WO2002059711A2

WO2002059711A2 - Method and system of anonymously trading securities on-line

Info

Publication number: WO2002059711A2
Application number: PCT/US2001/044235
Authority: WO
Inventors: Mark E. Bowles; Nicholas J. Taddeo
Original assignee: Bondmart Technologies, Inc.
Priority date: 2000-11-28
Filing date: 2001-11-28
Publication date: 2002-08-01
Also published as: WO2002059711A3

Abstract

A method of trading securities anonymously among a plurality of investors includes the steps of maintaining a database of a plurality of standing orders to trade securities; entering a first order to trade securities by a first investor on a first one of a plurality of data communication devices; encrypting the first order, thereby creating an encrypted first order; communicating the encrypted first order from the first data communication device over a public network to a host processing system; processing the encrypted first order by the host processing system, thereby creating a second order; adding the second order to the database, thereby creating a first updated database; processing the second order by the host processing system, thereby creating a first anonymous order; adding the first anonymous order to a record of a plurality of anonymous standing orders, thereby creating a first updated record; encrypting the first updated record, thereby creating an encrypted first updated record; communicating the encrypted first updated record from the host processing system over the public network to the plurality of data communication devices; matching the second order with a first standing order of a second investor, thereby creating an executed trade; and creating a settlement statement by the host processing system for the executed trade.

Description

METHOD AND SYSTEM OF ANONYMOUSLY TRADING SECURITIES ON-LINE

BACKGROUND OF THE INVENTION

Field of the Invention

The present invention relates to a method and system of on-line trading of securities, and

more particularly, to a method and system of on-line trading debt securities anonymously among

a plurality of investors.

Discussion of the Related Art

Advances in computer processing power and network communications have made

information from a wide variety of sources available to users on computer networks. Computer

networking allows network computer users to share information, software applications and

hardware devices, and internetworking enables a set of physical networks to be. connected into a

single network, such as the Internet. Computers connected to the Internet or connected to

networks other than the Internet also have access to information stored on those networks. The

World Wide Web (Web), a hypermedia system used on the Internet, enables hypertext linking,

whereby documents automatically reference or link other documents located on connected

computer networks around the world. Thus, users connected to the Internet have almost instant

access to information stored in relatively distant regions.

A page of information on the Web may include references to other Web pages and may₍

include a broad range of multimedia data including textual, graphical, audio, and animation

information. Currently, Internet users retrieve information from the Internet, through the Web by

"visiting" a web site on a computer that is connected to the Internet.

The web site is, in general terms, a server application that displays information stored on

a network server computer. The web site accepts connections from client programs, such as Internet browser applications. Browser applications, such as Microsoft Explorer™ or Netscape

Internet Browser™, allow Internet users to access information displayed on the website. Most

browser applications display information on computer screens and permit a user to navigate

through the Web using a mouse. Like other network applications, Web browsing uses a client-

server paradigm. When given a Uniform Resource Locator (URL) of a document, the browser

application becomes a client and contacts a server application specified in the URL to request the

document. After receiving the document from the server application, the browser application

displays the document to the user. When the browser application interacts with the server

application, the two applications follow the Hyper-Text Transport Protocol (HTTP). HTTP

allows the browser application to request a specific article, which the server application then

returns. To ensure that browser applications and server applications inter-operate

unambiguously, HTTP defines the exact format for requests sent from the browser application to

the server application as well as the format of replies that the server application returns.

With the proliferation of physical networks connected to the Internet, many web sites

have become accessible to Internet users to trade securities. Typically, these websites contain

market data and news and information about particular securities and allow Internet users to

place orders to trade securities. Currently these websites allow investors to do over the Internet

what in the past could only be done telephonically or in writing. While efforts to date have

increased the amount of information available to investors and provided investors with another

avenue for submitting trades, the related art has not shifted the paradigm for trading securities.

Trading securities is still largely performed with investors placing orders to trade with brokers who then execute the trades and clear the executed trades with a settlement agent. Furthermore,

the related art has largely ignored the economic realities of trading debt securities or bonds.

A bond is a contract of debt issued by a government or business entity guaranteeing

payment of the original investment with interest on a specified date. Bonds may be held by the

original purchaser or traded in a secondary market. Many bonds provide semiannual interest

payments and return an original face value at an end of a fixed term, ranging anywhere from a

few months to several decades. Some bonds, notably U.S. Treasury bills, do not provide

periodic interest but have a face value or par and are sold initially at a discount. Such bonds are

traded in the secondary market at a decreasing discount as time approaches the maturity date at

which time the face value is paid to the current owner of the bond. The majority of trades

executed in the secondary market are by large institutional investors. An institutional investor is

an entity, outside the brokerage industry, that trades debt securities for purposes of investment,

hedging, or short-term capital management.

The average single trade size in the bond market is approximately $15 million.

Moreover, the U.S. institutional bond market averages approximately 30,000 transactions every

trading day for a dollar volume of approximately $450 billion. In contrast, the NYSE alone

averages approximately one million transactions every trading day. Effct∑" to automate the

institutional bond market to date have largely ignored these economic realities.

Currently, investors must rely on brokerages to facilitate bringing together buyers and

sellers of debt securities in the secondary market. Institutional investors must communicate their

orders directly to the brokerages, which do not offer flexibility in price specification and order

execution and cannot provide total investor anonymity. While brokerages undoubtedly respect an investor's wish to remain anonymous, brokerages are unable to offer total investor anonymity

over the entire course of a trade. Finally, once an order is executed, a settlement agent clears the

executed trade.

SUMMARY OF THE INVENTION

Accordingly, the present invention is directed to a method and system of trading debt

securities anonymously among a plurality of investors that substantially obviates one or more of

the problems due to the limitations and disadvantages of the related art.

An object of the present invention is to provide a common place for investors to place

anonymous expressions of trading interest and to complete transactions by responding to other

parties without the need for brokers.

Another object of the present invention is to provide investors with flexibility in price

specification beyond that available in any other electronic exchange.

Additional features and advantages of the invention will be set forth in the description

which follows, and in part will be apparent from the description, or may be learned by practice of

the invention. The objectives and other advantages of the invention will be realized and attained

by the structure particularly pointed out in the written description and claims hereof as well as

the appended drawings.

To achieve these and other advantages and in accordance with the purpose of the present

invention, as embodied and broadly described, the method of trading securities anonymously

among a plurality of investors includes the steps of maintaining a database of a plurality of

standing orders to trade securities; entering a first order to trade securities by a first investor on a

first one of a plurality of data communication devices; encrypting the first order, thereby creating an encrypted first order; communicating the encrypted first order from the first data

communication device over a public network to a host processing system; processing the

encrypted first order by the host processing system, thereby creating a second order; adding the

second order to the database, thereby creating a first updated database; processing the second

order by the host processing system, thereby creating a first anonymous order; adding the first

anonymous order to a record of a plurality of anonymous standing orders, thereby creating a first

updated record; encrypting the first updated record, thereby creating an encrypted first updated

record; communicating the encrypted updated record from the host processing system over the

public network to the plurality of data communication devices; matching the second order with a

first standing order of a second investor, thereby creating an executed trade; and creating a

settlement statement by the host processing system for the executed trade.

In another aspect, the system for trading securities anonymously among a plurality of

investors includes a database for storing a plurality of standing orders to trade securities, the

database including information about the plurality of standing orders; a host processing system

for storing the database, creating a record of a plurality of anonymous standing orders,

encrypting the record, communicating the encrypted record to a plurality of data communication

devices, receiving orders to trade from the plurality -i investors, adjusting the orders in relation

to a dynamic market index, updating the database, updating the record, encrypting the updated

record, communicating the encrypted updated record to the data communication devices,

matching the plurality of standing orders, and providing investors whose orders have been

matched and a settlement agent with a settlement statement of matched standing orders; and the

plurality of data communication devices, in communication with the host processing system through a public network, for sending encrypted orders to trade securities and receiving

encrypted record and the settlement statement from the host processing system.

It is to be understood that both the foregoing general description and the following

detailed description are exemplary and explanatory and are intended to provide further

explanation of the invention as claimed.

BRIEF DESCRIPTION OF THE DRAWINGS

The accompanying drawings, which are included to provide a further understanding of

the invention and are incorporated in and constitute a part of this specification, illustrate the

embodiments of the invention and together with the description serve to explain the principles of

the invention. In the drawings:

Fig. 1 illustrates a computer network in which the present invention may be incorporated;

Fig. 2 illustrates the TCP/IP Layering Model Protocol used during communications

between components on the computer network;

Fig. 3 is a block diagram that illustrates a preferred embodiment of a system of the

present invention;

Fig. 4 is a representation of a preferred embodiment of data fields for entry of an order to

trade;

Fig. 5 is a representation of a preferred embodiment of order status fields; and

Fig. 6 is a representation of a preferred embodiment of order book fields.

DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS

Reference will now be made in detail to the preferred embodiments of the present

invention, examples of which are illustrated in the accompanying drawings. Figure 1, is an example of a local area network ("LAN") 100 that is configured to utilize

a non-repudiation protocol. LAN 100 comprises a server 102, four computer systems 104, 106,

108, and 110, and peripherals 112, such as printers and other devices that may be shared by

components on LAN 100. Computer systems 104, 106, 108, and 110 may serve as clients for

server 102 and/or as clients and/or servers for each other and/or for other components connected

to LAN 100. Components on LAN 100 are preferably connected together by cable media, for

example copper or fiber-optic cable and the network topology may be a token ring topology 114.

It should be apparent to those of ordinary skill in the art that other media, for example, wireless

media, such as optical and radio frequency, may also connect LAN 100 components. It should

also be apparent that other network topologies, such as Ethernet, may be used.

Data may be transferred between components on LAN 100 in packets, i.e., blocks of data

that are individually transmitted over LAN 100. Routers 120, 122 create an expanded network

by connecting LAN 100 to other computer networks, such as the Internet, other LANs, or Wide

Area Networks ("WAN"). Routers are hardware devices that may include a conventional

processor, memory, and separate I/O interface for each network to which it connects. Hence,

components on the expanded network may share information and services with each other. In

order for communication;;- .--, occur between components of physically connected networks, all

components on the expanded network and the routers that connect them must adhere to a

standard protocol. Computer networks connected to the Internet and to other networks typically

use TCP/IP Layering Model Protocol. It should be noted that other networking protocols may be

used. As illustrated in Figure 2, the TCP/IP Layering Model comprises an application layer

(Layer 5) 202, a transport layer (Layer 4) 204, an Internet Layer (Layer 3) 206, a network

interface layer (Layer 2) 208, and a physical layer (Layer 1) 210. Application layer protocols

202 specify how each software application connected to the network uses the network. Transport

layer protocols 204 specify how to ensure reliable transfer among complex protocols. Internet

layer protocols 206 specify the format of packets sent across the network as well as mechanisms

used to forward packets from a computer through one or more routers to a final destination.

Network interface layer protocols 208 specify how to organize data into frames and how a

computer transmits frames over the network. Physical layer protocols 210 correspond to the

basic network hardware. By using TCP/IP Layering model protocols, any component connected

to the network can communicate with any other component connected directly or indirectly to

one of the attached networks.

Referring to Figure 3, a system 300 for anonymously trading securities includes a

database 310, which is connected to a host server 320. Data structures, such as orders, are

defined and maintained in the database 310. The database 310 is private to the applications of

the host server 320, which manipulates the data structures maintained in the database 310. The

host s!. ~ver 320 is also connected to a publish/subscribe middleware 330, a request/reply

middleware 380, a protocol converter 390, and a clearing/settlement agent 360. The

publish/subscribe middleware 330 communicates system information received from the host

server 320 to a plurality of local area networks 350 through a virtual public network ("VPN")

server 340. The request/reply middleware 380 communicates investor information received from

the plurality of local area networks 350 to the host server 320. The protocol converter receives market data 370 via synchronous dedicated line connections. The market data 370 may include

GONPX. The market data 370 enters the protocol converter 390 where the market data 370 is

converted from synchronous to ethernet/LAΝ form. Once on ethernet via TCP/IP, the host

server 320 takes the market data 370 records and converts the market data 370 records to be

compatible with the publish/subscribe middleware 330 transport. The publish/subscribe

middleware 330 in turn communicates market information to the plurality of local area networks

350, which in turn is received by the computer systems 104, 106, 108, and 110. The host server

320 records all new prices and other information received from market data 370 in a relational

database (not shown) so that this information can be referred to when needed. Periodically,

throughout a trading day, the host server 320 will submit a group of matched orders and

communicate the matched orders to a clearing/settlement agent 360. The clearing/settlement

agent 360 may include one or several institutions, such as the Bank of New York and the Chase

Bank. The host server 320 communicates to the clearing/settlement agent 360 via TCP/IP or a

real-time request/reply messaging connection based on TCP/IP. The clearing/settlement agent

360 verifies the validity of the instructions communicated by the host server 320 and in turn

communicates a reply to the host server 320.

Any one of the plurality of investors may request to enter, modify, or cancel orders on the

plurality of local area networks 350. Referring to Figure 4, the plurality of investors have access

to manipulate a plurality of order fields 400 on computer systems similar to the computer

systems 104, 106, 108, and 110 on the local area networks 350. In an order BS field 410, the

plurality of investors specify whether an order is to buy or sell a debt security. An order CUSIP

field 420 specifies the security to be traded. CUSIP is a unique nine-character identification string representing the specific security to be traded and is an internationally recognized standard

for identification of securities instruments. An actual nine-character CUSIP code is not

displayed. Instead, the host server 320 provides a list (not shown) of securities eligible to be

traded.

An amount entered in an order Sizemax field 430 indicates a maximum amount that may

be traded under the order. A value in an order Sizemin field 432 is a minimum amount that must

be matched with the order before any other matches may take place. In other words, any partial

execution of the order cannot be less than the value represented by the order Sizemin field 432.

An amount entered in an order Sizelot field 434 indicates the increment in number of

bonds which may be matched between the minimum and maximum amounts. Any partial

execution of the order will be either the value represented by the order Sizemin field 432 or an

integral multiple of the value represented by the order Sizelot field 434 above the minimum

amount.

In addition to the order fields 400 described above, the plurality of investors may

manipulate the following fields. An order Pricebasis field 440 indicates whether a price of the

order is stated in absolute terms or whether the order is tied to one of a plurality of dynamic

market indices. Where the order Pricebasis field 440 specifies that the order price is re tive to

one of the dynamic market indices, the host server 320 updates the order price to reflect a

changing value of the selected dynamic market index. Any such changes in the order price are

communicated by the host server 320 to the publish/subscribe middleware 330, and in tum, to the^'

plurality of local area networks 350. An order Pricedelta field 442 is a numeric value of the

order price in either an absolute price or a difference to be added to the dynamic market index specified in the order Pricebasis field 440. An order Priceform field 444 indicates how the order

Pricedelta field 442 is expressed, such as percent of par value, discount from par value, or yield-

to-maturity.

An order Limitbasis field 450 specifies a price limit for the order. There may be no price

limit, the price limit may be an absolute value, or the price limit may be tied to one of the

plurality of dynamic market indices. An order Limitvalue field 452 is a value of one of the

plurality of dynamic market indices specified in the order Limitbasis field 450 at which point the

order is to be removed from trading. An order Limittype field 456 indicates whether the order is

to be permanently canceled, or only temporarily removed from the order book, when the limit is

reached. An order Limitform field 454 indicates how the order Limitbasis field 450 is expressed,

such as percent of par value, discount from par value, or yield-to-maturity. An order Expiredelta

field 460 is a value representing when the order is to be automatically canceled by the host server

320 and removed from the database 310. The value in the Expiredelta field 460 may be

expressed as either "NONE" or as a number of seconds, minutes, or hours from the time of initial

entry that the order is to be permanently removed from the database 310. An order

Settlementdate field 470 is a date on which the trade will be settled.

Several examples below provide additional explanation of the order fields 400 described

above. In a first example, the investor enters BUY in the order BS field 410, ABS in the order

Pricebasis field 440, PCTJPAR in the order Priceform field 444, 99.5 in the order Pricedelta

field 442. The investor is thus offering to purchase at 99.5 percent of par value or lower.

In a second example, the investor enters SELL in the order BS field 410, ABS in the

order Pricebasis field 440, YTM in the order Priceform field 444, and 5.75 in the order Pricedelta field 442. This offer is to sell at any price that will return a yield to maturity to a buyer of no

more than 5.75 percent.

In a third example, the investor enters BUY in the order BS field 410, GONPX-Offer in

the order Pricebasis field 440, PCTJPAR in the order Priceform field 444, and 0 in the order

Pricedelta field 442. The investor is offering to pay as much as the bid price currently shown on

GONPX for a particular security.

In an fourth example, the investor enters SELL in the BS field 410, GONPX_Bid in the

order Pricebasis field 440, PCT_PAR in the order Priceform field 444, and 0-00+ in the order

Pricedelta field 442. This offer is to sell at no less than the current GONPX price plus half a tick,

i.e., a 64^th of a percentage point of par.

In a fifth example, the investor enters BUY in the order BS field 410, GOVPX_Bid in the

order Pricebasis field 440, DISC_PAR in the order Priceform field 444, and 0.005 in the order

Pricedelta field 442. The investor is offering to purchase at a discount from par at least 0.005

greater than a discount shown in a GOVPX bid.

Referring to Figure 5, the investor placing the order will have access to view, but not

manipulate, order status fields 500. This information is private to the investor placing the order,

i.e., the plurality of investors do not have access to the information ir. -each others' order status

fields 500. An Id field 510 is a unique integer identifying an order and is generated by the host

server 320. A Clientid field 520 is an integer identifying one of the plurality of investors placing

the order. A plurality of reference tables (not shown) within the database 510 identify an entity

represented by the investor. The Clientid field 520 is provided by the host server 320 based on

authentication information communicated from one of the plurality of local area networks 350. A Createtime field 530 indicates when the order was received by the host server 320. A

Lastmodified field 540 indicates when the order was last changed by one of the plurality of

investors or by the host server 520 based on directions provided by the^'investor, such as in the

Limitvalue field 452 or the Expiredelta field 460.

A Status field 550 indicates the status of the order. A Sizedone field 560 is a size of the

order that has been traded. Where the value in the Sizedone field 560 equals the value in the

order Sizemax field 430, the order has been totally executed. A Naluedone field 570 is the total

monetary value that has been executed against the order to date. In the Naluedone field 570, an

order to buy is indicated by a positive number while an order to sell is indicated by a negative

number. An average price per bond may be determined by dividing a value in the Naluedone

field 570 by a value in the Sizedone field 560. An Expiretime field 580 is a time of day

indicating when the order shall be automatically removed from the database 310.

Referring to Fig. 6, the host server 320 dynamically maintains an order book (not shown).

The order book is a digest of anonymous open orders and may be viewed continuously by the

plurality of investors. In addition, the order book only contains order book fields 600 that all the

investors may view, but not manipulate. The order book contains information on a current state

of an order, but not an order history. The order book is located in. " s host server 320 and is an

SQL database, which is communicated to the plurality of local area networks 350 by the

publish/subscribe middleware 330. The order book has the following fields.

An order book Id field 610 is identical to the Id field 510. An order book Clientcode 612 ^'

is an encrypted form of the Clientid field 520. An order book Firmcode 614 is an encrypted form

of a unique entity identifier (not shown). Order book fields Clientcode 612 and Firmcode 614 are encrypted such that the graphical user interface running on the computer systems 104, 106,

108, and 110 is capable of recognizing order book entries originating from the computer

system's own user and firm, yet not capable of recognizing that two or more order book entries

originate from the same external user or firm. An order book Lastmodifϊed field 620 is identical

to the Lastmodified field 540, and an order book BS field 622 is identical to the order BS field

410. An order book CUSIP field 624 is identical to the order CUSIP field 420. An order book

Sizemax field 626 identifies a maximum size remaining to trade in an order and changes as a

result of trading. An order book Sizemin field 628 identifies a minimum size remaimng to trade

in the order and changes as a result of trading. The order book Sizemin field 628 will either be

the value in the order Sizemin field 432 or zero. An order book Sizelot field 630 is identical to

an order Sizelot field 434. If a value in the order book Sizemin field 628 equals a value in the

order book Sizemax field 626, the order book Sizelot field 630 is not used. An order book Price

field 640 is a floating-point representation of a current price of the order in either percent-of-par

or discount-from-par, as appropriate for a particular instrument. A method of price calculation is

not displayed in the order book Price field 640. An order book Realprice field 642 is a floating¬

point representation of the current price of the order in a cash-per-bond form. An order book

'Settlementdate field 650 is identical to the ordeF ttlementdate field 470. An order book Status

field 660 is identical to the Status field 550.

Where a record exists in the order book, there may be one equivalent record in the

database 510 with the Id field 510 being the same as the order book Id field 610. The fields in

the order book record, however, are a subset of the fields in the order database 310. The order

must be present in the order book to be eligible to be matched with a plurality of open orders by the host server 320. However, the order will not be recorded in the order book if one or more of

the following conditions exist: the order has been completely executed; the order has been

canceled; a limit of the order is being violated by a specified dynamic market index that is not

reporting a valid value; and the order has been suspended by the host server 320.

Operation of the system with reference to the figures described above is as follows. A

plurality of standing orders are available for a plurality of investors to view on graphical user

interfaces of a plurality of local area networks 350. At any time, any one of the plurality of

investors may initiate a new order to trade a particular security by specifying whether the order is

to buy or sell in an order BS field 410. The graphical user interface provides a unique identifier

for the security to be traded in an order CUSIP field 420. The investor specifies restrictions on

trade size in an order Sizemax field 430, an order Sizemin field 432, and the order Sizelot field

434. The host server 320 will match any integral multiple of the Sizelot field 434 between the

value in the Sizemin field 432 and the Sizemax field 430. If the Sizemin field 432 equals the

Sizemax field 430, the Sizelot field 434 is not used. The investor specifies restrictions on trade

price in an order Pricebasis field 440, an order Pricedelta field 442, and an order Priceform field

444. The trade price may be entered as an absolute number or relative to a plurality of dynamic

market indices.

The investor specifies instructions in an order Limittype field 456 for removal of the

order if certain market conditions are met in an order Limitbasis field 450, an order Limitvalue

field 452, and an order Limitform field 454. The investor specifies instructions to automatically ^'

cancel the order upon the passage of a particular time on a particular date in an order Expiredelta

field 460. The investor also specifies instructions to settle an executed trade on a certain date following execution of the trade in an order Settlementdate field 470. The order is encrypted and

communicated over the VPN server 340 to a request/reply middleware 380, which in turn

communicates the order to the host server 320. Communications between the plurality of local

area networks 350 and the system 300 are encrypted as described in the following paragraph.

The investor, through one of the plurality of local area networks 350, contacts the NPN

server 340 through TCP/IP protocols. The investor presents a user name and password to the

NPN server 340. At the option of the investor, a correct user name and password may not be

granted access to the investor's account unless the communication originates from a particular

LAN 100 of the plurality of local area networks 350 bearing a specific internet address. An

investor is thus able to minimize access to its account by unauthorized users. Whenever the

investor contacts the VPN server 340, the VPN server 340 in turn communicates with the host

server 320 via the request/reply middleware 380 to obtain the login information for the investor.

Once the VPN server 340 has validated the investor login information a new encrypted channel

is established between the VPN server 340 and the investor's particular LAN 100 of the plurality

of local area networks 350. In this manner, the investor's particular LAN 100 is logically linked

into the VPN server 340 internal network and is given a new internet address on the VPN server

340 internal network f , :."he duration of the investor's connection. By mapping the new address

back to the login information provided by the VPN server 340, the host server 320 obtains a

positive identification of the investor. Communications to and from the investor are routed on

the basis of the new internet address which is the basic identification medium for the investor. If^'

the new internet address is forged or disturbed, communications will not be routed correctly and

will be ignored and destroyed by the VPN server 340. The host server 320 processes the order. Processing the order by the host server 320

includes validating the order data, adding the order to a database 310 of the plurality of open

orders, placing a subset of data from the order in an order book, updating the order book, and

communicating a first updated order book to a publish/subscribe middleware 330. The

publish/subscribe middleware 330 encrypts and communicates the updated order book to the

plurality of local area networks 350 through the VPN server 340. As described in detail above,

the order book fields 600 viewed by the plurality of investors include the following fields: Id

610, Clientcode 612, Firmcode 614, Lastmodified 620, BS 622, CUSIP 624, Sizemax 626,

Sizemin 628, Sizelot 630, Price 640, Realprice 642, Ytmprice 644, Settlementdate 650, and

Status 660.

At any time, the plurality of investors may monitor the order book. No action other than

initial selection of instrument and settlement date is required on the part of the plurality of

investors to monitor the order book. The publish/subscribe middleware 330 communicates

changes to the order book in real-time to the plurality of local area networks 350. As a result, the

plurality of investors see the same market picture.

At any time prior to execution of the order, the investor may modify the order. A request

to modify the orde irr encrypted and communicated to the request/reply middleware 380. The

host server 320 evaluates the request to modify the order. Once the request to modify the order

is validated by the host server 320, the host server 320 updates the database 310 and the second

updated order book, and communicates a third updated order book to the publish/subscribe

middleware 330. The publish/subscribe middleware 330 then encrypts and communicates the

third updated order book to the plurality of local area networks 350 via the VPN server 340. The host server 320 continuously monitors a plurality of dynamic market indices. The

order may specify, in an order Limitvalue field 452, an index value of any one of the plurality of

the dynamic market indices instructing the host server 320 to temporarily remove the order from

the second updated order book if the specified dynamic market index crosses the index value.

When the specified dynamic market index crosses the index value, the host server 320 removes

the order from the third updated order book. The host server 320 will update the third updated

order book and communicate a fourth updated order book to the publish/subscribe middleware

330. In turn, the publish subscribe middleware 330 will encrypt and communicate the fourth

updated order book to the plurality of local area networks 350 through the VPN server 340. If

the value in the order Limittype field 456 is "CANCEL," the order will be permanently removed

from the order database and the order book. Otherwise, the order will not be removed from the

database 310.

If the value in the order Limittype field 456 is "TEMP," the host server 320 will return

the order to the order book when the specified dynamic market index again crosses the index

value. The host server 320 will update the fourth updated order book and communicate a fifth

updated order book to the publish/subscribe middleware 330, which, in turn, will encrypt and

communicate the fifth updated order book to the plurality of local area networks 350 through the

VPN server 340.

At any time prior to execution of the order, the order may be canceled automatically by

the host server 320 or manually by the investor. The order may specify in an order Expiredelta

field 460 when the host processor 320 is to permanently remove the order from both the order

book and the database 310. Alternatively, the investor may instruct the host server 320 to cancel the order at any time prior to execution of the order. The manual instruction to cancel the order

is encrypted and communicated through the VPN server 340 from one of the plurality of local

area networks 350 to the request/reply middleware 380. In turn, the request/reply middleware

380 communicates the manual instruction to cancel the order to the host server 320. The host

server 320 validates the manual instruction to cancel the order. When the order is canceled either

automatically or manually, the host processor 320 removes the order from both the database 310

and the order book. The host processor updates the fifth updated order book to remove the

canceled order and communicates a sixth updated order book to the publish/subscribe

middleware 330. In turn, the publish/subscribe middleware 330 encrypts and communicates the

sixth updated order book to the plurality of local area networks 350 through the VPN server 340.

The host server 320 will match orders to buy with orders to sell when one or more of the

following events occur: a new order to buy or sell is communicated to the host server 320; any

one of the dynamic market indices tied to an open order changes value; the market opens

operations; and the market closes operations. Orders that the host server 320 matches are

complete without subsequent interaction by any of the investors.

The host server 320 matches multiple orders to buy with multiple orders to sell in a match

cycle according to the following rules: only orders for the same security to be settled on the same

day may match each other; a total number of bonds bought must equal a total number of bonds

sold over an entire match cycle; a total amount of cash provided by buyers must equal or exceed

a total amount of cash required by sellers over an entire single match cycle — if there is a cash

surplus in a trade, the surplus is divided on a per-bond pro-rata basis among all matched orders;

and orders are prioritized first by price attractiveness and second by time of entry or last user modification. Buy orders are more attractive when their price is higher, whereas sell orders are

more attractive when their price is lower. Orders of equal price will be executed in order in

which they are received by the host server 320. Where an order is modified, for example by

changing its price or size specification, priority for its time-of-entry is modified accordingly by

the host server 320.

Matching orders by the host server 320 according the rules above includes a first step of

assigning real cash prices to orders which are based on a market index by obtaining the value of

the index and applying specified offsets. A second step includes grouping orders by security and

settlement date and sorting according to the price and time-of-entry priority described above. A

third step includes analyzing the extent of market crossing — in other words, the host processor

320 determines a maximum number of bonds which may be traded at a specific time based on a

cash surplus that exists between orders to buy and sell and orders which are below this maximum

volume in a prioritized market listing are not considered for further matching at that specific time

(of course, where there are no buy orders with a price that equals or exceeds a sell order no match

can be made). A fourth step includes matching, fully or partially, the highest priority buy order

with the highest priority sell order — any cash surplus that results from matching lower-priority

trades is included within the current matching cycle, and continues from the fourth

If there

is no new match, a fifth step includes comparing maximum sizes of buy orders and sell orders. If

open buy orders are smaller than open sell orders, the highest priority buy order is considered for

matching; otherwise the highest priority sell order is added to the list of orders considered for

matching. If a group of orders is matched fully or partially using any cash surplus carried

forward from previous matched orders, the cycle continues from the fourth step. When no additional orders are matched, a sixth step includes removing an order prioritized as second to

last and adding the lowest-priority order. If a match then results, the cash surplus is recalculated

and the matching cycle continues with the fourth step. When no additional orders are matched, a

seventh step includes removing orders between the highest and lowest priority orders. When all

combinations of orders have been evaluated without a new match by the host server 320, the

match cycle is complete.

It will be apparent to those skilled in the art that various modifications and variations can

be made in the method and system of trading securities anonymously among a plurality of

investors of the present invention without departing from the spirit or scope of the invention.

Thus, it is intended that the present invention cover the modifications and variations of this

invention provided they come within the scope of the appended claims and their equivalents.

Claims

What is claimed is:

1. A method of trading securities anonymously among a plurality of investors

comprising the steps of:

maintaining a database of a plurality of standing orders to trade securities;

entering a first order to trade securities by a first investor on a first one of a plurality of

data communication devices;

encrypting the first order, thereby creating an encrypted first order;

communicating the encrypted first order from the first data communication device over a

public network to a host processing system;

processing the encrypted first order by the host processing system, thereby creating a

second order;

adding the second order to the database, thereby creating a first updated database;

processing the second order by the host processing system, thereby creating a first

anonymous order; adding the first anonymous order to a record of a plurality of anonymous standing orders,

thereby creating a first updated record;

encrypting the first updated record, thereby creating ar- :-.ucryρted first updated record;

communicating the encrypted first updated record from the host processing system over

the public network to the plurality of data communication devices;

matching the second order with a first standing order of a second investor, thereby

creating an executed trade; and

creating a settlement statement by the host processing system for the executed trade.

2. The method of anonymously trading securities according to claim 1, further

comprising the steps of:

removing the second order and the first standing order from the first updated database,

thereby creating a second updated database;

removing the first anonymous order and a first anonymous standing order from the first

updated record, thereby creating a second updated record;

encrypting the second updated record, thereby creating an encrypted second updated

record;

communicating the encrypted second updated record from the host processing system

over the public network to the plurality of data communication devices;

encrypting the settlement statement, thereby creating an encrypted settlement statement;

and

communicating the encrypted settlement statement from the host processing system over

the public network to the first investor, the second investor, and a settlement agent.

3. The method of anonymously trading securities according to claim 1, further

comprising the steps of:

canceling the first order by the first investor on the first data communication device,

thereby creating a canceled order;

encrypting the canceled order, thereby creating an encrypted canceled order;

communicating the encrypted canceled order from the first data communication device

over the public network to the host processing system; processing the encrypted canceled order by the host processing system;

removing the second order from the first updated database, thereby creating a second

updated database;

removing the first anonymous order from the first updated record, thereby creating a

second updated record;

record; and

over the public network to the data communication devices.

4. The method of anonymously trading securities according to claim 1, wherein the

step of entering the first order to trade securities includes entering a maximum value of the first

order.

5. The method of anonymously trading securities according to claim 1, wherein the

step of entering the first order to trade securities includes entering a minimum value of the first

order.

6. The method of anonymously trading securities according to claim 1, wherein the

step of entering the first order to trade securities includes entering a fixed incremental value of a

value of the first order.

7. The method of anonymously trading securities according to claim 1, wherein the

step of entering the first order to trade securities includes entering a value of a condition to cancel

the first order.

8. The method of anonymously trading securities according to claim 1, further

comprising the steps of:

comparing by the host processing system a value of a condition to cancel with a plurality

of values of monitored conditions;

matching the value of the condition to cancel with one of the plurality of values of the

monitored conditions by the host processing system;

removing the second order by the host processing system from the first updated database,

thereby creating a second updated database;

second updated record;

record; and

communicating the encrypte i. second updated record from the host processing system

over the public network to the plurality of data communications devices.

9. The method of anonymously trading securities according to claim 8, further

comprising the steps of: comparing by the host processing system a value of a condition to reinstate with the value

of the matched condition to cancel;

matching the value of the condition to reinstate with the value of the matched condition to

cancel by the host processing system, thereby creating a reinstated order;

adding the reinstated order to the second updated database, thereby creating a third

updated database;

processing the reinstated order, thereby creating an anonymous reinstated order;

adding the anonymous reinstated order to the second updated record, thereby creating a

third updated record;

encrypting the third updated record, thereby creating an encrypted third updated record;

and

communicating the encrypted third updated record from the host processing system over

the public network to the plurality of data communication devices.

10. The method of anonymously trading securities according to claim 9, further

comprising the steps of:

canceling M; reinstated order by the first investor on the first data communication device,

thereby creating a canceled order;

encrypting the canceled order, thereby creating an encrypted canceled order;

removing the reinstated order from the third updated database, thereby creating a fourth

updated database;

removing the anonymous reinstated order from the third updated record, thereby creating

a fourth updated record;

encrypting the fourth updated record, thereby creating an encrypted fourth updated

record; and

communicating the encrypted fourth updated record from the host processing system over

the public network to the data communication devices.

11. The method of anonymously trading securities according to claim 8, wherein the

value of the condition to cancel includes a period of time.

12. The method of anonymously trading securities according to claim 9, wherein the

value of the condition to cancel includes a monetary value.

13. V method of anonymously trading securities according to claim 9, wherein the

value of the condition to cancel includes a dynamic market index value.

14. The method of anonymously trading securities according to claim 1 , further

comprising the steps of:

modifying the first order by the first investor on the first data communication device,

thereby creating a modified order;

encrypting the modified order, thereby creating an encrypted modified order;

communicating the encrypted modified order from the first data communication device

over the public network to the host processing system;

processing the encrypted modified order by the host processing system, thereby creating a

third order;

replacing the second order in the first updated database with the third order, thereby

creating a second updated database;

processing the third order by the host processing system, thereby creating a second

anonymous order; replacing the first anonymous order in the first updated record with the second

anonymous order, thereby creating a second updated record;

record; and

over the public network to the data communication devices.

15. The method of anonymously trading securities according to claim 14, wherein the

step of modifying the first order includes entering a value of a condition to cancel the modified

order.

16. The method of anonymously trading securities according to claim 15, further

comprising the steps of:

comparing by the host processing system the value of the condition to cancel with a

plurality of values of monitored conditions;

monitored conditions by the host processing system;

removing the third order from the second updated database by the host processing system,

thereby creating a third updated database;

removing the second anonymous order from the second updated record by the host

processing system, thereby creating a third updated record;

and

communicating the encrypted third updated record from the host processing system ^~"°,r

the public network to the data communications devices.

17. The method of anonymously trading securities according to claim 16, further

comprising the steps of:

comparing by the host processing system, a value of a condition to reinstate with the

) value of the matched condition to cancel;

matching the value of the condition to reinstate with the matched condition to cancel by

the host processing system, thereby creating a reinstated order;

returning the reinstated order to the third updated database, thereby creating a fourth

updated database;

I processing the reinstated order, thereby creating a third anonymous order;

returning the third anonymous order to the third updated record, thereby creating a fourth

updated record;

record; and

the public communication network to the data communication devices.

18. The method of anonymously trading securities according to claim 17, further

comprising the steps of:

canceling the reinstated order by the first investor on the first data communication device, -

thereby creating a second canceled order; encrypting the second canceled order, thereby creating an encrypted second canceled order;

communicating the encrypted second canceled order from the first data communication

device over the public communication network to the host processing system;

processing the encrypted second canceled order by the host processing system;

removing the reinstated order by the host processing system from the fourth updated

database, thereby creating a fifth updated database;

removing the third anonymous order from the fourth updated record by the host

processing system, thereby creating a fifth updated record;

encrypting the fifth updated record, thereby creating an encrypted fifth updated record;

and

communicating the encrypted fifth updated record from the host processing system over

the public network to the data communication devices.

19. The method of anonymously trading securities according to claim 16, wherein the

value of the condition to cancel includes a period of time.

20. The method of anonymously trading securities according to claim 16, wherein the

value of the condition to cancel includes a monetary value.

21. The method of anonymously trading securities according to claim 16, wherein the

value of the condition to cancel includes a dynamic market index value.

22. The method of anonymously trading securities according to claim 1 , wherein the

step of matching the second order with the first standing order comprises the steps of:

grouping the plurality of standing orders in the first updated database according to

security type and settlement date;

sorting the plurality of standing orders, thereby creating a standing order ranking;

comparing orders to buy with orders to sell;

matching the orders to buy with the orders to sell by the host processing system according

to the standing order ranking;

removing matched orders from the first updated database, thereby creating a second

updated database;

removing matched anonymous orders from the first updated record, thereby creating a

second updated record;

record; and

communicating the second updated record from the host processing system over the

public network to the data communication devices.

23. The method of anonymously trading securities according to claim 1, wherein a

value of the first order is a function of a dynamic market index.

24. The method of anonymously trading securities according to claim 23, further

comprising the steps of: receiving a change in the dynamic market index over a private communication network

by the host processing system;

revising the value of the second order in relationship to the change in the dynamic market

index, thereby creating a revised order;

replacing the second order with the revised order in the first updated database, thereby

creating a second updated database;

processing the revised order by the host processing system, thereby creating a second

anonymous order;

replacing the first anonymous order with the second anonymous order in the first updated

record, thereby creating a second updated record;

record; and

over the public network to the data communication devices.

25. A system for trading securities anonymously among a plurality of investors

comprising:

a database for storing a plurality of standing orders to trade securities, the database

including information about the plurality of standing orders;

a host processing system for storing the database, creating a record of a plurality of

anonymous standing orders, encrypting the record; communicating the encrypted record to a

plurality of data communication devices, receiving orders to trade from the plurality of investors, adjusting the orders in relation to a dynamic market index, updating the database, updating the

record, encrypting the updated record; communicating the encrypted updated record to the data

communication devices, matching the plurality of standing orders, and providing investors whose

orders have been matched and a settlement agent with a settlement statement of matched

standing orders; and

the plurality of data communication devices, in communication with the host processing

system through a public network, for sending encrypted orders to trade securities and receiving

the encrypted record and the settlement statement from the host processing system.

26. The system for trading securities anonymously among a plurality of investors

according to claim 25, wherein the information about the plurality of standing orders include bid

and offer prices, encrypted identities of the investors, and minimum and maximum offer sizes.