WO2001015000A1 - A method of performing securitized transactions - Google Patents

A method of performing securitized transactions Download PDF

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Publication number
WO2001015000A1
WO2001015000A1 PCT/US2000/022987 US0022987W WO0115000A1 WO 2001015000 A1 WO2001015000 A1 WO 2001015000A1 US 0022987 W US0022987 W US 0022987W WO 0115000 A1 WO0115000 A1 WO 0115000A1
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WO
WIPO (PCT)
Prior art keywords
customer
security
server
offer
custodian
Prior art date
Application number
PCT/US2000/022987
Other languages
French (fr)
Inventor
Jacques S. David
David Kricheff
Original Assignee
Netrade Llc
Priority date (The priority date is an assumption and is not a legal conclusion. Google has not performed a legal analysis and makes no representation as to the accuracy of the date listed.)
Filing date
Publication date
Priority to US09/378,815 priority Critical patent/US6493683B1/en
Priority to US09/378,815 priority
Priority to US52741900A priority
Priority to US09/527,419 priority
Application filed by Netrade Llc filed Critical Netrade Llc
Publication of WO2001015000A1 publication Critical patent/WO2001015000A1/en

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Classifications

    • GPHYSICS
    • G06COMPUTING; CALCULATING; COUNTING
    • G06QDATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR
    • G06Q30/00Commerce, e.g. shopping or e-commerce
    • G06Q30/06Buying, selling or leasing transactions
    • GPHYSICS
    • G06COMPUTING; CALCULATING; COUNTING
    • G06QDATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR
    • G06Q20/00Payment architectures, schemes or protocols
    • G06Q20/02Payment architectures, schemes or protocols involving a neutral party, e.g. certification authority, notary or trusted third party [TTP]
    • GPHYSICS
    • G06COMPUTING; CALCULATING; COUNTING
    • G06QDATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR
    • G06Q20/00Payment architectures, schemes or protocols
    • G06Q20/04Payment circuits
    • GPHYSICS
    • G06COMPUTING; CALCULATING; COUNTING
    • G06QDATA PROCESSING SYSTEMS OR METHODS, SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL, SUPERVISORY OR FORECASTING PURPOSES, NOT OTHERWISE PROVIDED FOR
    • G06Q20/00Payment architectures, schemes or protocols
    • G06Q20/22Payment schemes or models
    • G06Q20/28Pre-payment schemes, e.g. "pay before"

Abstract

A system and method of trading commodities includes an open commodities exchange server (12) which can be accessed by registered customers (14-22). Registration of customers with the system includes providing information to the system which identifies the customers and the deposition by customers of commodities with one or more custodians (17, 19). Orders associated with commodities are posted by the server as offers on a database after the offers have been securitized. Registered customers can then review the offers and generate responses thereto. These responses are also securitized to insure that the proper securities or assets are on deposit with the custodian; the custodians having their own servers (24, 25). Alternatively, customers can send an offer related to a commodity directly to an exchange server. The offer is backed up by a custodian which securitizes the offer either by accepting assets for deposit or by generating a line of credit.

Description

A METHOD OF PERFORMING SECURITIZED TRANSACTIONS

BACKGROUND OF THE INVENTION

A. Field of the Invention

This invention pertains to a flexible electronic trading system which enables buyers and sellers to trade commodities whereby the commodities traded are authenticated and securitized by a third party. The invention further pertains to a method of trading in which entities, including individual as well as institutional, corporate and fiduciary investors and traders can purchase and sell commodities without resorting to a traditional exchange environment or exchanges where third parties, in addition to the buyer and seller must participate.

B. Description of the Prior Art

Any item that can be traded is a commodity. Thus, commodities include intangibles such as stocks, bonds and options, as well as tangibles such as gold, real estate, and works of art.

There have always been means to trade commodities. In earlier times, when commerce was less complex, it was a simple matter for buyer and seller to meet face to face and consummate a sale with physical assurance that what was being traded had been verified. As commerce became more complex, it became necessary for institutions such as stock exchanges and third parties such as brokers, agents, and market makers to facilitate the buying and selling and to assure the validity of that which was sold. Most recently, the trading of intangibles have been facilitated by the increase in the number and variety of form of exchange systems, most notably the electronic communication networks ("ECN"s). Their existence has greatly enhanced the economic efficiency of these markets by providing faster trading and more open access to specific items being traded.

The individual investor, however, remains removed from the direct trading environment. The individual investor must deal with a large variety of people when negotiating and consummating a transaction with another individual. Thus, when an individual decides to buy or sell a commodity, he still must place this order with another party who will then decide how to process this order. This results in the cost of handling each transaction by a number of people and a time delay in execution of the transaction. The delay alone can be costly in a dynamic market. Also, if the individual wants to buy or sell a commodity, such as a stock or bond, which is seldom or infrequently traded, he has no means to directly communicate with a potential buyer or seller except through a third party. This third party often makes a market in the commodity, allowing for arbitrary economic large spreads between the bid and ask, and resultant purchase and sale prices.

The individual investors have been left out of this trading environment because none of the existing systems either allow them to trade with each other (or directly with other entities) or have the means necessary to validate investors' ability to consummate a transaction. It is this understanding of these problems which provide the impetus for the present invention.

Some automated systems related to commodities trading and the like are described in the following references: U.S. Patent No. 4,751,640 describes an automated investment system for investment banks in which idle funds of customers are invested in commodities designated by the customer.

U. S. Patent No. 5,262,942 describes a financial transaction network in which mutual funds are maintained in different currencies and are transferred between customers at will.

U.S. Patent No. 5,809,483 describes an online transaction processing system which provides current trading information to customers.

U.S. Patent No. 5,845,266 describes a network utilized to match buy and sell orders for commodities.

U.S. Patent No. 5,873,071 describes an order management system for negotiating the exchange of commodities.

U.S. Patent No. 5,890,138 describes a computer-based auction system.

U.S. Patent No. 5,897,621 describes a system for buying goods or services from a merchant using multiple currencies.

U.S. Patent No. 5,903,878 describes a system for electronic commerce in which each transaction is validated by using a special transaction identifier.

U.S. Patent No. 5,905,974 describes a system for auctioning fixed-income commodities.

U.S. Patent No. 5,915,023 describes a system for selling goods or services through a third party.

U.S. Patent No. 5,671,364 describes a system which allows individuals to trade commodities using gold as a means for pricing the same, thereby dispensing the need to convert currencies in care of foreign transactions. OBJECTIVES AND SUMMARY OF THE INVENTION

In view of the above, it is an objective of the present invention to provide a system which provides the total ability of individual investors to buy and sell commodities directly between each other with no effective delay between the time of order and the time of confirmation.

An objective is to enable the purchase and sale of commodities to take place with the elimination of the spread between the selling price and the purchase price presently common to existing transactions between individual investors.

Another objective is to provide a trading system which can be used to trade commodities between buyers and sellers without the need for a conventional commodities exchange and associated commission charges and/or transaction fees.

A further objective is to provide a trading system in which every trade or transaction is automatically secured to insure the comfort and trust of all the participants in the trade.

Yet, an even further objective is to provide an automated commodities trading and method in which a large number of transactions can be completed rapidly and economically.

While another objective is to provide a trading system in which commodities which are rarely traded are readily available with increased liquidity to a potential buyer or seller.

A further objective is to provide a market for less frequently traded commodities by making known their availability for purchase and sale.

Other objectives and advantages of the invention will become apparent from the following description. In one embodiment, the subject invention pertains to an automated commodities trading system including an open commodities exchange server (OCES) which can be accessed by a plurality of customers and at least one custodian in communication with said OCES. Commodities, funds, and other assets used for trading are deposited by the customer with the custodian.

The customers can participate in two kinds of trades: placing orders for commodities or responding to offers by other customers. When a customer places an order on the OCES, a request is sent to the custodian to securitize the order, meaning that the custodian verifies that the customer has the proper commodities, assets or funds to meet the order, and optionally segregates or otherwise separates the same into an escrow account. After an order has been securitized, it is posted to an appropriate database and then becomes an offer.

A response to an offer is securitized in the same manner as an order. Once a response to an offer is securitized, the offer is executed and the buyer and seller customers as well as the custodian(s) are notified, and the order is settled.

Briefly, a system for trading commodities includes an open commodities exchange server ("OCES") provided to receive a plurality of orders to buy and sell commodities from a plurality of customers. The OCES is also coupled to one or more custodians. Before being allowed to trade, each customer must deposit with a corresponding custodian the funds, commodities and other marketable assets the customer may wish to use in the purchase and sale of commodities through the OCES.

Whenever a customer initiates a trade through the OCES, the OCES requests confirmation and securitization from the appropriate custodian, whereby the custodian segregates or otherwise blocks the appropriate assets of the customer and acknowledges the same to the OCES. In this description, the term trade is used to refer generically to any conventional commodities exchange, including either:

(1) an order to buy or sell commodities, or

(2) a response to a posted order to buy or sell commodities. Moreover, an order to sell a commodity could be a short order covering a commodity which is not in the possession of the customer. Short orders are securitized by other assets of the customer or by other means as prescribed, for example, by government regulations. Once confirmation is received, the offer (if any) is posted on the OCES.

The settlement for the trade is performed by the custodians. The custodian may be an independent entity and it may be associated with banks, brokerage houses or other similar entities normally involved in trading or it may be established specifically for this purpose.

Generally, the present invention covers an automated commodities trading system for trading a commodity between a first and second customer with an asset or payment being deposited with a custodian on the account of said second customer; said commodity being deposited with a custodian on the account of said first customer; said system including an open commodities exchange server ("OCES") arranged and constructed to communicate with all parties involved, and to manage requests to buy and sell commodities from said customers. A custodian server is associated with the custodian and can access data identifying assets including funds and commodities held by said custodian.

The OCES generates messages to said custodian servers in response to requests to confirm that the custodians have said assets in escrow. The custodian receives the messages and generates an acknowledgment based on the data identifying said assets. The OCES generates a transfer message in response to said acknowledgments to transfer said stock to said second customer and payment to said first customer.

More specifically, a commodities trading system for trading a commodity between a first and second customer is disclosed having a first database holding data indicative of a commodity being held by a custodian on behalf of said first customer; a second database holding data indicating the funds of said second costumer (or other indicia showing that he has the ability to pay), an OCES being in communication with said first and second databases and said first and second customers and receiving a request for transferring said commodity from said first to said second consumer; the OCES being arranged to confirm that said first commodity is securitized. The OCES is also arranged to confirm that said second customer has funds to pay for said commodity by contacting said second database. The OCES is constructed and arranged to allow said transfer only after confirming that the transaction is secure.

The system may also include a first custodian server associated with a first custodian, said first custodian server being connected to one of said first and second databases. The custodian is associated with said first database and is adapted to securitize the commodity.

In addition, a method of trading commodities on an automated distributed system including an open commodities exchange server ("OCES"), a first database indicating that a commodity is deposited with a custodial facility on behalf of a first customer and a second database indicating that a second customer has funds to pay for commodities presented, the method including generating a request to said OCES to trade said commodity between said first and said second customers; generating a first confirmation request by said OCES that said first customer has rights to said commodity; generating a second confirmation request by said OCES that said second customer has the required funds; generating a first response from said first database to indicate that said first customer has rights to said commodity; generating a second response from said second database to indicate that said second customer has the funds; and responsive to said first and second responses, transferring said commodity from said first customer to said second customer in return for said funds. The method further includes generating an offer to sell said commodity by said first customer and an offer to buy said commodity by said second customer; and comparing said offers by said server and initiating said transfer if said offers meet a predetermined criteria. Preferably and prior to confirmation, said commodity and the corresponding funds are securitized by the corresponding custodians.

As part of this method and prior to any trading, each customer may be required to register with the server and with a custodian. As part of this registration, the customer gets an identification and password for the system. The customer must also deposit his commodities with the custodian, but before he can buy any commodities, each customer must also register with a custodian and either deposit funds or other assets or provide sufficient information to receive a credit rating for a particular amount. Since most customers want to buy and sell commodities, it is expected that they deposit their commodities and funds concurrently with a custodian. Prior to any trade by a customer to sell a commodity, the server must receive confirmation through the appropriate custodian that it has custody of the subject commodity and, therefore, that the customer has the right to sell the same and that the subject commodity has been securitized. Prior to any trade by a customer to buy, the server must obtain confirmation from the appropriate custodian (which may be the same custodian as the one confirming the commodity) that the customer has deposited sufficient funds to purchase the commodity and that these funds have been securitized. In effect this confirmation indicates that the customer has the ability to pay for the commodities which he wants to buy.

Finally, a method of trading commodities is presented by generating a request to trade a commodity between said first and said second customers, confirming that said first customer has rights to said commodity (or funds to pay for the same) and that the commodity (or funds) has been securitized and thereby confirming that said second customer has the funds for paying for said commodity and that said funds indeed have been securitized and, if both conditions are met, transferring said commodity between said first and said second customer.

In another embodiment of the invention, customers with securitized assets can issue offers related to commodities directly to one or more servers. A customer can respond to an offer by sending an acceptance. The server then checks whether the acceptance is securitized, i.e., whether the respective customer has deposited funds or commodities with a proper custodian. If the acceptance has been securitized, a transaction is completed between the two parties. Preferably, the customer making an offer has deposited his assets (i.e., funds or commodities) funds with a custodian before hand and has received a corresponding authorization from the corresponding custodian. The offer can then include the authorization to indicate that the offer is securitized. Of course, in some cases, several different classes of customers may be recognized by the servers, depending for example, on a rating system or other criteria. If a customer is recognized as having a certain credit rating by a server, then any transactions involving that customer up to a certain credit limit dependent on his rating may proceed without the necessity of securitizing any offers or acceptances by that customer. Several different customers may send acceptances to an offer, especially if the offer is posed on several servers. One of the servers then arbitrates between the acceptances and chooses one for the offeror.

Once an offer is accepted, the transaction is settled through the custodian using standard procedures acceptable in the industry.

In one embodiment of the invention, the customer sends an offer directly to a server, with a message indicating that the offer is securitized by a particular custodian being imbedded in the offer. In this manner, the server is insured that the customer has the ability to perform the transaction. However, for a higher security level, the customer may send his offer not directly to the server, but indirectly to the custodian holding the assets. The custodian can then automatically forward the offer with the securitizing message attached or otherwise incorporated into the offer. The server receiving the offer directly from a custodian is more confident of its validity.

In all the transactions, the identity of the customers may or may not be known from the offers and acceptances. However, the identity of the custodians are generally known to the servers.

BRIEF DESCRIPTION OF THE DRAWINGS

Fig. 1 shows a block diagram of an open commodities exchange system constructed in accordance with this invention;

Fig. 2 shows a flow chart illustrating how the system of Fig.1 handles a trade order by a customer;

Fig. 3 shows a typical welcome screen for a customer after he has signed onto the open board server; Fig. 4 show a flow chart for confirming the status of a customer by a custodian server;

Fig. 5 shows a block diagram of an alternate embodiment of the invention;

Fig. 6 shows a block diagram for the exchange server of the embodiment of Fig. 5; and

Fig. 7 shows a flow chart of the operation of Figs. 5 and 6 in order to execute a transaction.

DETAILED DESCRIPTION OF THE INVENTION

Referring now to Fig. 1, a system 10 for performing commodities trading in accordance with this invention includes an open commodities exchange server (OCES) 12, with a plurality of customers 14, 16, 18, 20, 22 being connected to the OCES 12 to execute trades. The connections between the customers and the OCES 12 may be provided by secure telephone lines via the Internet or any other similar means. The customers 14, 16, 18, 20, 22 may be individual investors, small or large traders, etc., each having a PC or other means of accessing the OCES 12, such as a smart terminal or a dumb terminal.

Also connected to the system 10 are a plurality of custodians 17, 19, 21, 23. The number of these custodians may vary depending on the size and physical or geographical extend of the system 10. A custodian, or at least its functions, may also be incorporated into the OCES 12. It is contemplated at this time that the custodians will be associated with banks, brokerage firms, or other financial institutions of facilities traditionally involved in receiving and storing commodities. Each custodian includes a custodian server, an escrow account and a customer database as discussed in more detail below. Only the servers 28, 30 for custodians 21, 23 are shown for the sake of clarity.

The depository 32 may represent a physical chamber such as a vault in which the actual notes, corresponding to commodities and other and funds are stored, together with a database containing an inventory of these notes, including their ownership, etc. In the future, it is expected that the notes will be eliminated and that the depository will consist only of the database.

As seen in Fig. 1, OCES 12 includes a microprocessor 40 which performs all the data processing associated with the functions of OCES 12. In addition, OCES 12 further includes a customer database 42, a sell database 44, a buy database 46, a matching component 48, a current commodity posting database 50, and a news database 52. The operation and function of each of these elements will become apparent from the following description.

Before a customer can access the system 10, he must be registered. This registration may be performed either through the OCES 12 or directly through any one of the custodians. Initially, if the customer is interested only in buying commodities, then registration consists of depositing funds. The funds are then credited to his account. A protocol is preferably established to update the customer's account. Alternatively, the customer may establish credit as a means of providing funds to pay for commodities.

If a customer initially wants to sell commodities, then during registration to the custodian, and in addition to providing personal information, the customer may also surrender the subject commodities. These commodities are stored in the depository 32 and the customer database 36 is adjusted to indicate that the commodities are on deposit in the customer's account.

It is expected that most customers deposit their commodities, assets and funds at the same time. Hereinafter, the term assets shall be used to refer to commodities and funds that can be used to pay for commodities.

After the customer has traded commodities using system 10, any commodities thus acquired can also be placed in the depository 32. Alternatively, the customer may select to receive and store the commodities himself. However, in this case, the acquired commodities must be re-deposited before initiating any sell orders.

Once a customer is properly registered, his profile (including name, address, password, portfolio information, and other data) is stored in customer database 42.

A customer 14 can make a trade on the OCES 12 as shown in Fig. 2. In step 100, the customer contacts OCES 12 using a standard PC or other similar device and attempts to sign on to get access to the subject trading service. In step 102, the OCES 12 requests the customer to provide the customer's identification name and password. The customer's PC can provide this information automatically or the information may be entered manually by the customer. The identification and password are checked by the OCES 12 by comparing the same with the information in the database 42. If the customer is not a registered user, his request for access is rejected. (Step 103).

If the customer 14 is accepted as a registered user, the OCES 12 sends data to his PC for presenting a welcome screen which is then displayed for customer 14 (step 104). A typical welcome screen may appear as that illustrated in Fig. 3. On this screen 60, the customer 14 is provided with various information preferably tailored to his needs and his personal profile. For example, the screen may include a zone 62 used to display a list of the current holdings of the customer. Zone 64 may be used to show a watch list, i.e., a list of commodities that the customer wants to monitor on a regular basis.

Two buttons 66, 68 may be provided to allow customer 14 to obtain further information. Button 66 may be used to obtain instructions on how to use the system 10 while button 68 may be used to request financial news. When button 66 is selected, the customer can get instructions on how to use the system 10. When button 68 is selected, the OCES 12 downloads financial news to the customer. The OCES 12 obtains this financial news as well as current commodity price information from database 50. This information is provided by a news database 52. The data in this database is collected by the processor 40 either from its own databases, such as current posting database 50, or from external sources through the Internet.

A zone 70 is also provided in which the customer 14 can monitor the progress and status of his orders. For example, the zone 70 may contain a list of all the buy and sell orders by the customer, the current price of the corresponding commodity, and so on.

Finally a button 72 is provided to allow the customer one means of initiating the trading process, as described below. Obviously, the screen in Fig. 3 is merely exemplary and many other variations and formats may be used to provide the information to the customer.

Once the welcome screen is shown, the customer 14 may initiate a trade in a number of different ways. For example, the customer may review his watch list in zone 64 and when he wants to trade a particular commodity, he chooses that commodity from the list. Once this choice is made, a trade screen is displayed (step 106). This screen shows a list of all buy and sell offers for the selected commodity as posted in databases 46 and 44 respectively. Optionally, the trade screen may also show the current buy and sell orders from others, possibly conventional exchanges. In step 108, the customer 14 may select one of the offers and thereby indicate that he would like to accept the offer. If the customer does not like any offers that are listed, he can then place his own order. If the customer wants to trade a commodity that is not listed in his watch list, he must first select trade zone 70, and then identifies the commodity that he is interested in.

In step 110, the OCES 12 receives the order.

In step 112, the OCES 12 contacts the corresponding custodian, for example, custodian 17 handling this particular customer and requests a proper confirmation.

The process performed by the custodian 17 depends on the nature of the order. For example, in Fig. 4, the custodian server 24 of custodian 17 receives the order for the sale of a stock X in step 200. In step 202, the custodian server 24 verifies that customer 14 has registered at least N of stock X commodities with custodian 17. In step 204, the custodian server 24 verifies that custodian 17 has registered and has in its custody at least N shares of stock X. The custodian server 24 also places a block, or segregates the shares N of stock X in the account of customer 14 or alternatively, transfers these shares to the escrow account 34. In this manner, the stock specified by the order is securitized, so that it cannot be touched while the order is processed.

In step 206, the custodian server 24 returns a message to OCES 12 indicating that the customer 14 has at least n shares of stock n and that this commodity is in the possession of custodian 17 and that these shares have been securitized. If the customer 14 is not recognized or does not have enough or any shares of stock x registered with custodian 17, then the custodian server 24 returns a message to the OCES 12 declining to confirm the request.

If the subject order is for buying a commodity or selling a commodity short, the custodian segregates or allocates assets or funds of the customer to the escrow account in anticipation of the prospective trade.

In Fig. 2, in step 114, the OCES 12 receives confirmation from the custodian server 24, that the commodities (or the funds) for order have been securitized. If the OCES 12 receives a rejection of the trade request, then a rejection message is sent to the customer 14.

In step 116, the OCES 12 posts the sell order in a sell database 44 (Fig. 1) as an offer and notifies the customer 14 of the posting.

In step 118, all offer acceptances are monitored by the OCES 12. If the subject offer is accepted, then in step 120, an execution order is sent to the buyer, the seller, and the appropriate custodian(s). The custodians then settle the order. If the offer is not accepted within the predetermined time, then in step 122, the order is canceled and removed from the appropriate database (44 or 46) and the custodian is requested to release the subject commodity (or assets) to the customer's account.

Optionally, in step 118, a matching component 48 is accessed. This component 48 uses a predetermined algorithm to compare the sell orders from the database 44 and the buy orders from database 46 and, if no match is found, negotiates a match which is fair to both parties. If a match is found, the matching component 48 insures that the new order is matched to the earliest corresponding offer.

If in step 108, the customer selects an offer listed in zone 64 and elects to accept it, then in step 124 a request is sent to the appropriate custodian for confirmation. Once again, the custodian checks whether the customer 14 has either the required commodity or assets (depending on the nature of the order). Once securitization is accomplished, the custodian sends a confirmation to the OCES 12. The order corresponding to the offer accepted by the customer 14 is then executed in step 120 as described above.

Once an order is executed, a settlement has to be performed to effectuate the commodity transfer. The settlement is preferably conducted between the custodian servers (for example, 17 as the custodian for the seller and 19 as the custodian for the buyer) without the involvement of the OCES 12, although the OCES may be notified of these settlements so that it can keep track of the transactions and their status. Alternatively, all the communications between the custodian servers 17, 19 can be performed through the OCES 12.

As previously mentioned, in step 120, both custodians 17, 19 are notified of the order to be settled. During the order, the two custodians 17, 19 exchange confirmation signals to verify that custodian 17 is indeed the seller custodian and has the securitized commodity, and that the buyer custodian's server base securitized the buyer's funds. Next, the two servers 17,19 exchange the subject commodity in return for the funds, and the depositors 32, 32A, escrow accounts 34, 34A, and customer databases 36, 36A are adjusted to reflect this transaction.

The term server is used generically to describe any microprocessor-based device, apparatus or process capable of performing the functions described herein. It should be understood that the various functions and sequence of steps described above and attributed to the servers 12, 24, 26 have been provided only for the purposes of clarity and that some of these functions and steps can be performed by other elements of the systems. For example, a customer may be registered with more than one custodian server. Alternatively, a single custodian server may be provided to handle all the transactions. If separate custodians are used, different custodians may be associated with different functions or operations. For example, some custodians may be dedicated to handling only commodities while other custodians may be dedicated to handling only funds and credit information. Some custodians may be provided to handle both commodities and funds. Finally, some custodians may be dedicated to managing only particular types of commodities (i.e., options, stocks, bonds, or tangibles). Moreover, the steps for performing a trade may also be performed in a different sequence.

In an alternate embodiment of the invention, a customer can deposit his assets with a custodian and then deal with an exchange server directly and try to maximize his return by skipping a broker in this manner. More particularly and referring to Fig. 5, three customers 314, 316, 318 deposit their assets with custodian servers 324, 326 and 328, respectively, and receive corresponding acknowledgment codes indicating that the custodians have received the assets. Each customer is then free to approach any exchange server, such as servers 312 A, 312B or 312C and to try to complete a transaction related to a particular commodity. The transaction thus could include buying, or selling a commodity, buying or selling options for a commodity and so on. In Fig. 5, for example, customer 314 posts an offer ( such as a sell or a buy) on exchange server 312A , customer 316 posts an offer on exchange server 312B, and customer 318 posts an offer on exchange server 312C. Referring to Fig. 6, exchange server 312A, which is typical of all the exchange servers, includes a microprocessor 340, a buy database 344, a sell database 346 and a matching component 348. The server 312A can communicate with other exchanges, the custodians and the customers via an Internet connection 150, or other secure telecommunication lines. In addition, the server 312A may also be connected to its own dedicated customers 352, 354 who, in this case, deal only through server 312A in accordance with the embodiments of Figs. 1-4.

The operation of the embodiment is now described in conjunction with the flow chart of Fig. 7. Starting in step 360, customer 314 deposits a commodity with the custodian associated with server 314. The details of how this is accomplished is discussed above for the first embodiment. The custodian server 324 then issues an authorization code to the customer 314 indicating that the subject commodity is in custody (step 362).

Next, in step 364, the customer 314 (for the sake of simplicity the customer and a computer used to send and receive electronic messages and generate orders, acceptances, etc., via the Internet connection 150 are represented by a single box) sends an offer to exchange server 312A. More particularly, if the customer wants to sell 100 shares of stock x, he deposits the shares with the custodian associated with server 324 and the server 324 then sends an authorization or other message to customer 314 indicating that 100 shares of stock x have been received. The customer then sends an offer for selling the shares. This offer includes the authorization from the custodian server 324. The offer can be sent by the customer 314 directly to exchange server 312A or, alternatively, the customer can send a request for an offer to the custodian server 324. The custodian server 324 generates the offer by adding to the message from the customer a code indicating that the assets for the offer are indeed in custody. The custodian then sends the offer with the validation code to the server 312A.

In step 366, the exchange server 312 receives the offer and checks that the offer includes the proper authorization from custodian 324. In this embodiment, preferably the authorization code is imbedded or otherwise incorporated into the order received by the exchange 312A and therefore the exchange server 312 A need not contact the custodian server 324 although, it may do so if a higher level of security is required. If the server 312 A receives the offer from the custodian server 324 and the authorization validation step 366 is more reliable. In either case, the server 312A need not know the identity of customer 314. If no authorization is included with the offer, or if the authorization is not proper, then the offer is rejected in step 368. If the authorization is proper, then in step 370, the order is posted by the server 312 A. In case of an offer to sell, the offer is posted in database 346. Buy offers are posted in database 344.

In step 372, the server 312A checks whether an acceptance to the offer has been issued by another customer. For this purpose, the microprocessor 340 may use the matching component 348 and compare the offers in the buy and sell data bases, or it may just wait for an express acceptance of the offer. If no acceptance is received within a predetermined time, the order is canceled in step 374. If an acceptance is received or a match is found, then in step 376, the server 312A may send a request for a confirmation from the custodian server 324. The identity of the custodian server may be imbedded in the authorization code.

The server 312A then waits for the confirmation from custodian server 324. During this time, the custodian server 324 receives the request for confirmation, checks whether subject commodity is still in its custody, puts a hold on the commodity so that it will not be sold to anyone else, and then sends back a confirmation message to the exchange server 312 A.

If the server 312 A does not receive the confirmation within a predetermined time period, then the acceptance process is canceled in step 380.

If a lower level of security is sufficient, for example, if the server 312A is satisfied that the original offer from customer 314 is genuine then the confirmation steps 376 and 378 may be omitted.

If the confirmation is received within the allotted time, then the server 312A executes the offer in step 380. This step may entail sending messages to the custodian server 324 and the custodian of the party accepting the offer. The custodians then settle the accounts for each party thereby completing a transaction. The identity of the customer 314 may or may not be known by the server 312A.

In a variation of the embodiment, the offers from each of the customers 314, 316, 318 may be sent not only to one exchange server, but several servers. In this variation, one of the exchange or custodian servers must arbitrate between different acceptances (if any) to determine which was the earliest and/or which acceptance provides the best return for the offeror. In this manner, the customers do not have to deal with only a single exchange server but can deal with any number of such servers. The exchange servers can be run by any organization, such as stock broker firms, banks, and so forth. Moreover, in each of the embodiments, the custodian functions can be performed by known and established commodity exchanges and other independent organizations, or the organizations which also run the exchange servers.

In the embodiments of Figs. 5-7 preferably both the offer and the acceptance are securitized by the appropriate custodian before they are posted or otherwise processed. Of course, in some instances, securitization may not necessarily include the deposit of commodities or other assets. For example, the customers may establish a credit line with the custodians and/or the exchange servers, for example for transactions worth up to a certain limit M. Then, when a preapproved customer posts an offer or acceptance the appropriate custodian or server (if the offer or acceptance are sent directly thereto) he is recognized and if the related transaction does not reach the limit M, then the offer or acceptance is processed normally. Thus, in this case, the process of securitization consists of the step of preapproving the credit limit of the customer.

It is clear from the above description that the subject invention provides several advantages over the prior art systems using a standard exchange. More particularly, the system allows individuals to trade directly with each other. Trades can be matched and the offers can be executed very rapidly so that there is virtually no time delay between the time of each order and its execution, including the time required to settle a transaction. In other words, as a transaction is completed, settlement and the transfer of appropriate debits and credits between the accounts of various custodians can occur substantially simultaneously. Assets and commodities are verified and securitized on both sides of the transaction. Trades may be made without a spread between the buy and the sell price. Trades are posted and executed without paying commissions or other fees to third parties (i.e., brokers or dealers).

The price paid for the commodity can be determined using a predetermined formula that has been agreed on by the participants. Alternatively, the price for a commodity may be determined at regular basis by a third party and transmitted to all the exchange servers. This preset price may be dependent on the size of a particular transaction, or the number of shares being exchanged. More specifically, a third party may 'publish' electronically a list of prices for all commodities being traded, said list specifying prices for each commodity for lots of 100 shares, a price for lots of 10,000 shares and a price for lots less than 100 shares.

Finally, while the invention has been described in terms of transferring commodities, it should be understood that its principles can be applicable for other transactions, such as, for example, transfer of large commercial transactions as well.

Numerous other modifications may be made to the invention without departing from its scope as defined in the appended claims.

Claims

I claim:
1. An automated securities trading system for trading a security between a first and a second customer, said security being deposited with a custodian facility on the account of said first customer, said system comprising: an open board server arranged and constructed to communicate with at least said first of customers, and to manage requests to buy and sell securities from said customers; and a custodian server associated with the custodian facility, and a data base containing data identifying securities held by said facility; wherein said open board server is adapted to receive a request from said second customer to buy said security; said open market server being adapted to generate a message to said custodian server in response to said request to confirm that the custodian facility has said security on escrow; said custodian server being adapted to receive said message and to generate an acknowledgment based on data in said data base; and wherein said open market is adapted to generate a transfer message in response to said acknowledgment to transfer said stock to said second customer.
2. The system of claim 1 wherein the second customer has a credit rating and wherein said open board server is adapted to check said credit rating to insure that the second customer has sufficient funds to pay for said security prior to the release of said security to said second customer.
3. The system of claim 1 wherein said credit rating is stored in a credit data base.
4. The system of claim 3 wherein said custodian server is associated with said credit data base.
5. The system of claim 1 wherein said open board server is adapted to check if the second customer has sufficient funds to pay for said security.
6. A security trading system for allowing security trading between a first and a second customer, said system comprising: a first data base holding data indicative of a security being held by a custodian facility on behalf of said first customer; a second data base holding data indicating that said second costumer has the ability to pay at least a predetermined amount of money; a server being in communication with said first and second data bases and to said first and second customers and receiving a request for transferring said security from said first to said second consumer, said server being arranged to confirm that said first customer has rights to said security by contacting said first data base; said server being arranged to confirm that said second customer has the ability to pay for said security by contacting said second data base; wherein said server is constructed and arranged to initiate said transfer only after confirming that said first customer has rights to said security and said second customer has the ability to pay for said security.
7. The system of claim 6 further comprising a first custodian server associated with a custodian facility, said first custodian server being connected to one of said first and second data bases.
8. The system of claim 7 wherein said first server is associated with said first data base and is adapted to provide a lock on said security to prevent said security from being traded twice.
9. The system of claim 7 wherein said first server is adapted to set aside said security until a respective transaction is completed or cancelled.
10. A method of trading securities on an automated distributed system including an open board server, a first data base indicating that a security is deposited with a custodial facility on behalf of a first customer and a second data base indicating that a second customer has the ability to pay a predetermined amount of money for securities, said method comprising: generating a request to said server to trade said security between said first and said second customers; generating a first confirmation request by said server that said first customer has rights to said security; generating a second confirmation request by said server that said second customer has the ability to pay; generating a first response from said first data base that said first customer
has rights to said security; generating a second response from said second data base that said second customer has the ability to pay; and responsive to said first and second responses, transferring said security from said first to said customer in return for funds for said security.
11. The method of claim 10 further comprising generating an offer to sell said security by said first customer and an offer to buy said security by said second customer.
12. The method of claim 11 further comprising comparing said offers by said server and initiating said transfer if said offers meet predetermined criteria.
13. A method of trading securities comprising the steps of : generating a request to trade a security between said first and said second customers; confirming that said first customer has rights to said security; confirming that said second customer has the capability of paying for said security; and if both conditions are met, transferring the right to said security from said first to said second customer.
14. The method of claim 13 further comprising depositing said security with a custodian by said first customer, wherein said custodian confirms on request that said customer has rights to said security.
15. The method of claim 13 further comprising registering by said second customer with a custodian, said step of registering including providing information indicative of the ability of said second customer to pay a predetermined amount of money.
16. The method of claim 15 wherein said step of registering includes depositing money with said custodian.
17. The method of claim 15 wherein said step of registering includes providing information sufficient to generate a credit rating for said second customer.
18. A method of trading commodities between a plurality of customers comprising: generating an offer for a transaction designating a commodity by a first customer; generating an acceptance from a second customer; securitizing said offer and said acceptance by said custodian; and if the acceptance is securitized, then completing the transaction.
19. The method of claim 18 wherein the respective commodity is securitized before said offer is generated.
20. The method of claim 18 wherein said step of securitizing includes setting a hold on said commodity until said transaction is completed or said offer is canceled.
21. A method of trading commodities between a plurality of customers, using a system of interconnected customers, an exchange server and a custodian server, comprising: securitizing assets and commodities of customers; issuing an offer for a transaction designating a commodity to said exchange server from a first customer; generating an acceptance from a second customer; and if the acceptance is securitized, then completing the transaction.
22. The method of claim 21 further comprising including with said offer an authorization indicating that one of said custodians holds assets corresponding to said offer and has set said assets aside to insure that the assets can be delivered during the completion of said transaction.
23. The method of claim 21 further comprising depositing first assets by said first customer with one of said custodians and depositing second assets by said second customer before said transaction is completed.
24. The method of claim 21 comprising issuing an offer to sell a commodity by said first customer.
25. The method of claim 21 comprising issuing an offer to buy a commodity by said first customer.
26. The method of claim 21 wherein said offer is transmitted to a plurality of servers.
27. The method of claim 21 further comprising getting a first acceptance and second acceptance from separate customers responding to said offer.
28. The method of claim 27 further comprising analyzing said first and second acceptances to determine which should be accepted.
29. A method of dealing with commodities by a plurality of customers comprising: securitizing commodities by depositing with custodians assets by customers, said assets including commodities and funds to pay for said commodities; issuing an offer by a first customer associated with one of said securitized commodity; receiving an acceptance of said offer from a second customer using securitized assets; and if the acceptance has been securitized, then completing a transaction by exchanging said one commodity from the first customer to the second customer for a second commodity from the second customer to said first customer.
30. The method of claim 29 wherein said issuing of said offer includes attaching to said offer an authorization indicating that said offer has been securitized.
31. The method of claim 29 wherein said offer is issued to a plurality of servers, further comprising receiving several acceptances from different servers.
32. The method of claim 31 further comprising securitizing each of said acceptances.
33. The method of claim 32 further comprising evaluating the securitized acceptances and selecting one said securitized acceptance.
34. The method of claim 33 wherein said transaction is completed between said offer and said one securitized acceptance.
35. The method of claim 29 wherein said step of securitizing includes depositing assets with a custodian.
36. The method of claim 29 wherein said step of securitizing includes setting up a credit line for said customers.
37. The method of claim 29 wherein said step of securitizing includes setting the corresponding commodity aside for each offer and acceptance and holding said set aside commodities so that the owner of said set aside commodities cannot touch said set aside commodities until the transaction is completed or the offer is canceled.
PCT/US2000/022987 1999-08-23 2000-08-22 A method of performing securitized transactions WO2001015000A1 (en)

Priority Applications (4)

Application Number Priority Date Filing Date Title
US09/378,815 US6493683B1 (en) 1999-08-23 1999-08-23 Open commodites exchange
US09/378,815 1999-08-23
US52741900A true 2000-03-17 2000-03-17
US09/527,419 2000-03-17

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