 907 relates to a chosen reference U.S. Treasury security of comparable maturity to the bonds being auctioned. The benchmark Treasury yield may be used to price the bond after the auction. In an embodiment ofthe invention, if the benchmark Treasury yield is above the maximum rate at pricing, the issuer is allowed, but not required, to cancel the auction.
• This cumulative bid chart provides a clue to the end user as to what bps the end user may have to bid in order to have a feasible chance at successfully winning the auction.
• the end user knows that a final bid of 105 bps would presently garner no legitimate chance of winning because there are already more than $450 million worth of bids at 104 bps and below, and the total amount of bonds up for auction is between $300 million and $450 million. Only initial bids, not final bids, are shown by the cumulative bid chart 902, but the protected spread range 906 does provide a guide for the end user as to where the final bids may fall.
• the cumulative bid chart 1002 is color coded into three colors, one color for bids that may be above a hypothetical clearing price, a second color for bids that may or may not be above the clearing price, and a third color for bids that would be below the clearing price.
• a nominal bid chart 1102 is communicated to the end user, as shown in Figure 11.
• Nominal bid chart 1102 shows the number of initial bids, grouped in bar graph form, for each basis point spread. Also shown is the quantity of bonds initially requested at each basis point spread. In the example shown in Figure 11, there are only two initial bids at 103 bps, but they account for a large quantity of bonds ($110 million worth at 103 bps).
• the nominal bid chart 1102 is color coded into three colors, one color for bids that may be above a hypothetical clearing price, a second color for bids that may or may not be above the clearing price, and a third color for bids that would be below the clearing price.
• a bid data table 1202 is communicated to the end user, as shown in Figure 12.
• Bid data table 1202 shows each bid, ordered by bps.
• the first bid shown is a noncompetitive bid "N" at a quantity of 10 timestamped at 9:00 ET.
• the entries in the bid data table 1202 are color coded into three colors, one color for bids that may be above a hypothetical clearing price, a second color for bids that may or may not be above the clearing price, and a third color for bids that would be below the clearing price. If there are too many bids to display in one screen for the bid data table 1202, the end user may click or select the see remaining bids button to show additional bids.
• the end user may elect to place a bid by entering bid information in the place bid window 1201.
• Place bid window 1201 appears on the end user's screen when the auction begins and remains on the user screen if the user chooses to cycle through the various bid history charts and tables.
• the end user may choose to place a competitive bid 1203, a non-competitive bid 1208, or both a competitive bid 1203 and a non-competitive bid 1208.
• Size 1205 is the bid amount, in millions.
• the minimum competitive bid is $1 million and can be increased in increments of $1,000.
• the minimum non-competitive bid is $1,000 and can be increased in increments of $1 ,000.
• An investor may increase the size of an existing bid by up to 50% and keep the original timestamp. In an embodiment ofthe invention, increasing the size of a bid by more than 50% will result in cancellation ofthe original bid and entry of a new bid with a new timestamp 1204.
• the end user must also enter an initial bid 1206 and a final bid 1207.
• Initial bid 1206 is the spread in basis points of a competitive bid, which is revealed anonymously to other investors.
• the final bid 1207 can only be set at or below the initial bid but may not differ from the initial bid by more than the protected spread range 906.
• the final bid 1207 may be changed at any time prior to the end ofthe auction. Setting the final bid 1207 below the initial bid 1206 by more than the protected spread range will result in cancellation ofthe original bid and entry of a new bid with a new timestamp 1204.
• max bid 1210 is the maximum amount a specific investor may bid in a given auction. When added together, the size of an investor's competitive bid 1203 and noncompetitive bid 1208 may not exceed the maximum bid size indicated by max bid 1210. In the example shown in Figure 12, the max bid 1210 is $75 million.
• the confirm bid screen shown in Figure 13 may be communicated to the end user. If the end user has improperly entered bid information, such as by entering a bid that exceeds the maximum bid allowed for a specific investor, an e ⁇ or screen such as the one shown in Figure 20 is communicated to the end user. In Figure 20, the e ⁇ or 2001 describes the mistake to the user in the place bid 1201 window. In the example shown in Figure 20, the bid exceeded the maximum bid allowed, is communicated to the user.
• the confirm bid screen shown in Figure 13 may be communicated to the user.
• Confirm bid window 1301 appears, reminding and summarizing the end user's previously entered bid information. If the end user has made a mistake or changes his or her mind, the end user may click or select back 1302 to return to a previous place bid screen. If the end user selects confirm bid 1303, the current bid status screen, as shown in Figure 14, is communicated to the end user.
• Current bid status window 1401 contains a current status column 1402 and a modify column 1403. Current status column 1402 displays the present bid or bids ofthe end user. Also communicated to the user is total bid 1404, which is the sum of competitive bid 1203 and non-competitive bid 1208.
• the end user may elect to change the size 1205 ofthe bid.
• the user may change the spread for the final bid 1207, subject to constraints such as the protected spread range 906.
• another constraint on modifying the size 1205 ofthe bid is that the size a bid may be increased by up to
• the size of a bid cannot be decreased without canceling it.
• An investor may cancel bids at any time during an auction.
• the method and system ofthe present invention may exclude bidders for any reason, including activity that is disruptive to the auction process.
• investors are given a maximum bid size limit that varies with credit and/or other methods established by the method and system ofthe present invention.
• the size of an investor's competitive bid and noncompetitive bid may not exceed the maximum bid size.
• a screen such as the one shown in Figure 15 is shown to the user.
• the end user has chosen to modify the final bid 1207 for the end user's competitive bid 1203.
• the end user may click or select back 1501 if the user has made a mistake or changed his or her mind, or the user may click or select confirm bid 1502 to accept the modification 1503 shown.
• cancel bid screen shown in Figure 21 is communicated to the user.
• the end user may choose to cancel competitive bid 2102, cancel non-competitive bid 2103, or cancel both bids 2104.
• the review bid window 1601 is communicated to the end user as shown in Figure 16.
• a notation 1602 appears next to the unprotected improper final bid 1207, and a warning 1603 reminds the end user that accepting the final bid would result in the loss ofthe current timestamp 1204. If the end user changes his or her mind, he or she may click or select back 1604. If the end user wishes to continue with the new bid 1606, and therefore losing the old timestamp 1204, the end user may select submit bid 1605.
• a successful purchase window 1701 is communicated to the end user, as exemplified by the screenshot in Figure 17.
• Total successful purchase 1704 shows the total purchase amount, in millions of dollars.
• soft dollars available 1702 shows the portion ofthe selling concession designated by an investor to be paid to a non- underwriting broker-dealer.
• a portion ofthe selling concession on each deal will be available to investors on a soft dollar basis.
• winning bids with earlier timestamps are given a greater fraction ofthe selling concession in soft dollars.
• Investors may assign soft dollars to accounts of their choice.
• investors have up to 24 hours after a deal prices to complete their soft dollar designations.
• Size of benchmark for sale 1703 allows an investor to set an amount ofthe benchmark Treasury to sell, up to 15 minutes after the end ofthe auction.
• an end user may set and change the amount ofthe benchmark Treasury bonds the end user wishes to sell. The sale may be made at the prevailing market price at the time the deal prices, or approximately 30 minutes after the conclusion of an auction.
• Auction results 1705 shows a clearing spread 1706, a final deal size 1707, and a time of final pricing 1708.
• Clearing spread 1706 shows the lowest spread in basis points over the benchmark Treasury that results in the sale of all ofthe bonds up to the final deal size 1707.
• Final deal size 1707 shows the aggregate number of bonds to be sold and may be set by the issuer ofthe bonds a prespecified time before the end of auction.
• Time of final pricing 1708 shows the final terms of a bond issue, with for example, the yield, price, and coupon set approximately one half-hour after the end ofthe auction. If an end user fails to make one or more successful bids at the conclusion of the auction, a screen such as the one shown in Figure 18 and continued in Figure 19 is communicated to the end user.
• Auction results 1801, the end user's bid or bids 1803, and initial auction terms 1802 are communicated to the unsuccessful end user.
• the method and system ofthe present invention uses a modified Dutch Auction format.
• a Dutch Auction winning bidders pay a market-clearing price, that is, the highest price that sells out all securities offered in the auction.
• orders are filled working from the lowest-spread bids up to the spread that sells out the entire offering. All who bid below the clearing spread have their orders filled at the clearing spread.
• Bids at the clearing spread are awarded in timestamp order. In the event of ties in spread and timestamp, bonds are awarded pro-rata. If the last accepted bid at the clearing spread requests more bonds than are available, all remaining bonds may be awarded within the final deal size to the bidder.
• the auction will be cancelled. If there are not enough orders to fill the final deal size announced by the issuer, the auction will also be cancelled.
• successful bidders at the end of an auction are notified electronically.
• Basic information about the auctioned bond are publicly available at a website associated with the method and system ofthe present invention after the conclusion of an auction. Such information may include, for example, size, yield, coupon, and maturity. Further details about the outcome of an auction and the demographics of bidders may be made available to those who are awarded bonds.
• bond pricing occurs approximately 30 minutes after the auction terminates.
• the clearing spread is added to the benchmark treasury rate to obtain the auction yield.
• the coupon rate on the bond may become the auction yield rounded down to the nearest 1/8%.
• the bond price that co ⁇ esponds to the auction yield and coupon rate may be calculated to three decimal places. Bonds may be made available to trade shortly after pricing, subject completion of necessary documentation.

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• 2001
  • 2001-03-02 AU AU2001253835A patent/AU2001253835A1/en not_active Abandoned
  • 2001-03-02 WO PCT/US2001/040236 patent/WO2001065908A2/en not_active Application Discontinuation
  • 2001-03-02 CA CA002440836A patent/CA2440836A1/en not_active Abandoned
  • 2001-03-02 EP EP01927379A patent/EP1264246A1/de not_active Withdrawn
  • 2001-03-02 CN CNA018091105A patent/CN1543619A/zh active Pending

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