US20220148086A1

US20220148086A1 - Apparatuses, methods and systems for a computationally efficient volatility index platform

Info

Publication number: US20220148086A1
Application number: US17/571,818
Authority: US
Inventors: John Joseph Wiesner; John Balaam Alexander Kerpel
Original assignee: Chicago Mercantile Exchange Inc
Current assignee: CME Group Inc
Priority date: 2018-08-27
Filing date: 2022-01-10
Publication date: 2022-05-12
Also published as: EP3617984A1; US11257155B2; US20200065900A1

Abstract

The disclosed embodiments facilitate efficient calculation, determination, generation, management, analysis and/or communications relating to volatility indexes used to measure volatility of a market parameter, such as interest rates. More particularly, the disclosed embodiments relate to a type of futures contract whose underlier is a strip of options contracts whose underlier is another futures contract. Referred to as a “Premium over Parity” (“POP”) futures contract, the underlying strip of options contracts are characterized by strike prices defined in terms of a relationship with the market price of the options contracts valued at the settlement/expiration of the POP futures contract, e.g. +/−1, 2, 3, and 4 bp from the options contract value at expiration. This POP futures contract is then used as a single input to a volatility computation which enables rapid computation thereof.

Description

RELATED APPLICATIONS

The present application is a continuation of U.S. application Ser. No. 16/404,096, filed May 6, 2019 which is claims the benefit of the filing date under 35 U.S.C. § 119(e) of U.S. Provisional Application Ser. No. 62/723,197, filed Aug. 27, 2018, the entirety of which are incorporated by reference herein and relied upon.

BACKGROUND

A futures contract provides a mechanism to buy or sell a particular commodity or asset (an underlying asset) at a predetermined price at a specified time in the future. Because futures contracts specify many of the contract conditions (e.g., particular terms such as units, or the underlying asset), they are referred to/considered standardized contracts. Some users buy (or sell) futures contracts because they wish to hold the contract to expiration, i.e. they wish to obtain (or deliver) the underlying asset at the price and time specified in the standardized futures contract. However, other users buy (or sell) futures contracts with the sole intention to subsequently sell (or buy) those futures contracts prior to expiration so as to earn profits based on a price movement of the futures contracts themselves. Others buy or sell futures contracts to hedge or offset risks. Regardless, there is a large class of users that engage in futures trading who have no intention or desire to hold the contracts to expiration, i.e. to acquire or sell the underlying asset. For these users, many aspects of futures trading, as well as the electronic systems which facilitate futures trading, represent computational, logistical and/or administrative difficulties.
For example, futures contracts are typically divided into several (e.g., four) expiry dates spread throughout the calendar year. When the expiration date of a futures contract occurs, that contract can no longer be traded as the electronic trading systems disable the trading thereof. Holding a contract, i.e. a position therein, past the expiration date triggers the electronic trading systems to process the obligations for the futures contract holder to settle the obligation, e.g., purchase (or sell) the underlying asset or otherwise settle the obligation in cash. Users who do not wish to buy or sell the underlying asset roll their contracts that are close to expiring (i.e., a near month) to a different month (e.g., a deferred month), i.e., prior to expiration they undertake transactions in the electronic trading systems to sell the about-to-expire contract and acquire a new later-expiring contract with the desired economic parameters, such as to approximate what they sold as closely as possible, to avoid the costs and obligations associated with settlement of the contracts. Rolling futures contracts can be a computational burden on the computer systems of traders who simply want to participate in futures contract trading as asset managers, e.g., traders who do not want to actually take delivery of, or deliver, an underlying asset.
Moreover, as futures contracts are standardized, traders must buy and sell futures contracts in the units in which the futures contract is offered, or made available for trading by the electronic trading/exchange computing systems of a futures exchange. For example, an exchange computing system such as the CME may offer a futures contract for crude oil that specifies 1,000 barrels of crude oil. An exchange computing system that lists futures contracts is configured to allow transactions in specifically configured products, i.e. specific quantities, and does not typically allow traders to buy or sell fractions of futures contracts. Accordingly, a trader cannot use the crude oil futures contract to take a position in 1,200 barrels. A trader can only buy or sell whole (non-decimal/non-fractional) units of the futures contract. If a trader has an influx of additional cash to be invested, he/she may not be able to allocate all of that cash in futures contracts. The cash may remain unused (idle cash) in the trader's account.
A stock index or stock market index is a measurement of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments. In particular, since it would be too difficult to track every single security that trades in the U.S., the publishers of an index take a smaller sample of the market that is representative of the whole—similar to the way pollsters use surveys to gauge the sentiment of the population based on a subset thereof. The measurement derived from that smaller sample is what is typically referred to by the term “index”, and, in the case of sampling of stocks, is a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market.
Investors and other market participants use indexes to track the performance of the stock market. Ideally, a change in the price of an index represents an exactly proportional change in the stocks included in the index: If an index goes up 1%, for example, it means the stocks that comprise that index have also increased by an average of 1%.
In 1896, Charles Dow—who with fellow reporter Edward Jones founded Dow Jones & Company—created the Dow Jones Industrial Average (DJIA), the second-oldest stock market index in the world (the oldest is the Dow Jones Transportation Index, also created by Dow). At that time, the DJIA contained 12 publicly-traded industrials, including General Electric—the only original constituent that remains in the index. Today, the Dow is a benchmark that tracks 30 of the largest and most influential companies in the U.S. and is one of the best-known indexes in the world.
Before the digital age, calculating the price of a stock market index had to be kept as simple as possible. The original DJIA was calculated using a simple average: add up the prices of the 12 companies and divide that number by 12. These calculations made the index truly nothing more than an average, but it served its purpose.
Today, the DJIA uses a different methodology called price-based weighting, where the components are weighted in accordance to their prices. To calculate the index, the current prices of the 30 stocks are added together and then divided by what's known as the Dow Divisor—a number that's used to maintain the historical continuity of the index. This number is continually adjusted to account for market changes like stock splits, spinoffs and any changes to the Dow constituents. In 2008, for example, the Dow Divisor value was 0.125553. Today, it's 0.14602128057775.
Most indexes weigh companies based on market capitalization instead of price. If a company's market cap is $1,000,000 and the value of all stocks in the index is $100,000,000, the company would be worth 1% of the index. Indexes are continually calculated to provide accurate reflections of the market throughout the trading session.
It's important to note that an index is essentially a list of stocks; anybody can create one. This was especially true during the dotcom bull market, when many publications created an index representing a section of new economy stocks. What sets apart the well-known indexes—such as the Dow and the S&P 500—from the smaller ones is the reputation of the company that puts out the index. For example, the Dow and the S&P 500 are both owned by S&P Dow Jones Indices, the world's largest global resource for index-based concepts.
The S&P 500 is designed to reflect the U.S. equity markets and, through the markets, the U.S. economy. It's widely regarded as the best single measure of large-cap U.S. stocks, and, like the Dow, has become synonymous with “the market.” The index includes 500 top U.S. companies in leading industries and captures about 80% coverage of available market capitalization. Created in 1957, it was the first U.S. market-cap-weighted stock market index. While the Dow used to be the main gauge of economic health in the U.S., the S&P 500 has become the leading stock index because of its broader scope.
The S&P 500 index covers all major sectors of the market, and some of its top constituents (by index weight) include Apple, Microsoft, Facebook, Amazon, Berkshire Hathaway B, Johnson & Johnson, ExxonMobil and J.P. Morgan Chase (current as of Oct. 23, 2017). Although the S&P 500 contains 500 constituents, it may contain greater than 500 “constituent trading lines” since some companies are represented by multiple share classes.
Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.
Volatility refers to the amount of uncertainty or risk related to the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security's value does not fluctuate dramatically and tends to be more steady.
The Volatility Index, or VIX®, is an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options, where implied volatility represents the expected/future volatility of a stock over the life of the option on that stock. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk. The VIX® is often referred to as the “investor fear gauge.” Fear, volatility, and the index move up when stock prices are falling, and investors are fearful. The index, volatility, and fear decline when stock prices are rising.
The VIX® is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, i.e., options contracts whose underlying value is based on the value of the S&P 500 index, and then estimates how volatile those options will be between the current date and the option's expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.
The CBOE provides the following formula as a general example of how the VIX® is calculated:
$σ^{2} = \frac{2}{T} \sum_{i} \frac{Δ K_{i}}{K_{i}^{2}} e^{RT} Q (K_{i}) - {\frac{1}{T} [\frac{F}{K_{0}} - 1]}^{2}$
The calculations behind each part of the equation are rather complex for most people who don't do math for a living. The following is an example calculation:
$σ = \sqrt{\begin{matrix} {(\frac{21, 600}{525, 600}) \times 0.66472 \times [\frac{61, 920 - 43, 200}{61, 920 - 21, 600}] + (\frac{61, 920}{525, 600}) \times \\ 0.063667 \times [\frac{43, 200 - 21, 600}{61, 920 - 21, 600}]} \times \frac{525, 600}{43, 200} ? \end{matrix}}$ $σ = 0.253610$ $VIX = 100 \times σ = 25.36$ $? indicates text missing or illegible when filed$
The VIX® is calculated using a “formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls.” Using options contracts that expire in 16 and 44 days, respectively, in the example below, and starting on the far left of the formula, the symbol on the left of “=” represents the number that results from the calculation of the square root of the sum of all the numbers that sit to the right multiplied by 100.
An options contract gives the holder/purchaser thereof the option, at any time prior to a defined expiration date, to buy from the options contract seller, in the case of a “call” options contract, or sell, in the case of a “put” options contract, an underlying asset, e.g. a commodity or financial instrument, at a set price, referred to as the “strike price.” Physically settled options contracts require physical exchange of the underlying asset upon exercise of the option whereas cash settled options contracts are settled via a cash payment from one party to the other. When the current price of the underlying asset exceeds the strike price of a call option, or falls below the strike price of a put option, the options contract is said to be “in the money” (ITM). When the current price of the underlying asset exceeds the strike price of a put option, or falls below the strike price of a call option, the options contract is said to be “out of the money” (OTM). When the current price of the underlying asset is the same as the strike price, the options contract is said to be “at the money” (ATM). The price of an options contract, referred to as a “premium,” tends to decrease (decay) as the expiration thereof approaches and the value of the options contract, i.e. the relationship of the strike price to the actual price of the underlying asset, becomes more certain. An increase in the expected volatility increases the price of an option. Greater expected price swings will increase the expected positive payoff of an option. Therefore, the greater the expected volatility, the greater the price of the option. Options trading and volatility are intrinsically linked to each other in this way.
In particular, there are four main factors that influence the price of an option:
Price changes in the underlying asset;
Changes in the implied volatility in the underlying asset;
Time value decay of the option; and
Prevailing interest rates.
These factors influence option buyers and sellers in different ways which may be summarized using the Greeks, i.e., numerical values that help quantify the risk and reward profile of a given option or option strategy. Options traders use Greeks to quickly and easily understand the complex interplay of these factors in a way that is mathematically exact.
Many options traders rely on the “Greeks” to evaluate option positions and to determine option sensitivity. The Greeks are a collection of statistical values that measure the risk involved in an options contract in relation to certain underlying variables. Popular Greeks include Delta, Vega, Gamma and Theta. Rho is another value which may be used.
Δ Delta—Sensitivity to Underlying's Price: Delta measures an option's price sensitivity relative to changes in the price of the underlying asset, and is the number of points that an option's price is expected to move for each one-point change in the underlying. Delta is important because it provides an indication of how the option's value will change with respect to price fluctuations in the underlying instrument, assuming all other variables remain the same. Delta is typically shown as a numerical value between 0.0 and 1.0 for call options and 0.0 and -1.0 for put options. In other words, options Delta will always be positive for calls and negative for puts. Call options that are out-of-the-money will have Delta values approaching 0.0; in-the-money call options will have Delta values that are close to 1.0. It should be noted that Delta values can also be represented as whole numbers between 0.0 and 100 for call options and 0.0 to −100 for put options, rather than using decimals.
v Vega—Sensitivity to Underlying's Volatility: Vega measures an option's sensitivity to changes in the volatility of the underlying, and represents the amount that an option's price changes in response to a 1% change in volatility of the underlying market. The more time that there is until expiration, the more impact increased volatility will have on the option's price. Because increased volatility implies that the underlying instrument is more likely to experience extreme values, a rise in volatility will correspondingly increase the value of an option. Conversely, a decrease in volatility will negatively affect the value of the option.
Γ Gamma—Sensitivity to Delta: Gamma measures the sensitivity of Delta in response to price changes in the underlying instrument and indicates how Delta will change relative to each one-point price change in the underlying. Since Delta values change at different rates, Gamma is used to measure and analyze Delta. Gamma is used to determine how stable an option's Delta is: Higher Gamma values indicate that Delta could change dramatically in response to even small movements in the underlying's price. Gamma is higher for options that are at-the-money and lower for options that are in- and out-of-the-money. Gamma values are generally smaller the further away from the date of expiration; options with longer expirations are less sensitive to Delta changes. As expiration approaches, Gamma values are typically larger, as Delta changes have more impact.
Θ Theta—Sensitivity to Time Decay: Theta measures the time decay of an option—the theoretical dollar amount that an option loses every day as time passes, assuming the price and volatility of the underlying remain the same. Theta increases when options are at-the-money, and decreases when options are in- and out-of-the money. Long calls and long puts will usually have negative Theta; short calls and short puts will have positive Theta. By comparison, an instrument's whose value is not eroded by time, such as a stock, would have zero Theta.
Rho: Changes in Interest Rates: Rho measures the impact of changes in interest rates on an option's price. Since interest rates don't change very frequently, we will not cover it in this tutorial, but they are frequently used in assessing arbitrage opportunities and with long-term options (e.g. long-term equity anticipation securities—or LEAPS) that may be influenced by interest rates over time. For example, an arbitrage trader may pay more for call options and less for put options when interest rates rise because they can hedge the positions and earn interest on any free capital at the risk-free rate. A LEAPS investor may also pay attention to Rho when determining the impact of rising or falling interest rates over the years.
In the VIX formula above, the first set of numbers to the right of the “=” represents time. This figure is determined by using the time to expiration in minutes of the nearest term option divided by 525,600, which represents the number of minutes in a 365-day year. Assuming the VIX® calculation time is 8:30 a.m., the time to expiration in minutes for the 16-day option will be the number of minutes within 8:30 a.m. today and 8:30 a.m. on the settlement day. In other words, the time to expiration excludes midnight to 8:30 a.m. today and excludes 8:30 a.m. to midnight on the settlement day (full 24 hours excluded). The number of days we'll be working with will technically be 15 (16 days minus 24 hours), so it's 15 days×24 hours×60 minutes=21,600. Use the same method to get the time to expiration in minutes for the 44-day option to get 43 days×24 hours×60 minutes=61,920.
The result is multiplied by the variance estimate from the sum of the options that expire in 15 days in the example, represented in the example by 0.066472.
The result is then multiplied by the result of the difference between the number of minutes to expiration of the next term option (61,920) minus the number of minutes in 30 days (43,200). This result is divided by the difference of the number of minutes to expiration of the next term option (61,920) minus the number of minutes to expiration of the near-term option (21,600). Just in case you're wondering where 30 days came from, the VIX® uses a weighted average of options with a constant maturity of 30 days to expiration.
The result is added to the sum of the time calculation for the second set of options, which is 61,920 divided by the number of minutes in a 365-day year (526,600). Just as in the first calculation, the result is multiplied by the variance estimate from the sum of the options that expire in 44 days in the example, represented in the example by 0.063667.
Next the process discussed above is repeated, multiplying the result of step 4 by the difference of the number of minutes in 30 days (43,200), minus the number of minutes to expiration of the near-term options (21,600). We divide this result by the difference of the number of minutes to expiration of the next-term option (61,920) minus the number of minutes to expiration of the near-term options (21,600).
The sum of all previous calculations is then multiplied by the result of the number of minutes in a 365-day year (526,600) divided by the number of minutes in 30 days (43,200).
The square root of that number multiplied by 100 equals the VIX®.
The order of operations is important to the calculation.
Volatility is useful to investors, as it gives them a way to gauge the market environment. It also provides investment opportunities. Since volatility is often associated with negative stock market performance, volatility investments can be used to hedge risk. Of course, volatility can also mark rapidly rising markets. Whether the direction is up or down, volatility investments can also be used to speculate.
For example, on June 13, 2016, the VIX® surged by more than 23%, closing at a high of 20.97, which represented its highest level in over three months. The spike in the VIX® came about due to a global sell-off of U.S. equities.
As one might expect, investment vehicles used for this purpose can be rather complex. VIX® options and futures provide popular vehicles through which sophisticated traders can place their hedges or implement their hunches. Professional investors use these on a routine basis.
Exchange-traded notes—a type of unsecured, unsubordinated debt security—can also be used. ETNs that track volatility include the iPath S&P 500 VIX® Short-Term Futures (VXX) and the VelocityShares Daily Inverse VIX® Short-Term (XIV).
Exchange-traded funds offer a somewhat more familiar vehicle for many investors. Volatility ETF options include the ProShares Ultra VIX® Short-Term Futures (UVXY) and ProShares VIX® Mid-Term Futures (VIX®M).
The VIX® Index has enjoyed multiple successful applications well beyond the scope of its original purpose as a complement to OTC variance swap trading—as a fee input for variable annuities, a hedge for CDS positions, a hedge for forward-starting vega exposure in structured products, and even as a means for retail market participants to bet on “fear in the market.”

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 depicts a computer network system, according to some embodiments.

FIG. 2 depicts a general computer system, according to some embodiments.

FIG. 3A depicts a storage data structure, according to some embodiments.

FIG. 3B depicts another storage data structure, according to some embodiments.

FIG. 3C depicts yet another data structure, according to some embodiments.

FIG. 4 depicts a match engine module, according to some embodiments.

FIG. 5 depicts a block diagram of an exchange computing system including an index module, according to some embodiments.

FIG. 6 depicts a more detailed block diagram of the index module of FIG. 5.

FIGS. 7 and 8 depict a relationship between POP futures prices and VolPOP values according to one embodiment.

FIG. 9 depicts a comparison between VIX and VolPOP for TY.

FIGS. 10 and 11 depict a comparison of Log Variance Swap outcomes.

FIGS. 12-16A and 16B depict an example of a VIX® strip payoff versus the Variance Swap Payoff.

FIG. 17 illustrates an example flowchart showing example operation of the system of FIGS. 1-6.

DETAILED DESCRIPTION

The disclosure describes APPARATUSES, METHODS AND SYSTEMS FOR A COMPUTATIONALLY EFFICIENT VOLATILITY INDEX PLATFORM that provides a particular practical application which facilitates efficient calculation, determination, generation, management, analysis and/or communications relating to volatility indexes used to measure volatility of a market parameter, such as interest rates. More particularly, the disclosed embodiments relate to an improved electronic transaction processing system for an electronic trading system which generates and enables trading of a specific type of futures contract whose underlier is a set or bundle, also referred to as a “strip”, of options contracts, the underlier of each of which is another futures contract, which will be identified and delivered at the time of settlement. That is, the set of options contracts are not specifically identified in the futures contract but are instead specified by reference/definition, e.g. they are defined based on a yet to be determined value of a parameter, e.g. the settlement price of the underlying futures contract, such that when the value of the parameter is determined, e.g. at the time the futures contract is valued or settled, the set of options contracts may be identified based on that determined value. At settlement, the identified options contracts are delivered.
While the set or bundle of options contracts may also be referred to as a “strip”, it will be appreciated that a strip refers to a set or bundle of options contracts having a serial component or relationship therebetween, e.g. they are all characterized by the same expiration date but with sequential, but not necessarily consecutive, strike prices. In one embodiment, a strip will contain a subset of options contracts having particular strike prices, e.g. covering a particular sub-range of strike prices, selected from a larger set of available options contracts at a range of strike prices all expiring on the same day. It will be appreciated that this subset may in fact comprise the entire set. The disclosed embodiments are applicable to any set of options contracts, whether considered a strip or not.
The disclosed futures contract is referred to as a “Premium over Parity” (“POP”) futures contract, or Pop future. Each options contract, of the set/bundle/strip underlying the POP future, is characterized by a relative strike price defined in terms of a relationship with the market price of that option contracts' underlying futures contract at the settlement/expiration of the POP futures contract, e.g. +/−1, 2, 3, and 4 points from the underlying contract value determined at settlement/expiration of the POP future. At that time, the specific strike prices are determined and the actual options contracts at those particular strike prices are identified. The holder of the short position in the POP futures contract then delivers, and the holder of the long position receives, the underlying strip/bundle of options contracts at a collective price determined in accordance with the then market price of their underlying futures contract. While POP futures will be generally discussed in terms of their mechanics at final settlement, it will be appreciated that the disclosed mechanisms, save for the actual delivery of underlying options contracts, may be applied to the computation of periodic, e.g. daily, variation margin to be collected from/credited to holders of positions in POP futures contracts as part of an Exchange's risk management processes to mitigate risk of loss.
For example, where the underlying options contracts underlying the POP futures contract are options contracts on US treasury futures, upon expiration (or at any time of valuation such as at a time when variation margin is computed) of the POP futures contract, the price of the underlying US treasury futures contract to be delivered may be $121.00 and, accordingly, the set, e.g. strip or bundle, of options contracts may include those with strike prices within 5 points of that value, e.g. Puts struck at $116.50, $117.50, $118.50, $119.50 and $120.50, and Calls struck at $121.50, $122.50, $123.50, $124.50 and $125.50, each being an option contract at a particular strike price for a treasury futures contract. The disclosed embodiments further relate to an index which may be objectively, rapidly and efficiently derived based on the trading of the above described POP futures contracts whose underlier is a strip of options contracts whose underlier is another futures contract. The efficiency with which the disclosed index may be derived enables not only rapid generation but also more frequent generation thereof. The objective basis on which the disclosed index is computed ensures transparency and assurance of accuracy.
The disclosed embodiments further facilitate, enhance, generate, enable and/or provide (“provides”) calculation, determination, generation, management, analysis and/or communications relating to volatility indexes/indices, the associated underlying instruments (and/or the like), and/or financial instruments/products based on and/or influenced by the one or more volatility indexes (and/or the like), facilitating access to and utilization of future volatility. In one embodiment, using the volatility index value of the disclosed embodiments, a volatility index financial instrument may be further automatically generated and introduced into an electronic financial instrument exchange market for subsequent electronic trading among the participants thereof.
As will be appreciated, a POP futures contract may have different types of underlying options contracts, i.e. the options contracts themselves having different types of underliers, depending upon the needs of the trader. For example, in addition to options on treasury futures, a POP futures contract may use options on S&P 500 futures as the underlier. As will be discussed in more detail below, POP futures contracts provide a flexible measure of implied, i.e. expected future, volatility in different financial areas, e.g., the nature of the underlying deliverable strip of options contracts and the specific choice, i.e. parameters, of those options contracts to be delivered defines how the POP futures contract price can be used as a measure of implied volatility. For example, where the deliverable strip of options contracts contains options contracts on treasury futures, the price of the POP futures contract acts as a measure of implied interest rate volatility. Where the deliverable strip of options contains options on S&P 500 futures, the price of the POP futures contract may be used as a measure of implied equity index volatility. Using options contracts on futures contracts for particular commodities, the POP futures contract price may be used as a measure of implied volatility of the price of the particular underlying commodity. Volatility generally refers to a likelihood of something to change rapidly and/or the magnitude or range of that change, and, as used herein, typically specifically refers to the degree of variation of a trading/market price of a financial instrument over time, e.g. large swings in price over a short time period may indicate a high volatility thereof. When referring to options contracts, volatility, in most cases, refers to implied volatility, i.e. the volatility input number used in an option pricing formula, such as Black-Scholes, that generates an output equal to that specific option's market price. This implied volatility is considered a measure of the collective market's expectation of actual volatility of the option's underlying instrument. It will be appreciated that volatility may be based on other factors such as quantity or supply of a tradeable item/financial instrument, interest rate or other financial metric. As described herein, a POP future may be used to determine an implied volatility for the period of time subsequent to the expiration of the POP future and prior to the expiration of the set, e.g. strip, of options contracts.
In one embodiment, POP futures contracts may initially be offered monthly (not necessarily 30 days), i.e., with month-end expirations, and the underlier will be a strip of options contracts all expiring at the end of the subsequent month, representing that next month's worth of implied volatility, i.e. the implied volatility for the period of time subsequent to the expiration of the POP future and prior to the expiration of the strip of options contracts. As noted above, while the specific strike prices of each options contract of the strip will not be specified, the relationship of those strike prices to each other and to the settlement price at expiration will be defined by the terms of the POP futures contract according to the contract specification/definition.
As will be discussed in more detail below, POP futures contracts may have their own specific utility to traders due to the particular characteristics of the instrument, e.g. traders who have persistent gamma exposure across a range of possible underlying price points and use variance swaps to provide a hedge, could use a POP future to lock in the cost of buying a strip of options that will provide gamma exposure across a range of underlying price points, and they can also be used as a forward starting Vega hedge that includes vega convexity in way similar to what a forward starting variance swap provides. The POP future is a listed product which is able to provide these kinds of exposures for traders and is easier and cheaper to trade than variance swaps that might be issued by a bank.
Additionally, a POP futures contract, or more particularly, the price thereof established by the market as they are traded, provides an objective, transparent and computationally simplified manner of calculating implied volatility, relating to the options contracts' underlier, in a manner which may be utilized, in one implementation, as an alternative to the VIX® volatility index. More particularly, the price of the POP futures contract may represent an expected future cost of a consistent strip of options contracts that will always have the same relationship of moneyness, e.g. the relative position of the current price (or future price) of an underlying asset (e.g., a stock) with respect to the strike price of a derivative (most commonly a call option or a put option), to the underlying futures contract price at that time. A consistent strip of options contracts being a set of options contracts where each options contract of the set is consistent with its underlier, i.e. the number of options contracts, e.g. 10 or 20, in the set and their weighting, e.g. 1.0000, is readily ascertainable. The intrinsic value of an options contract relates to the “part” of an options price that comes from the option being “in-the-money”; since a POP futures contract will deliver non-ITM options only (the strike prices of the put options will be equal to or less than the price of the underlying future and the strike prices of the call options will exceed the price of the underlying futures contract), the intrinsic value will always be 0.00. This contract acts as an expected view of the cost of the underlying strip of options which can be priced in a manner similar to the VIX® volatility index.
Whereas VIX® requires more than 70 different inputs and requires considerable time and computational resources to compute, a volatility index based on POP futures contracts, referred to herein as “VolPOP,” requires only one input, i.e. the current price of the POP futures contract which may be objectively determined, and may be rapidly computed. For example, whereas VIX® may be recalculated and published every 10 seconds, VolPOP may be computed and published every millisecond without degrading performance of the computing systems. Where other index-based futures contracts are constructed based on the VolPOP index, their prices may be more frequently and more accurately computed.
In one embodiment, POP futures contracts may be generated and automatically introduced into the electronic trading system for trading. Generally, the term “xxPOP future” refers to a POP futures contract where “xx” indicates the type of futures contract underlying the options contracts which underlie the POP futures contract, as well as the VolPOPxx index generated based thereon as will be explained. For example, Other VolPOP and POP contracts may be created such as:


				Measure of
Underlying Asset of	Future			implied
Options Contract	(xx)	xxPOP	VolPOPxx	Volatility in:

Nasdaq-100 Futures	NQ	NQPOP	VolPOPNQ	Equity Markets
Corn Futures	ZC	ZCPOP	VolPOPZC	Price of corn
10 Year Treasury Note	ZN	ZNPOP	VolPOPZN	Interest rates
Futures
Gold Futures	GC	GCPOP	VolPOPGC	Price of gold

It will be appreciated that multiple POP futures contracts, in accordance with the disclosed embodiments, may be introduced for trading having the same, overlapping, consecutive or non-consecutive time periods for the same and/or different underliers. In particular, for example, the underlying set, e.g. strip/bundle of options may have any tenor that would actually exist once the POP future reaches its expiry. Furthermore, the set of options may be delivered with any amount of time left to expiry such as 90 days or 45 days or 7 days or 3 days. For example, delivery of a 30 day strip may occur 15 days after a different 30 day strip would be delivered, and the difference between the prices of these two contracts may represent the difference in expected volatility between the two “un-shared” time periods. Similar to variance swaps, holding a EOM May POP future (delivery EOM May option at the end of APR) and a June POP future and a July POP future may provide virtually the same vega exposure as a 3 month variance swap covering May June and July. And the sum of these POP futures prices divided by a T that equals 3 months (rather than just one month) may provide an annualized expected volatility number for those 3 months.
In one embodiment, an xxPOP futures contract will, at settlement, deliver a set, e.g. strip, of options contracts which includes a combination of both call and put options contracts covering an appropriately defined range of possible underlying futures prices as will be described. This range may be referred to as the “Coverage Range” and may be defined as a measure or assessment of historical riskiness of the underlying futures contract, such as a historical measure of the standard deviation of the price of the underlying futures contract. In one embodiment, Coverage Range is specified as a percentage of the settlement price or the resultant index points. This range may be determined by CME's SPAN risk management system or some other risk management system and this range may be codified in the rules defining the xxPOP futures contract settlement procedures. This Coverage Range may be product specific as some asset classes exhibit a greater or lesser historical standard deviation than other asset classes and will therefore benefit from having a larger or smaller Coverage Range. The Coverage Range is related to the deliverable set of options via two variables, N and y, where N is the number of options contracts delivered in the strip and “y,” also referred herein by “I”, is a statically defined strike price interval between those options contracts as set forth in the option's contract specifications. It will be appreciated that in alternative embodiments, the strike price interval may vary over the range of contracts, e.g. may increase or decrease by a fixed, linearly or exponentially increasing/decreasing amount between each of the N contracts of the Covered Range. The Coverage Range, where y is statically defined, is thus set equal to (N−1)*y where knowing any two of the Coverage Range, number of options contracts in the set or strike price interval allows one to solve for the third value. For example, assume an underlying index future has a final settlement value, referred to as “xxSET” of 10000 (therefore xxSET=10000) and the Coverage Range is 9%, then the Coverage Range in index points=10000*0.09=900. If the deliverable options have a fixed strike interval of 100, y is thus 100, and then N=10 by solving 900=(N−1)*100. The deliverable set of options then may include five Calls with strikes 10100, 10200, 10300, 10400 and 10500 and five Puts with strikes 10000, 9900, 9800, 9700 and 9600. Note that no Call options contract with a strike price equal to 10000 is included because in this embodiment the POP future only delivers OTM Call options; a Call option struck at 10000 is considered ATM and is therefore not included. In other embodiments, ATM options may be included in the set.
Alternatively, the strike price interval y may be expressed as a percentage rather than a fixed strike interval. In this case, y can be thought of as a minimum increment to the Coverage Range. Nonetheless, the same formula applies; if the Coverage Range is 9%, and y is 1%, 0.09=(N−1)*0.01 and N still equals 10. The answer is the same as above; the POP future delivers five OTM Calls and five OTM Puts centered at 10000.
Alternatively, the number of options contracts N in the deliverable strip may be configurable. In this case, N is set in advance in the POP future contract specification. The same formula applies. If the Coverage Range=9% and N=20, the implied y is 0.5%. In this case, the POP future delivers ten OTM Calls and ten non-ITM Puts centered at 10000.
In other embodiments, other POP futures instruments may be created which further restrict the composition of the underlying set of options contracts which may be selected for the underlier. For example, the underlying options contracts may be limited to only non-ITM Call options contracts wherein the contract may be referred to as a “xxPOPUP” futures contract, or the underlying options contracts may be limited to only non-ITM Put options contracts wherein the contract may be referred to as a “xxPOPDN” contract. These two contracts can be thought of two sides of the same POP futures described above. The POPDN contract covers the strikes at or below ATM and the POPUP futures covers the strikes above ATM. When put together they cover the entire Coverage Range. If a trader were to sell the POPUP future while simultaneously buying the POPDN future, this would be referred to as an option skew trade. The price of this spread, POPUP-POPDN is itself a skew index. If the price of this spread is zero, that would mean upside and downside risks are roughly balanced. If the price of this spread is greater than zero, more upside is anticipated; the opposite is true if the price is less than zero. Hence this skew index variation on the POP future contract of the disclosed embodiments and may represent an alternative embodiment thereof.
In another embodiment, the POPUP_tand POPDN_tprices themselves can by divided by F_t, the price of the underlying future of the set of options, generating another skew measure; e.g. percentSkew=(POPUP_t−POPDN_t)/F_t
In addition, because the POP futures contract will ultimately settle with physical delivery of the underlying options contracts, i.e. the trader bidding the price will end up owning the contracts, there is a disincentive to trade these contracts at prices which may otherwise manipulate an index derived therefrom as will be described.
In one embodiment, subsequent, immediately thereto or otherwise, to the generation and introduction of a particular POP futures contract for trading on an electronic trading system, calculation of the disclosed VolPOP index may be implemented as follows:

- The current POP future price, e.g. the current best bid, current best ask and/or a midpoint price therebetween, derived from the trading thereof on the electronic trading system, can be used to generate an annualized risk metric, VolPOP as follows:

${VolPOP}_{t} = 100 \times \sqrt{\frac{2}{T \times F_{t}^{}} \times I \times {POP}_{t}}$

- Where T is time to expiry, in years, of the options in the bundle from the date that the POP future settles (e.g. 35 days would be 35/365.)
- t is the time or date for which this calculation is applicable.
- F_tis the price of the underlying future of the options in the bundle.
- I is the interval between strike prices of the options contracts, also referred to herein as y.
- POP_tis the price of the POP future itself. Note that this could be a bid price, ask price, or the average of the two (mid) or all three, resulting in a VolPOP_t ^BID, VolPOP_t ^ASK, VolPOP_t ^MID

In the above formula only the prices for two market instruments would be needed at any given time; the F_tand the POP_t. All other inputs are known, e.g. defined by the POP future contract specification/definition specified by the Exchange.
Note that the price of the POP futures contract can be sampled, and the VolPOP index calculated, immediately upon the commencement of trading of the POP futures contract, and will represent an accurate measure of implied volatility contemporaneous with the sample. There is no need to wait for a certain amount of trades to occur or time to pass, etc., as the disclosed index does not rely on historical data, e.g. historical POP futures contract prices, or trends therein but instead represents a real-time instantaneous measurement of future expectations. In other words, as opposed to computing the value of the POP futures contract by assuming settlement, determining which options contracts would be included if settled today, and the price thereof, etc., the disclosed embodiments merely look to the then current market price for the POP futures contract, e.g. the mid-point between the current best bid/ask, representing the market's expected value, and use this as the basis for the VolPOP index calculation.
In addition, another future can be introduced into the market place via an exchange platform that would settle to the calculation of the VolPOP index value, e.g. the VolPOPNQ, using, for example, the final settlement price of the original POP futures, e.g. the NQPOP futures, contract. By using the final settlement price, at the time the VolPOP futures expires, the price to which it settles is based on the POP futures price at precisely the moment at which there is the most disadvantage to a trader to manipulating the outcome. Anyone who “bids up” (or “pushes down”) the POP future will immediately take an actual monetary hit when they pay for the strip of options that are individually priced at lower prices. That is, actual delivery of the options in the POP future helps ensure that VolPOP future does not suffer from manipulative behavior, as other similar indices may.
As was noted above, despite its popularity, VIX® suffers a variety of shortcomings that remain troublesome to many of its users. The POP futures contract design and the corresponding VolPOP index based thereon, both described herein, address many of these concerns. Notably, for market participants such as pension plans and variable annuity writers who face locally constant and persistent gamma exposure (the rate of change between an option's delta and the underlying asset's price), the disclosed POP futures mechanism may provide a useful risk management tool to roll their option positions without waiting until the options on the books actually expire.
In another embodiment, subsequent to the generation and introduction of a particular POP futures contract for trading on an electronic trading system, calculation of the disclosed percentPOP index may be implemented as follows:
The current POP future price, e.g. the best bid/ask midpoint or its best bid or offer, derived from the trading thereof on the electronic trading system, can be used to generate an annualized risk metric, percentPOP by dividing the POP_tby F_t ²and then by multiplying that quotient by I (the interval between the strikes) and by, e.g. percentPOP_t=(POP_t/(F_t)²)*(I).
In addition, another future can be introduced into the market place via an exchange platform that would settle to the calculation of the percentPOP index value, e.g. the percentPOPNQ, using the final settlement price of the original POP futures, e.g. the NQPOP, futures contract.
The vega convexity of a typical variance swap can be dynamically replicated by (or hedged with) a strip of out-of-the-money (OTM) plain vanilla options arrayed across an appropriately selected range of exercise price levels. Daily rebalancing of any such replicating portfolio, however, is laborious and costly.
The VIX® index provides a convenient basis for such hedging or replication, precisely because it is structured to ascribe different weightings to index component options at different strike price levels. Thus, using futures on VIX® to implement the hedge or replication strategy mitigates the effort and cost of maintaining the appropriate composition—the right strike price levels, the right weightings—of the variance swap's replicating option portfolio.
The price of this convenience is that VIX®'s structure is complicated in ways that create weak points. Among these are:

- Alleged Susceptibility to Manipulation: Because an equity index variance swap is predicated on the square of the log return of its underlying equity price index, replicating or hedging any intraday “downside” movement in the equity index variance swap tends to entail ever-increasing numbers of put options per strike price level. Among the consequences is that both plain vanilla variance swaps and the VIX® index are structurally highly sensitive to seemingly minuscule price movements in OTM puts. The further out of the money the put, the greater the sensitivity of VIX® to movements in that out of the money put's premium. For this reason, from time to time, the VIX® index becomes subject to criticism that it is vulnerable to manipulation. Because the POP futures mechanism described herein would, upon expiration, settle into physical assignment of the index component options contracts, concerns about manipulation would be mitigated.
- Settlement calculation requires an SOQ: VIX® futures come to final settlement on the basis of SPX option prices established through a special opening quotation (SOQ) exactly 30 days prior to expiry of those options. The SOQ process has proved to be highly sensitive, capable of producing unexpected final settlement values especially during market disruptions.
- Indeterminacy of the replicating portfolio: Because the VIX® index's component option prices do not translate linearly into VIX® index values, and because the quantity (i.e., index weight) of any component option is dependent on the price levels of options at all other strike prices in the VIX® index “strip,” it is difficult in practice to replicate the VIX® index strip for the purpose of hedging or risk management of VIX® exposures. At any moment, the composition of the “perfect” strip may change with but a few ticks of movement in prices of OTM SPX puts. The physical delivery feature of the POP futures mechanism, combined with its comparatively simple and stable structure, would diminish the difficulties associated with index replication. The POP futures mechanism sacrifices some exactitude and precision as a hedge for a conventional OTC variance swap. Owing to the increasing log quantity of the variance swap's replicating portfolio of options, the POP futures mechanism may not fully cover the variance swap's tail risk. Whether and how much this would matter to prospective users is an open question but some buyers of variance swaps (for example, an insurance company that uses variance for gamma) may prefer not to pay for the extra tail-risk premium associated with buying variance swaps and would prefer a product that does not incorporate so much hyperbolic downside protection. Against this backdrop, the “imperfection” in the POP futures mechanism may be attractive to prospective users insofar as it permits cost savings. Because the POP futures contract culminates in physical assignment of a strip of ES options, market participants would be able to adjust their local gamma exposures via purchases or sales in ES options, without paying the extra premium associated with very OTM puts.
- Disproportionate emphasis on deferred deep OTM SPX puts: As noted earlier, the VIX® index inherently assigns increasing weight to OTM puts at lower strike prices. Moreover, non-zero bids in options with remote expiry months force such options to be included in the index calculation. For these reasons—and given the excess premium associated with market crashes (or with the market's tendency to be one-sided in terms of its need for volatility protection)—the VIX® index calculation is prone to assign disproportionately high weight to deferred highly OTM puts. This means that, if OTM puts are even modestly “over-priced,” then options for back-month expiry will tend to get disproportionately higher index weight relative to options for nearby expiry. This feature of the VIX® index may explain its poor performance. To the extent that index volatility ETFs are mandated to sell nearby VIX® index futures and to buy deferred month VIX® futures, they frequently find themselves constrained to “sell low and buy high” as they roll out the term structure of volatility.
- No margin relief against ES futures: The Options Clearing Corporation (“OCC”), the central clearing body for all SEC regulated options, grants cross-margin offsets between VIX® futures (CFTC regulated) and VIX® options (SEC regulated). Market makers cannot enjoy these cross-margin benefits, however, while simultaneously benefitting from cross-margin benefits that OCC permits between SPX options (SEC regulated) and CME ES futures (CFTC regulated). Each market maker is constrained to choose one offset or the other. The POP futures mechanism proposed here can (and should) be cleared by CME Clearing with vega offsets against ES options, and delta offsets against ES futures. (Just as VIX® index dynamics are negatively correlated with the SP500, so would POP futures price movements be expected to correlate negatively with ES futures price action, albeit with an added element of vega convexity.) This feature alone could make CME a more desirable venue for trading options on the SP500.

Given the success of the VIX® index, to penetrate the incumbent liquidity pool with a copycat product might be difficult and costly. Although the proposed POP contract would not be a direct competitor to VIX®, it is possible that it would signify a cost-effective means of satisfying end-user needs that are currently met by VIX®. Due to POP's simplicity and potentially greater capital efficiencies via CME Clearing portfolio margin offsets, it might achieve standing as a preferred alternative.
An expiring POP (Premium-Over-Parity) futures contract would expire by physical assignment of a strip of out-of-the-money (OTM) options, with the at-the-money (ATM) strike price being determined by the same process used to determine the regular settlement of concurrently expiring European style ES options. Consider for example a hypothetical POP futures contract that expires in January 2017, on the same schedule as January 2017 ES options. Assume the afternoon fixing price for options' underlying Mar 2017 ES futures contract is 1967.50. Then the ATM strike used for assignment of options to the expiring POP futures contract would be based likewise a March fixing value of 1967.50, and the ES options assigned in delivery would be February 2017 ES Options on March 2017 ES futures.
The long holder of the expiring POP future might receive 10 calls and 10 puts at each of 20 exercise price levels at, say, 1% intervals above and below 1967.50 and 1 put at each of 10 exercise price levels at, say, 1% intervals below 1967.50 (The POP futures contract deliverable grade, i.e., the actual number of exercise price levels and the price intervals/widths between them, is a key design feature to be decided only after due diligence discussions with prospective contract users. This example is intended thus to be illustrative without being concrete.). Because the strike price levels themselves are not set until the moment that the POP contract expires and the F_t(in this case 1976.50) is known, the POP futures contract carries no delta or gamma exposure during its life.
Similarly, for rates products, a strip of calls every full or half point above implied spot of say 131 up to 139, and puts from 131 down to 126, would provide a consistent known amount of protection, and could be used to roll options positions.
POP Futures have the following advantages:

- Gamma Hedge: Because the final settlement and delivery of a new set of options, an expiring POP futures contract can coincide with the expiry of options, it can provide the user with access to fresh gamma exposure precisely at the moment when expiring options no longer have any gamma. In the example above, the POP futures mechanism enables the portfolio manager to lock in the cost of his February option position at an opportune time, well prior to the expiry of his current January options position.
- Vega Hedge: Until the strike price levels of the ES options assigned in delivery are set, the POP future should fluctuate only with the changes in the expected cost of the expected strip of options. There will be no change in the price of the POP future based on underlying market movements, because the moneyness of the strikes to be assigned in delivery is in a constant ratio to F_t. The beneficial paradox of the POP futures mechanism is that, although it is not an implied volatility product, the principal determinant of its price dynamics will be market expectations of forward-starting option prices, which in turn are related to implied volatility.

Regarding quoting conventions, POP futures likely will be priced in terms of SP500 index points, as the options which are assigned in delivery must be priced and paid for in terms of points of premium. By contrast, while the VIX® index is a normalized implied volatility measure based on prices of options, it does not directly or clearly express the cost of the strip of options.
POP futures can also be understood and priced in percent of spot terms, as shown above. Often OTC option trades are quoted in percent terms and then finalized into index points (and dollars per index point) at end of day (EOD), when strikes are chosen. Similarly, the sum of the individual prices of options in a POP futures delivery might be divided by the SP500 spot index value to provide a percentage reference. This will give market participants an apples-to-apples comparison with other forward-starting option quotes that exist in the OTC world.
Finally, by application of a slightly modified version of the VIX® index formula, the POP futures contract-grade strip of options can be quoted in a VIX®-style volatility measure. In general “VolPOP” would track VIX® closely, and would provide easy comparison for statistical arbitrage between POP futures and VIX® futures and VIX® options.
Referring to FIGS. 7 and 8, because POP futures prices may be traded and quoted in terms of VolPOP, and also in terms of SP500 index points, POP futures price dynamics are apt to be convex in Vega, similar to variance swaps. For this reason, VIX® futures might be used in conjunction with POP futures to aid liquidity providers in maintaining both the dynamic replicating portfolios of options deliverable into POP futures final settlement as well as any forward-starting variance swap exposures.
POP for Rates
This process can easily be applied to interest rate products as well as other asset classes that have robust options' markets. Interestingly, the VIX®-like number associated with interest rates can be higher than the traditional TYVIX® (see FIG. 9). This is primarily because the calls receive more weight in POP than in VIX® (and puts receive less weight in POP than in VIX®), and because the kurtosis for TY is often on the upside of the TY futures market.
The mathematics behind VIX® is predicated on replicating the payout of what is over-generically called a “Variance Swap”. There are “Log Variance Swaps” and “Simple Variance Swaps”. Log Variance Swaps, because of their early adoption, have enjoyed the generalized term of “Variance Swaps”, but the exponentially increasing exposure on the down-side forces sellers of Variance Swaps to take on risk exposure that the natural buyers do not necessarily need. These sellers must charge appropriately for this excess risk, and buyers are therefore (rightly) forced to spend more than necessary to pay for this excess tail-risk coverage.
To elucidate this excess, the Log Variance Swap formula and the VIX® formula will be dissected, as will the proposed POP future equivalent, so that the focus can be placed on what is different between a POP future's deliverable strip and a Log Variance Swap, and then by extension, how the POP future, prior to delivery, compares to VIX®.
Log Payoff Formula:
$V_{Δ InF} = \frac{N}{n} \sum_{i = 1}^{n} \ln^{2} (F_{i} / F_{i - 1})$
Because the log of “today's” price divided by “yesterday's” price is squared, dramatic drops in the market produce exponentially increasing exposure.
For a given single day in the life of the Log Variance Swap the payoff=(LN(todayEODprice/YesterdayEODprice))
FIG. 10 shows a limited range of possible market outcomes, namely 1000 index points to 3000 index points. It can already be seen that there is an asymmetric downside payoff versus upside payoff. FIG. 11 shows an exaggerated range that further elucidates the incredibly leveraged tail payoff on the downside of the market. This asymmetry is precisely why more and more puts are needed to replicate the variance swap, and therefore also why the VIX® strip does not have equal weightings of the component vanilla options.
VIX® formula:
$? VIX = 100 * \sqrt{\frac{2}{τ} \sum_{i = 0}^{n} \frac{Δ K_{i}}{K_{l}} e^{r T} Q (O_{2}) - ? {\frac{1}{T} [\frac{F}{K_{0}} - 1]}^{2}} ?$ $? indicates text missing or illegible when filed$
where Q(O) represents the price of the i^thoption. Also please note that the phrase
$? {\frac{1}{T} [\frac{F}{K_{0}} - 1]}^{2}$ $? indicates text missing or illegible when filed$
approaches zero as the “ATM” Strike (KO) approaches the Forward price (F). This part of the equation removes the intrinsic value of the option that is “in the money”. The more granular the strikes, the more closely K can be to F, and therefore the less impact the “in-the-money intrinsic” value has. For the sake of getting an understanding of the essence of the formula, mentally treating this as near or at zero greatly simplifies the concepts.
FIGS. 12-16A and 16B show a VIX® strip payoff versus the Variance Swap Payoff example.
Note that the “Volume” which represents the quantity of options needed from the VIX® formula is more than twice as large for strikes near 1500 (with deltaK=5), namely 34 contracts, as is the quantity for options near 2200 namely 16 contracts.

Generalized VolPOP Formula:

$? VolPOP = 100 * \frac{2}{T} \sum_{i = 0}^{n} \frac{Δ K_{i}}{F} e^{r T} Q (O_{k}) - \cdot {\frac{1}{T} [\frac{F}{K_{0}} - 1]}^{2}$ $? indicates text missing or illegible when filed$
where this formula shows the incremental evolution from VIX® to VolPOP, namely changing the denominator from K²to F². The practical product will likely be constrained to have fewer strikes as the minimum quantity deliverable is 1 contract; and similarly the strikes chosen will render the Δ K's as close to being equal to one another as possible.
FIG. 8 shows the cost of the strip of options by using the “Volume” (which means the number of contracts needed for that particular strike) times the Trade Price. The POP number is the “Volume” for the POP strip, again times the Trade Price. Not unexpectedly, the cost for the POP strip is less than for the VIX® strip. The actual cost to own the POP strip is less than the cost to own the VIX® strip ($16000 versus $17000), but that savings does in fact result from buying fewer very OTM Puts. This will have an impact on the actual protection provided by the portfolio. The following table shows how much impact this “savings” will have on the Gamma profile of the two strips. In fact, the more local gamma is purchased for the same money spent.


	VIX	POP

Calls	185.462	194.743
Puts	336.827	306.014
Total	522.289	500.757
Cost	17334	16267
gamma/$	0.03013	0.03078

The advantage: the POP strip can be quoted with only one price but the VIX® requires multiple individual price inputs, all on the same time increment. CME can offer a volatility product that greatly reduces messaging traffic and eliminates the manipulability of VIX®. In addition, the clearinghouse is made more efficient by reducing line items and improving capital efficiency with margin offsets.
How a single future's price can provide a volatility number: A Future that delivers a strip of options whose strikes will not be set until the future itself expires (settles). This future will not trade at sum of the current price of those options, but at a price that will reflect the expected cost of those options when the future expires.
To help provide an understanding, let us first consider something called a “forward start option”. “In finance, a forward start option is an option that starts at a specified future date with an expiration date set further in the future. A forward start option starts at a specified date in the future; however, the premium is paid in advance, and the time of expiration is established at the time the forward start option is purchased. Since the asset price at the start of this option is not known a priori, it is common to specify that the strike price will be set in the future so that the option is initially at the money or a certain percentage in the money or out of the money. This contract can be used to give an investor exposure to forward volatility. Executive stock options can be viewed as a type of forward start option. This is because a company commits to granting at-the-money options to employees in the future.”
The following examples will follow a certain order to show the progression of ideas from the more commonly known to the more opaque and finally to the new solution. The order will be:
FSO_Cash_Atm with known cash pre-purchase price but unknown strike price, except that the strike will set equal to the underlying price on a later date.
FSO_Cash_plus1 with a known cash pre-purchase price, and still with an unknown strike, except that the strike will be 1 point higher than the underlying price on that same later date.
FSO_Pct_Atm with unknown cash price and unknown strike price, but agreed % price with a “down payment” or margin on the price set as a function of the agreed percentage and the current spot price for the TY future.
FSO_Pct_plus1 with unknown cash price and unknown strike price, except with a known differential to the ATM at the later date, and an agreed % price with a “down payment” or margin on the price set as a function of the agreed percentage and the current spot price for the TY future.
A bundle future that delivers a strip of FSOs with unknown actual strikes, as the strikes will be a function of the later-date TY settlement price; and a quoting convention that allows the actual price of that strip of options to also be a function of the later-date TY settlement price.
FSO_Cash_Atm with known cash pre-purchase price: In the description above, the strike on a single “Forward Start Option” (“FSO”) is not set until the “start date” and is (typically) set as “At the Money”; meaning the strike of this FSO is set equal to the price of the underlying (Future in the case of CME products), but not until the “start date”. If the TY Future is trading at 126 Jan. 1, 2000, and on that day a thirty-day FSO is purchased for a price of, say 2.52, but is not struck until Jan. 14, 2000, the buyer and the seller don't know the actual strike until January 14. These options will expire 30 days after January 14 (namely, February 13)
Let us suppose that the TY future settles at 124.75 on January 14.
The owner of the FSOatm will now receive a “regular” option struck at 124.75 that expires on February 13.
The seller of the FSO will be short this same “regular” option.
The 2.52 that the buyer paid to seller remains with the seller, and from that point onward, the two parties (buyer and seller) could have these now regular looking options exist in their respective CFTC regulated accounts.
In the time period prior to January 14, that FSO does have a value and could possibly be traded. If implied volatility increased dramatically between January 1 and January 14, that FSO, which was purchased for 2.52, may very well be worth considerably more than 2.52. What should the price be? In currency, it should trade at the PV of the expected price of a 30 day ATM option at January 14.
FSO_Cash_plus1 with a known cash pre-purchase price; higher strike: Let us extend the example a bit. Let us say that another FSO, call it FSO2 will be created that will be struck at, say, ½ point above ATM on January 14. And let suppose the price paid was 2.1875
Again, let us suppose that the TY future settles at 124.75 on January 14.
The owner of the FSO_Cash_plus1 will now receive a “regular” option struck at 124.75 plus ½ point or 125.25 that also expires on February 13.
The seller of the FSO_Cash_plus1 will be short this same “regular” option.
In the time period prior to January 14, the FSO_Cash_plus1 does have a value and could also possibly be traded. If implied volatility increased dramatically between January 1 and January 14, that FSO, which was purchased for 2.1875, may very well be worth considerably more than 2.1875. What should the price be? In currency, it should trade at the PV of the expected price of a 30 day option struck ½ point above ATM at Jan 14.
FSO_Pct_Atm with unknown cash pre-purchase price: Again in the description above, the strike on a single “Forward Start Option” (“FSO”) is not set until the “start date” and is (typically) set as “At the Money”; meaning the strike of this FSO is set equal to the price of the underlying (Future in the case of CME products), but not until the “start date”. If the TY Future is trading at 126 Jan. 1, 2000, and on that day a thirty-day FSO is purchased, but for a price of, say 2.0% of the Underlying on the later date, and is not struck until Jan. 14, 2000, the buyer and the seller don't know the actual price OR the actual strike until January 14. These options will expire 30 days after January 14 (namely, February 13)
Let us suppose that the TY future settles at 124.75 on January 14.
The owner of the FSO will now receive a “regular” option struck at 124.75 that expires on February 13. He will pay 2.0% of 124.75 for that option (2.495)
The seller of the FSO will be short this same “regular” option; and will receive 2.495
As with any normal option purchase, the 2.495 that the buyer paid to seller remains with the seller, and from that point onward, the two parties (buyer and seller) could have these now regular looking options exist in their respective CFTC regulated accounts.
In the time period prior to January 14, that FSO does have a value and could possibly be traded. If implied volatility increased dramatically between January 1 and January 14, that FSO, which was agreed to be purchased for 2.0% of Underlying, may very well be worth considerably more. What should the price be? Again in currency, it should trade at the PV of the expected price of a 30 day ATM option at January 14.
This agreement could be collateralized or “margined” prior to the actually delivery of the options, with the margin being some fixed amount, and the mark-to-market reflecting the changes in both the Underlying future to reflect that a “price” of 2% of the underlying will become an increase or decrease based on the movement of the Underlying future of which 2% will be the “price” of the FSO; and it should also reflect any change in implied volatility.
FSO_Pct_plus1 with unknown cash pre-purchase price; higher strike: Now let us say that another FSO4 will be created that will be struck at, say, ½ point above ATM on January 14. And let suppose the price agreed to be paid was 1.7535% of the Underlying on January 14
Again, let us suppose that the TY future settles at 124.75 on January 14.
The owner of the FSO_Cash_plus1 will now receive a “regular” option struck at 124.75 plus ½ point or 125.25 that also expires on February 13. He will pay 1.7535% of 124.75 for that option (2.1875)
The seller of the FSO_Cash_plus1 will be short this same “regular” option.
In the time period prior to January 14, the FSO_Pct_plus1 does have a value and could also possibly be traded. If implied volatility increased dramatically between January 1 and January 14, that FSO may very well be worth considerably more than 1.7535% of the Underlying. What should the price be? In currency, it should trade at the PV of the expected price of a 30 day option struck ½ point above ATM at January 14.
Bundle future that delivers a strip of FSOs: Using the nomenclature above FSO_Pct_plus2 would imply a forward starting option that is 2 intervals above the designated FSO_Pct_Atm. Similarly FSO_Pct_minus1 would imply an option struck one interval below FSO_Pct_Atm
A POP future would deliver a set, e.g. a strip, of options that has the relationship of the strikes of the various constituent options known by reference to the Underlier at the later date. Let us suppose that a TY Option Bundle future or a “TYPOP future” would deliver a strip of 5 calls and 5 puts at ½ point intervals above and below ATM. For example, if the POP future settled on January 14 (as in the earlier example) at 124.75, then the POP future would deliver the following:


	1 TY 125	Call Expiring on Feb 13
	1 TY 125.5	Call Expiring on Feb 13
	1 TY 126	Call Expiring on Feb 13
	1 TY 126.5	Call Expiring on Feb 13
	1 TY 127	Call Expiring on Feb 13
	1 TY 124.5	Put Expiring on Feb 13
	1 TY 124	Put Expiring on Feb 13
	1 TY 123.5	Put Expiring on Feb 13
	1 TY 123	Put Expiring on Feb 13
	1 TY 122.5	Put Expiring on Feb 13

For a total of 10 options.
Since the POP Bundle Future will deliver these options only when they have 30 days until they all expire, the collective price of this bundle, even before the delivery of the options, will represent the market's expected price of that strip of options at January 14.
This bundle can be priced both in actual price (“POPactual”), as in the first two examples above; but it could also be priced in percentage terms as in the third and fourth examples above (“POPpercent”).
If quoted in volatility terms, the resulting numbers could be systematically recorded at, say, daily intervals and used as a volatility benchmark, representative of a range of options, without needing to gather multiple option prices that may or may not have been simultaneously generated nor representative of the real markets for those options at the time the sample is taken.
The disclosed embodiments may be implemented in association with a data transaction processing system that processes data items or objects, such as an exchange computing system. Customer or user devices (e.g., client computers) may submit electronic data transaction request messages, e.g., inbound messages, to the data transaction processing system over a data communication network. The electronic data transaction request messages may include, for example, transaction matching parameters, such as instructions and/or values, for processing the data transaction request messages within the data transaction processing system. The instructions may be to perform transactions, e.g., buy or sell a quantity of a product at a specified price. Products, e.g., financial instruments such as the POP futures contracts described above, or order books representing the state of an electronic marketplace for a product, may be represented as data objects within the exchange computing system. The instructions may also be conditional, e.g., buy or sell a quantity of a product at a given value if a trade for the product is executed at some other reference value.
The data transaction processing system may include various specifically configured matching processors that match, e.g., automatically, electronic data transaction request messages for the same one of the data items or objects. The specifically configured matching processors may match, or attempt to match, electronic data transaction request messages based on multiple transaction matching parameters from the different client computers. Input electronic data transaction request messages may be received from different client computers over a data communication network, and output electronic data transaction result messages may be transmitted to the client computers and may be indicative of results of the attempts to match incoming electronic data transaction request messages. The specifically configured matching processors may additionally generate information indicative of a state of an environment (e.g., the state of the order book) based on the processing of the electronic data transaction request messages, and report this information to data recipient computing systems via outbound messages published via one or more data feeds that contain electronic data transaction result messages. While the disclosed embodiments may be described with respect to electronic data transaction request and result messages, it will be appreciated that the disclosed embodiments may be implemented with respect to other technologies later developed, such as photonic, e.g., light-based, messages.
For example, one exemplary environment where the disclosed embodiments may be desirable is in financial markets, and in particular, electronic financial exchanges, such as a futures exchange, such as the Chicago Mercantile Exchange Inc. (CME).

Exchange Computing System

An exchange provides one or more markets for the purchase and sale of various types of products including financial instruments such as stocks, bonds, futures contracts, e.g. the above described POP futures contracts, options, currency, cash, and other similar instruments. Agricultural products and commodities are also examples of products traded on such exchanges. A futures contract is a product that is a contract for the future delivery of another financial instrument such as a quantity of grains, metals, oils, bonds, currency, or cash. Generally, each exchange establishes a specification for each market provided thereby that defines at least the product traded in the market, minimum quantities that must be traded, and minimum changes in price (e.g., tick size). For some types of products (e.g., futures or options), the specification further defines a quantity of the underlying product represented by one unit (or lot) of the product, and delivery and expiration dates. As will be described, the exchange may further define the matching algorithm, or rules, by which incoming orders will be matched/allocated to resting orders.
Generally, a market may involve market makers, such as market participants who consistently provide bids and/or offers at specific prices in a manner typically conducive to balancing risk, and market takers who may be willing to execute transactions at prevailing bids or offers may be characterized by more aggressive actions so as to maintain risk and/or exposure as a speculative investment strategy. From an alternate perspective, a market maker may be considered a market participant who places an order to sell at a price at which there is no previously or concurrently provided counter order. Similarly, a market taker may be considered a market participant who places an order to buy at a price at which there is a previously or concurrently provided counter order. A balanced and efficient market may involve both market makers and market takers, coexisting in a mutually beneficial basis. The mutual existence, when functioning properly, may facilitate liquidity in the market such that a market may exist with “tight” bid-ask spreads (e.g., small difference between bid and ask prices) and a “deep” volume from many currently provided orders such that large quantity orders may be executed without driving prices significantly higher or lower.
A financial instrument trading system, such as a futures exchange, such as the Chicago Mercantile Exchange Inc. (CME), provides a contract market where financial instruments, e.g., futures and options on futures, are traded using electronic systems. “Futures” is a term used to designate all contracts for the purchase or sale of financial instruments or physical commodities for future delivery or cash settlement on a commodity futures exchange. A futures contract is a legally binding agreement to buy or sell a commodity at a specified price at a predetermined future time. An option contract is the right, but not the obligation, to sell or buy the underlying instrument (in this case, a futures contract) at a specified price on or before a certain expiration date. An option contract offers an opportunity to take advantage of futures price moves without actually having a futures position. The commodity to be delivered in fulfillment of the contract, or alternatively the commodity for which the cash market price shall determine the final settlement price of the futures contract, is known as the contract's underlying reference or “underlier.” The underlying or underlier for an options contract is the corresponding futures contract that is purchased or sold upon the exercise of the option.
The terms and conditions of each futures contract are standardized as to the specification of the contract's underlying reference commodity, the quality of such commodity, quantity, delivery date, and means of contract settlement. Cash settlement is a method of settling a futures contract whereby the parties effect final settlement when the contract expires by paying/receiving the loss/gain related to the contract in cash, rather than by effecting physical sale and purchase of the underlying reference commodity at a price determined by the futures contract, price. Options and futures may be based on more generalized market indicators, such as stock indices, interest rates, futures contracts and other derivatives.
An exchange may provide for a centralized “clearing house” through which trades made must be confirmed, matched, and settled each day until offset or delivered. The clearing house may be an adjunct to an exchange, and may be an operating division of an exchange, which is responsible for settling trading accounts, clearing trades, collecting and maintaining performance bond funds, regulating delivery, and reporting trading data. One of the roles of the clearing house is to mitigate credit risk. Clearing is the procedure through which the clearing house becomes buyer to each seller of a futures contract, and seller to each buyer, also referred to as a novation, and assumes responsibility for protecting buyers and sellers from financial loss due to breach of contract, by assuring performance on each contract. A clearing member is a firm qualified to clear trades through the clearing house.
An exchange computing system may operate under a central counterparty model, where the exchange acts as an intermediary between market participants for the transaction of financial instruments. In particular, the exchange computing system novates itself into the transactions between the market participants, i.e., splits a given transaction between the parties into two separate transactions where the exchange computing system substitutes itself as the counterparty to each of the parties for that part of the transaction, sometimes referred to as a novation. In this way, the exchange computing system acts as a guarantor and central counterparty and there is no need for the market participants to disclose their identities to each other, or subject themselves to credit or other investigations by a potential counterparty. For example, the exchange computing system insulates one market participant from the default by another market participant. Market participants need only meet the requirements of the exchange computing system. Anonymity among the market participants encourages a more liquid market environment as there are lower barriers to participation. The exchange computing system can accordingly offer benefits such as centralized and anonymous matching and clearing.
A match engine within a financial instrument trading system may comprise a transaction processing system that processes a high volume, e.g., millions, of messages or orders in one day. The messages are typically submitted from market participant computers. Exchange match engine systems may be subject to variable messaging loads due to variable market messaging activity. Performance of a match engine depends to a certain extent on the magnitude of the messaging load and the work needed to process that message at any given time. An exchange match engine may process large numbers of messages during times of high volume messaging activity. With limited processing capacity, high messaging volumes may increase the response time or latency experienced by market participants.
Electronic messages such as incoming messages from market participants, i.e., “outright” messages, e.g., trade order messages, etc., are sent from client devices associated with market participants, or their representatives, to an electronic trading or market system.
The disclosed embodiments may be implemented by an exchange computing system to generate a new type of financial instrument that closely tracks a futures contract based on historical settlement prices of the futures contract, which may be traded on the exchange computing system.

Electronic Trading

Electronic trading of financial instruments, such as futures contracts, is conducted by market participants sending orders, such as to buy or sell one or more futures contracts, in electronic form to the exchange. These electronically submitted orders to buy and sell are then matched, if possible, by the exchange, i.e., by the exchange's matching engine, to execute a trade. Outstanding (unmatched, wholly unsatisfied/unfilled or partially satisfied/filled) orders are maintained in one or more data structures or databases referred to as “order books,” such orders being referred to as “resting,” and made visible, i.e., their availability for trading is advertised, to the market participants through electronic notifications/broadcasts, referred to as market data feeds. An order book is typically maintained for each product, e.g., instrument, traded on the electronic trading system and generally defines or otherwise represents the state of the market for that product, i.e., the current prices at which the market participants are willing buy or sell that product. As such, as used herein, an order book for a product may also be referred to as a market for that product.
Upon receipt of an incoming order to trade in a particular financial instrument, whether for a single-component financial instrument, e.g., a single futures contract, or for a multiple-component financial instrument, e.g., a combination contract such as a spread contract, a match engine, as described herein, will attempt to identify a previously received but unsatisfied order counter thereto, i.e., for the opposite transaction (buy or sell) in the same financial instrument at the same or better price (but not necessarily for the same quantity unless, for example, either order specifies a condition that it must be entirely filled or not at all).
In one embodiment, traders may buy and sell the disclosed tracking financial instrument instead of a futures contract that is associated with an underlying asset, where the futures contract may be settled by delivery of the underlying asset or by cash settlement.
Previously received but unsatisfied orders, i.e., orders which either did not match with a counter order when they were received or their quantity was only partially satisfied, referred to as a partial fill, are maintained by the electronic trading system in an order book database/data structure to await the subsequent arrival of matching orders or the occurrence of other conditions which may cause the order to be modified or otherwise removed from the order book.
If the match engine identifies one or more suitable previously received but unsatisfied counter orders, they, and the incoming order, are matched to execute a trade there between to at least partially satisfy the quantities of one or both the incoming order or the identified orders. If there remains any residual unsatisfied quantity of the identified one or more orders, those orders are left on the order book with their remaining quantity to await a subsequent suitable counter order, i.e., to rest. If the match engine does not identify a suitable previously received but unsatisfied counter order, or the one or more identified suitable previously received but unsatisfied counter orders are for a lesser quantity than the incoming order, the incoming order is placed on the order book, referred to as “resting”, with original or remaining unsatisfied quantity, to await a subsequently received suitable order counter thereto. The match engine then generates match event data reflecting the result of this matching process. Other components of the electronic trading system, as will be described, then generate the respective order acknowledgment and market data messages and transmit those messages to the market participants.
Matching, which is a function typically performed by the exchange, is a process, for a given order which specifies a desire to buy or sell a quantity of a particular instrument at a particular price, of seeking/identifying one or more wholly or partially, with respect to quantity, satisfying counter orders thereto, e.g., a sell counter to an order to buy, or vice versa, for the same instrument at the same, or sometimes better, price (but not necessarily the same quantity), which are then paired for execution to complete a trade between the respective market participants (via the exchange) and at least partially satisfy the desired quantity of one or both of the order and/or the counter order, with any residual unsatisfied quantity left to await another suitable counter order, referred to as “resting.” A match event may occur, for example, when an aggressing order matches with a resting order. In one embodiment, two orders match because one order includes instructions for or specifies buying a quantity of a particular instrument at a particular price, and the other order includes instructions for or specifies selling a (different or same) quantity of the instrument at a same or better price. It should be appreciated that performing an instruction associated with a message may include attempting to perform the instruction. Whether or not an exchange computing system is able to successfully perform an instruction may depend on the state of the electronic marketplace.
While the disclosed embodiments will be described with respect to a product by product or market by market implementation, e.g. implemented for each market/order book, it will be appreciated that the disclosed embodiments may be implemented so as to apply across markets for multiple products traded on one or more electronic trading systems, such as by monitoring an aggregate, correlated or other derivation of the relevant indicative parameters as described herein.
While the disclosed embodiments may be discussed in relation to futures and/or options on futures trading, it should be appreciated that the disclosed embodiments may be applicable to any equity, fixed income security, currency, commodity, options or futures trading system or market now available or later developed. It may be appreciated that a trading environment, such as a futures exchange as described herein, implements one or more economic markets where rights and obligations may be traded. As such, a trading environment may be characterized by a need to maintain market integrity, transparency, predictability, fair/equitable access and participant expectations with respect thereto. In addition, it may be appreciated that electronic trading systems further impose additional expectations and demands by market participants as to transaction processing speed, latency, capacity and response time, while creating additional complexities relating thereto. Accordingly, as will be described, the disclosed embodiments may further include functionality to ensure that the expectations of market participants are met, e.g., that transactional integrity and predictable system responses are maintained.
Financial instrument trading systems allow traders to submit orders and receive confirmations, market data, and other information electronically via electronic messages exchanged using a network. Electronic trading systems ideally attempt to offer a more efficient, fair and balanced market where market prices reflect a true consensus of the value of traded products among the market participants, where the intentional or unintentional influence of any one market participant is minimized if not eliminated, and where unfair or inequitable advantages with respect to information access are minimized if not eliminated.
Electronic marketplaces attempt to achieve these goals by using electronic messages to communicate actions and related data of the electronic marketplace between market participants, clearing firms, clearing houses, and other parties. The messages can be received using an electronic trading system, wherein an action or transaction associated with the messages may be executed. For example, the message may contain information relating to an order to buy or sell a product in a particular electronic marketplace, and the action associated with the message may indicate that the order is to be placed in the electronic marketplace such that other orders which were previously placed may potentially be matched to the order of the received message. Thus, the electronic marketplace may conduct market activities through electronic systems.
As may be perceived/experienced by the market participants from outside the Exchange or electronic trading system operated thereby, the following sequence describes how, at least in part, information may be propagated in such a system and how orders may be processed: (1) An opportunity is created at a matching engine of the Exchange, such as by placing a recently received but unmatched order on the order book to rest; (2) The matching engine creates an update reflecting the opportunity and sends it to a feed engine; (3) The feed engine multicasts it to all of the market participants to advertise the opportunity to trade; (4) The market participants evaluate the opportunity and each, upon completion of their evaluation, may or may not choose to respond with an order responsive to the resting order, i.e. counter to the resting order; (5) The Exchange gateway receives any counter orders generated by the market participants, sends confirmation of receipt back directly to each submitting market participant, and forwards the received orders to the matching engine; and (6) The matching engine evaluates the received orders and matches the first arriving order against the resting opportunity and a trade is executed.

I. Electronic Data Transaction Request/Result Messages and Market Data Feeds

As used herein, a financial message, or an electronic message, refers both to messages communicated by market participants to an electronic trading or market system and vice versa. The messages may be communicated using packeting or other techniques operable to communicate information between systems and system components. Some messages may be associated with actions to be taken in the electronic trading or market system. In particular, in one embodiment, upon receipt of a request, a token is allocated and included in a TCP shallow acknowledgment transmission sent back to the participant acknowledging receipt of the request. It should be appreciated that while this shallow acknowledgment is, in some sense, a response to the request, it does not confirm the processing of an order included in the request. The participant, i.e., their device, then sends back a TCP acknowledgment which acknowledges receipt of the shallow acknowledgment and token.
Financial messages communicated to the electronic trading system, also referred to as “inbound” messages, may include associated actions that characterize the messages, such as trader orders, order modifications, order cancellations and the like, as well as other message types. Inbound messages may be sent from client devices associated with market participants, or their representatives, e.g., trade order messages, etc., to an electronic trading or market system. For example, a market participant may submit an electronic message to the electronic trading system that includes an associated specific action to be undertaken by the electronic trading system, such as entering a new trade order into the market or modifying an existing order in the market. In one embodiment, if a participant wishes to modify a previously sent request, e.g., a prior order which has not yet been processed or traded, they may send a request message comprising a request to modify the prior request. In one exemplary embodiment, the incoming request itself, e.g., the inbound order entry, may be referred to as an iLink message. iLink is a bidirectional communications/message protocol/message format implemented by the Chicago Mercantile Exchange Inc.
Financial messages communicated from the electronic trading system, referred to as “outbound” messages, may include messages responsive to inbound messages, such as confirmation messages, or other messages such as market update messages, quote messages, and the like. Outbound messages, or electronic data transaction result messages, may be disseminated via data feeds.
Financial messages may further be categorized as having or reflecting an impact on a market or electronic marketplace, also referred to as an “order book” or “book,” for a traded product, such as a prevailing price therefore, number of resting orders at various price levels and quantities thereof, etc., or not having or reflecting an impact on a market or a subset or portion thereof. In one embodiment, an electronic order book may be understood to be an electronic collection of the outstanding or resting orders for a financial instrument.
For example, a request to place a trade may result in a response indicative of the trade either being matched with, or being rested on an order book to await, a suitable counter-order. This response may include a message directed solely to the trader who submitted the order to acknowledge receipt of the order and report whether it was matched, and the extent thereto, or rested. The response may further include a message to all market participants reporting a change in the order book due to the order, or an electronic data transaction result message. This response may take the form of a report of the specific change to the order book, e.g., an order for quantity X at price Y was added to the book (referred to, in one embodiment, as a Market By Order message), or may simply report the result, e.g., price level Y now has orders for a total quantity of Z (where Z is the sum of the previous resting quantity plus quantity X of the new order). In some cases, requests may elicit a non-impacting response, such as temporally proximate to the receipt of the request, and then cause a separate market-impact reflecting response at a later time. For example, a stop order, fill or kill order (FOK), also known as an immediate or cancel order, or other conditional request may not have an immediate market impacting effect, if at all, until the requisite conditions are met.
An acknowledgement or confirmation of receipt, e.g., a non-market impacting communication, may be sent to the trader simply confirming that the order was received. Upon the conditions being met and a market impacting result thereof occurring, a market-impacting message may be transmitted as described herein both directly back to the submitting market participant and to all market participants (in a Market By Price “MBP”, or Market By Order “MBO”). It should be appreciated that additional conditions may be specified, such as a time or price limit, which may cause the order to be dropped or otherwise canceled and that such an event may result in another non-market-impacting communication instead. In some implementations, market impacting communications may be communicated separately from non-market impacting communications, such as via a separate communications channel or feed.
For additional details and descriptions of different market data feeds, see U.S. Patent Publication No. 2017/0331774, filed on May 16, 2016, entitled “Systems and Methods for Consolidating Multiple Feed Data”, assigned to the assignee of the present application, the entirety of which is incorporated by reference herein and relied upon.
It should be further appreciated that various types of market data feeds may be provided which reflect different markets or aspects thereof. Market participants may then, for example, subscribe to receive those feeds of interest to them. For example, data recipient computing systems may choose to receive one or more different feeds. As market impacting communications usually tend to be more important to market participants than non-impacting communications, this separation may reduce congestion and/or noise among those communications having or reflecting an impact on a market or portion thereof. Furthermore, a particular market data feed may only communicate information related to the top buy/sell prices for a particular product, referred to as “top of book” feed, e.g., only changes to the top 10 price levels are communicated. Such limitations may be implemented to reduce consumption of bandwidth and message generation resources. In this case, while a request message may be considered market-impacting if it affects a price level other than the top buy/sell prices, it will not result in a message being sent to the market participants.
Examples of the various types of market data feeds which may be provided by electronic trading systems, such as the CME, in order to provide different types or subsets of market information or to provide such information in different formats include Market By Order, Market Depth (also known as Market by Price to a designated depth of the book), e.g., CME offers a 10-deep market by price feed, Top of Book (a single depth Market by Price feed), and combinations thereof. There may also be all manner of specialized feeds in terms of the content, i.e., providing, for example, derived data, such as a calculated index.
Market data feeds may be characterized as providing a “view” or “overview” of a given market, an aggregation or a portion thereof or changes thereto. For example, a market data feed, such as a Market By Price (“MBP”) feed, may convey, with each message, the entire/current state of a market, or portion thereof, for a particular product as a result of one or more market impacting events. For example, an MBP message may convey a total quantity of resting buy/sell orders at a particular price level in response to a new order being placed at that price. An MBP message may convey a quantity of an instrument which was traded in response to an incoming order being matched with one or more resting orders. MBP messages may only be generated for events affecting a portion of a market, e.g., only the top 10 resting buy/sell orders and, thereby, only provide a view of that portion. As used herein, a market impacting request may be said to impact the “view” of the market as presented via the market data feed.
An MBP feed may utilize different message formats for conveying different types of market impacting events. For example, when a new order is rested on the order book, an MBP message may reflect the current state of the price level to which the order was added, e.g., the new aggregate quantity and the new aggregate number of resting orders. As can be seen, such a message conveys no information about the individual resting orders, including the newly rested order, themselves to the market participants. Only the submitting market participant, who receives a separate private message acknowledging the event, knows that it was their order that was added to the book. Similarly, when a trade occurs, an MBP message may be sent which conveys the price at which the instrument was traded, the quantity traded and the number of participating orders, but may convey no information as to whose particular orders contributed to the trade. MBP feeds may further batch reporting of multiple events, i.e., report the result of multiple market impacting events in a single message.
Alternatively, a market data feed, referred to as a Market By Order (“MBO”) feed, may convey data reflecting a change that occurred to the order book rather than the result of that change, e.g., that order ABC for quantity X was added to price level Y or that order ABC and order XYZ traded a quantity X at a price Y. In this case, the MBO message identifies only the change that occurred so a market participant wishing to know the current state of the order book must maintain their own copy and apply the change reflected in the message to know the current state. As can be seen, MBO messages may carry much more data than MBP messages because MBO messages reflect information about each order, whereas MBP messages contain information about orders affecting some predetermined value levels. Furthermore, because specific orders, but not the submitting traders thereof, are identified, other market participants may be able to follow that order as it progresses through the market, e.g., as it is modified, canceled, traded, etc.
An MBP book data object may include information about multiple values. The MBP book data object may be arranged and structured so that information about each value is aggregated together. Thus, for a given value V (e.g., a price), the MBP book data object may aggregate all the information by value, such as for example, the number of orders having a certain position at value V, the quantity of total orders resting at value V, etc. Thus, the value field may be the key, or may be a unique field, within an MBP book data object. In one embodiment, the value for each entry within the MBP book data object is different. In one embodiment, information in an MBP book data object is presented in a manner such that the value field is the most granular field of information.
An MBO book data object may include information about multiple orders. The MBO book data object may be arranged and structured so that information about each order is represented. Thus, for a given order O, the MBO book data object may provide all of the information for order O. Thus, the order field may be the key, or may be a unique field, within an MBO book data object. In one embodiment, the order ID for each entry within the MBO book data object is different. In one embodiment, information in an MBO book data object is presented in a manner such that the order field is the most granular field of information.
Thus, the MBO book data object may include data about unique orders, e.g., all unique resting orders for a product, and the MBP book data object may include data about unique values, e.g., up to a predetermined level, e.g., top ten price or value levels, for a product.
It should be appreciated that the number, type and manner of market data feeds provided by an electronic trading system are implementation dependent and may vary depending upon the types of products traded by the electronic trading system, customer/trader preferences, bandwidth and data processing limitations, etc. and that all such feeds, now available or later developed, are contemplated herein. MBP and MBO feeds may refer to categories/variations of market data feeds, distinguished by whether they provide an indication of the current state of a market resulting from a market impacting event (MBP) or an indication of the change in the current state of a market due to a market impacting event (MBO).
Messages, whether MBO or MBP, generated responsive to market impacting events which are caused by a single order, such as a new order, an order cancellation, an order modification, etc., are fairly simple and compact and easily created and transmitted. However, messages, whether MBO or MBP, generated responsive to market impacting events which are caused by more than one order, such as a trade, may require the transmission of a significant amount of data to convey the requisite information to the market participants. For trades involving a large number of orders, e.g., a buy order for a quantity of 5000 which matches 5000 sell orders each for a quantity of 1, a significant amount of information may need to be sent, e.g., data indicative of each of the 5000 trades that have participated in the market impacting event.
In one embodiment, an exchange computing system may generate multiple order book objects, one for each type of view that is published or provided. For example, the system may generate an MBO book object and an MBP book object. It should be appreciated that each book object, or view for a product or market, may be derived from the MBO book object, which includes all the orders for a given financial product or market.
An inbound message may include an order that affects the MBO book object, the MBP book object, or both. An outbound message may include data from one or more of the structures within the exchange computing system, e.g., the MBO book object queues or the MBP book object queues.
Furthermore, each participating trader needs to receive a notification that their particular order has traded. Continuing with the example, this may require sending 5001 individual trade notification messages, or even 10,000+ messages where each contributing side (buy vs. sell) is separately reported, in addition to the notification sent to all of the market participants.
As detailed in U.S. Patent Publication No. 2015/0161727, the entirety of which is incorporated by reference herein and relied upon, it may be recognized that trade notifications sent to all market participants may include redundant information repeated for each participating trade and a structure of an MBP trade notification message may be provided which results in a more efficient communication of the occurrence of a trade. The message structure may include a header portion which indicates the type of transaction which occurred, i.e., a trade, as well as other general information about the event, an instrument portion which comprises data about each instrument which was traded as part of the transaction, and an order portion which comprises data about each participating order. In one embodiment, the header portion may include a message type, Transaction Time, Match Event Indicator, and Number of Market Data Entries (“No. MD Entries”) fields. The instrument portion may include a market data update action indicator (“MD Update Action”), an indication of the Market Data Entry Type (“MD Entry Type”), an identifier of the instrument/security involved in the transaction (“Security ID”), a report sequence indicator (“Rpt Seq”), the price at which the instrument was traded (“MD Entry PX”), the aggregate quantity traded at the indicated price (“ConsTradeQty”), the number of participating orders (“NumberOfOrders”), and an identifier of the aggressor side (“Aggressor Side”) fields. The order portion may further include an identifier of the participating order (“Order ID”), described in more detail below, and the quantity of the order traded (“MD Entry Size”) fields. It should be appreciated that the particular fields included in each portion are implementation dependent and that different fields in addition to, or in lieu of, those listed may be included depending upon the implementation. It should be appreciated that the exemplary fields can be compliant with the FIX binary and/or FIX/FAST protocol for the communication of the financial information.
The instrument portion contains a set of fields, e.g., seven fields accounting for 23 bytes, which are repeated for each participating instrument. In complex trades, such as trades involving combination orders or strategies, e.g., spreads, or implied trades, there may be multiple instruments being exchanged among the parties. In one embodiment, the order portion includes only one field, accounting for 4 bytes, for each participating order which indicates the quantity of that order which was traded. As will be discussed below, the order portion may further include an identifier of each order, accounting for an additional 8 bytes, in addition to the quantity thereof traded. As should be appreciated, data which would have been repeated for each participating order, is consolidated or otherwise summarized in the header and instrument portions of the message thereby eliminating redundant information and, overall, significantly reducing the size of the message.
The disclosed embodiments may be applicable to the use of either an MBP market data feed and/or an MBO market data feed.

Matching and Transaction Processing

Market participants, e.g., traders, use software to send orders or messages to the trading platform. The order identifies the product, the quantity of the product the trader wishes to trade, a price at which the trader wishes to trade the product, and a direction of the order (i.e., whether the order is a bid, i.e., an offer to buy, or an ask, i.e., an offer to sell). It will be appreciated that there may be other order types or messages that traders can send including requests to modify or cancel a previously submitted order.
The exchange computer system monitors incoming orders received thereby and attempts to identify, i.e., match or allocate, as described herein, one or more previously received, but not yet matched, orders, i.e., limit orders to buy or sell a given quantity at a given price, referred to as “resting” orders, stored in an order book database, wherein each identified order is contra to the incoming order and has a favorable price relative to the incoming order. An incoming order may be an “aggressor” order, i.e., a market order to sell a given quantity at whatever may be the current resting bid order price(s) or a market order to buy a given quantity at whatever may be the current resting ask order price(s). An incoming order may be a “market making” order, i.e., a market order to buy or sell at a price for which there are currently no resting orders. In particular, if the incoming order is a bid, i.e., an offer to buy, then the identified order(s) will be an ask, i.e., an offer to sell, at a price that is identical to or higher than the bid price. Similarly, if the incoming order is an ask, i.e., an offer to sell, the identified order(s) will be a bid, i.e., an offer to buy, at a price that is identical to or lower than the offer price.
An exchange computing system may receive conditional orders or messages for a data object, where the order may include two prices or values: a reference value and a stop value. A conditional order may be configured so that when a product represented by the data object trades at the reference price, the stop order is activated at the stop value. For example, if the exchange computing system's order management module (described below) includes a stop order with a stop price of 5 and a limit price of 1 for a product, and a trade at 5 (i.e., the stop price of the stop order) occurs, then the exchange computing system attempts to trade at 1 (i.e., the limit price of the stop order). In other words, a stop order is a conditional order to trade (or execute) at the limit price that is triggered (or elected) when a trade at the stop price occurs.
Stop orders also rest on, or are maintained in, an order book to monitor for a trade at the stop price, which triggers an attempted trade at the limit price. In some embodiments, a triggered limit price for a stop order may be treated as an incoming order.
Upon identification (matching) of a contra order(s), a minimum of the quantities associated with the identified order and the incoming order is matched and that quantity of each of the identified and incoming orders become two halves of a matched trade that is sent to a clearing house. The exchange computer system considers each identified order in this manner until either all of the identified orders have been considered or all of the quantity associated with the incoming order has been matched, i.e., the order has been filled. If any quantity of the incoming order remains, an entry may be created in the order book database and information regarding the incoming order is recorded therein, i.e., a resting order is placed on the order book for the remaining quantity to await a subsequent incoming order counter thereto.
It should be appreciated that in electronic trading systems implemented via an exchange computing system, a trade price (or match value) may differ from (i.e., be better for the submitter, e.g., lower than a submitted buy price or higher than a submitted sell price) the limit price that is submitted, e.g., a price included in an incoming message, or a triggered limit price from a stop order.
As used herein, “better” than a reference value means lower than the reference value if the transaction is a purchase (or acquire) transaction, and higher than the reference value if the transaction is a sell transaction. Said another way, for purchase (or acquire) transactions, lower values are better, and for sell (or relinquish) transactions, higher values are better.
Traders access the markets on a trading platform using trading software that receives and displays at least a portion of the order book for a market, i.e., at least a portion of the currently resting orders, enables a trader to provide parameters for an order for the product traded in the market, and transmits the order to the exchange computer system. The trading software typically includes a graphical user interface to display at least a price and quantity of some of the entries in the order book associated with the market. The number of entries of the order book displayed is generally preconfigured by the trading software, limited by the exchange computer system, or customized by the user. Some graphical user interfaces display order books of multiple markets of one or more trading platforms. The trader may be an individual who trades on his/her behalf, a broker trading on behalf of another person or entity, a group, or an entity. Furthermore, the trader may be a system that automatically generates and submits orders.
If the exchange computer system identifies that an incoming market order may be filled by a combination of multiple resting orders, e.g., the resting order at the best price only partially fills the incoming order, the exchange computer system may allocate the remaining quantity of the incoming, i.e., that which was not filled by the resting order at the best price, among such identified orders in accordance with prioritization and allocation rules/algorithms, referred to as “allocation algorithms” or “matching algorithms,” as, for example, may be defined in the specification of the particular financial product or defined by the exchange for multiple financial products. Similarly, if the exchange computer system identifies multiple orders contra to the incoming limit order and that have an identical price which is favorable to the price of the incoming order, i.e., the price is equal to or better, e.g., lower if the incoming order is a buy (or instruction to purchase, or instruction to acquire) or higher if the incoming order is a sell (or instruction to relinquish), than the price of the incoming order, the exchange computer system may allocate the quantity of the incoming order among such identified orders in accordance with the matching algorithms as, for example, may be defined in the specification of the particular financial product or defined by the exchange for multiple financial products.
An exchange responds to inputs, such as trader orders, cancellation, etc., in a manner as expected by the market participants, such as based on market data, e.g., prices, available counter-orders, etc., to provide an expected level of certainty that transactions will occur in a consistent and predictable manner and without unknown or unascertainable risks. Accordingly, the method by which incoming orders are matched with resting orders must be defined so that market participants have an expectation of what the result will be when they place an order or have resting orders and an incoming order is received, even if the expected result is, in fact, at least partially unpredictable due to some component of the process being random or arbitrary or due to market participants having imperfect or less than all information, e.g., unknown position of an order in an order book. Typically, the exchange defines the matching/allocation algorithm that will be used for a particular financial product, with or without input from the market participants. Once defined for a particular product, the matching/allocation algorithm is typically not altered, except in limited circumstance, such as to correct errors or improve operation, so as not to disrupt trader expectations. It will be appreciated that different products offered by a particular exchange may use different matching algorithms.
For example, a first-in/first-out (FIFO) matching algorithm, also referred to as a “Price Time” algorithm, considers each identified order sequentially in accordance with when the identified order was received. The quantity of the incoming order is matched to the quantity of the identified order at the best price received earliest, then quantities of the next earliest best price orders, and so on until the quantity of the incoming order is exhausted. Some product specifications define the use of a pro-rata matching algorithm, wherein a quantity of an incoming order is allocated to each of plurality of identified orders proportionally. Some exchange computer systems provide a priority to certain standing orders in particular markets. An example of such an order is the first order that improves a price (i.e., improves the market) for the product during a trading session. To be given priority, the trading platform may require that the quantity associated with the order is at least a minimum quantity. Further, some exchange computer systems cap the quantity of an incoming order that is allocated to a standing order on the basis of a priority for certain markets. In addition, some exchange computer systems may give a preference to orders submitted by a trader who is designated as a market maker for the product. Other exchange computer systems may use other criteria to determine whether orders submitted by a particular trader are given a preference. Typically, when the exchange computer system allocates a quantity of an incoming order to a plurality of identified orders at the same price, the trading host allocates a quantity of the incoming order to any orders that have been given priority. The exchange computer system thereafter allocates any remaining quantity of the incoming order to orders submitted by traders designated to have a preference, and then allocates any still remaining quantity of the incoming order using the FIFO or pro-rata algorithms. Pro-rata algorithms used in some markets may require that an allocation provided to a particular order in accordance with the pro-rata algorithm must meet at least a minimum allocation quantity. Any orders that do not meet or exceed the minimum allocation quantity are allocated to on a FIFO basis after the pro-rata allocation (if any quantity of the incoming order remains). More information regarding order allocation may be found in U.S. Pat. No. 7,853,499, the entirety of which is incorporated by reference herein and relied upon.
Other examples of matching algorithms which may be defined for allocation of orders of a particular financial product include: Price Explicit Time; Order Level Pro Rata; Order Level Priority Pro Rata; Preference Price Explicit Time; Preference Order Level Pro Rata; Preference Order Level Priority Pro Rata; Threshold Pro-Rata; Priority Threshold Pro-Rata; Preference Threshold Pro-Rata; Priority Preference Threshold Pro-Rata; and Split Price-Time Pro-Rata, which are described in U.S. patent application Ser. No. 13/534,499, filed on Jun. 27, 2012, entitled “Multiple Trade Matching Algorithms,” published as U.S. Patent Application Publication No. 2014/0006243 A1, the entirety of which is incorporated by reference herein and relied upon.
With respect to incoming orders, some traders, such as automated and/or algorithmic traders, attempt to respond to market events, such as to capitalize upon a mispriced resting order or other market inefficiency, as quickly as possible. This may result in penalizing the trader who makes an errant trade, or whose underlying trading motivations have changed, and who cannot otherwise modify or cancel their order faster than other traders can submit trades there against. It may considered that an electronic trading system that rewards the trader who submits their order first creates an incentive to either invest substantial capital in faster trading systems, participate in the market substantially to capitalize on opportunities (aggressor side/lower risk trading) as opposed to creating new opportunities (market making/higher risk trading), modify existing systems to streamline business logic at the cost of trade quality, or reduce one's activities and exposure in the market. The result may be a lesser quality market and/or reduced transaction volume, and corresponding thereto, reduced fees to the exchange.
With respect to resting orders, allocation/matching suitable resting orders to match against an incoming order can be performed, as described herein, in many different ways. Generally, it will be appreciated that allocation/matching algorithms are only needed when the incoming order quantity is less than the total quantity of the suitable resting orders as, only in this situation, is it necessary to decide which resting order(s) will not be fully satisfied, which trader(s) will not get their orders filled. It can be seen from the above descriptions of the matching/allocation algorithms, that they fall generally into three categories: time priority/first-in-first-out (“FIFO”), pro rata, or a hybrid of FIFO and pro rata.
FIFO generally rewards the first trader to place an order at a particular price and maintains this reward indefinitely. So if a trader is the first to place an order at price X, no matter how long that order rests and no matter how many orders may follow at the same price, as soon as a suitable incoming order is received, that first trader will be matched first. This “first mover” system may commit other traders to positions in the queue after the first move traders. Furthermore, while it may be beneficial to give priority to a trader who is first to place an order at a given price because that trader is, in effect, taking a risk, the longer that the trader's order rests, the less beneficial it may be. For instance, it could deter other traders from adding liquidity to the marketplace at that price because they know the first mover (and potentially others) already occupies the front of the queue.
With a pro rata allocation, incoming orders are effectively split among suitable resting orders. This provides a sense of fairness in that everyone may get some of their order filled. However, a trader who took a risk by being first to place an order (a “market turning” order) at a price may end up having to share an incoming order with a much later submitted order. Furthermore, as a pro rata allocation distributes the incoming order according to a proportion based on the resting order quantities, traders may place orders for large quantities, which they are willing to trade but may not necessarily want to trade, in order to increase the proportion of an incoming order that they will receive. This results in an escalation of quantities on the order book and exposes a trader to a risk that someone may trade against one of these orders and subject the trader to a larger trade than they intended. In the typical case, once an incoming order is allocated against these large resting orders, the traders subsequently cancel the remaining resting quantity which may frustrate other traders. Accordingly, as FIFO and pro rata both have benefits and problems, exchanges may try to use hybrid allocation/matching algorithms which attempt to balance these benefits and problems by combining FIFO and pro rata in some manner. However, hybrid systems define conditions or fixed rules to determine when FIFO should be used and when pro rata should be used. For example, a fixed percentage of an incoming order may be allocated using a FIFO mechanism with the remainder being allocated pro rata.

Clearing House

The clearing house of an exchange clears, settles and guarantees matched transactions in contracts occurring through the facilities of the exchange. In addition, the clearing house establishes and monitors financial requirements for clearing members and conveys certain clearing privileges in conjunction with the relevant exchange markets.
The clearing house establishes clearing level performance bonds (margins) for all products of the exchange and establishes minimum performance bond requirements for customers of such products. A performance bond, also referred to as a margin requirement, corresponds with the funds that must be deposited by a customer with his or her broker, by a broker with a clearing member or by a clearing member with the clearing house, for the purpose of insuring the broker or clearing house against loss on open futures or options contracts. This is not a part payment on a purchase. The performance bond helps to ensure the financial integrity of brokers, clearing members and the exchange as a whole. The performance bond refers to the minimum dollar deposit required by the clearing house from clearing members in accordance with their positions. Maintenance, or maintenance margin, refers to a sum, usually smaller than the initial performance bond, which must remain on deposit in the customer's account for any position at all times. The initial margin is the total amount of margin per contract required by the broker when a futures position is opened. A drop in funds below this level requires a deposit back to the initial margin levels, i.e., a performance bond call. If a customer's equity in any futures position drops to or under the maintenance level because of adverse price action, the broker must issue a performance bond/margin call to restore the customer's equity. A performance bond call, also referred to as a margin call, is a demand for additional funds to bring the customer's account back up to the initial performance bond level whenever adverse price movements cause the account to go below the maintenance.
The exchange derives its financial stability in large part by removing debt obligations among market participants as they occur. This is accomplished by determining a settlement price at the close of the market each day for each contract and marking all open positions to that price, referred to as “mark to market.” Every contract is debited or credited based on that trading session's gains or losses. As prices move for or against a position, funds flow into and out of the trading account. In the case of the CME, each business day by 6:40 a.m. Chicago time, based on the mark-to-the-market of all open positions to the previous trading day's settlement price, the clearing house pays to or collects cash from each clearing member. This cash flow, known as settlement variation, is performed by CME's settlement banks based on instructions issued by the clearing house. All payments to and collections from clearing members are made in “same-day” funds. In addition to the 6:40 a.m. settlement, a daily intra-day mark-to-the market of all open positions, including trades executed during the overnight GLOBEX®, the CME's electronic trading systems, trading session and the current day's trades matched before 11:15 a.m., is performed using current prices. The resulting cash payments are made intra-day for same day value. In times of extreme price volatility, the clearing house has the authority to perform additional intra-day mark-to-the-market calculations on open positions and to call for immediate payment of settlement variation. CME's mark-to-the-market settlement system may differ from the settlement systems implemented by many other financial markets, including the interbank, Treasury securities, over-the-counter foreign exchange and debt, options, and equities markets, where participants regularly assume credit exposure to each other. In those markets, the failure of one participant can have a ripple effect on the solvency of the other participants. Conversely, CME's mark-to-the-market system may not allow losses to accumulate over time or allow a market participant the opportunity to defer losses associated with market positions.
While the disclosed embodiments may be described in reference to the CME, it should be appreciated that these embodiments are applicable to any exchange. Such other exchanges may include a clearing house that, like the CME clearing house, clears, settles and guarantees all matched transactions in contracts of the exchange occurring through its facilities. In addition, such clearing houses establish and monitor financial requirements for clearing members and convey certain clearing privileges in conjunction with the relevant exchange markets.
The disclosed embodiments are also not limited to uses by a clearing house or exchange for purposes of enforcing a performance bond or margin requirement. For example, a market participant may use the disclosed embodiments in a simulation or other analysis of a portfolio. In such cases, the settlement price may be useful as an indication of a value at risk and/or cash flow obligation rather than a performance bond. The disclosed embodiments may also be used by market participants or other entities to forecast or predict the effects of a prospective position on the margin requirement of the market participant.
As discussed herein, the disclosed embodiments may use the settlement prices, along with other market data for a target futures contract, to determine a tracking value. The value of a tracking financial instrument may be based on the tracking value, whereby trading the tracking financial instrument enables a trader to avoid many of the complications (e.g., computational, logistical, etc.) associated with trading a traditional futures contract.

Spread Instruments

Traders trading on an exchange including, for example, exchange computer system 100, often desire to trade multiple financial instruments in combination. Each component of the combination may be called a leg. Traders can submit orders for individual legs or in some cases can submit a single order for multiple financial instruments in an exchange-defined combination. Such orders may be called a strategy order, a spread order, or a variety of other names.
A spread instrument may involve the simultaneous purchase of one security and sale of a related security, called legs, as a unit. The legs of a spread instrument may be options or futures contracts, or combinations of the two. Trades in spread instruments are executed to yield an overall net position whose value, called the spread, depends on the difference between the prices of the legs. Spread instruments may be traded in an attempt to profit from the widening or narrowing of the spread, rather than from movement in the prices of the legs directly. Spread instruments are either “bought” or “sold” depending on whether the trade will profit from the widening or narrowing of the spread, respectively. An exchange often supports trading of common spreads as a unit rather than as individual legs, thus ensuring simultaneous execution of the two legs, eliminating the execution risk of one leg executing but the other failing.
One example of a spread instrument is a calendar spread instrument. The legs of a calendar spread instrument differ in delivery date of the underlier. The leg with the earlier occurring delivery date is often referred to as the lead month contract. A leg with a later occurring delivery date is often referred to as a deferred month contract. Another example of a spread instrument is a butterfly spread instrument, which includes three legs having different delivery dates. The delivery dates of the legs may be equidistant to each other. The counterparty orders that are matched against such a combination order may be individual, “outright” orders or may be part of other combination orders.
In other words, an exchange may receive, and hold or let rest on the books, outright orders for individual contracts as well as outright orders for spreads associated with the individual contracts. An outright order (for either a contract or for a spread) may include an outright bid or an outright offer, although some outright orders may bundle many bids or offers into one message (often called a mass quote).
A spread is an order for the price difference between two contracts. This results in the trader holding a long and a short position in two or more related futures or options on futures contracts, with the objective of profiting from a change in the price relationship. A typical spread product includes multiple legs, each of which may include one or more underlying financial instruments. A butterfly spread product, for example, may include three legs. The first leg may consist of buying a first contract. The second leg may consist of selling two of a second contract. The third leg may consist of buying a third contract. The price of a butterfly spread product may be calculated as:
Butterfly=Leg1−2*Leg2+Leg3
In the above equation, Leg1 equals the price of the first contract, Leg2 equals the price of the second contract and Leg3 equals the price of the third contract. Thus, a butterfly spread could be assembled from two inter-delivery spreads in opposite directions with the center delivery month common to both spreads.
A calendar spread, also called an intra-commodity spread, for futures is an order for the simultaneous purchase and sale of the same futures contract in different contract months (i.e., buying a September CME S&P 500® futures contract and selling a December CME S&P 500 futures contract).
A crush spread is an order, usually in the soybean futures market, for the simultaneous purchase of soybean futures and the sale of soybean meal and soybean oil futures to establish a processing margin. A crack spread is an order for a specific spread trade involving simultaneously buying and selling contracts in crude oil and one or more derivative products, typically gasoline and heating oil. Oil refineries may trade a crack spread to hedge the price risk of their operations, while speculators attempt to profit from a change in the oil/gasoline price differential.
A straddle is an order for the purchase or sale of an equal number of puts and calls, with the same strike price and expiration dates. A long straddle is a straddle in which a long position is taken in both a put and a call option. A short straddle is a straddle in which a short position is taken in both a put and a call option. A strangle is an order for the purchase of a put and a call, in which the options have the same expiration and the put strike is lower than the call strike, called a long strangle. A strangle may also be the sale of a put and a call, in which the options have the same expiration and the put strike is lower than the call strike, called a short strangle. A pack is an order for the simultaneous purchase or sale of an equally weighted, consecutive series of four futures contracts, quoted on an average net change basis from the previous day's settlement price. Packs provide a readily available, widely accepted method for executing multiple futures contracts with a single transaction. A bundle is an order for the simultaneous sale or purchase of one each of a series of consecutive futures contracts. Bundles provide a readily available, widely accepted method for executing multiple futures contracts with a single transaction.

Implication

Thus an exchange may match outright orders, such as individual contracts or spread orders (which as discussed herein could include multiple individual contracts). The exchange may also imply orders from outright orders. For example, exchange computer system 100 may derive, identify and/or advertise, publish, display or otherwise make available for trading orders based on outright orders.
As was described above, the financial instruments which are the subject of the orders to trade, may include one or more component financial instruments. While each financial instrument may have its own order book, i.e. market, in which it may be traded, in the case of a financial instrument having more than one component financial instrument, those component financial instruments may further have their own order books in which they may be traded. Accordingly, when an order for a financial instrument is received, it may be matched against a suitable counter order in its own order book or, possibly, against a combination of suitable counter orders in the order books the component financial instruments thereof, or which share a common component financial instrument. For example, an order for a spread contract comprising component financial instruments A and B may be matched against another suitable order for that spread contract. However, it may also be matched against suitable separate counter orders for the A and for the B component financial instruments found in the order books therefore. Similarly, if an order for the A contract is received and suitable match cannot be found in the A order book, it may be possible to match order for A against a combination of a suitable counter order for a spread contract comprising the A and B component financial instruments and a suitable counter order for the B component financial instrument. This is referred to as “implication” where a given order for a financial instrument may be matched via a combination of suitable counter orders for financial instruments which share common, or otherwise interdependent, component financial instruments. Implication increases the liquidity of the market by providing additional opportunities for orders to be traded. Increasing the number of transactions may further increase the number of transaction fees collected by the electronic trading system.
The order for a particular financial instrument actually received from a market participant, whether it comprises one or more component financial instruments, is referred to as a “real” or “outright” order, or simply as an outright. The one or more orders which must be synthesized and submitted into order books other than the order book for the outright order to create matches therein, are referred to as “implied” orders.
Upon receipt of an incoming order, the identification or derivation of suitable implied orders which would allow at least a partial trade of the incoming outright order to be executed is referred to as “implication” or “implied matching”, the identified orders being referred to as an “implied match.” Depending on the number of component financial instruments involved, and whether those component financial instruments further comprise component financial instruments of their own, there may be numerous different implied matches identified which would allow the incoming order to be at least partially matched and mechanisms may be provided to arbitrate, e.g., automatically, among them, such as by picking the implied match comprising the least number of component financial instruments or the least number of synthesized orders.
Upon receipt of an incoming order, or thereafter, a combination of one or more suitable/hypothetical counter orders which have not actually been received but if they were received, would allow at least a partial trade of the incoming order to be executed, may be, e.g., automatically, identified or derived and referred to as an “implied opportunity.” As with implied matches, there may be numerous implied opportunities identified for a given incoming order. Implied opportunities are advertised to the market participants, such as via suitable synthetic orders, e.g. counter to the desired order, being placed on the respective order books to rest (or give the appearance that there is an order resting) and presented via the market data feed, electronically communicated to the market participants, to appear available to trade in order to solicit the desired orders from the market participants. Depending on the number of component financial instruments involved, and whether those component financial instruments further comprise component financial instruments of their own, there may be numerous implied opportunities, the submission of a counter order in response thereto, that would allow the incoming order to be at least partially matched.
Implied opportunities, e.g. the advertised synthetic orders, may frequently have better prices than the corresponding real orders in the same contract. This can occur when two or more traders incrementally improve their order prices in the hope of attracting a trade, since combining the small improvements from two or more real orders can result in a big improvement in their combination. In general, advertising implied opportunities at better prices will encourage traders to enter the opposing orders to trade with them. The more implied opportunities that the match engine of an electronic trading system can calculate/derive, the greater this encouragement will be and the more the exchange will benefit from increased transaction volume. However, identifying implied opportunities may be computationally intensive. One response message may trigger the calculations of hundreds or thousands of calculations to determine implied opportunities, which are then published, e.g., as implied messages, via market data feeds. In a high performance trading system where low transaction latency is important, it may be important to identify and advertise implied opportunities quickly so as to improve or maintain market participant interest and/or market liquidity.
For example, two different outright orders may be resting on the books, or be available to trade or match. The orders may be resting because there are no outright orders that match the resting orders. Thus, each of the orders may wait or rest on the books until an appropriate outright counteroffer comes into the exchange, or is placed by a user of the exchange. The orders may be for two different contracts that only differ in delivery dates. It should be appreciated that such orders could be represented as a calendar spread order. Instead of waiting for two appropriate outright orders to be received that would match the two existing or resting orders, the exchange computer system may identify a hypothetical spread order that, if entered into the system as a tradable spread order, would allow the exchange computer system to match the two outright orders. The exchange may thus advertise or make available a spread order to users of the exchange system that, if matched with a tradable spread order, would allow the exchange to also match the two resting orders. Thus, the exchange computing system may be configured to detect that the two resting orders may be combined into an order in the spread instrument and accordingly creates an implied order.
In other words, the exchange may imply the counteroffer order by using multiple orders to create the counteroffer order. Examples of spreads include implied IN, implied OUT, 2nd- or multiple-generation, crack spreads, straddle, strangle, butterfly, and pack spreads. Implied IN spread orders are derived from existing outright orders in individual legs. Implied OUT outright orders are derived from a combination of an existing spread order and an existing outright order in one of the individual underlying legs. Implied orders can fill in gaps in the market and allow spreads and outright futures traders to trade in a product where there would otherwise have been little or no available bids and asks.
For example, implied IN spreads may be created from existing outright orders in individual contracts where an outright order in a spread can be matched with other outright orders in the spread or with a combination of orders in the legs of the spread. An implied OUT spread may be created from the combination of an existing outright order in a spread and an existing outright order in one of the individual underlying leg. An implied IN or implied OUT spread may be created when an electronic matching system simultaneously works synthetic spread orders in spread markets and synthetic orders in the individual leg markets without the risk to the trader/broker of being double filled or filled on one leg and not on the other leg.
By linking the spread and outright markets, implied spread trading increases market liquidity. For example, a buy in one contract month and an offer in another contract month in the same futures contract can create an implied market in the corresponding calendar spread. An exchange may match an order for a spread product with another order for the spread product. Some exchanges attempt to match orders for spread products with multiple orders for legs of the spread products. With such systems, every spread product contract is broken down into a collection of legs and an attempt is made to match orders for the legs.
Implied orders, unlike real orders, are generated by electronic trading systems. In other words, implied orders are computer generated orders derived from real orders. The system creates the “derived” or “implied” order and provides the implied order as a market that may be traded against. If a trader trades against this implied order, then the real orders that combined to create the implied order and the resulting market are executed as matched trades. Implied orders generally increase overall market liquidity. The creation of implied orders increases the number of tradable items, which has the potential of attracting additional traders. Exchanges benefit from increased transaction volume. Transaction volume may also increase as the number of matched trade items increases.
Examples of implied spread trading include those disclosed in U.S. Patent Publication No. 2005/0203826, entitled “Implied Spread Trading System,” the entire disclosure of which is incorporated by reference herein and relied upon. Examples of implied markets include those disclosed in U.S. Pat. No. 7,039,610, entitled “Implied Market Trading System,” the entire disclosure of which is incorporated by reference herein and relied upon.
In some cases, the outright market for the deferred month or other constituent contract may not be sufficiently active to provide market data (e.g., bid-offer data) and/or trade data. Spread instruments involving such contracts may nonetheless be made available by the exchange. The market data from the spread instruments may then be used to determine a settlement price for the constituent contract. The settlement price may be determined, for example, through a boundary constraint-based technique based on the market data (e.g., bid-offer data) for the spread instrument, as described in U.S. Patent Publication No. 2015/0073962 entitled “Boundary Constraint-Based Settlement in Spread Markets”, the entire disclosure of which is incorporated by reference herein and relied upon. Settlement price determination techniques may be implemented to cover calendar month spread instruments having different deferred month contracts.
Referring again to data transaction processing systems, a system may depend on certain rules, logic, and inter-related objects and data. In technical and computing environments, a system may calculate values for multiple objects subject to rules, e.g., business or environment logic, associated with the objects. Certain object types may also depend on other object types. For example, a computing environment may include multiple objects of different types, e.g., base objects and composite objects. A composite object as used herein is an object whose value depends on, is related to, or is influenced by, the values of other objects, such as base objects or other composite objects. For example, a composite object may involve transactions between multiple, e.g., two, base objects. Or, a composite object may define a relationship between other objects. Thus, composite objects depend on the values of other system objects. In one embodiment, a composite object involves or defines a transaction or relationship between at least two other objects. For example, a composite object involves or defines a transaction or relationship between two base objects. A base object may represent an outright order associated with a financial instrument, and a composite object may represent a spread order associated with a financial instrument.

II. Computing Environment

The embodiments may be described in terms of a distributed computing system. The particular examples identify a specific set of components useful in a futures and options exchange. However, many of the components and inventive features are readily adapted to other electronic trading environments. The specific examples described herein may teach specific protocols and/or interfaces, although it should be understood that the principles involved may be extended to, or applied in, other protocols and interfaces.
It should be appreciated that the plurality of entities utilizing or involved with the disclosed embodiments, e.g., the market participants, may be referred to by other nomenclature reflecting the role that the particular entity is performing with respect to the disclosed embodiments and that a given entity may perform more than one role depending upon the implementation and the nature of the particular transaction being undertaken, as well as the entity's contractual and/or legal relationship with another market participant and/or the exchange.
An exemplary trading network environment for implementing trading systems and methods is shown in FIG. 1. An exchange computer system 100 receives messages that include orders and transmits market data related to orders and trades to users, such as via wide area network 162 and/or local area network 160 and computer devices 150, 152, 154, 156 and 158, as described herein, coupled with the exchange computer system 100.
Herein, the phrase “coupled with” is defined to mean directly connected to or indirectly connected through one or more intermediate components. Such intermediate components may include both hardware and software based components. Further, to clarify the use in the pending claims and to hereby provide notice to the public, the phrases “at least one of <A>, <B>, . . . and <N>” or “at least one of <A>, <B>, . . . <N>, or combinations thereof” are defined by the Applicant in the broadest sense, superseding any other implied definitions herebefore or hereinafter unless expressly asserted by the Applicant to the contrary, to mean one or more elements selected from the group comprising A, B, . . . and N, that is to say, any combination of one or more of the elements A, B, . . . or N including any one element alone or in combination with one or more of the other elements which may also include, in combination, additional elements not listed.
The exchange computer system 100 may be implemented with one or more mainframe, desktop or other computers, such as the example computer 200 described herein with respect to FIG. 2. A user database 102 may be provided which includes information identifying traders and other users of exchange computer system 100, such as account numbers or identifiers, user names and passwords. An account data module 104 may be provided which may process account information that may be used during trades.
A match engine module 106 may be included to match bid and offer prices and may be implemented with software that executes one or more algorithms for matching bids and offers. A trade database 108 may be included to store information identifying trades and descriptions of trades. In particular, trade database 108 may store information identifying the time that a trade took place and the contract price.
An order book module 110 may be included to compute or otherwise determine current bid and offer prices, e.g., in a continuous auction market, or also operate as an order accumulation buffer for a batch auction market.
A market data module 112 may be included to collect market data and prepare the data for transmission to users. For example, the market data module 112 may prepare the market data feeds described herein.
A risk management module 114 may be included to compute and determine a user's risk utilization in relation to the user's defined risk thresholds. The risk management module 114 may also be configured to determine risk assessments or exposure levels in connection with positions held by a market participant. The risk management module 114 may be configured to administer, manage or maintain one or more margining mechanisms implemented by the exchange computer system 100. Such administration, management or maintenance may include managing a number of database records reflective of margin accounts of the market participants. In some embodiments, the risk management module 114 implements one or more aspects of the disclosed embodiments, including, for instance, principal component analysis (PCA) based margining, in connection with interest rate swap (IRS) portfolios, as described herein.
A message management module 116 may be included to, among other things, receive, and extract orders from, electronic data transaction request messages. The message management module 116 may define a point of ingress into the exchange computer system 100 where messages are ordered and considered to be received by the system. This may be considered a point of determinism in the exchange computer system 100 that defines the earliest point where the system can ascribe an order of receipt to arriving messages. The point of determinism may or may not be at or near the demarcation point between the exchange computer system 100 and a public/internet network infrastructure. The message management module 116 processes messages by interpreting the contents of a message based on the message transmit protocol, such as the transmission control protocol (“TCP”), to provide the content of the message for further processing by the exchange computer system.
The message management module 116 may also be configured to detect characteristics of an order for a transaction to be undertaken in an electronic marketplace. For example, the message management module 116 may identify and extract order content such as a price, product, volume, and associated market participant for an order. The message management module 116 may also identify and extract data indicating an action to be executed by the exchange computer system 100 with respect to the extracted order. For example, the message management module 116 may determine the transaction type of the transaction requested in a given message. A message may include an instruction to perform a type of transaction. The transaction type may be, in one embodiment, a request/offer/order to either buy or sell a specified quantity or units of a financial instrument at a specified price or value. The message management module 116 may also identify and extract other order information and other actions associated with the extracted order. All extracted order characteristics, other information, and associated actions extracted from a message for an order may be collectively considered an order as described and referenced herein.
Order or message characteristics may include, for example, the state of the system after a message is received, arrival time (e.g., the time a message arrives at the Market Segment Gateway (“MSG”) that is the point of ingress/entry and/or egress/departure for all transactions, i.e., the network traffic/packets containing the data therefore), message type (e.g., new, modify, cancel), and the number of matches generated by a message. Order or message characteristics may also include market participant side (e.g., buyer or seller) or time in force (e.g., a good until end of day order that is good for the full trading day, a good until canceled ordered that rests on the order book until matched, or a fill or kill order that is canceled if not filled immediately, or a fill and kill order (FOK) that is filled to the maximum amount possible based on the state of the order book at the time the FOK order is processed, and any remaining or unfilled/unsatisfied quantity is not stored on the books or allowed to rest).
An order processing module 118 may be included to decompose delta-based, spread instrument, bulk and other types of composite orders for processing by the order book module 110 and/or the match engine module 106. The order processing module 118 may also be used to implement one or more procedures related to clearing an order. The order may be communicated from the message management module 116 to the order processing module 118. The order processing module 118 may be configured to interpret the communicated order, and manage the order characteristics, other information, and associated actions as they are processed through an order book module 110 and eventually transacted on an electronic market. For example, the order processing module 118 may store the order characteristics and other content and execute the associated actions. In an embodiment, the order processing module 118 may execute an associated action of placing the order into an order book for an electronic trading system managed by the order book module 110. In an embodiment, placing an order into an order book and/or into an electronic trading system may be considered a primary action for an order. The order processing module 118 may be configured in various arrangements, and may be configured as part of the order book module 110, part of the message management module 116, or as an independent functioning module.
As an intermediary to electronic trading transactions, the exchange bears a certain amount of risk in each transaction that takes place. To that end, the clearing house implements risk management mechanisms to protect the exchange. One or more of the modules of the exchange computer system 100 may be configured to determine settlement prices for constituent contracts, such as deferred month contracts, of spread instruments, such as for example, settlement module 120. A settlement module 120 (or settlement processor or other payment processor) may be included to provide one or more functions related to settling or otherwise administering transactions cleared by the exchange. Settlement module 120 of the exchange computer system 100 may implement one or more settlement price determination techniques. Settlement-related functions need not be limited to actions or events occurring at the end of a contract term. For instance, in some embodiments, settlement-related functions may include or involve daily or other mark to market settlements for margining purposes. In some cases, the settlement module 120 may be configured to communicate with the trade database 108 (or the memory(ies) on which the trade database 108 is stored) and/or to determine a payment amount based on a spot price, the price of the futures contract or other financial instrument, or other price data, at various times. The determination may be made at one or more points in time during the term of the financial instrument in connection with a margining mechanism. For example, the settlement module 120 may be used to determine a mark to market amount on a daily basis during the term of the financial instrument. Such determinations may also be made on a settlement date for the financial instrument for the purposes of final settlement.
In some embodiments, the settlement module 120 may be integrated to any desired extent with one or more of the other modules or processors of the exchange computer system 100. For example, the settlement module 120 and the risk management module 114 may be integrated to any desired extent. In some cases, one or more margining procedures or other aspects of the margining mechanism(s) may be implemented by the settlement module 120.
Index module 122 may be included to generate financial indexes, such as the volatility index discussed herein, such as by generating tracking financial instruments or other instruments such as the POP Futures contract described herein, which can be listed by the exchange computing system or made available for trading by the exchange computing system, and which may then be further used to generate an index as described herein. As described herein, the index module 122 may operate automatically to generate and introduce requisite financial instruments into the exchange computer system 100 for trading and, based thereon, periodically automatically generate an index based on the trading of that financial instrument. It will be appreciated that the index module may also, or alternatively, operate responsive to requests/instructions from market participants or the operator of the exchange computer system 100 to generate specific index values and, responsive thereto, generate and introduce the requisite financial instrument for trading necessary for the index module 122 to generate the requested index. Index values may be generated and published on a periodic basis, such as every 1 second, and/or may be generated and published on demand, such as based on instructions or a request from a market participant or the operator of the exchange computer system 100. As shown in FIG. 5, in one embodiment, the index module 122 includes a market data module interface component 113 for interfacing with the market data module 112 to obtain data indicative of current trading prices for traded financial instruments, etc. In one embodiment, the index module 122 includes a settlement module interface component 121 for interfacing with the settlement module 120 to obtain data indicative of the settlement of traded instruments which have reached their expiration. In one embodiment, the index module 122 includes an index value calculator component 508 which, as will be described, computes the index value. In one embodiment, the index module 122 further includes an index value publishes component 510 coupled with the index value calculator component 508 and operative to publish, transmit or otherwise make available the calculated index value, such as via an electronic communications network 162.
One or more of the above-described modules of the exchange computer system 100 may be used to gather or obtain data to support the settlement price determination, as well as a subsequent margin requirement determination. For example, the order book module 110 and/or the market data module 112 may be used to receive, access, or otherwise obtain market data, such as bid-offer values of orders currently on the order books. The trade database 108 may be used to receive, access, or otherwise obtain trade data indicative of the prices and volumes of trades that were recently executed in a number of markets. In some cases, transaction data (and/or bid/ask data) may be gathered or obtained from open outcry pits and/or other sources and incorporated into the trade and market data from the electronic trading system(s). It should be appreciated that concurrent processing limits may be defined by or imposed separately or in combination on one or more of the trading system components.
The disclosed mechanisms may be implemented at any logical and/or physical point(s), or combinations thereof, at which the relevant information/data (e.g., message traffic and responses thereto) may be monitored or flows or is otherwise accessible or measurable, including one or more gateway devices, modems, the computers or terminals of one or more market participants, e.g., client computers, etc.
One skilled in the art will appreciate that one or more modules described herein may be implemented using, among other things, a tangible computer-readable medium comprising computer-executable instructions (e.g., executable software code). Alternatively, modules may be implemented as software code, firmware code, specifically configured hardware or processors, and/or a combination of the aforementioned. For example, the modules may be embodied as part of an exchange 100 for financial instruments. It should be appreciated the disclosed embodiments may be implemented as a different or separate module of the exchange computer system 100, or a separate computer system coupled with the exchange computer system 100 so as to have access to margin account record, pricing, and/or other data. As described herein, the disclosed embodiments may be implemented as a centrally accessible system or as a distributed system, e.g., where some of the disclosed functions are performed by the computer systems of the market participants.
The trading network environment shown in FIG. 1 includes exemplary computer devices 150, 152, 154, 156 and 158 which depict different exemplary methods or media by which a computer device may be coupled with the exchange computer system 100 or by which a user may communicate, e.g., send and receive, trade or other information therewith. It should be appreciated that the types of computer devices deployed by traders and the methods and media by which they communicate with the exchange computer system 100 is implementation dependent and may vary and that not all of the depicted computer devices and/or means/media of communication may be used and that other computer devices and/or means/media of communications, now available or later developed may be used. Each computer device, which may comprise a computer 200 described in more detail with respect to FIG. 2, may include a central processor, specifically configured or otherwise, that controls the overall operation of the computer and a system bus that connects the central processor to one or more conventional components, such as a network card or modem. Each computer device may also include a variety of interface units and drives for reading and writing data or files and communicating with other computer devices and with the exchange computer system 100. Depending on the type of computer device, a user can interact with the computer with a keyboard, pointing device, microphone, pen device or other input device now available or later developed.
An exemplary computer device 150 is shown directly connected to exchange computer system 100, such as via a T1 line, a common local area network (LAN) or other wired and/or wireless medium for connecting computer devices, such as the network 220 shown in FIG. 2 and described with respect thereto. The exemplary computer device 150 is further shown connected to a radio 168. The user of radio 168, which may include a cellular telephone, smart phone, or other wireless proprietary and/or non-proprietary device, may be a trader or exchange employee. The radio user may transmit orders or other information to the exemplary computer device 150 or a user thereof. The user of the exemplary computer device 150, or the exemplary computer device 150 alone and/or autonomously, may then transmit the trade or other information to the exchange computer system 100.
Exemplary computer devices 152 and 154 are coupled with a local area network (“LAN”) 160 which may be configured in one or more of the well-known LAN topologies, e.g., star, daisy chain, etc., and may use a variety of different protocols, such as Ethernet, TCP/IP, etc. The exemplary computer devices 152 and 154 may communicate with each other and with other computer and other devices which are coupled with the LAN 160. Computer and other devices may be coupled with the LAN 160 via twisted pair wires, coaxial cable, fiber optics or other wired or wireless media. As shown in FIG. 1, an exemplary wireless personal digital assistant device (“PDA”) 158, such as a mobile telephone, tablet based compute device, or other wireless device, may communicate with the LAN 160 and/or the Internet 162 via radio waves, such as via WiFi, Bluetooth and/or a cellular telephone based data communications protocol. PDA 158 may also communicate with exchange computer system 100 via a conventional wireless hub 164.
FIG. 1 also shows the LAN 160 coupled with a wide area network (“WAN”) 162 which may be comprised of one or more public or private wired or wireless networks. In one embodiment, the WAN 162 includes the Internet 162. The LAN 160 may include a router to connect LAN 160 to the Internet 162. Exemplary computer device 156 is shown coupled directly to the Internet 162, such as via a modem, DSL line, satellite dish or any other device for connecting a computer device to the Internet 162 via a service provider therefore as is known. LAN 160 and/or WAN 162 may be the same as the network 220 shown in FIG. 2 and described with respect thereto.
Users of the exchange computer system 100 may include one or more market makers 166 which may maintain a market by providing constant bid and offer prices for a derivative or security to the exchange computer system 100, such as via one of the exemplary computer devices depicted. The exchange computer system 100 may also exchange information with other match or trade engines, such as trade engine 170. One skilled in the art will appreciate that numerous additional computers and systems may be coupled to exchange computer system 100. Such computers and systems may include clearing, regulatory and fee systems.
The operations of computer devices and systems shown in FIG. 1 may be controlled by computer-executable instructions stored on a non-transitory computer-readable medium. For example, the exemplary computer device 152 may store computer-executable instructions for receiving order information from a user, transmitting that order information to exchange computer system 100 in electronic messages, extracting the order information from the electronic messages, executing actions relating to the messages, and/or calculating values from characteristics of the extracted order to facilitate matching orders and executing trades. In another example, the exemplary computer device 154 may include computer-executable instructions for receiving market data from exchange computer system 100 and displaying that information to a user.
Numerous additional servers, computers, handheld devices, personal digital assistants, telephones and other devices may also be connected to exchange computer system 100. Moreover, one skilled in the art will appreciate that the topology shown in FIG. 1 is merely an example and that the components shown in FIG. 1 may include other components not shown and be connected by numerous alternative topologies.
Referring now to FIG. 2, an illustrative embodiment of a general computer system 200 is shown. The computer system 200 can include a set of instructions that can be executed to cause the computer system 200 to perform any one or more of the methods or computer based functions disclosed herein. The computer system 200 may operate as a standalone device or may be connected, e.g., using a network, to other computer systems or peripheral devices. Any of the components discussed herein, such as processor 202, may be a computer system 200 or a component in the computer system 200. The computer system 200 may be specifically configured to implement a match engine, margin processing, payment or clearing function on behalf of an exchange, such as the Chicago Mercantile Exchange, of which the disclosed embodiments are a component thereof.
In a networked deployment, the computer system 200 may operate in the capacity of a server or as a client user computer in a client-server user network environment, or as a peer computer system in a peer-to-peer (or distributed) network environment. The computer system 200 can also be implemented as or incorporated into various devices, such as a personal computer (PC), a tablet PC, a set-top box (STB), a personal digital assistant (PDA), a mobile device, a palmtop computer, a laptop computer, a desktop computer, a communications device, a wireless telephone, a land-line telephone, a control system, a camera, a scanner, a facsimile machine, a printer, a pager, a personal trusted device, a web appliance, a network router, switch or bridge, or any other machine capable of executing a set of instructions (sequential or otherwise) that specify actions to be taken by that machine. In a particular embodiment, the computer system 200 can be implemented using electronic devices that provide voice, video or data communication. Further, while a single computer system 200 is illustrated, the term “system” shall also be taken to include any collection of systems or sub-systems that individually or jointly execute a set, or multiple sets, of instructions to perform one or more computer functions.
As illustrated in FIG. 2, the computer system 200 may include a processor 202, e.g., a central processing unit (CPU), a graphics processing unit (GPU), or both. The processor 202 may be a component in a variety of systems. For example, the processor 202 may be part of a standard personal computer or a workstation. The processor 202 may be one or more general processors, digital signal processors, specifically configured processors, application specific integrated circuits, field programmable gate arrays, servers, networks, digital circuits, analog circuits, combinations thereof, or other now known or later developed devices for analyzing and processing data. The processor 202 may implement a software program, such as code generated manually (i.e., programmed).
The computer system 200 may include a memory 204 that can communicate via a bus 208. The memory 204 may be a main memory, a static memory, or a dynamic memory. The memory 204 may include, but is not limited to, computer readable storage media such as various types of volatile and non-volatile storage media, including but not limited to random access memory, read-only memory, programmable read-only memory, electrically programmable read-only memory, electrically erasable read-only memory, flash memory, magnetic tape or disk, optical media and the like. In one embodiment, the memory 204 includes a cache or random access memory for the processor 202. In alternative embodiments, the memory 204 is separate from the processor 202, such as a cache memory of a processor, the system memory, or other memory. The memory 204 may be an external storage device or database for storing data. Examples include a hard drive, compact disc (“CD”), digital video disc (“DVD”), memory card, memory stick, floppy disc, universal serial bus (“USB”) memory device, or any other device operative to store data. The memory 204 is operable to store instructions executable by the processor 202. The functions, acts or tasks illustrated in the figures or described herein may be performed by the programmed processor 202 executing the instructions 212 stored in the memory 204. The functions, acts or tasks are independent of the particular type of instructions set, storage media, processor or processing strategy and may be performed by software, hardware, integrated circuits, firm-ware, micro-code and the like, operating alone or in combination. Likewise, processing strategies may include multiprocessing, multitasking, parallel processing and the like.
As shown, the computer system 200 may further include a display unit 214, such as a liquid crystal display (LCD), an organic light emitting diode (OLED), a flat panel display, a solid state display, a cathode ray tube (CRT), a projector, a printer or other now known or later developed display device for outputting determined information. The display 214 may act as an interface for the user to see the functioning of the processor 202, or specifically as an interface with the software stored in the memory 204 or in the drive unit 206.
Additionally, the computer system 200 may include an input device 216 configured to allow a user to interact with any of the components of system 200. The input device 216 may be a number pad, a keyboard, or a cursor control device, such as a mouse, or a joystick, touch screen display, remote control or any other device operative to interact with the system 200.
In a particular embodiment, as depicted in FIG. 2, the computer system 200 may also include a disk or optical drive unit 206. The disk drive unit 206 may include a computer-readable medium 210 in which one or more sets of instructions 212, e.g., software, can be embedded. Further, the instructions 212 may embody one or more of the methods or logic as described herein. In a particular embodiment, the instructions 212 may reside completely, or at least partially, within the memory 204 and/or within the processor 202 during execution by the computer system 200. The memory 204 and the processor 202 also may include computer-readable media as discussed herein.
The present disclosure contemplates a computer-readable medium that includes instructions 212 or receives and executes instructions 212 responsive to a propagated signal, so that a device connected to a network 220 can communicate voice, video, audio, images or any other data over the network 220. Further, the instructions 212 may be transmitted or received over the network 220 via a communication interface 218. The communication interface 218 may be a part of the processor 202 or may be a separate component. The communication interface 218 may be created in software or may be a physical connection in hardware. The communication interface 218 is configured to connect with a network 220, external media, the display 214, or any other components in system 200, or combinations thereof. The connection with the network 220 may be a physical connection, such as a wired Ethernet connection or may be established wirelessly. Likewise, the additional connections with other components of the system 200 may be physical connections or may be established wirelessly.
The network 220 may include wired networks, wireless networks, or combinations thereof. The wireless network may be a cellular telephone network, an 802.11, 802.16, 802.20, or WiMax network. Further, the network 220 may be a public network, such as the Internet, a private network, such as an intranet, or combinations thereof, and may utilize a variety of networking protocols now available or later developed including, but not limited to, TCP/IP based networking protocols.
Embodiments of the subject matter and the functional operations described in this specification can be implemented in digital electronic circuitry, or in computer software, firmware, or hardware, including the structures disclosed in this specification and their structural equivalents, or in combinations of one or more of them. Embodiments of the subject matter described in this specification can be implemented as one or more computer program products, i.e., one or more modules of computer program instructions encoded on a computer readable medium for execution by, or to control the operation of, data processing apparatus. While the computer-readable medium is shown to be a single medium, the term “computer-readable medium” includes a single medium or multiple media, such as a centralized or distributed database, and/or associated caches and servers that store one or more sets of instructions. The term “computer-readable medium” shall also include any medium that is capable of storing, encoding or carrying a set of instructions for execution by a processor or that cause a computer system to perform any one or more of the methods or operations disclosed herein. The computer readable medium can be a machine-readable storage device, a machine-readable storage substrate, a memory device, or a combination of one or more of them. The term “data processing apparatus” encompasses all apparatus, devices, and machines for processing data, including by way of example a programmable processor, a computer, or multiple processors or computers. The apparatus can include, in addition to hardware, code that creates an execution environment for the computer program in question, e.g., code that constitutes processor firmware, a protocol stack, a database management system, an operating system, or a combination of one or more of them.
In a particular non-limiting, exemplary embodiment, the computer-readable medium can include a solid-state memory such as a memory card or other package that houses one or more non-volatile read-only memories. Further, the computer-readable medium can be a random access memory or other volatile re-writable memory. Additionally, the computer-readable medium can include a magneto-optical or optical medium, such as a disk or tapes or other storage device to capture carrier wave signals such as a signal communicated over a transmission medium. A digital file attachment to an e-mail or other self-contained information archive or set of archives may be considered a distribution medium that is a tangible storage medium. Accordingly, the disclosure is considered to include any one or more of a computer-readable medium or a distribution medium and other equivalents and successor media, in which data or instructions may be stored.
In an alternative embodiment, dedicated or otherwise specifically configured hardware implementations, such as application specific integrated circuits, programmable logic arrays and other hardware devices, can be constructed to implement one or more of the methods described herein. Applications that may include the apparatus and systems of various embodiments can broadly include a variety of electronic and computer systems. One or more embodiments described herein may implement functions using two or more specific interconnected hardware modules or devices with related control and data signals that can be communicated between and through the modules, or as portions of an application-specific integrated circuit. Accordingly, the present system encompasses software, firmware, and hardware implementations.
In accordance with various embodiments of the present disclosure, the methods described herein may be implemented by software programs executable by a computer system. Further, in an exemplary, non-limited embodiment, implementations can include distributed processing, component/object distributed processing, and parallel processing. Alternatively, virtual computer system processing can be constructed to implement one or more of the methods or functionality as described herein.
Although the present specification describes components and functions that may be implemented in particular embodiments with reference to particular standards and protocols, the invention is not limited to such standards and protocols. For example, standards for Internet and other packet switched network transmission (e.g., TCP/IP, UDP/IP, HTML, HTTP, HTTPS) represent examples of the state of the art. Such standards are periodically superseded by faster or more efficient equivalents having essentially the same functions. Accordingly, replacement standards and protocols having the same or similar functions as those disclosed herein are considered equivalents thereof.
A computer program (also known as a program, software, software application, script, or code) can be written in any form of programming language, including compiled or interpreted languages, and it can be deployed in any form, including as a standalone program or as a module, component, subroutine, or other unit suitable for use in a computing environment. A computer program does not necessarily correspond to a file in a file system. A program can be stored in a portion of a file that holds other programs or data (e.g., one or more scripts stored in a markup language document), in a single file dedicated to the program in question, or in multiple coordinated files (e.g., files that store one or more modules, sub programs, or portions of code). A computer program can be deployed to be executed on one computer or on multiple computers that are located at one site or distributed across multiple sites and interconnected by a communication network.
The processes and logic flows described in this specification can be performed by one or more programmable processors executing one or more computer programs to perform functions by operating on input data and generating output. The processes and logic flows can also be performed by, and apparatus can also be implemented as, special purpose logic circuitry, e.g., an FPGA (field programmable gate array) or an ASIC (application specific integrated circuit).
Processors suitable for the execution of a computer program include, by way of example, both general and special purpose microprocessors, and anyone or more processors of any kind of digital computer. Generally, a processor will receive instructions and data from a read only memory or a random access memory or both. The essential elements of a computer are a processor for performing instructions and one or more memory devices for storing instructions and data. Generally, a computer will also include, or be operatively coupled to receive data from or transfer data to, or both, one or more mass storage devices for storing data, e.g., magnetic, magneto optical disks, or optical disks. However, a computer need not have such devices. Moreover, a computer can be embedded in another device, e.g., a mobile telephone, a personal digital assistant (PDA), a mobile audio player, a Global Positioning System (GPS) receiver, to name just a few. Computer readable media suitable for storing computer program instructions and data include all forms of non-volatile memory, media and memory devices, including by way of example semiconductor memory devices, e.g., EPROM, EEPROM, and flash memory devices; magnetic disks, e.g., internal hard disks or removable disks; magneto optical disks; and CD ROM and DVD-ROM disks. The processor and the memory can be supplemented by, or incorporated in, special purpose logic circuitry.
As used herein, the terms “microprocessor” or “general-purpose processor” (“GPP”) may refer to a hardware device that fetches instructions and data from a memory or storage device and executes those instructions (for example, an Intel Xeon processor or an AMD Opteron processor) to then, for example, process the data in accordance therewith. The term “reconfigurable logic” may refer to any logic technology whose form and function can be significantly altered (i.e., reconfigured) in the field post-manufacture as opposed to a microprocessor, whose function can change post-manufacture, e.g. via computer executable software code, but whose form, e.g. the arrangement/layout and interconnection of logical structures, is fixed at manufacture. The term “software” may refer to data processing functionality that is deployed on a GPP. The term “firmware” may refer to data processing functionality that is deployed on reconfigurable logic. One example of a reconfigurable logic is a field programmable gate array (“FPGA”) which is a reconfigurable integrated circuit. An FPGA may contain programmable logic components called “logic blocks”, and a hierarchy of reconfigurable interconnects that allow the blocks to be “wired together”, somewhat like many (changeable) logic gates that can be inter-wired in (many) different configurations. Logic blocks may be configured to perform complex combinatorial functions, or merely simple logic gates like AND, OR, NOT and XOR. An FPGA may further include memory elements, which may be simple flip-flops or more complete blocks of memory.
To provide for interaction with a user, embodiments of the subject matter described in this specification can be implemented on a device having a display, e.g., a CRT (cathode ray tube) or LCD (liquid crystal display) monitor, for displaying information to the user and a keyboard and a pointing device, e.g., a mouse or a trackball, by which the user can provide input to the computer. Other kinds of devices can be used to provide for interaction with a user as well. Feedback provided to the user can be any form of sensory feedback, e.g., visual feedback, auditory feedback, or tactile feedback. Input from the user can be received in any form, including acoustic, speech, or tactile input.
Embodiments of the subject matter described in this specification can be implemented in a computing system that includes a back end component, e.g., a data server, or that includes a middleware component, e.g., an application server, or that includes a front end component, e.g., a client computer having a graphical user interface or a Web browser through which a user can interact with an implementation of the subject matter described in this specification, or any combination of one or more such back end, middleware, or front end components. The components of the system can be interconnected by any form or medium of digital data communication, e.g., a communication network. Examples of communication networks include a local area network (“LAN”) and a wide area network (“WAN”), e.g., the Internet.
The computing system can include clients and servers. A client and server are generally remote from each other and typically interact through a communication network. The relationship of client and server arises by virtue of computer programs running on the respective computers and having a client-server relationship to each other.
It should be appreciated that the disclosed embodiments may be applicable to other types of messages depending upon the implementation. Further, the messages may comprise one or more data packets, datagrams or other collection of data formatted, arranged configured and/or packaged in a particular one or more protocols, e.g., the FIX protocol, TCP/IP, Ethernet, etc., suitable for transmission via a network 214 as was described, such as the message format and/or protocols described in U.S. Pat. No. 7,831,491 and U.S. Patent Publication No. 2005/0096999 A1, both of which are incorporated by reference herein in their entireties and relied upon. Further, the disclosed message management system may be implemented using an open message standard implementation, such as FIX, FIX Binary, FIX/FAST, or by an exchange-provided API.
The embodiments described herein may utilize trade related electronic messages such as mass quote messages, individual order messages, modification messages, cancellation messages, etc., so as to enact trading activity in an electronic market. The trading entity and/or market participant may have one or multiple trading terminals associated with the session. Furthermore, the financial instruments may be financial derivative products. Derivative products may include futures contracts, options on futures contracts, futures contracts that are functions of or related to other futures contracts, swaps, swaptions, or other financial instruments that have their price related to or derived from an underlying product, security, commodity, equity, index, or interest rate product. In one embodiment, the orders are for options contracts that belong to a common option class. Orders may also be for baskets, quadrants, other combinations of financial instruments, etc. The option contracts may have a plurality of strike prices and/or comprise put and call contracts. A mass quote message may be received at an exchange. As used herein, an exchange computing system 100 includes a place or system that receives and/or executes orders.
In an embodiment, a plurality of electronic messages is received from the network. The plurality of electronic messages may be received at a network interface for the electronic trading system. The plurality of electronic messages may be sent from market participants. The plurality of messages may include order characteristics and be associated with actions to be executed with respect to an order that may be extracted from the order characteristics. The action may involve any action as associated with transacting the order in an electronic trading system. The actions may involve placing the orders within a particular market and/or order book of a market in the electronic trading system.
In an embodiment, an incoming transaction may be received. The incoming transaction may be from, and therefore associated with, a market participant of an electronic market managed by an electronic trading system. The transaction may involve an order as extracted from a received message, and may have an associated action. The actions may involve placing an order to buy or sell a financial product in the electronic market, or modifying or deleting such an order. In an embodiment, the financial product may be based on an associated financial instrument which the electronic market is established to trade.
In an embodiment, the action associated with the transaction is determined. For example, it may be determined whether the incoming transaction comprises an order to buy or sell a quantity of the associated financial instrument or an order to modify or cancel an existing order in the electronic market. Orders to buy or sell and orders to modify or cancel may be acted upon differently by the electronic market. For example, data indicative of different characteristics of the types of orders may be stored.
In an embodiment, data relating to the received transaction is stored. The data may be stored in any device, or using any technique, operable to store and provide recovery of data. For example, a memory 204 or computer readable medium 210, may be used to store data, as is described with respect to FIG. 2 in further detail herein. Data may be stored relating received transactions for a period of time, indefinitely, or for a rolling most recent time period such that the stored data is indicative of the market participant's recent activity in the electronic market.
If and/or when a transaction is determined to be an order to modify or cancel a previously placed, or existing, order, data indicative of these actions may be stored. For example, data indicative of a running count of a number or frequency of the receipt of modify or cancel orders from the market participant may be stored. A number may be a total number of modify or cancel orders received from the market participant, or a number of modify or cancel orders received from the market participant over a specified time. A frequency may be a time based frequency, as in a number of cancel or modify orders per unit of time, or a number of cancel or modify orders received from the market participant as a percentage of total transactions received from the participant, which may or may not be limited by a specified length of time.
If and/or when a transaction is determined to be an order to buy or sell a financial product, or financial instrument, other indicative data may be stored. For example, data indicative of quantity and associated price of the order to buy or sell may be stored.
Data indicative of attempts to match incoming orders may also be stored. The data may be stored in any device, or using any technique, operable to store and provide recovery of data. For example, a memory 204 or computer readable medium 210, may be used to store data, as is described with respect to FIG. 2. The acts of the process as described herein may also be repeated. As such, data for multiple received transactions for multiple market participants may be stored and used as describe herein.
The order processing module 118 may also store data indicative of characteristics of the extracted orders. For example, the order processing module may store data indicative of orders having an associated modify or cancel action, such as by recording a count of the number of such orders associated with particular market participants. The order processing module may also store data indicative of quantities and associated prices of orders to buy or sell a product placed in the market order book 110, as associated with particular market participants.
Also, the order processing module 118 may be configured to calculate and associate with particular orders a value indicative of an associated market participant's market activity quality, which is a value indicative of whether the market participant's market activity increases or tends to increase liquidity of a market. This value may be determined based on the price of the particular order, previously stored quantities of orders from the associated market participant, the previously stored data indicative of previously received orders to modify or cancel as associated with the market participant, and previously stored data indicative of a result of the attempt to match previously received orders stored in association with the market participant. The order processing module 118 may determine or otherwise calculate scores indicative of the quality value based on these stored extracted order characteristics.
Further, electronic trading systems may perform actions on orders placed from received messages based on various characteristics of the messages and/or market participants associated with the messages. These actions may include matching the orders either during a continuous auction process, or at the conclusion of a collection period during a batch auction process. The matching of orders may be by any technique.
The matching of orders may occur based on a priority indicated by the characteristics of orders and market participants associated with the orders. Orders having a higher priority may be matched before orders of a lower priority. Such priority may be determined using various techniques. For example, orders that were indicated by messages received earlier may receive a higher priority to match than orders that were indicated by messages received later. Also, scoring or grading of the characteristics may provide for priority determination. Data indicative of order matches may be stored by a match engine and/or an order processing module 118.

Order Book Object Data Structures

In one embodiment, the messages and/or values received for each object may be stored in queues according to value and/or priority techniques implemented by an exchange computing system 100. FIG. 3A illustrates an example data structure 300, which may be stored in a memory or other storage device, such as the memory 204 or storage device 206 described with respect to FIG. 2, for storing and retrieving messages related to different values for the same action for an object. For example, data structure 300 may be a set of queues or linked lists for multiple values for an action, e.g., bid, on an object. Data structure 300 may be implemented as a database. It should be appreciated that the system may store multiple values for the same action for an object, for example, because multiple users submitted messages to buy specified quantities of an object at different values. Thus, in one embodiment, the exchange computing system may keep track of different orders or messages for buying or selling quantities of objects at specified values.
Although the present application contemplates using queue data structures for storing messages in a memory, the implementation may involve additional pointers, i.e., memory address pointers, or linking to other data structures. Incoming messages may be stored at an identifiable memory address. The transaction processor can traverse messages in order by pointing to and retrieving different messages from the different memories. Thus, messages that may be depicted sequentially, e.g., in FIG. 3B below, may actually be stored in memory in disparate locations. The software programs implementing the transaction processing may retrieve and process messages in sequence from the various disparate (e.g., random) locations. Thus, in one embodiment, each queue may store different values, which could represent prices, where each value points to or is linked to the messages (which may themselves be stored in queues and sequenced according to priority techniques, such as prioritizing by value) that will match at that value. For example, as shown in FIG. 3A, all of the values relevant to executing an action at different values for an object are stored in a queue. Each value in turn points to, e.g., a linked list or queue logically associated with the values. The linked list stores the messages that instruct the exchange computing system to buy specified quantities of the object at the corresponding value.
The sequence of the messages in the message queues connected to each value may be determined by exchange implemented priority techniques. For example, in FIG. 3A, messages M1, M2, M3 and M4 are associated with performing an action (e.g., buying or selling) a certain number of units (may be different for each message) at Value 1. M1 has priority over M2, which has priority over M3, which has priority over M4. Thus, if a counter order matches at Value 1, the system fills as much quantity as possible associated with M1 first, then M2, then M3, and then M4.
In the illustrated examples, the values may be stored in sequential order, and the best or lead value for a given queue may be readily retrievable by and/or accessible to the disclosed system. Thus, in one embodiment, the value having the best priority may be illustrated as being in the topmost position in a queue, although the system may be configured to place the best priority message in some other predetermined position. In the example of FIG. 3A, Value 1 is shown as being the best value or lead value, or the top of the book value, for an example Action.
A lead acquisition value may be the best or lead value in an acquisition queue of an order book object, and a lead relinquish value may be the best or lead value in a relinquish queue of the order book object.
FIG. 3B illustrates an example alternative data structure 310 for storing and retrieving messages and related values. It should be appreciated that matches occur based on values, and so all the messages related to a given value may be prioritized over all other messages related to a different value. As shown in FIG. 3B, the messages may be stored in one queue and grouped by values according to the hierarchy of the values. The hierarchy of the values may depend on the action to be performed.
For example, if a queue is a sell queue (e.g., the Action is Sell), the lowest value may be given the best priority and the highest value may be given the lowest priority. Thus, as shown in FIG. 3B, if Value 1 is lower than Value 2 which is lower than Value 3, Value 1 messages may be prioritized over Value 2, which in turn may be prioritized over Value 3.
Within Value 1, M1 is prioritized over M2, which in turn is prioritized over M3, which in turn is prioritized over M4. Within Value 2, M5 is prioritized over M6, which in turn is prioritized over M7, which in turn is prioritized over M8. Within Value 3, M9 is prioritized over M10, which in turn is prioritized over M11, which in turn is prioritized over M12.
Alternatively, the messages may be stored in a tree-node data structure that defines the priorities of the messages. In one embodiment, the messages may make up the nodes.
In one embodiment, the system may traverse through a number of different values and associated messages when processing an incoming message. Traversing values may involve the processor loading each value, checking that value and deciding whether to load another value, i.e., by accessing the address pointed at by the address pointer value. In particular, referring to FIG. 3B, if the queue is for selling an object for the listed Values 1, 2 and 3 (where Value 1 is lower than Value 2 which is lower than Value 3), and if the system receives an incoming aggressing order to buy quantity X at a Value 4 that is greater than Values 1, 2, and 3, the system will fill as much of quantity X as possible by first traversing through the messages under Value 1 (in sequence M1, M2, M3, M4). If any of the quantity of X remains, the system traverses down the prioritized queue until all of the incoming order is filled (e.g., all of X is matched) or until all of the quantities of M1 through M12 are filled. Any remaining, unmatched quantity remains on the books, e.g., as a resting order at Value 4, which was the entered value or the message's value.
The system may traverse the queues and check the values in a queue, and upon finding the appropriate value, may locate the messages involved in making that value available to the system. When an outright message value is stored in a queue, and when that outright message is involved in a trade or match, the system may check the queue for the value, and then may check the data structure storing messages associated with that value.
In one embodiment, an exchange computing system may convert all financial instruments to objects. In one embodiment, an object may represent the order book for a financial instrument. Moreover, in one embodiment, an object may be defined by two queues, one queue for each action that can be performed by a user on the object. For example, an order book converted to an object may be represented by an Ask queue and a Bid queue. Resting messages or orders associated with the respective financial instrument may be stored in the appropriate queue and recalled therefrom.
In one embodiment, the messages associated with objects may be stored in specific ways depending on the characteristics of the various messages and the states of the various objects in memory. For example, a system may hold certain resting messages in queue until the message is to be processed, e.g., the message is involved in a match. The order, sequence or priority given to messages may depend on the characteristics of the message. For example, in certain environments, messages may indicate an action that a computer in the system should perform. Actions may be complementary actions, or require more than one message to complete. For example, a system may be tasked with matching messages or actions contained within messages. The messages that are not matched may be queued by the system in a data queue or other structure, e.g., a data tree having nodes representing messages or orders.
The queues are structured so that the messages are stored in sequence according to priority. Although the embodiments are disclosed as being implemented in queues, it should be understood that different data structures such as for example linked lists or trees may also be used.
The system may include separate data structures, e.g., queues, for different actions associated with different objects within the system. For example, in one embodiment, the system may include a queue for each possible action that can be performed on an object. The action may be associated with a value. The system prioritizes the actions based in part on the associated value.
For example, as shown in FIG. 3C, the order book module of a computing system may include several paired queues, such as queues Bid and Ask for an object 302 (e.g., Object A). The system may include two queues, or one pair of queues, for each object that is matched or processed by the system. In one embodiment, the system stores messages in the queues that have not yet been matched or processed. FIG. 3C may be an implementation of the data structures disclosed in FIGS. 3A and/or 3B. Each queue may have a top of book, or lead, position, such as positions 304 and 306, which stores data that is retrievable.
The queues may define the priority or sequence in which messages are processed upon a match event. For example, two messages stored in a queue may represent performing the same action at the same value. When a third message is received by the system that represents a matching action at the same value, the system may need to select one of the two waiting, or resting, messages as the message to use for a match. Thus, when multiple messages can be matched at the same value, the exchange may have a choice or some flexibility regarding the message that is matched. The queues may define the priority in which orders that are otherwise equivalent (e.g., same action for the same object at the same value) are processed.
The system may include a pair of queues for each object, e.g., a bid and ask queue for each object. Each queue may be for example implemented utilizing the data structure of FIG. 3B. The exchange may be able to specify the conditions upon which a message for an object should be placed in a queue. For example, the system may include one queue for each possible action that can be performed on an object. The system may be configured to process messages that match with each other. In one embodiment, a message that indicates performing an action at a value may match with a message indicating performing a corresponding action at the same value. Or, the system may determine the existence of a match when messages for the same value exist in both queues of the same object. The messages may be received from the same or different users or traders.
The queues illustrated in FIG. 3C hold or store messages received by a computing exchange, e.g., messages submitted by a user to the computing exchange, and waiting for a proper match. It should be appreciated that the queues may also hold or store implieds, e.g., implied messages generated by the exchange system, such as messages implied in or implied out as described herein. The system thus adds messages to the queues as they are received, e.g., messages submitted by users, or generated, e.g., implied messages generated by the exchanges. The sequence or prioritization of messages in the queues is based on information about the messages and the overall state of the various objects in the system.
When the data transaction processing system is implemented as an exchange computing system, as discussed above, different client computers submit electronic data transaction request messages to the exchange computing system. Electronic data transaction request messages include requests to perform a transaction on a data object, e.g., at a value for a quantity. The exchange computing system includes a transaction processor, e.g., a hardware matching processor or match engine, that matches, or attempts to match, pairs of messages with each other. For example, messages may match if they contain counter instructions (e.g., one message includes instructions to buy, the other message includes instructions to sell) for the same product at the same value. In some cases, depending on the nature of the message, the value at which a match occurs may be the submitted value or a better value. A better value may mean higher or lower value depending on the specific transaction requested. For example, a buy order may match at the submitted buy value or a lower (e.g., better) value. A sell order may match at the submitted sell value or a higher (e.g., better) value.

Transaction Processor Data Structures

FIG. 4 illustrates an example embodiment of a data structure used to implement match engine module 106. Match engine module 106 may include a conversion component 402, pre-match queue 404, match component 406, post-match queue 408 and publish component 410.
Although the embodiments are disclosed as being implemented in queues, it should be understood that different data structures, such as for example linked lists or trees, may also be used. Although the application contemplates using queue data structures for storing messages in a memory, the implementation may involve additional pointers, i.e., memory address pointers, or linking to other data structures. Thus, in one embodiment, each incoming message may be stored at an identifiable memory address. The transaction processing components can traverse messages in order by pointing to and retrieving different messages from the different memories. Thus, messages that may be processed sequentially in queues may actually be stored in memory in disparate locations. The software programs implementing the transaction processing may retrieve and process messages in sequence from the various disparate (e.g., random) locations.
The queues described herein may, in one embodiment, be structured so that the messages are stored in sequence according to time of receipt, e.g., they may be first in first out (FIFO) queues.
The match engine module 106 may be an example of a transaction processing system. The pre-match queue 404 may be an example of a pre-transaction queue. The match component 406 may be an example of a transaction component. The post-match queue 408 may be an example of a post-transaction queue. The publish component 410 may be an example of a distribution component. The transaction component may process messages and generate transaction component results.
It should be appreciated that match engine module 106 may not include all of the components described herein. For example, match engine module 106 may only include pre-match queue 404 and match component 406. In one embodiment, the latency detection system may detect how long a message waits in a pre-match queue 404 (e.g., latency), and compares the latency to the maximum allowable latency associated with the message.
In one embodiment, the publish component may be a distribution component that can distribute data to one or more market participant computers. In one embodiment, match engine module 106 operates according to a first in, first out (FIFO) ordering. The conversion component 402 converts or extracts a message received from a trader via the Market Segment Gateway or MSG into a message format that can be input into the pre-match queue 404.
Messages from the pre-match queue may enter the match component 406 sequentially and may be processed sequentially. In one regard, the pre-transaction queue, e.g., the pre-match queue, may be considered to be a buffer or waiting spot for messages before they can enter and be processed by the transaction component, e.g., the match component. The match component matches orders, and the time a messages spends being processed by the match component can vary, depending on the contents of the message and resting orders on the book. Thus, newly received messages wait in the pre-transaction queue until the match component is ready to process those messages. Moreover, messages are received and processed sequentially or in a first-in, first-out (FIFO) methodology. The first message that enters the pre-match or pre-transaction queue will be the first message to exit the pre-match queue and enter the match component. In one embodiment, there is no out-of-order message processing for messages received by the transaction processing system. The pre-match and post-match queues are, in one embodiment, fixed in size, and any messages received when the queues are full may need to wait outside the transaction processing system or be re-sent to the transaction processing system.
The match component 406 processes an order or message, at which point the transaction processing system may consider the order or message as having been processed. The match component 406 may generate one message or more than one message, depending on whether an incoming order was successfully matched by the match component. An order message that matches against a resting order in the order book may generate dozens or hundreds of messages. For example, a large incoming order may match against several smaller resting orders at the same price level. For example, if many orders match due to a new order message, the match engine needs to send out multiple messages informing traders which resting orders have matched. Or, an order message may not match any resting order and only generate an acknowledgement message. Thus, the match component 406 in one embodiment will generate at least one message, but may generate more messages, depending upon the activities occurring in the match component. For example, the more orders that are matched due to a given message being processed by the match component, the more time may be needed to process that message. Other messages behind that given message will have to wait in the pre-match queue.
Messages resulting from matches in the match component 406 enter the post-match queue 408. The post-match queue may be similar in functionality and structure to the pre-match queue discussed above, e.g., the post-match queue is a FIFO queue of fixed size. As illustrated in FIG. 4, a difference between the pre- and post-match queues may be the location and contents of the structures, namely, the pre-match queue stores messages that are waiting to be processed, whereas the post-match queue stores match component results due to matching by the match component. The match component receives messages from the pre-match queue, and sends match component results to the post-match queue. In one embodiment, the time that results messages, generated due to the transaction processing of a given message, spend in the post-match queue is not included in the latency calculation for the given message.
Messages from the post-match queue 408 enter the publish component 410 sequentially and are published via the MSG sequentially. Thus, the messages in the post-match queue 408 are an effect or result of the messages that were previously in the pre-match queue 404. In other words, messages that are in the pre-match queue 404 at any given time will have an impact on or affect the contents of the post-match queue 408, depending on the events that occur in the match component 406 once the messages in the pre-match queue 404 enter the match component 406.
As noted above, the match engine module 106 in one embodiment operates in a first in first out (FIFO) scheme. In other words, the first message that enters the match engine module 106 is the first message that is processed by the match engine module 106. Thus, the match engine module 106 in one embodiment processes messages in the order the messages are received. In FIG. 4, as shown by the data flow arrow, data is processed sequentially by the illustrated structures from left to right, beginning at the conversion component 402, to the pre-match queue, to the match component 406, to the post-match queue 408, and to the publish component 410. The overall transaction processing system operates in a FIFO scheme such that data flows from element 402 to 404 to 406 to 408 to 410, in that order. If any one of the queues or components of the transaction processing system experiences a delay, that creates a backlog for the structures preceding the delayed structure. For example, if the match or transaction component is undergoing a high processing volume, and if the pre-match or pre-transaction queue is full of messages waiting to enter the match or transaction component, the conversion component may not be able to add any more messages to the pre-match or pre-transaction queue.
Messages wait in the pre-match queue. The time a message waits in the pre-match queue depends upon how many messages are ahead of that message (i.e., earlier messages), and how much time each of the earlier messages spends being serviced or processed by the match component. Messages also wait in the post-match queue. The time a message waits in the post-match queue depends upon how many messages are ahead of that message (i.e., earlier messages), and how much time each of the earlier messages spends being serviced or processed by the publish component. These wait times may be viewed as a latency that can affect a market participant's trading strategy.
After a message is published (after being processed by the components and/or queues of the match engine module), e.g., via a market data feed, the message becomes public information and is publicly viewable and accessible. Traders consuming such published messages may act upon those message, e.g., submit additional new input messages to the exchange computing system responsive to the published messages.
The match component attempts to match aggressing or incoming orders against resting orders. If an aggressing order does not match any resting orders, then the aggressing order may become a resting order, or an order resting on the books. For example, if a message includes a new order that is specified to have a one-year time in force, and the new order does not match any existing resting order, the new order will essentially become a resting order to be matched (or attempted to be matched) with some future aggressing order. The new order will then remain on the books for one year. On the other hand, an order specified as a fill or kill (e.g., if the order cannot be filled or matched with an order currently resting on the books, the order should be canceled) will never become a resting order, because it will either be filled or matched with a currently resting order, or it will be canceled. The amount of time needed to process or service a message once that message has entered the match component may be referred to as a service time. The service time for a message may depend on the state of the order books when the message enters the match component, as well as the contents, e.g., orders, that are in the message.
In one embodiment, orders in a message are considered to be “locked in”, or processed, or committed, upon reaching and entering the match component. If the terms of the aggressing order match a resting order when the aggressing order enters the match component, then the aggressing order will be in one embodiment guaranteed to match.
As noted above, the latency experienced by a message, or the amount of time a message spends waiting to enter the match component, depends upon how many messages are ahead of that message (i.e., earlier messages), and how much time each of the earlier messages spends being serviced or processed by the match component. The amount of time a match component spends processing, matching or attempting to match a message depends upon the type of message, or the characteristics of the message. The time spent inside the processor may be considered to be a service time, e.g., the amount of time a message spends being processed or serviced by the processor.
The number of matches or fills that may be generated in response to a new order message for a financial instrument will depend on the state of the data object representing the electronic marketplace for the financial instrument. The state of the match engine can change based on the contents of incoming messages.
It should be appreciated that the match engine's overall latency is in part a result of the match engine processing the messages it receives. The match component's service time may be a function of the message type (e.g., new, modify, cancel), message arrival rate (e.g., how many orders or messages is the match engine module receiving, e.g., messages per second), message arrival time (e.g., the time a message hits the inbound MSG or market segment gateway), number of fills generated (e.g., how many fills were generated due to a given message, or how many orders matched due to an aggressing or received order), or number of Mass Quote entries (e.g., how many of the entries request a mass quote).
In one embodiment, the time a message spends: being converted in the conversion component 402 may be referred to as a conversion time; waiting in the pre-match queue 404 may be referred to as a wait until match time; being processed or serviced in the match component 406 may be referred to as a matching time; waiting in the post-match queue 408 may be referred to as a wait until publish time; and being processed or published via the publish component 410 may be referred to as a publishing time.
It should be appreciated that the latency may be calculated, in one embodiment, as the sum of the conversion time and wait until match time. Or, the system may calculate latency as the sum of the conversion time, wait until match time, matching time, wait until publish time, and publishing time. In systems where some or all of those times are negligible, or consistent, a measured latency may only include the sum of some of those times. Or, a system may be designed to only calculate one of the times that is the most variable, or that dominates (e.g., percentage wise) the overall latency. For example, some market participants may only care about how long a newly sent message that is added to the end of the pre-match queue will spend waiting in the pre-match queue. Other market participants may care about how long that market participant will have to wait to receive an acknowledgement from the match engine that a message has entered the match component. Yet other market participants may care about how much time will pass from when a message is sent to the match engine's conversion component to when match component results exit or egress from the publish component.

Index Module

Referring now to FIG. 5, there are depicted aspects of a system architecture in a block-diagram form and data flow between and among various system components for operation of one embodiment of an exchange computing system 100 including an index module 122 for generation and introduction of POP Futures contracts for trading and, subsequent thereto efficient computation of a volatility index, wherein the volatility index may be referred to, as noted above, as a VolPOP index. In one embodiment, the exchange computing system may automatically generate and introduce POP futures contracts and subsequently automatically generate the VolPOP index periodically based thereon, such as every 1 second or every 1 millisecond. In one embodiment, the volatility index is published into a financial instrument exchange market via an exchange computing system server, where it is automatically made available for use in trading, such as the basis of a derivative financial instrument as described herein.
In one implementation, the index module 122 may be coupled to, or include, a market data module interface component 113 configured to query and/or receive market data from the market data module 112, e.g. current prices of POP futures contracts.
In one embodiment, the index module 122 may be coupled to, or include, a settlement module interface component 121 configured to query and/or receive settlement prices from the settlement data module 120, e.g. of POP futures contracts.
The index module 122 additionally may be coupled to and retrieve data from exchange computing system 100 databases such as the trade database 108 and/or user database 102.
In this formula only 2 market instruments' prices would be needed at any given time; the F_tand the POP_t. T is known ex-ante (likely 30 or 35 days), N is known as it will be in the definition of the POP_t(10 options in this case), I is also known.
The index module 122 may determine a frequency by which the current POP futures prices is sampled and the index computed and published. For example, the Cboe Volatility Index® (VIX® Index) index is disseminated every 10 seconds because it requires many option prices to compute. Some of the inputs may not have transactions or volume within the prescribed time interval. For example, on final settlement day, the S&P 500 SOQ (Special Opening Quotation) can be delayed for several minutes while all index components await opening quotes. Adding to this complexity is an alternative set of rules for when component prices are not available.
Unlike these types of financial instruments, the inputs of the disclosed index are minimal, so the index value can be recalculated as frequently as desired, e.g., the volatility index could be updated hourly, every minute or every second. The volatility index can be updated on a high frequency basis due to the small number of data elements needed, reducing complexity, latency, and the number of line items needed, thereby greatly reducing the load on a computer system. Because the inputs of the index value calculator component 508 are minimal and readily available, the volatility index value can be calculated extremely quickly, enabling the tracking instrument to closely track the target futures contract in real time or near real time.
In one embodiment, the index module 122 may further include an instrument generator logic stored in the memory, coupled with the index calculator logic and executable by the processor to cause the processor to, generate at least one volatility index financial instrument having a value that is determined from the calculated annualized risk metric and upon completion of the calculation, introduce the at least one generated volatility index financial instrument into a financial instrument exchange market via the electronic exchange server where it is automatically listed for trading, the at least one volatility index financial instrument having at least one parameter corresponding to the calculated annualized risk metric.
FIG. 6 depicts a more detailed block diagram of the index module 122 of FIG. 5 illustrating a system 600 for generating, manually or automatically, and outputting a volatility index as described herein, for use in conjunction with the exchange computing system 100 or the hardware matching processor/match engine module 106 thereof. For example, the generated volatility index may be used as the basis for the trading of a derivative instrument based thereon. As described above, using the described system, a single futures instrument's price can provide a volatility value where that futures instrument (the POP Future) delivers a set, e.g. strip, of options contracts whose strikes will not be set until the future itself expires (settles). According to the disclosed embodiments, this futures instrument will not trade at sum of the current price of those options contracts, but at a price that will reflect the expected cost of those options when the futures instrument expires. As the expectation as to the prices of the options contracts increases or decreases, the fluctuating market price of the POP Future reflects the numerical value of that expectation and can be transformed from a “cost” into a “volatility” via a simple closed form calculation as described herein.
The system 600 may be implemented as a separate component or as one or more logic components, such as part of one more of the modules of the exchange computing system 100 described above, such as on an FPGA that may include a memory or reconfigurable component to store logic and processing component to execute the stored logic, or as computer program logic, stored in a memory 602, or other non-transitory computer readable medium, and executable by a processor 604, such as the processor 202 and memory 204 described above with respect to FIG. 2. In one embodiment, the system 600 may be coupled with an order book database maintained by the order book module 110 to introduce new futures instruments for trading, as described herein, and for access to current prices of those instruments.
The system 600 includes a contract generator 606 coupled with the other components of the exchange computing system 100, such as via communications interface and/or an electronic communications network 162, such as the network 126 described above. The contract generator 606 may be implemented as a separate component or as one or more logic components, e.g. first, second and third logic 606A, 606B, 606C, such as on an FPGA that may include a memory or reconfigurable component to store logic and processing component to execute the stored logic, or as computer program logic, stored in the memory 602, or other non-transitory computer readable medium, and executable by a processor 604, such as the processor 202 and memory 204 described below with respect to FIG. 2, to cause the processor 604 to, or otherwise be operative to, e.g. via first logic 606A, determine a type of annualized forward volatility metric of a selected characteristic of a financial market to be generated. Such a determination may be made based on an electronic request or instruction message received from a participant in the electronic trading system 100 or an operator thereof. For example, the type of annualized forward volatility metric to be generated may include one of interest rate volatility, stock market volatility, or volatility of a price of a particular commodity.
The contract generator 606 may be further operative, e.g. via second logic 606B stored in the memory 602 and configured to be executed by the processor 604 to cause the processor 604 to generate, a financial instrument, e.g. the above described POP Futures contract, characterized by an expiration and a definition of a first underlying asset to be both determined and physically delivered upon the defined expiration, for trading by selecting a currently available futures contract characterized by a price and having a second underlying asset whose value is characterized by the selected characteristic, the price of the selected futures contract being indicative of market expectations of the second underlying asset's future value, wherein the definition specifies a set of options contracts as the first underlying asset, each having the selected futures contract as the underlier thereof, each of the set of options contract being characterized by a different strike price, relative to a price of the selected futures contract, to be determined upon the expiration of the generated financial instrument, wherein the strike price of each of the set of options contracts differs from price of the selected futures contract determined upon the expiration of the generated financial instrument by an interval.
In one embodiment, the selected futures contract is one of a S&P 500 futures contract, a Nasdaq 100 futures contract, a Corn futures contract, a gold futures contract, a US treasury futures contract, and may depend upon the type of annualized forward volatility metric to be generated.
In one embodiment, the price range and price interval are specified by a risk management system (e.g. SPAN), such as the risk management module 114 described above, based on an assessment of volatility of the price of the selected futures contract. Alternatively, the price range and/or price interval may be specified by another entity such as participant or operator of the electronic exchange computer system 100.
In one embodiment, each of the options contracts of the set of options contracts comprises an identical expiration subsequent to the expiration of the generated financial instrument. Alternatively, one or more of the options contracts of the set may have a different expiration from another of the options contracts of the set.
In one embodiment, the interval is a fixed value. Alternatively, the interval may be a percentage or a variable value, e.g. linearly varying, exponentially varying or arbitrarily varying.
In one embodiment, the set of options contracts may include a number of options contracts, the number of options contracts in the set and the interval defining a range of strike prices relative to the price of the selected futures contract determined at the expiration of the generated financial instrument.
In one embodiment, a subset of the set of options contracts may be characterized by strike prices above the price of the selected futures contract determined at the expiration of the generated financial instrument, a remaining subset of the set of options contracts being characterized by strike prices below the price of the selected futures contract determined at the expiration of the generated financial instrument. Alternatively, all of the options contracts of the set may be characterized by strike price above the price of selected futures contract determined at the expiration of the generated financial instrument, or they may all be characterized by strike price below the price of selected futures contract determined at the expiration of the generated financial instrument.
In one embodiment, the subset, i.e. with strike prices above, and remaining subset, i.e. with strike prices below, are symmetric, i.e. they comprise the same number of options contracts. Alternatively, the subset and remaining subset may be asymmetric, i.e. the subset or the remaining subset include more options contracts than the other of the subset or the remaining subset.
The contract generator 606 may be further operative, e.g. via second logic 606C stored in the memory 602 and configured to be executed by the processor 604 to cause the processor 604 to introduce the generated financial instrument into an electronic financial instrument exchange market via an electronic exchange computer system 100 coupled with the processor where upon it is automatically listed for trading, i.e. traders may place orders to buy and sell the contract at prices according to their requirements, expectations as to value, etc.
The system 600 includes an index generator 610, which may be part of the index value calculator component 508, coupled with the contract generator 606 and other components of the exchange computing system 100, such as via communications interface and/or an electronic communications network 608, such as the network 126 described above. The index generator 610 may be implemented as a separate component or as one or more logic components, e.g. fourth logic, such as on an FPGA that may include a memory or reconfigurable component to store logic and processing component to execute the stored logic, or as computer program logic, stored in the memory 602, or other non-transitory computer readable medium, and executable by a processor 604, such as the processor 202 and memory 204 described below with respect to FIG. 2, to cause the processor 604 to, or otherwise be operative to determine, subsequent to the introduction of the generated financial instrument, from the electronic exchange computer system, a current price of the introduced generated financial instrument based on prior trading thereof and generate the annualized forward volatility metric (“VolPOP”) for an applicable time period (“t”) via a calculation of:
${VolPOP}_{t} = 100 \times \sqrt{\frac{2}{T \times F_{t}^{}} \times I \times {POP}_{t}}$
Where:

- T is time to expiry, in years, of the set of options contracts from the defined expiration of the introduced generated financial instrument (the date that the POP future settles (e.g. 35 days would be 35/365));
- t is the time or date for which this calculation is applicable;
- F_tis the price of the selected futures contract;
- I is the interval between strike prices of each of the set of options contracts (also referred to by y above); and
- POP_tis the current price of the introduced generated financial instrument; and

wherein the index generator 610 (fourth logic) is further configured to cause the processor to output the generated annualized forward volatility metric, such as via the index value publisher component 510, over, for example, an electronic communications network 162.
In one embodiment, the current price of the introduced generated financial instrument (POP_t) may be one of a bid price (VolPOP_t ^BID), ask price (VolPOP_t ^ASK), an average of the bid and ask prices (VolPOP_t ^MID) or a combination thereof.
In one embodiment, the system 600 further includes a volatility index financial instrument generator 612 coupled with the contract generator 606, index generator 610 and other components of the exchange computing system 100, such as via communications interface and/or an electronic communications network 608, such as the network 126 described above. The volatility index financial instrument generator 612 may be implemented as a separate component or as one or more logic components, e.g. fifth logic, such as on an FPGA that may include a memory or reconfigurable component to store logic and processing component to execute the stored logic, or as computer program logic, stored in the memory 602, or other non-transitory computer readable medium, and executable by a processor 604, such as the processor 202 and memory 204 described below with respect to FIG. 2, to cause the processor 604 to, or otherwise be operative to generate at least one volatility index financial instrument having a value that is determined from the generated annualized forward volatility metric, wherein upon completion of the generation of the at least one volatility index financial instrument, the at least one generated volatility index financial instrument is introduced into a financial instrument exchange market via the electronic exchange server where it is automatically listed for trading, the at least one volatility index financial instrument having at least one parameter corresponding to the generated annualized forward volatility metric.
In one embodiment, the index generator 610 (fourth logic) is further configured to cause the processor to periodically determine the current price of the introduced generated financial instrument based on prior trading thereof and generate the annualized forward volatility metric (“VolPOP”) is periodically performed for a subsequent applicable time period (“t”).
In one embodiment, the system 600 further includes an options contract selector 614 coupled with the contract generator 606, index generator 610 and other components of the exchange computing system 100, such as via communications interface and/or an electronic communications network 608, such as the network 126 described above. The options contract selector 614 may be implemented as a separate component or as one or more logic components, e.g. sixth logic, such as on an FPGA that may include a memory or reconfigurable component to store logic and processing component to execute the stored logic, or as computer program logic, stored in the memory 602, or other non-transitory computer readable medium, and executable by a processor 604, such as the processor 202 and memory 204 described below with respect to FIG. 2, to cause the processor 604 to, or otherwise be operative to, upon expiration of the introduced generated financial instrument, determine a set of deliverable options contracts which meet the definition and delivering the deliverable set of options contracts.
In one embodiment, the current price of the introduced generated financial instrument is indicative of an expectation of the prices of each of the set of options contracts. That is, the beneficial paradox of the POP futures mechanism is that, although it is not an implied volatility product, the principal determinant of its price dynamics will be market expectations of forward-starting option prices, which in turn are related to implied volatility.
FIG. 17 illustrates an example flowchart 1700 of the operation of the system 600 for generating, manually or automatically, and outputting a volatility index as described herein, for use in conjunction with the exchange computing system 100 or the hardware matching processor/match engine module 106 thereof. In one embodiment, the operation of the system 600 includes: determining, by a contract generator executed by a processor, a type of annualized forward volatility metric of a selected characteristic of a financial market to be generated (Block 1702); generating, by the contract generator, a financial instrument, e.g. the POP Futures contract described above, characterized by an expiration and a definition of a first underlying asset to be both determined and physically delivered upon the defined expiration, for trading by selecting a currently available futures contract characterized by a price and having a second underlying asset whose value is characterized by the selected characteristic, the price of the selected futures contract being indicative of market expectations of the second underlying asset's future value, wherein the definition specifies a set of options contracts as the first underlying asset, each having the selected futures contract as the underlier thereof, each of the set of options contract being characterized by a different strike price, relative to a price of the selected futures contract, to be determined upon the expiration of the generated financial instrument, wherein the strike price of each of the set of options contracts differs from price of the selected futures contract determined upon the expiration of the generated financial instrument by an interval (Block 1704); and wherein the operation further includes: introducing, by the contract generator, the generated financial instrument into an electronic financial instrument exchange market via an electronic exchange computer system coupled with the processor where upon it is automatically listed for trading (Block 1706); determining, subsequent to the introducing by an index generator executed by the processor, from the electronic exchange computer system, a current price of the introduced generated financial instrument based on prior trading thereof and generating the annualized forward volatility metric (“VolPOP”) for an applicable time period (“t”) by calculating, by the processor:
${VolPOP}_{t} = 100 \times \sqrt{\frac{2}{T \times F_{t}^{}} \times I \times {POP}_{t}}$
Where:

- T is time to expiry, in years, of the set of options contracts from the defined expiration (e.g. the date that the POP future settles (e.g. 35 days would be 35/365)) of the introduced generated financial instrument;
- t is the time or date for which this calculation is applicable;
- F_tis the price of the selected futures contract;
- I is the interval, also referred to above as y, between strike prices of each of the set of options contracts; and
- POP_tis the current price of the introduced generated financial instrument (Block 1708);
- outputting, by the index generator, the generated annualized forward volatility metric (Block 1710).

In one embodiment, the selected futures contract is one of a S&P 500 futures contract, a Nasdaq 100 futures contract, a Corn futures contract, a gold futures contract, a US treasury futures contract, and may depend upon the type of annualized forward volatility metric to be generated.
In one embodiment, the price range and price interval are specified by a risk management system (e.g. SPAN), such as the risk management module 114 described above, based on an assessment of volatility of the price of the selected futures contract. Alternatively, the price range and/or price interval may be specified by another entity such as participant or operator of the electronic exchange computer system 100.
In one embodiment, each of the options contracts of the set of options contracts comprises an identical expiration subsequent to the expiration of the generated financial instrument. Alternatively, one or more of the options contracts of the set may have a different expiration from another of the options contracts of the set.
In one embodiment, the interval is a fixed value. Alternatively, the interval may be a percentage or a variable value, e.g. linearly varying, exponentially varying or arbitrarily varying.
In one embodiment, the set of options contracts may include a number of options contracts, the number of options contracts in the set and the interval defining a range of strike prices relative to the price of the selected futures contract determined at the expiration of the generated financial instrument.
In one embodiment, a subset of the set of options contracts may be characterized by strike prices above the price of the selected futures contract determined at the expiration of the generated financial instrument, a remaining subset of the set of options contracts being characterized by strike prices below the price of the selected futures contract determined at the expiration of the generated financial instrument. Alternatively, all of the options contracts of the set may be characterized by strike price above the price of selected futures contract determined at the expiration of the generated financial instrument, or they may all be characterized by strike price below the price of selected futures contract determined at the expiration of the generated financial instrument.
In one embodiment, the subset, i.e. with strike prices above, and remaining subset, i.e. with strike prices below, are symmetric, i.e. they comprise the same number of options contracts. Alternatively, the subset and remaining subset may be asymmetric, i.e. the subset or the remaining subset include more options contracts than the other of the subset or the remaining subset.
In one embodiment, the operation of the system 600 further includes the computer implemented method of claim 1 further comprising generating at least one volatility index financial instrument having a value that is determined from the generated annualized forward volatility metric, wherein upon completion of the generation of the at least one volatility index financial instrument, the at least one generated volatility index financial instrument is introduced into a financial instrument exchange market via the electronic exchange server where it is automatically listed for trading, the at least one volatility index financial instrument having at least one parameter corresponding to the generated annualized forward volatility metric (Block 1712).
In one embodiment, the current price of the introduced generated financial instrument (POP_t) may be one of a bid price (VolPOP_t ^BID), ask price (VolPOP_t ^ASK), an average of the bid and ask prices (VolPOP_t ^MID) or a combination thereof.
In one embodiment, the determining the current price of the introduced generated financial instrument based on prior trading thereof and generating the annualized forward volatility metric (“VolPOP”) is periodically performed for a subsequent applicable time period (“t”).
In one embodiment the operation of the system 600 further includes, upon expiration of the introduced generated financial instrument, determining, by the processor, a set of deliverable options contracts which meet the definition and delivering the deliverable set of options contracts (Block 1714).
In one embodiment, the current price of the introduced generated financial instrument is indicative of an expectation of the prices of each of the set of options contracts. That is, the beneficial paradox of the POP futures mechanism is that, although it is not an implied volatility product, the principal determinant of its price dynamics will be market expectations of forward-starting option prices, which in turn are related to implied volatility.

Conclusion

The illustrations of the embodiments described herein are intended to provide a general understanding of the structure of the various embodiments. The illustrations are not intended to serve as a complete description of all of the elements and features of apparatus and systems that utilize the structures or methods described herein. Many other embodiments may be apparent to those of skill in the art upon reviewing the disclosure. Other embodiments may be utilized and derived from the disclosure, such that structural and logical substitutions and changes may be made without departing from the scope of the disclosure. Additionally, the illustrations are merely representational and may not be drawn to scale. Certain proportions within the illustrations may be exaggerated, while other proportions may be minimized. Accordingly, the disclosure and the figures are to be regarded as illustrative rather than restrictive.
While this specification contains many specifics, these should not be construed as limitations on the scope of the invention or of what may be claimed, but rather as descriptions of features specific to particular embodiments of the invention. Certain features that are described in this specification in the context of separate embodiments can also be implemented in combination in a single embodiment. Conversely, various features that are described in the context of a single embodiment can also be implemented in multiple embodiments separately or in any suitable sub-combination. Moreover, although features may be described as acting in certain combinations and even initially claimed as such, one or more features from a claimed combination can in some cases be excised from the combination, and the claimed combination may be directed to a sub-combination or variation of a sub-combination.
Similarly, while operations are depicted in the drawings and described herein in a particular order, this should not be understood as requiring that such operations be performed in the particular order shown or in sequential order, or that all illustrated operations be performed, to achieve desirable results. In certain circumstances, multitasking and parallel processing may be advantageous. Moreover, the separation of various system components in the described embodiments should not be understood as requiring such separation in all embodiments, and it should be understood that the described program components and systems can generally be integrated together in a single software product or packaged into multiple software products.
One or more embodiments of the disclosure may be referred to herein, individually and/or collectively, by the term “invention” merely for convenience and without intending to voluntarily limit the scope of this application to any particular invention or inventive concept. Moreover, although specific embodiments have been illustrated and described herein, it should be appreciated that any subsequent arrangement designed to achieve the same or similar purpose may be substituted for the specific embodiments shown. This disclosure is intended to cover any and all subsequent adaptations or variations of various embodiments. Combinations of the above embodiments, and other embodiments not specifically described herein, will be apparent to those of skill in the art upon reviewing the description.
The Abstract of the Disclosure is provided to comply with 37 C.F.R. § 1.72(b) and is submitted with the understanding that it will not be used to interpret or limit the scope or meaning of the claims. In addition, in the foregoing Detailed Description, various features may be grouped together or described in a single embodiment for the purpose of streamlining the disclosure. This disclosure is not to be interpreted as reflecting an intention that the claimed embodiments require more features than are expressly recited in each claim. Rather, as the following claims reflect, inventive subject matter may be directed to less than all of the features of any of the disclosed embodiments. Thus, the following claims are incorporated into the Detailed Description, with each claim standing on its own as defining separately claimed subject matter.
It is therefore intended that the foregoing detailed description be regarded as illustrative rather than limiting, and that it be understood that it is the following claims, including all equivalents, that are intended to define the spirit and scope of this invention.

Claims

1. A computer implemented method comprising:

introducing into an electronic financial instrument exchange market via an electronic exchange computer system, by a contract generator executed by a processor coupled therewith, a financial instrument characterized by an expiration and a definition of a first underlying asset to be both determined and physically delivered upon the defined expiration, the financial instrument having been generated for trading by selecting a currently available futures contract characterized by a price and having a second underlying asset whose value is characterized by a selected characteristic, the price of the selected futures contract being indicative of market expectations of the second underlying asset's future value, wherein the definition specifies a set of options contracts as the first underlying asset, each having the selected futures contract as an underlier thereof, each of the set of options contract being characterized by a different strike price, relative to a price of the selected futures contract, to be determined upon the expiration of the generated financial instrument, wherein the strike price of each of the set of options contracts differs from price of the selected futures contract determined upon the expiration of the generated financial instrument by an interval, where upon subsequent to the introducing, the financial instrument is automatically listed for trading;

determining, subsequent to the financial instrument being listed for trading, by an index generator executed by the processor, from the electronic exchange computer system, a current price of the introduced generated financial instrument based on trading thereof and generating an annualized forward volatility metric (“VolPOP”) for an applicable time period (“t”) by:

calculating, by the processor:

{VolPOP}_{t} = 100 \times \sqrt{\frac{2}{T \times F_{t}^{2}} \times I \times {POP}_{t}}

Where:

T is time to expiry, in years, of the set of options contracts from the defined expiration of the introduced generated financial instrument;

t is the time or date for which this calculation is applicable;

F_tis the price of the selected futures contract;

I is the interval between strike prices of each of the set of options contracts; and

POP_tis the current price of the introduced generated financial instrument; and

generating a volatility index financial instrument having a value that is determined from the generated annualized forward volatility metric and subsequent thereto, introducing the generated volatility index financial instrument into a financial instrument exchange market via the electronic exchange computer system where it is automatically listed for trading, the at least one volatility index financial instrument having at least one parameter corresponding to the generated annualized forward volatility metric.

2. The computer implemented method of claim 1, further comprising:

determining, by a contract generator executed by a processor, a type of annualized forward volatility metric of the selected characteristic of a financial marke to be generated, wherein the type of annualized forward volatility metric to be generated comprises one of interest rate volatility, stock market volatility, or volatility of a price of a particular commodity.

3. The computer implemented method of claim 1, wherein the selected futures contract is one of a S&P 500 futures contract, a Nasdaq 100 futures contract, a Corn futures contract, a gold futures contract, a US treasury futures contract.

4. The computer implemented method of claim 1, wherein the price range and price interval are specified by a risk management system based on an assessment of volatility of the price of the selected futures contract.

5. The computer implemented method of claim 1, wherein each of the options contracts of the set of options contracts comprises an identical expiration subsequent to the expiration of the generated financial instrument.

6. The computer implemented method of claim 1, wherein the interval is a fixed value.

7. The computer implemented method of claim 1, wherein the set of options contracts comprises a number of options contracts, the number of options contracts in the set and the interval defining a range of strike prices relative to the price of the selected futures contract determined at the expiration of the generated financial instrument.

8. The computer implemented method of claim 1, wherein a subset of the set of options contracts are characterized by strike prices above the price of the selected futures contract determined at the expiration of the generated financial instrument, a remaining subset of the set of options contracts being characterized by strike prices below the price of the selected futures contract determined at the expiration of the generated financial instrument.

9. The computer implemented method of claim 9, wherein the subset and remaining subset comprise the same number of options contracts.

10. The computer implemented method of claim 1, wherein the determining the current price of the introduced generated financial instrument based on prior trading thereof and generating the annualized forward volatility metric (“VolPOP”) is periodically performed for a subsequent applicable time period (“t”).

11. The computer implemented method of claim 1 further comprising, upon the expiration of the introduced generated financial instrument, determining, by the processor, a set of deliverable options contracts which meet the definition and delivering the deliverable set of options contracts.

12. The computer implemented method of claim 1, wherein the current price of the introduced generated financial instrument is indicative of an expectation of the prices of each of the set of options contracts.

13. The computer implemented method of claim 1, wherein the current price of the introduced generated financial instrument (POP_t) may be one of a bid price (VolPOP_t ^BID), ask price (VolPOP_t ^ASK), an average of the bid and ask prices (VolPOP_t ^MID) or a combination thereof.

14. A system comprising:

a processor and a memory coupled therewith;

first logic stored in the memory and configured to be executed by the processor to cause the processor to introduce into an electronic financial instrument exchange market via an electronic exchange computer system, a financial instrument characterized by an expiration and a definition of a first underlying asset to be both determined and physically delivered upon the defined expiration, the financial instrument having been generated for trading via selection of a currently available futures contract characterized by a price and having a second underlying asset whose value is characterized by a selected characteristic, the price of the selected futures contract being indicative of market expectations of the second underlying asset's future value, wherein the definition specifies a set of options contracts as the first underlying asset, each having the selected futures contract as an underlier thereof, each of the set of options contract being characterized by a different strike price, relative to a price of the selected futures contract, to be determined upon the expiration of the generated financial instrument, wherein the strike price of each of the set of options contracts differs from price of the selected futures contract determined upon the expiration of the generated financial instrument by an interval, where upon subsequent to the introduction, the financial instrument is automatically listed for trading; and

second logic stored in the memory and configured to be executed by the processor to cause the processor to determine, subsequent to the generated financial instrument being listed for trading, from the electronic exchange computer system, a current price of the introduced generated financial instrument based on prior trading thereof and generate an annualized forward volatility metric (“VolPOP”) for an applicable time period (“t”) via a calculation of:

{VolPOP}_{t} = 100 \times \sqrt{\frac{2}{T \times F_{t}^{2}} \times I \times {POP}_{t}}

Where:

t is the time or date for which this calculation is applicable;

F_tis the price of the selected futures contract;

POP_tis the current price of the introduced generated financial instrument; and

third logic stored in the memory and configured to be executed by the processor to cause the processor to generate a volatility index financial instrument having a value that is determined from the generated annualized forward volatility metric and subsequent thereto, introduce the volatility index financial instrument into a financial instrument exchange market via the electronic exchange computer system where it is automatically listed for trading, the at least one volatility index financial instrument having at least one parameter corresponding to the generated annualized forward volatility metric.

15. The system of claim 14, further comprising:

fourth logic stored in the memory and configured to be executed by the processor to cause the processor to determine a type of annualized forward volatility metric of the selected characteristic of a financial market to be generated, wherein the type of annualized forward volatility metric to be generated comprises one of interest rate volatility, stock market volatility, or volatility of a price of a particular commodity.

16. The system of claim 14, wherein the selected futures contract is one of a S&P 500 futures contract, a Nasdaq 100 futures contract, a Corn futures contract, a gold futures contract, a US treasury futures contract.

17. The system of claim 14, wherein the price range and price interval are specified by a risk management system based on an assessment of volatility of the price of the selected futures contract.

18. The system of claim 14, wherein each of the options contracts of the set of options contracts comprises an identical expiration subsequent to the expiration of the generated financial instrument.

19. The system of claim 14, wherein the interval is a fixed value.

20. The system of claim 14, wherein the set of options contracts comprises a number of options contracts, the number of options contracts in the set and the interval defining a range of strike prices relative to the price of the selected futures contract determined at the expiration of the generated financial instrument.

21. The system of claim 14, wherein a subset of the set of options contracts are characterized by strike prices above the price of the selected futures contract determined at the expiration of the generated financial instrument, a remaining subset of the set of options contracts being characterized by strike prices below the price of the selected futures contract determined at the expiration of the generated financial instrument.

22. The system of claim 21, wherein the subset and remaining subset comprise the same number of options contracts.

23. The system of claim 14, wherein the fourth logic is further configured to cause the processor to periodically determine the current price of the introduced generated financial instrument based on prior trading thereof and generate the annualized forward volatility metric (“VolPOP”) is periodically performed for a subsequent applicable time period (“t”).

24. The system of claim 14 further comprising sixth logic stored in the memory and configured to be executed by the processor to cause the processor to, upon the expiration of the introduced generated financial instrument, determine a set of deliverable options contracts which meet the definition and delivering the deliverable set of options contracts.

25. The system of claim 14, wherein the current price of the introduced generated financial instrument is indicative of an expectation of the prices of each of the set of options contracts.

26. The system of claim 14, wherein the current price of the introduced generated financial instrument (POP_t) may be one of a bid price (VolPOP_t ^BID), ask price (VolPOP_t ^ASK), an average of the bid and ask prices (VolPOP_t ^MID) or a combination thereof.

27. A system comprising:

a processor and a memory coupled therewith; and

computer executable program code stored in the memory and executable by the processor to cause the processor to:

introduce into an electronic financial instrument exchange market via an electronic exchange computer system, a financial instrument characterized by an expiration and a definition of a first underlying asset to be both determined and physically delivered upon the defined expiration, the financial instrument having been generated for trading via selection of a currently available futures contract characterized by a price and having a second underlying asset whose value is characterized by a selected characteristic, the price of the selected futures contract being indicative of market expectations of the second underlying asset's future value, wherein the definition specifies a set of options contracts as the first underlying asset, each having the selected futures contract as an underlier thereof, each of the set of options contract being characterized by a different strike price, relative to a price of the selected futures contract, to be determined upon the expiration of the generated financial instrument, wherein the strike price of each of the set of options contracts differs from price of the selected futures contract determined upon the expiration of the generated financial instrument by an interval, where upon subsequent to the introduction, the financial instrument is automatically listed for trading;

determine, subsequent to the generated financial instrument being listed for trading, from the electronic exchange computer system, a current price of the introduced generated financial instrument based on prior trading thereof and generate an annualized forward volatility metric (“VolPOP”) for an applicable time period (“t”) via a calculation of:

{VolPOP}_{t} = 100 \times \sqrt{\frac{2}{T \times F_{t}^{2}} \times I \times {POP}_{t}}

Where:

t is the time or date for which this calculation is applicable;

F_tis the price of the selected futures contract;

I is the interval between strike prices of each of the set of options contracts;

POP_tis the current price of the introduced generated financial instrument; and

generate a volatility index financial instrument having a value that is determined from the generated annualized forward volatility metric and subsequent thereto, introduce the volatility index financial instrument into a financial instrument exchange market via the electronic exchange computer system where it is automatically listed for trading, the at least one volatility index financial instrument having at least one parameter corresponding to the generated annualized forward volatility metric.