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WO2008019465A1 - Computer based method and system for matching orders - Google Patents

Computer based method and system for matching orders Download PDF

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Publication number
WO2008019465A1
WO2008019465A1 PCT/CA2007/000524 CA2007000524W WO2008019465A1 WO 2008019465 A1 WO2008019465 A1 WO 2008019465A1 CA 2007000524 W CA2007000524 W CA 2007000524W WO 2008019465 A1 WO2008019465 A1 WO 2008019465A1
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WO
WIPO (PCT)
Prior art keywords
intent
order
bbo
subscriber
subscriber order
Prior art date
Application number
PCT/CA2007/000524
Other languages
French (fr)
Inventor
Albert Kovacs
Original Assignee
Tsx Inc.
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
Application filed by Tsx Inc. filed Critical Tsx Inc.
Publication of WO2008019465A1 publication Critical patent/WO2008019465A1/en

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Classifications

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

Definitions

  • the present invention relates to trading and more particularly relates to a computer-based method and system for matching orders.
  • Automated trading is offered in many different markets, and is a well known means of matching orders to buy and sell items in the market, and then executing trades that implement those matched orders.
  • One example of a market where automated trading is employed is an electronic stock exchange ("ESE”).
  • ESE electronic stock exchange
  • TSX Toronto Stock Exchange
  • An aspect provides a method for matching orders comprising: receiving an intent; receiving a subscriber order; determining if the intent potentially matches the subscriber order; and, if the intent potentially matches the subscriber order then determining if the intent and the subscriber order originate from an identical firm; and, if the intent and the subscriber order originate from an identical firm then attempting to internalize the subscriber order with the intent; if the intent potentially matches the subscriber order then determining if the intent and the subscriber order originate from different firms; and, if the intent and the subscriber order originate from different firms then attempting to match the subscriber order with the intent as a trade between firms; if one of the attempts are successful then executing a trade based on the one of the attempts; if the subscriber order cannot be matched with the intent then forwarding the subscriber order to a trading engine for matching with another order.
  • the step of attempting to internalize the subscriber order with the intent can comprise: determining if matching the intent with the subscriber order would conflict with a best bid or offer ("BBO"); and if matching the intent with the subscriber order conflicts with the best bid or offer (“BBO") then determining if the intent can be adjusted to improve over the BBO; if the intent can be adjusted to improve over the BBO then adjusting parameters of the intent to improve over the BBO; if the intent cannot be adjusted to improve over the BBO then forwarding the subscriber order to a trading engine for matching with another order.
  • BBO best bid or offer
  • the attempt to match the subscriber order with the intent can comprise: determining if matching the intent with the subscriber order would conflict with a best bid or offer ("BBO"); and if matching the intent with the subscriber order conflicts with the best bid or offer (“BBO") then determining if the intent can be adjusted to improve over the BBO; if the intent can be adjusted to improve over the BBO then adjusting parameters of the intent to improve over the BBO; if the intent cannot be adjusted to improve over the BBO then forwarding the subscriber order to a trading engine for matching with another order.
  • BBO best bid or offer
  • the improvement criterion can be associated with the intent.
  • the improvement criterion can be a specific parameter included with the intent.
  • the improvement criterion can be predefined.
  • the method can comprise only attempting to match the subscriber order with the intent if a volume of a potential trade between the different firms based on the subscriber order and the intent exceeds a predefined threshold.
  • Another aspect provides a system for matching orders comprising a plurality of workstations. At least a portion of the workstations belong to one firm and a remainder of the works stations belonging at least one other firm.
  • the system also comprises a network interface connected to the workstations for receiving an intent and an order therefrom.
  • the system also comprises a trading engine connected to the network interface for processing the orders.
  • the system also comprises an alternative engine connected to the network interface for processing the intents and certain ones of the orders.
  • the alternative engine is configured to: determine if the intent potentially matches the subscriber order; and, if the intent potentially matches the subscriber order then determining if the intent and the subscriber order originate from an identical firm; and, if the intent and the subscriber order originate from an identical firm then attempting to internalize the subscriber order with the intent; if the intent potentially matches the subscriber order then determining if the intent and the subscriber order originate from different firms; and, if the intent and the subscriber order originate from different firms then attempting to match the subscriber order with the intent as trade between firms; if one of the attempts are successful then executing a trade based on the one of the attempts; if the subscriber order cannot be matched with the intent then forwarding the subscriber order to the trading engine for matching with another order.
  • Another aspect provides an alternative trading engine in a system for matching orders comprising a plurality of workstations. At least a portion of the workstations belong to one firm and a remainder of the works stations belonging at least one other firm.
  • the system also comprises a network interface connected to the workstations for receiving an intent and an order therefrom.
  • the system also comprises a trading engine connected to the network interface for processing the orders.
  • the alternative engine is connected to the network interface for processing the intents and certain ones of the orders.
  • the alternative engine is configured to: determine if the intent potentially matches the subscriber order; and, if the intent potentially matches the subscriber order then determining if the intent and the subscriber order originate from an identical firm; and, if the intent and the subscriber order originate from an identical firm then attempting to internalize the subscriber order with the intent; if the intent potentially matches the subscriber order then determining if the intent and the subscriber order originate from different firms; and, if the intent and the subscriber order originate from different firms then attempting to match the subscriber order with the intent as a trade between firms; if one of the attempts are successful then executing a trade based on the one of the attempts; if the subscriber order cannot be matched with the intent then forwarding the subscriber order to the trading engine for matching with another order.
  • Figure 1 shows a system for matching orders in accordance with an embodiment.
  • Figure 2 shows the alternative engine of the system in Figure 1 in greater detail.
  • Figure 3 shows a flow chart depicting a method for matching orders in accordance with another embodiment.
  • Figure 4 shows the system of Figure 1 during exemplary performance of step 110 of the method from Figure 3.
  • Figure 5 shows the system of Figure 1 during exemplary performance of step 115 of the method from Figure 3.
  • Figure 6 shows a flow chart depicting one possible a method of performing step 125 from the method of Figure 3.
  • Figure 7 shows the system of Figure 1 during exemplary performance of step 255 from the method of Figure 6.
  • Figure 8 shows the system of Figure 1 during exemplary performance partial performance step 215 from the method of Figure 6.
  • Figure 9 shows the system of Figure 1 during another exemplary performance of step 115 of the method from Figure 3.
  • Figure 10 shows a flow chart depicting one possible a method of performing step 140 from the method of Figure 3.
  • Figure 11 shows a flow chart depicting a method for matching orders in accordance with another embodiment.
  • System 50 comprises a plurality of workstations 54-1, 54-2 . . . 54-n (generically referred to herein as “workstation 54" and collectively as “workstations 54") all of which are connected to a market network interface 58 via any suitable network 62.
  • Each workstation 54 is typically a computing device such as a personal computer having a keyboard and mouse (or other input devices), a monitor (or other output device) and a desktop-module connecting the keyboard, mouse and monitor and housing one or more central processing units, volatile memory (i.e. random access memory), persistent memory (i.e. hard disk devices) and network interfaces to allow the workstation 54 to communicate over network 60.
  • workstation 54 can be any type of computing device, such as a personal digital assistant, cell phone, laptop computer, email paging device etc.
  • Each workstation 54 is operated by a trader belonging to a firm, or a group of workstations 54 may be operated by a plurality of traders belonging to one firm.
  • Each workstation 54 is used to enter orders to buy or sell a particular security.
  • Each work station 54 is operated by a trader T respective to each work station 54.
  • Network interface 58 is a server, a mainframe, or other type of computing environment that is operable to receive orders from workstations 54.
  • Network interface 58 can be a Sun Fire V480 running a UNIX operating system, from Sun Microsystems, Inc. of Palo Alto Calif., and having four central processing units each operating at about 900 megahertz and having about sixteen gigabytes of random access memory.
  • this particular server is merely exemplary, a vast array of other types of computing environments for network interface 58 are within the scope of the invention.
  • network interface 58 is part of an electronic stock exchange, and is thus able to process buy orders and sell orders that include requests to purchase, sell, cancel etc. securities that can be traded electronically.
  • Network interface 58 is connected to a primary persistent storage (not shown) that maintains all persistent data associated with the orders and processing thereof for network interface 58.
  • Network interface 58 is also operable to apply time stamps to orders as they are received by accessing time-date information from the operating system of network inteface 58.
  • Network interface 58 is operable to route orders according to the stock market ID, or firm ID to a trading engine 66 also attached to network interface 58.
  • Trading engine 66 is operable to maintain a central limit order book (CLOB) hosted via a central matching engine, where buy orders and sell orders are executed against each other, and against a central repository of orders to thereby process the trading of securities.
  • CLOB central limit order book
  • order refers to a message that indicates a desire to trade in a particular quantity of a given security, at a given price.
  • trading engine 66 is operable to execute orders in the usual manner, and return the results of those executed orders to the workstations 54 that originated the buy order and the sell order.
  • Network 62 can be wired or wireless, or based on combinations thereof, and based on any type of known network architecture or platform, (e.g. the Internet or a wide area network) or combinations thereof.
  • Network interface 58 is also operable to forward certain types special messages received from workstations 54 to an alternative engine 70 for further processing.
  • Alternative engine 70 is also a server, a mainframe, or other type of computing environment.
  • alternative engine 70 can also be a Sun 480R server from Sun Microsystems, Inc. of Palo Alto Calif., which has four CPUs and, because a significant portion of processing is performed in random access memory, such a server should be configured with about eight to about sixteen gigabytes of random access memory.
  • this particular server is merely exemplary, a vast array of other types of computing environments for alternative engine 70 are within the scope of the invention.
  • alternative engine 70 includes at least a processor 74 and a storage device 78.
  • Storage device 78 is operable to receive and store messages from workstations 54, while processor 74 is operable to process those messages, if possible.
  • Alternative engine 70 is generally operable to perform certain types of matching and trading that is not available on a trading engine 66. Further detail about alternative engine 70 will be provided below.
  • engines 66 and 70 are also connected to a market feed 82, enabling them to access a best bid and offer for any given security being traded using system 50.
  • the various components in system 50 can be owned and/or operated by different entities.
  • network interface 58, trading engine 66 and alternative engine 70 are owned and operated by a single business entity operating as an electronic stock exchange 86.
  • Workstation 54-1 and workstation 54-2 are owned and operated by a first firm denoted by reference F-I .
  • F-I first firm
  • Workstation 54-1 and workstation 54-2 are typically located in remote locations from the other such that the trader T-I is not aware of, or need not be aware of, the trading being performed by the trader T-2 of workstation 54-2.
  • remote locations can mean that each workstation 54-1 and workstation 54-2 is located in a different city, or on different floors of the same building belonging to a single firm. While in the present example such locations are remote from the other, it is contemplated that workstation 54-1 and workstation 54-2 can be located proximal to each other, but that the trader T-I is not aware of, or need not be aware of, the trading being performed by trader T-2. In general, it is to be understood that workstation 54-1 and workstation 54-2 are owned by a single firm F-I, and thus that the respective traders T-I and T-2 of workstations 54-1 and 54-2 may desire to internalize trades with each other rather than effecting trades with other firms. By the same token, it is assumed that workstation 54-3 and workstation 54-n are owned by a second firm and a third firm, denoted by references F-2 and F3, respectively.
  • firm F-3 is not a subscriber to the alternative trading offered by alternative engine 70, and thus trader T-n can only send orders to trading engine 66. Trader T-n cannot send subscriber orders to alternative engine 70.
  • firm F-3 is only able to trade using trading engine 66 in the traditional manner, while firms F-I and firm F-2 have the option of trading using either alternative engine 70 and/or via trading engine 66.
  • a method for executing orders in accordance with another embodiment of the invention is indicated generally at 100.
  • method 100 is performed using system 50.
  • system 50 and/or method 100 can be varied, and need not work exactly as discussed herein in conjunction with each other, and that such variations are within the scope of the present invention.
  • an intent is received.
  • trader T-I of workstation 54-1 of firm F-I wishes to lodge an intent for processing by alternative engine 70. Since firm F-I is a subscriber, trader T-I will be permitted to submit an intent to according to step 110.
  • This example is shown in Figure 4, wherein an intent, represented as an oval and indicated at reference "I”, is shown as entered at workstation 54-1 and received at alternative engine 70, (via network interface 58, which applies appropriate time stamps to Intent I as Intent I is passed through interface 58), and stored on storage device 78.
  • Table I shows the structure and exemplary contents of intent I.
  • Field 1 of Table I identifies that the originating firm of Intent I is Firm F-I, and thereby indicates that Firm F-I wishes to match one or more orders associated with Intent I with corresponding orders also originating from Firm F-I .
  • Field 2 of Table I named “Security Name” identifies the name of the specific security that is the subject of the internalized trade-in this example, "XYZ Co.”.
  • Field 3 of Table I named “Transaction Type” identifies whether the intent is an intent to buy, sell, etc. the security identified in Field 2. In this example, the Transaction Type is "Buy”, indicating that there is an intent to trade with corresponding orders to sell (Other Transaction Types could include short selling, etc.).
  • Field 4 of Table I named "Quantity” identifies the desired quantity of the security ⁇ in the present example, the Quantity is " 10,000 units", indicating that the intention is to Buy 10,000 units of XYZ Co.
  • Field 5 of Table I named “Price per unit” indicates the desired limit price at which the security is to be traded. In the present example, the Price per Unit is $1.00. (Price per unit could simply indicate "market” indicating that the price will be paid according whatever price is indicated on market feed 82.)
  • improvement criterion indicates the amount by which an incoming order can be price-improved to make a desired trade valid in light of market rules.
  • improvement in the context of price improvement refers to an amount an price of an order is varied in order to conform with the market price for a given security on the BBO.
  • the improvement criterion is fixed by exchange 86 to a particular amount, such as one cent, or other minimum or other amount that would be desired to achieve suitable price improvement.
  • such improvement criterion could actually be based on a plurality of different criteria. Notwithstanding any price improvement, however, in no event can the price be exceed the limit price in Field 5 of Table I.
  • improvement criterion could be expressly provided by the trader T as part of the submission of the intent.
  • step 115 a subscriber order is received.
  • a subscriber order is substantially the same as a regular order, except that it is destined for alternative engine 70.
  • the operator of workstation 54-2 of firm F- 1 wishes to enter an order. This example is shown in Figure 5, wherein a first order, represented as an oval and indicated at reference "O-l ", is shown as entered at workstation 54-2 and received at alternative engine 70via network interface 58, which applies appropriate time stamps to Order O-l as Order O-l is passed through interface 58.
  • Table II shows the structure and exemplary contents of Order O-l
  • Field 1 of Table II identifies that the originating firm of Order 0-1 is Firm F-I .
  • Field 2 of Table II named “Security Name” identifies the name of the specific security that is the subject of the trade-in this example, "XYZ Co.”.
  • Field 3 of Table II named “Transaction Type” identifies whether the order is to buy, sell, etc. the security identified in Field 2. In this example, the Transaction Type is "Sell”, indicating that this is an order to sell.
  • Field 4 of Table II named “Quantity” identifies the desired quantity of the security ⁇ in the present example, the Quantity is "10,000 units”, indicating that the intention is to Sell 10,000 units of XYZ Co.
  • Field 5 of Table II indicates the desired price at which the security is to be traded.
  • the Price per Unit is "market”, indicating that the security is to be sold according to whatever the market value for that security is according to the BBO.
  • Field 6 of Table II named “Subscriber Order” includes a “yes”, which indicates to network interface 58 that order O-l is destined for alternative engine 70 instead of trading engine 66. (If Field 6 of Table II indicated “No”, then network interface 58 would forward order O-l directly to trading engine 66 for processing in the same manner as regular orders.)
  • method 100 simply waits at step 115 until such an order is received. Having completed step 1 15, method 100 advances to step 120, at which point a determination is made as to whether the firms match. More particularly, the firm that sent the intent at step 110 is compared with the firm that sent the order at step 115 to see if they originated from the same firm. A comparison of field 1 of Table I with field 1 of Table II reveals the same firm in each table, and thus, in the present example, the determination at step 120 is "Yes", both firms do match, and accordingly method 100 will advance from step 120 to step 125. At step 125, an attempt is made to internalize Intent I with Order O-l, and thereby permit Firm F-I to achieve the benefits of such an internalization without having to utilize trading engine 66.
  • FIG. 6 An exemplary method for implementing the attempted internalization at step 125 is shown in Figure 6.
  • a determination is made as to whether Intent I matches Order O-l .
  • Table II shows that indeed, the security name and the quantity does indeed match, and that Intent I is a "buy” whereas Order O-l is a "sell”. Accordingly, it would be determined at step 205 that "yes", the intent matches the Order and the method would advance to step 210.
  • Step 255 is represented in Figure 7.
  • Step 210 a determination is made as to whether matching intent I with Order O-l would conflict with any market rules, or would match with an outstanding BBO order as indicated by market feed 82.
  • Step 210 is fulfilled by alternative engine 70 querying the BBO from market feed 82 to ascertain the BBO associated with the security name identified in the Intent I. Assuming that there is no conflict (i.e. there are no outstanding BBO orders that could be matched with Order 0-1 ), and assuming the market price on the BBO is $0.85, (i.e. less than $1.00, the limit price from Field 5 of Table I) then the method will advance to step 215, at which point a trade will be executed between Intent I and Order 0-1.
  • Step 215 is represented in Figure 8, as alternative engine 70 passes a trade notification TN to trading engine 66 for trade notification, so that the trade can be recorded and interested parties notified, including the originator of Intent I and the originator of Order 0-1.
  • Table III shows the form in which the trade notification TN is presented to trading engine 66.
  • Trading engine 66 can then handle the trade notification TN in the usual manner, returning results to Firm F-I , allowing Firm F-I (and/or traders T-I and T-2 that placed Intent I and Order 0-1) to enjoy the benefits of an internalized trade.
  • step 210 Assuming, however, at step 210 that the intent does conflict with the BBO, then the method would advance from step 210 to step 220. Such a conflict could arise at step 210 if there is already a market order on market feed 82 that indicates a party is willing to fulfill Order O-l . Thus, at step 220, a determination is made as to whether the intent can be adjusted to improve over the BBO. In this circumstance, a determination would be made as to whether an application of the price improvement criteria of one cent could be applied to the market price of the existing market order, without actually exceeding the limit price of $1.00 set in Field 5 of Table I.
  • step 220 it would be determined that "yes", intent I can be adjusted to improve over the BBO.
  • step 225 intent I is adjusted in order to improve over the existing market order.
  • the market price associated with the intent I would be set to $1.00, to improve over the existing market order on the BBO.
  • the method would advance from step 225 to step 215.
  • Table IV shows the form in which the trade notification TN is presented to trading engine 66.
  • Trading engine 66 can then handle the trade notification TN in the usual manner, returning results to Firm F-I, allowing Firm F-I (and/or traders T-I and T-2 that placed Intent I and Order O-l) to enjoy the benefits of an internalized trade.
  • step 220 Assuming, however, at step 220 that the intent cannot be adjusted to improve over BBO, then the method would advance from step 210 to step 255, which would be performed as previously discussed in relation to Figure 7. Such a "No" determination would be made at step 220 where the application of the price improvement criteria of one cent to Intent I would result in exceeding the limit price of $1.00 set in Field 5 of Table I. Thus, for example, if the outstanding market order on market feed 82 indicated a price of $1.02 cents, then at step 220 it would be determined that "No", intent I cannot be adjusted to improve over the BBO. At this point the method advances from step 220 to step 225 and no internalized trade would be effected and order O- 1 would be processed by trading engine 66 in the usual manner.
  • step 130 a determination is made as to whether the intent received at step 110 has been fulfilled. If the intent was fulfilled completely, as per the examples in either Table III or IV, then a determination is made that "yes", the intent was fulfilled and method 100 will end. However, if the intent was not fulfilled at all, or only partially fulfilled, then a determination is made that "no", the intent was not fulfilled, and method 100 will return to step 115.
  • Field 2 of Table V identifies that the originating firm of Order O-2 is Firm F-2.
  • Field 2 of Table V named "Security Name” identifies the name of the specific security that is the subject of the trade-in this example, "XYZ Co.”.
  • Field 3 of Table V named “Transaction Type” identifies whether the order is to buy, sell, etc. the security identified in Field 2. In this example, the Transaction Type is "Sell”, indicating that this is an order to sell.
  • Field 4 of Table V named “Quantity” identifies the desired quantity of the security ⁇ in the present example, the Quantity is "10,000 units”, indicating that the intention is to Sell 10,000 units of XYZ Co.
  • Field 5 of Table V indicates the desired price at which the security is to be traded.
  • the Price per Unit is "market”, indicating that the security is to be sold according to whatever the market value for that security is according to the BBO.
  • Field 6 of Table V named “Subscriber Order” includes a “yes”, which indicates to network interface 58 that order O-2 is destined for alternative engine 70 instead of trading engine 66. (If Field 6 of Table V indicated “No”, then network interface 58 would forward order O-2 directly to trading engine 66 for processing in the same manner as regular orders.) [0055] Having received order O-2, method 100 advances from step 1 15 to step 120, at which point a determination is made as to whether the firms match.
  • the firm that sent Intent I is compared with the firm that sent Order O-2 to see if they originated from the same firm.
  • a comparison of field 1 if Table I with field 1 of Table V reveals a different firm in each table, in the present example, the determination at step 120 is "No", the firms do not match, and accordingly method 100 will advance from step 120 to step 135.
  • step 135 a determination is made as to whether the intent otherwise matches the order, and that therefore there is a potential to effect a trade based on the intent and the order.
  • a comparison is made between the fields of Table I and Table V (other than the firm field) to determine whether there is a potential to match those orders.
  • Tables I and V are compared, it can be seen that there is a potential to match them, given that the same security is involved (XYZ Co.), that Firm F-I wishes to buy securities while Firm F-2 wishes to sell securities.
  • a determination would be made at step 135 that "yes", there is a potential to match the intent with the order and method 100 would advance to step 140.
  • step 145 is effected in substantially the manner same as step 255, as previously discussed and shown in Figure 7. From step 145, method 100 returns to step 130, which is performed as previously discussed.
  • Step 310 An exemplary method for implementing the attempted match at step 140 is shown in Figure 10.
  • a determination is made as to whether a match of Intent I and Order O-2 would conflict with BBO.
  • Performance of step 310 is substantially the same as performance of step 210.
  • a determination is made as to whether matching intent I with Order O-2 would conflict with any market rules, or would trade through an outstanding BBO order as indicated by market feed 82.
  • Step 310 is fulfilled by alternative engine 70 querying the BBO from market feed 82 to ascertain the BBO associated with the security name identified in the Intent I. Assuming that there is no conflict (i.e. there are no outstanding BBO orders that could be matched with Order O-2), and assuming the market price on the BBO is $0.85, (i.e. less than $1.00, the limit price from Field 5 of Table I) then the method will advance to step 345.
  • a determination as to whether the volume of the order is of sufficient volume More specifically, order O-2 will be examined to determine if the order contains a predefined quantity of units.
  • the exact quantity of units need not be particularly limited.
  • the quantity of units can be based on an absolute value, or it can be based on a relative value which combines both the share price and the quantity of units in order to arrive at a minimum financial value for the order.
  • the larger the volume the fewer transactions, which reduces burden on the traditional trading engine. Incidentally, market liquidity is enhanced and fees are reduced.
  • a presently preferred minimum volume for the Ontario Securities Commission is five thousand shares, however the actual preferred minimum volume will be dependent on the particular market being served by system 50.
  • step 345 If, at step 345, it is determined that the volume of the subscriber order is not sufficient, then the method advances to step 335 and the subscriber order is passed to trading engine 66 for processing in the usual manner.
  • step 335 is performed in substantially the same manner as step 255 or step 145 as previously discussed.
  • step 345 If, at step 345, it is determined that the volume of the subscriber order is sufficient, then the method advances to step 350, at which point a trade will be executed between Intent I and Order O-2, in substantially the same manner as was described in relation to step 215, except that in this event the trade will be effected between firm F-I and firm F-2, instead of being effected as an internalized trade within firm F-I . Having effected the trade at step 350, the method returns to step 130 which is performed as previously described.
  • step 310 if it was determined at step 310 that a match between intent I and order O-2 would conflict with the BBO, then the method would advance from step 310 to step 330 and a determination would be made as to whether the intent can be improved to conform with the BBO. If the determination at step 330 is "yes”, then the method advances from step 330 to step 340 and the intent is accordingly improved in order to conform to the BBO. If the determination at step 330 is "no”, then the method advances from step 330 to step 335.
  • steps 330 and 340 can be performed in substantially the same manner as step 220 and step 225, as discussed above.
  • step 345 could be omitted and the method in Figure 10 modified so that step 310 advances directly to step 350.
  • method 100 can be implemented in multiple threads or processes, so that alternative engine maintains a plurality of different intents and receives a plurality of different orders and method 100 is used to match, if possible, appropriate ones of those intents and orders.
  • steps 220 and 225 and steps 330 and 340
  • steps 330 and 340 contemplate improving the intent
  • Figure 11 shows a method 100a for executing orders that is a variation of method 100.
  • like steps are shown with a suffix "a" attached to their counterpart in method 100, although it should be understood that the exact manner that steps in method 100a are effected will typically involve at least some modification to their counterpart in method 100.
  • a determination is made as to whether there is some potential to match the received intent with the received order.
  • step 135a it would be determined at step 135a that there is no potential to match the intent with the order and the method would advance to step 145a, which would be performed in substantially the same manner as step 145 of method 100.
  • step 135a it was determined that there was at least a potential to match the intent with the order, then the method would advance to step 120a, where a further determination would be made as to whether the firms in the intent and the order match. For example, if Intent I and Order O-l were being examined at step 120a, then a determination would be made that "yes", the firms match and method 100a would advance to step 125a which would be performed in substantially the same manner as step 125, though with appropriate modifications.
  • step 120a if Intent I and Order O-2 were being examined at step 120a, then a determination would be made that "no", the firms do not match and method 100a would advance to step 140a which would be performed in substantially the same manner as step 140, though again with appropriate modifications.
  • step 141a a determination is made as to whether the attempt made at either step 140a or step 125a was successful. If "no", method 100a would advance from step 141a to step 145a, which would be performed as previously described. If the determination at step 141a was "yes”, then method 100a would advance from step 141a to step 130a. Step 130a would be performed in substantially the same manner as step 130.
  • step 141 a can obviate the need for step 335 and/or step 255.
  • step 141 a can be effected to step 125 and/or step 140 in order to effect step 125a or step 140a.
  • the present invention provides a novel system and method for matching orders.
  • An embodiment includes a system that comprises an alternative engine and an traditional trading engine.
  • Market participants have the option of routing intents and/or subscriber orders to the alternative engine.
  • the intents can either be internalized with subscriber orders from the same firm or matched with subscriber orders from other firms.
  • processing stresses on the traditional trading engine are relieved.
  • certain firms are reluctant to trade in large volumes of certain securities on the traditional trading engine.
  • the traditional trading engine can be bogged down with excessive small trades, and/or can experience large spikes in high volumes of trading.
  • the alternative trading engine is proximal to the traditional trading engine, latency can be reduced, since the functionality of the altnerative trading engine may be located at the relevant firm. Also, without the alternative trading engine, the tradidtional trading engine can be subject to a potentially lengthy series of "fill or kill orders", which are simply testing the liquidity offered by the traditional trading engine, thus further burdening the traditional trading engine.Also, the types of transactions conducted by the alternative trading engine can be subject to auditing for regulatory clearing and compliance purposes - particularly, though not necessarily limited to, transactions between the same desks of the same firm, commonly known as "off-market trades". Extracting records from the traditional trading engine is burdensome and complex, and thereby further impairs the efficiency of the traditional trading engine.

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Abstract

An embodiment includes a system that comprises an alternative engine and a traditional trading engine. Market participants have the option of routing intents and/or subscriber orders to the alternative engine. The intents can either be internalized with subscriber orders from the same firm or matched with subscriber orders from other firms. Subscriber orders that cannot be matched can then be routed to the traditional trading engine for matching with non-subscriber orders.

Description

COMPUTER BASED METHOD AND SYSTEM FOR MATCHING ORDERS
PRIORITY CLAIM
[0001] The present disclosure claims priority from U.S. Provisional Patent Application No. 60/822,579, filed August 16, 2006. The contents of which have incorporated herein by reference.
FIELD
[0002] The present invention relates to trading and more particularly relates to a computer-based method and system for matching orders.
BACKGROUND
[0003] Automated trading is offered in many different markets, and is a well known means of matching orders to buy and sell items in the market, and then executing trades that implement those matched orders. One example of a market where automated trading is employed is an electronic stock exchange ("ESE"). An example of an ESE is the Toronto Stock Exchange ("TSX").
[0004] Automated trading continues to evolve to accommodate the needs of capital markets and to keep pace with the technological developments that support automated trading platforms. Furthermore, there are an increasing number of ESEs that offer automated trading, which motivates all ESEs to improve their automated trading technology infrastructure, in order to offer a technological advantage over competition and thereby encourage more trades and increase market share. Such advances, however have not properly addressed certain realities, as capital markets are, in certain situations, increasingly fragmenting into multiple and distinct pools of liquidity. Market participants are increasing demands for faster, more efficient and cheaper forms of liquidity.
[0005] Responsive to such demands, one way in which market participants try to reduce costs is try to match their own buy and sell orders for the same security, so that the same market participant is both on the sell side and buy side of a given trade. This process is called internalization. One system for providing internalization is provided in the applicant's co-pending United States patent application bearing publication number US20060085317, the contents of which are incorporated herein by reference.
[0006] Through internalization, market participants may reduce the overall fees that are incurred, given that there is a single firm involved with the trade. Internalization can also improve the liquidity of a particular security offered by a firm, and can also give the opportunity to provide price improvement. Internalization is governed by many rules to ensure fairness~in particular to ensure that firms who are not using internalization do not get unfairly prevented from having their orders executed. [0007] Notwithstanding advances in the art of internalization, market participants continue to demand improvements to existing automated trading infrastructure in order to address their needs for faster, more efficient and cheaper forms of liquidity.
SUMMARY
[0008] An aspect provides a method for matching orders comprising: receiving an intent; receiving a subscriber order; determining if the intent potentially matches the subscriber order; and, if the intent potentially matches the subscriber order then determining if the intent and the subscriber order originate from an identical firm; and, if the intent and the subscriber order originate from an identical firm then attempting to internalize the subscriber order with the intent; if the intent potentially matches the subscriber order then determining if the intent and the subscriber order originate from different firms; and, if the intent and the subscriber order originate from different firms then attempting to match the subscriber order with the intent as a trade between firms; if one of the attempts are successful then executing a trade based on the one of the attempts; if the subscriber order cannot be matched with the intent then forwarding the subscriber order to a trading engine for matching with another order.
[0009] The step of attempting to internalize the subscriber order with the intent can comprise: determining if matching the intent with the subscriber order would conflict with a best bid or offer ("BBO"); and if matching the intent with the subscriber order conflicts with the best bid or offer ("BBO") then determining if the intent can be adjusted to improve over the BBO; if the intent can be adjusted to improve over the BBO then adjusting parameters of the intent to improve over the BBO; if the intent cannot be adjusted to improve over the BBO then forwarding the subscriber order to a trading engine for matching with another order.
[0010] The attempt to match the subscriber order with the intent can comprise: determining if matching the intent with the subscriber order would conflict with a best bid or offer ("BBO"); and if matching the intent with the subscriber order conflicts with the best bid or offer ("BBO") then determining if the intent can be adjusted to improve over the BBO; if the intent can be adjusted to improve over the BBO then adjusting parameters of the intent to improve over the BBO; if the intent cannot be adjusted to improve over the BBO then forwarding the subscriber order to a trading engine for matching with another order.
[0011] The improvement criterion can be associated with the intent. The improvement criterion can be a specific parameter included with the intent. The improvement criterion can be predefined.
[0012] Where the intent and the subscriber order originate from different firms then the method can comprise only attempting to match the subscriber order with the intent if a volume of a potential trade between the different firms based on the subscriber order and the intent exceeds a predefined threshold.
[0013] Another aspect provides a system for matching orders comprising a plurality of workstations. At least a portion of the workstations belong to one firm and a remainder of the works stations belonging at least one other firm. The system also comprises a network interface connected to the workstations for receiving an intent and an order therefrom. The system also comprises a trading engine connected to the network interface for processing the orders. The system also comprises an alternative engine connected to the network interface for processing the intents and certain ones of the orders. The alternative engine is configured to: determine if the intent potentially matches the subscriber order; and, if the intent potentially matches the subscriber order then determining if the intent and the subscriber order originate from an identical firm; and, if the intent and the subscriber order originate from an identical firm then attempting to internalize the subscriber order with the intent; if the intent potentially matches the subscriber order then determining if the intent and the subscriber order originate from different firms; and, if the intent and the subscriber order originate from different firms then attempting to match the subscriber order with the intent as trade between firms; if one of the attempts are successful then executing a trade based on the one of the attempts; if the subscriber order cannot be matched with the intent then forwarding the subscriber order to the trading engine for matching with another order.
[0014] Another aspect provides an alternative trading engine in a system for matching orders comprising a plurality of workstations. At least a portion of the workstations belong to one firm and a remainder of the works stations belonging at least one other firm. The system also comprises a network interface connected to the workstations for receiving an intent and an order therefrom. The system also comprises a trading engine connected to the network interface for processing the orders. The alternative engine is connected to the network interface for processing the intents and certain ones of the orders. The alternative engine is configured to: determine if the intent potentially matches the subscriber order; and, if the intent potentially matches the subscriber order then determining if the intent and the subscriber order originate from an identical firm; and, if the intent and the subscriber order originate from an identical firm then attempting to internalize the subscriber order with the intent; if the intent potentially matches the subscriber order then determining if the intent and the subscriber order originate from different firms; and, if the intent and the subscriber order originate from different firms then attempting to match the subscriber order with the intent as a trade between firms; if one of the attempts are successful then executing a trade based on the one of the attempts; if the subscriber order cannot be matched with the intent then forwarding the subscriber order to the trading engine for matching with another order.
BRIEF DESCRIPTION OF THE DRAWINGS
[0015] Figure 1 shows a system for matching orders in accordance with an embodiment.
[0016] Figure 2 shows the alternative engine of the system in Figure 1 in greater detail.
[0017] Figure 3 shows a flow chart depicting a method for matching orders in accordance with another embodiment.
[0018] Figure 4 shows the system of Figure 1 during exemplary performance of step 110 of the method from Figure 3.
[0019] Figure 5 shows the system of Figure 1 during exemplary performance of step 115 of the method from Figure 3. [0020] Figure 6 shows a flow chart depicting one possible a method of performing step 125 from the method of Figure 3.
[0021] Figure 7 shows the system of Figure 1 during exemplary performance of step 255 from the method of Figure 6.
[0022] Figure 8 shows the system of Figure 1 during exemplary performance partial performance step 215 from the method of Figure 6.
[0023] Figure 9 shows the system of Figure 1 during another exemplary performance of step 115 of the method from Figure 3.
[0024] Figure 10 shows a flow chart depicting one possible a method of performing step 140 from the method of Figure 3.
[0025] Figure 11 shows a flow chart depicting a method for matching orders in accordance with another embodiment.
DETAILED DESCRIPTION OF THE EMBODIMENTS
[0026] Referring now to Figure 1 , a system for executing orders is indicated generally at 50. System 50 comprises a plurality of workstations 54-1, 54-2 . . . 54-n (generically referred to herein as "workstation 54" and collectively as "workstations 54") all of which are connected to a market network interface 58 via any suitable network 62.
[0027] Each workstation 54 is typically a computing device such as a personal computer having a keyboard and mouse (or other input devices), a monitor (or other output device) and a desktop-module connecting the keyboard, mouse and monitor and housing one or more central processing units, volatile memory (i.e. random access memory), persistent memory (i.e. hard disk devices) and network interfaces to allow the workstation 54 to communicate over network 60. However, it is to be understood that workstation 54 can be any type of computing device, such as a personal digital assistant, cell phone, laptop computer, email paging device etc. Each workstation 54 is operated by a trader belonging to a firm, or a group of workstations 54 may be operated by a plurality of traders belonging to one firm. Each workstation 54 is used to enter orders to buy or sell a particular security. Each work station 54 is operated by a trader T respective to each work station 54.
[0028] Network interface 58 is a server, a mainframe, or other type of computing environment that is operable to receive orders from workstations 54. For example, Network interface 58 can be a Sun Fire V480 running a UNIX operating system, from Sun Microsystems, Inc. of Palo Alto Calif., and having four central processing units each operating at about 900 megahertz and having about sixteen gigabytes of random access memory. However, it is to be emphasized that this particular server is merely exemplary, a vast array of other types of computing environments for network interface 58 are within the scope of the invention.
[0029] In a present embodiment, network interface 58 is part of an electronic stock exchange, and is thus able to process buy orders and sell orders that include requests to purchase, sell, cancel etc. securities that can be traded electronically. Network interface 58 is connected to a primary persistent storage (not shown) that maintains all persistent data associated with the orders and processing thereof for network interface 58. Network interface 58 is also operable to apply time stamps to orders as they are received by accessing time-date information from the operating system of network inteface 58. Network interface 58 is operable to route orders according to the stock market ID, or firm ID to a trading engine 66 also attached to network interface 58.
[0030] Trading engine 66 is operable to maintain a central limit order book (CLOB) hosted via a central matching engine, where buy orders and sell orders are executed against each other, and against a central repository of orders to thereby process the trading of securities. As used herein the term "order" refers to a message that indicates a desire to trade in a particular quantity of a given security, at a given price. In general, trading engine 66 is operable to execute orders in the usual manner, and return the results of those executed orders to the workstations 54 that originated the buy order and the sell order.
[0031] Network 62 can be wired or wireless, or based on combinations thereof, and based on any type of known network architecture or platform, (e.g. the Internet or a wide area network) or combinations thereof.
[0032] Network interface 58 is also operable to forward certain types special messages received from workstations 54 to an alternative engine 70 for further processing. Alternative engine 70 is also a server, a mainframe, or other type of computing environment. For example, alternative engine 70 can also be a Sun 480R server from Sun Microsystems, Inc. of Palo Alto Calif., which has four CPUs and, because a significant portion of processing is performed in random access memory, such a server should be configured with about eight to about sixteen gigabytes of random access memory. However, it is to be emphasized that this particular server is merely exemplary, a vast array of other types of computing environments for alternative engine 70 are within the scope of the invention.
[0033] Thus, as shown in Figure 2, within the chosen computing environment, alternative engine 70 includes at least a processor 74 and a storage device 78. Storage device 78 is operable to receive and store messages from workstations 54, while processor 74 is operable to process those messages, if possible. Alternative engine 70 is generally operable to perform certain types of matching and trading that is not available on a trading engine 66. Further detail about alternative engine 70 will be provided below. [0034] Referring again to Figure 1 , engines 66 and 70 are also connected to a market feed 82, enabling them to access a best bid and offer for any given security being traded using system 50.
[0035] The various components in system 50 can be owned and/or operated by different entities. For purposes of explaining the present embodiment, it is assumed that network interface 58, trading engine 66 and alternative engine 70 are owned and operated by a single business entity operating as an electronic stock exchange 86. Workstation 54-1 and workstation 54-2 are owned and operated by a first firm denoted by reference F-I . (As used herein, the term "firm" refers to brokers, dealers, broker- dealers, agents or the like.) Workstation 54-1 and workstation 54-2 are typically located in remote locations from the other such that the trader T-I is not aware of, or need not be aware of, the trading being performed by the trader T-2 of workstation 54-2. For example "remote locations" can mean that each workstation 54-1 and workstation 54-2 is located in a different city, or on different floors of the same building belonging to a single firm. While in the present example such locations are remote from the other, it is contemplated that workstation 54-1 and workstation 54-2 can be located proximal to each other, but that the trader T-I is not aware of, or need not be aware of, the trading being performed by trader T-2. In general, it is to be understood that workstation 54-1 and workstation 54-2 are owned by a single firm F-I, and thus that the respective traders T-I and T-2 of workstations 54-1 and 54-2 may desire to internalize trades with each other rather than effecting trades with other firms. By the same token, it is assumed that workstation 54-3 and workstation 54-n are owned by a second firm and a third firm, denoted by references F-2 and F3, respectively.
[0036] Further assumptions are also made about system 50 in order to assist in explaining the present embodiment, which are thus: firm F-I and firm F-2 are subscribers to the alternative trading offered by alternative engine 70, and thus traders T-I, T-2, and T-3 have the option of forwarding intents and/or orders to alternative engine 70. As used herein the term intent refers to a message that indicates a desire to trade in a particular quantity of a given security, at a given price, etc. provided that the other side of such a trade comes from the same brokerage firm that initiated the intent. As used herein, orders destined for alternative engine 70 are referred to as subscriber orders. However, firm F-3 is not a subscriber to the alternative trading offered by alternative engine 70, and thus trader T-n can only send orders to trading engine 66. Trader T-n cannot send subscriber orders to alternative engine 70. Those skilled in the art will now recognize that firm F-3 is only able to trade using trading engine 66 in the traditional manner, while firms F-I and firm F-2 have the option of trading using either alternative engine 70 and/or via trading engine 66.
[0037] Referring now to Figure 3, a method for executing orders in accordance with another embodiment of the invention is indicated generally at 100. In order to assist in the explanation of the method, it will be assumed that method 100 is performed using system 50. Furthermore, the following discussion of method 100 will lead to further understanding of system 50 and its various components. However, it is to be understood that system 50 and/or method 100 can be varied, and need not work exactly as discussed herein in conjunction with each other, and that such variations are within the scope of the present invention.
[0038] Beginning first at step 110, an intent is received. By way of example, assume that trader T-I of workstation 54-1 of firm F-I wishes to lodge an intent for processing by alternative engine 70. Since firm F-I is a subscriber, trader T-I will be permitted to submit an intent to according to step 110. This example is shown in Figure 4, wherein an intent, represented as an oval and indicated at reference "I", is shown as entered at workstation 54-1 and received at alternative engine 70, (via network interface 58, which applies appropriate time stamps to Intent I as Intent I is passed through interface 58), and stored on storage device 78. Table I shows the structure and exemplary contents of intent I.
Table I Intent I
Figure imgf000009_0001
[0039] More particularly, Field 1 of Table I, named "Firm" identifies that the originating firm of Intent I is Firm F-I, and thereby indicates that Firm F-I wishes to match one or more orders associated with Intent I with corresponding orders also originating from Firm F-I . Field 2 of Table I, named "Security Name" identifies the name of the specific security that is the subject of the internalized trade-in this example, "XYZ Co.". Field 3 of Table I, named "Transaction Type" identifies whether the intent is an intent to buy, sell, etc. the security identified in Field 2. In this example, the Transaction Type is "Buy", indicating that there is an intent to trade with corresponding orders to sell (Other Transaction Types could include short selling, etc.). Field 4 of Table I, named "Quantity" identifies the desired quantity of the security~in the present example, the Quantity is " 10,000 units", indicating that the intention is to Buy 10,000 units of XYZ Co. Field 5 of Table I, named "Price per unit" indicates the desired limit price at which the security is to be traded. In the present example, the Price per Unit is $1.00. (Price per unit could simply indicate "market" indicating that the price will be paid according whatever price is indicated on market feed 82.)
[0040] As will be discussed in greater detail below, implicitly associated with intent I is an improvement criterion, which indicates the amount by which an incoming order can be price-improved to make a desired trade valid in light of market rules. Thus, as used herein, the term "improvement" in the context of price improvement refers to an amount an price of an order is varied in order to conform with the market price for a given security on the BBO. In the present example, the improvement criterion is fixed by exchange 86 to a particular amount, such as one cent, or other minimum or other amount that would be desired to achieve suitable price improvement. In still other embodiments, such improvement criterion could actually be based on a plurality of different criteria. Notwithstanding any price improvement, however, in no event can the price be exceed the limit price in Field 5 of Table I. In still other embodiments, such improvement criterion could be expressly provided by the trader T as part of the submission of the intent.
[0041] While not required, it can be desired at this point to perform a number of validations. For example, if intent I is received after closure of the market, then intent I can be rejected as being invalid simply for having been received at an unacceptable time. Other validations can include the verification of a) the existence of the security in question; b) whether the price and improvement combination is within a reasonable range of the BBO on the market feed 82. Other validations will now occur to those of skill in the art. If such validations are performed, but not met, then method 100 can be immediately ended, and the intent I can be rejected back to the originator.
[0042] Assuming, however, that intent I is validly received at step 110, then method 100 advances to step 115. At step 115, a subscriber order is received. As discussed above, a subscriber order is substantially the same as a regular order, except that it is destined for alternative engine 70. Continuing with the example associated with Intent I above, assume that the operator of workstation 54-2 of firm F- 1 wishes to enter an order. This example is shown in Figure 5, wherein a first order, represented as an oval and indicated at reference "O-l ", is shown as entered at workstation 54-2 and received at alternative engine 70via network interface 58, which applies appropriate time stamps to Order O-l as Order O-l is passed through interface 58. Table II shows the structure and exemplary contents of Order O-l
Table II Order O-l
Figure imgf000010_0001
[0043] More particularly, Field 1 of Table II, named "Firm" identifies that the originating firm of Order 0-1 is Firm F-I . Field 2 of Table II, named "Security Name" identifies the name of the specific security that is the subject of the trade-in this example, "XYZ Co.". Field 3 of Table II, named "Transaction Type" identifies whether the order is to buy, sell, etc. the security identified in Field 2. In this example, the Transaction Type is "Sell", indicating that this is an order to sell. Field 4 of Table II, named "Quantity" identifies the desired quantity of the security~in the present example, the Quantity is "10,000 units", indicating that the intention is to Sell 10,000 units of XYZ Co. Field 5 of Table II, named "Price per unit" indicates the desired price at which the security is to be traded. In the present example, the Price per Unit is "market", indicating that the security is to be sold according to whatever the market value for that security is according to the BBO. Field 6 of Table II, named "Subscriber Order" includes a "yes", which indicates to network interface 58 that order O-l is destined for alternative engine 70 instead of trading engine 66. (If Field 6 of Table II indicated "No", then network interface 58 would forward order O-l directly to trading engine 66 for processing in the same manner as regular orders.)
[0044] If no subscriber order is actually received, then method 100 simply waits at step 115 until such an order is received. Having completed step 1 15, method 100 advances to step 120, at which point a determination is made as to whether the firms match. More particularly, the firm that sent the intent at step 110 is compared with the firm that sent the order at step 115 to see if they originated from the same firm. A comparison of field 1 of Table I with field 1 of Table II reveals the same firm in each table, and thus, in the present example, the determination at step 120 is "Yes", both firms do match, and accordingly method 100 will advance from step 120 to step 125. At step 125, an attempt is made to internalize Intent I with Order O-l, and thereby permit Firm F-I to achieve the benefits of such an internalization without having to utilize trading engine 66.
[0045] An exemplary method for implementing the attempted internalization at step 125 is shown in Figure 6. Referring now to Figure 6 in relation to Intent I and Order O-l, at step 205 a determination is made as to whether Intent I matches Order O-l . A comparison of Table I with Table II shows that indeed, the security name and the quantity does indeed match, and that Intent I is a "buy" whereas Order O-l is a "sell". Accordingly, it would be determined at step 205 that "yes", the intent matches the Order and the method would advance to step 210.
[0046] (If however, Intent I did not match Order O-l then the method would advance from step 205 to step 255 and Order O-l could be passed on from alternative engine 70 to trading engine 66 so that order O-l could be processed as a regular order in the usual manner. Step 255 is represented in Figure 7.)
[0047] Continuing now with the discussion of step 210, at step 210 a determination is made as to whether matching intent I with Order O-l would conflict with any market rules, or would match with an outstanding BBO order as indicated by market feed 82. Step 210 is fulfilled by alternative engine 70 querying the BBO from market feed 82 to ascertain the BBO associated with the security name identified in the Intent I. Assuming that there is no conflict (i.e. there are no outstanding BBO orders that could be matched with Order 0-1 ), and assuming the market price on the BBO is $0.85, (i.e. less than $1.00, the limit price from Field 5 of Table I) then the method will advance to step 215, at which point a trade will be executed between Intent I and Order 0-1.
[0048] Step 215 is represented in Figure 8, as alternative engine 70 passes a trade notification TN to trading engine 66 for trade notification, so that the trade can be recorded and interested parties notified, including the originator of Intent I and the originator of Order 0-1. In the foregoing example, Table III shows the form in which the trade notification TN is presented to trading engine 66. Trading engine 66 can then handle the trade notification TN in the usual manner, returning results to Firm F-I , allowing Firm F-I (and/or traders T-I and T-2 that placed Intent I and Order 0-1) to enjoy the benefits of an internalized trade.
TABLE III
Information at trading engine 66 regarding trade notification TN (Method advances from step 210 to step 215)
Portion of Trade Notification TN extracted Portion of Trade Notification TN extracted from Intent I from Order O-l
Figure imgf000012_0001
Figure imgf000012_0002
[0049] Assuming, however, at step 210 that the intent does conflict with the BBO, then the method would advance from step 210 to step 220. Such a conflict could arise at step 210 if there is already a market order on market feed 82 that indicates a party is willing to fulfill Order O-l . Thus, at step 220, a determination is made as to whether the intent can be adjusted to improve over the BBO. In this circumstance, a determination would be made as to whether an application of the price improvement criteria of one cent could be applied to the market price of the existing market order, without actually exceeding the limit price of $1.00 set in Field 5 of Table I. Thus, for example, if the outstanding market order on market feed 82 indicated a price of no more than 99 cents, then at step 220 it would be determined that "yes", intent I can be adjusted to improve over the BBO. At this point the method advances to step 225 and intent I is adjusted in order to improve over the existing market order. In this example, the market price associated with the intent I would be set to $1.00, to improve over the existing market order on the BBO. The method would advance from step 225 to step 215. In the foregoing example, Table IV shows the form in which the trade notification TN is presented to trading engine 66. Trading engine 66 can then handle the trade notification TN in the usual manner, returning results to Firm F-I, allowing Firm F-I (and/or traders T-I and T-2 that placed Intent I and Order O-l) to enjoy the benefits of an internalized trade.
TABLE IV
Information at trading engine 66 regarding trade notification TN (Method advances from step 225 to step 215)
Portion of Trade Notification TN extracted Portion of Trade Notification TN extracted from Intent I from Order O-l
Figure imgf000013_0001
Figure imgf000013_0002
[0050] Assuming, however, at step 220 that the intent cannot be adjusted to improve over BBO, then the method would advance from step 210 to step 255, which would be performed as previously discussed in relation to Figure 7. Such a "No" determination would be made at step 220 where the application of the price improvement criteria of one cent to Intent I would result in exceeding the limit price of $1.00 set in Field 5 of Table I. Thus, for example, if the outstanding market order on market feed 82 indicated a price of $1.02 cents, then at step 220 it would be determined that "No", intent I cannot be adjusted to improve over the BBO. At this point the method advances from step 220 to step 225 and no internalized trade would be effected and order O- 1 would be processed by trading engine 66 in the usual manner.
[0051] (Of note, however, in the examples given in Tables III and IV, it need not be the case that the entire intent I or the entire order O-l be fulfilled - in other words the "quantity" need not match exactly. If intent I is not completely fulfilled then intent I can be partially filled by Order O-l and the remainder of Intent I can be reintroduced into method 100 and processed accordingly.)
[0052] From either step 215 or step 255, the method in Figure 6 will terminate and return to step 130 in Figure 3. At step 130, a determination is made as to whether the intent received at step 110 has been fulfilled. If the intent was fulfilled completely, as per the examples in either Table III or IV, then a determination is made that "yes", the intent was fulfilled and method 100 will end. However, if the intent was not fulfilled at all, or only partially fulfilled, then a determination is made that "no", the intent was not fulfilled, and method 100 will return to step 115.
[0053] For the purposes of continuing the explanation of method 100, it will be assumed that Intent I was not fulfilled at step 125, for any of the reasons previously discussed, and accordingly method 100 will return to step 115. Thus, Intent I will remain stored in alternative engine 70 with the same contents as Table I. Again, at step 115, a subscriber order is received. Continuing with the example associated with Intent I, assume that trader T-3 of workstation 54-3 of firm F-2 wishes to enter a subscriber order. This example is shown in Figure 9, wherein a second order, represented as an oval and indicated at reference "O-2", is shown as entered at workstation 54-3 and received at alternative engine 70 via network interface 58, which applies appropriate time stamps to Order O-2 as Order O-2 is passed through interface 58. Table V shows the structure and exemplary contents of Order O-2
Table V Order O-2
Figure imgf000014_0001
[0054] More particularly, Field 2 of Table V, named "Firm" identifies that the originating firm of Order O-2 is Firm F-2. Field 2 of Table V, named "Security Name" identifies the name of the specific security that is the subject of the trade-in this example, "XYZ Co.". Field 3 of Table V, named "Transaction Type" identifies whether the order is to buy, sell, etc. the security identified in Field 2. In this example, the Transaction Type is "Sell", indicating that this is an order to sell. Field 4 of Table V, named "Quantity" identifies the desired quantity of the security~in the present example, the Quantity is "10,000 units", indicating that the intention is to Sell 10,000 units of XYZ Co. Field 5 of Table V, named "Price per unit" indicates the desired price at which the security is to be traded. In the present example, the Price per Unit is "market", indicating that the security is to be sold according to whatever the market value for that security is according to the BBO. Field 6 of Table V, named "Subscriber Order" includes a "yes", which indicates to network interface 58 that order O-2 is destined for alternative engine 70 instead of trading engine 66. (If Field 6 of Table V indicated "No", then network interface 58 would forward order O-2 directly to trading engine 66 for processing in the same manner as regular orders.) [0055] Having received order O-2, method 100 advances from step 1 15 to step 120, at which point a determination is made as to whether the firms match. More particularly, the firm that sent Intent I is compared with the firm that sent Order O-2 to see if they originated from the same firm. A comparison of field 1 if Table I with field 1 of Table V reveals a different firm in each table, in the present example, the determination at step 120 is "No", the firms do not match, and accordingly method 100 will advance from step 120 to step 135.
[0056] At step 135, a determination is made as to whether the intent otherwise matches the order, and that therefore there is a potential to effect a trade based on the intent and the order. Continuing with the present example, a comparison is made between the fields of Table I and Table V (other than the firm field) to determine whether there is a potential to match those orders. When Tables I and V are compared, it can be seen that there is a potential to match them, given that the same security is involved (XYZ Co.), that Firm F-I wishes to buy securities while Firm F-2 wishes to sell securities. In this example, a determination would be made at step 135 that "yes", there is a potential to match the intent with the order and method 100 would advance to step 140.
[0057] (If, however, a determination was made that there was no potential to match the order with the intent, then the method would advance from step 135 to step 145, at which point the subscriber order would be passed to trading engine 66 in for processing in the usual manner. Those skilled in the art will now recognize that step 145 is effected in substantially the manner same as step 255, as previously discussed and shown in Figure 7. From step 145, method 100 returns to step 130, which is performed as previously discussed.)
[0058] An exemplary method for implementing the attempted match at step 140 is shown in Figure 10. Referring now to Figure 10 in relation to Intent I and Order O-2, at step 310 a determination is made as to whether a match of Intent I and Order O-2 would conflict with BBO. Performance of step 310 is substantially the same as performance of step 210. At step 310 a determination is made as to whether matching intent I with Order O-2 would conflict with any market rules, or would trade through an outstanding BBO order as indicated by market feed 82. Step 310 is fulfilled by alternative engine 70 querying the BBO from market feed 82 to ascertain the BBO associated with the security name identified in the Intent I. Assuming that there is no conflict (i.e. there are no outstanding BBO orders that could be matched with Order O-2), and assuming the market price on the BBO is $0.85, (i.e. less than $1.00, the limit price from Field 5 of Table I) then the method will advance to step 345.
[0059] At step 345, a determination as to whether the volume of the order is of sufficient volume. More specifically, order O-2 will be examined to determine if the order contains a predefined quantity of units. The exact quantity of units need not be particularly limited. The quantity of units can be based on an absolute value, or it can be based on a relative value which combines both the share price and the quantity of units in order to arrive at a minimum financial value for the order. The larger the volume, the fewer transactions, which reduces burden on the traditional trading engine. Incidentally, market liquidity is enhanced and fees are reduced. A presently preferred minimum volume for the Ontario Securities Commission is five thousand shares, however the actual preferred minimum volume will be dependent on the particular market being served by system 50.
[0060] If, at step 345, it is determined that the volume of the subscriber order is not sufficient, then the method advances to step 335 and the subscriber order is passed to trading engine 66 for processing in the usual manner. Those skilled in the art will now recognize that step 335 is performed in substantially the same manner as step 255 or step 145 as previously discussed.
[0061] If, at step 345, it is determined that the volume of the subscriber order is sufficient, then the method advances to step 350, at which point a trade will be executed between Intent I and Order O-2, in substantially the same manner as was described in relation to step 215, except that in this event the trade will be effected between firm F-I and firm F-2, instead of being effected as an internalized trade within firm F-I . Having effected the trade at step 350, the method returns to step 130 which is performed as previously described.
[0062] Returning now to step 310, if it was determined at step 310 that a match between intent I and order O-2 would conflict with the BBO, then the method would advance from step 310 to step 330 and a determination would be made as to whether the intent can be improved to conform with the BBO. If the determination at step 330 is "yes", then the method advances from step 330 to step 340 and the intent is accordingly improved in order to conform to the BBO. If the determination at step 330 is "no", then the method advances from step 330 to step 335.
[0063] Those skilled in the art will now recognize that steps 330 and 340 can be performed in substantially the same manner as step 220 and step 225, as discussed above.
[0064] While the foregoing describes certain embodiments and examples, it should be understood that these are non-limiting, and that variations, subsets, and combinations are within the scope of the invention. For example, step 345 could be omitted and the method in Figure 10 modified so that step 310 advances directly to step 350.
[0065] As another example, it should be understood that method 100 can be implemented in multiple threads or processes, so that alternative engine maintains a plurality of different intents and receives a plurality of different orders and method 100 is used to match, if possible, appropriate ones of those intents and orders. [0066] As another example, it should be understood that while steps 220 and 225 (and steps 330 and 340) contemplate improving the intent, it should be understood that likewise, in appropriate circumstances, it can be desired to attempt to improve the order in order to comply with the BBO. This can be particularly applicable to a market order.
[0067] As another example, it should be understood that the sequence of steps in the previously described methods can be changed. Specifically, Figure 11 shows a method 100a for executing orders that is a variation of method 100. In method 100a, like steps are shown with a suffix "a" attached to their counterpart in method 100, although it should be understood that the exact manner that steps in method 100a are effected will typically involve at least some modification to their counterpart in method 100. Of particular note, in method 100a, at step 135a a determination is made as to whether there is some potential to match the received intent with the received order. That is to say, that if different securities are listed in both the intent and the order, or if the intent and the order are both "buys" or "sells", then it would be determined at step 135a that there is no potential to match the intent with the order and the method would advance to step 145a, which would be performed in substantially the same manner as step 145 of method 100.
[0068] However, if at step 135a it was determined that there was at least a potential to match the intent with the order, then the method would advance to step 120a, where a further determination would be made as to whether the firms in the intent and the order match. For example, if Intent I and Order O-l were being examined at step 120a, then a determination would be made that "yes", the firms match and method 100a would advance to step 125a which would be performed in substantially the same manner as step 125, though with appropriate modifications. As another example, if Intent I and Order O-2 were being examined at step 120a, then a determination would be made that "no", the firms do not match and method 100a would advance to step 140a which would be performed in substantially the same manner as step 140, though again with appropriate modifications. At step 141a, a determination is made as to whether the attempt made at either step 140a or step 125a was successful. If "no", method 100a would advance from step 141a to step 145a, which would be performed as previously described. If the determination at step 141a was "yes", then method 100a would advance from step 141a to step 130a. Step 130a would be performed in substantially the same manner as step 130. Those skilled in the art will now recognize that the inclusion of step 141 a can obviate the need for step 335 and/or step 255. Those skilled in the art will now recognize further variations that can be effected to step 125 and/or step 140 in order to effect step 125a or step 140a.
[0069] The present invention provides a novel system and method for matching orders. An embodiment includes a system that comprises an alternative engine and an traditional trading engine. Market participants have the option of routing intents and/or subscriber orders to the alternative engine. The intents can either be internalized with subscriber orders from the same firm or matched with subscriber orders from other firms. By dividing trading activity between the two engines, processing stresses on the traditional trading engine are relieved. Without the alternative trading engine, certain firms are reluctant to trade in large volumes of certain securities on the traditional trading engine. As a result the traditional trading engine can be bogged down with excessive small trades, and/or can experience large spikes in high volumes of trading. This added volume can decrease the efficiency of the traditional trading engine and lead to the traditional trading engine to present a distorted view the actual liquidity and price of the particular security on the market feed. By diverting certain traffic to the alternative engine, the traditional trading engine is relieved of these stresses and its computing resources devoted to the traditional trades and by the same token the alternative engine provides a platform where liquidity needs are met, and thereby presenting market liquidity and price on the market feed in a more accurate manner.
[0070] Also, since the alternative trading engine is proximal to the traditional trading engine, latency can be reduced, since the functionality of the altnerative trading engine may be located at the relevant firm. Also, without the alternative trading engine, the tradidtional trading engine can be subject to a potentially lengthy series of "fill or kill orders", which are simply testing the liquidity offered by the traditional trading engine, thus further burdening the traditional trading engine.Also, the types of transactions conducted by the alternative trading engine can be subject to auditing for regulatory clearing and compliance purposes - particularly, though not necessarily limited to, transactions between the same desks of the same firm, commonly known as "off-market trades". Extracting records from the traditional trading engine is burdensome and complex, and thereby further impairs the efficiency of the traditional trading engine. However, by using the alternative trading engine, a discrete set of records of such transactions are maintained, and can be easily made available to the firms using the alternative trading engine, to assist them with regulatory compliance. Again, note that any extra burden to the traditional trading engine can unfairly prejudice those parties and firm that do not rely on the functionality of the alternative trading engine.
[0071] The scope of the present invention is not intended to be restricted by the foregoing but is instead defined by the claims attached hereto.

Claims

1. A method for matching orders comprising: receiving an intent; receiving a subscriber order; determining if said intent potentially matches said subscriber order; and, if said intent potentially matches said subscriber order then determining if said intent and said subscriber order originate from an identical firm; and,
if said intent and said subscriber order originate from an identical firm then attempting to internalize said subscriber order with said intent;
if said intent potentially matches said subscriber order then determining if said intent and said subscriber order originate from different firms; and,
if said intent and said subscriber order originate from different firms then attempting to match said subscriber order with said intent as a trade between firms; and,
if one of said attempts are successful then executing a trade based on said one of said attempts;
if said subscriber order cannot be matched with said intent then forwarding said subscriber order to a trading engine for matching with another order.
2. The method of claim 1 wherein said step of attempting to internalize said subscriber order with said intent comprises: determining if matching said intent with said subscriber order would conflict with a best bid or offer ("BBO"); and if matching said intent with said subscriber order conflicts with said best bid or offer ("BBO") then
determining if said intent can be adjusted to improve over said BBO; if said intent can be adjusted to improve over said BBO then adjusting parameters of said intent to improve over said BBO;
if said intent cannot be adjusted to improve over said BBO then forwarding said subscriber order to a trading engine for matching with another order.
3. The method of claim 1 wherein attempting to match said subscriber order with said intent comprises: determining if matching said intent with said subscriber order would conflict with a best bid or offer ("BBO"); and if matching said intent with said subscriber order conflicts with said best bid or offer ("BBO") then
determining if said intent can be adjusted to improve over said BBO; if said intent can be adjusted to improve over said BBO then adjusting parameters of said intent to improve over said BBO.
if said intent cannot be adjusted to improve over said BBO then forwarding said subscriber order to a trading engine for matching with another order.
4. The method of claim 1 wherein an improvement criterion is associated with said intent.
5. The method of claim 4 wherein said improvement criterion is a specific parameter included with said intent.
6. The method of claim 4 wherein said improvement criterion is predefined.
7. The method of claim 1 wherein if said intent and said subscriber order originate from different firms then only attempting to match said subscriber order with said intent if a volume of a potential trade between said different firms based on said subscriber order and said intent exceeds a predefined threshold.
8. A system for matching orders comprising: a plurality of workstations; at least a portion of said workstations belonging to one firm and a remainder of said works stations belonging at least one other firm; a network interface connected to said workstations for receiving an intent and an order therefrom; a trading engine connected to said network interface for processing said orders; an alternative engine connected to said network interface for processing said intents and certain ones of said orders; said alternative engine configured to: determine if said intent potentially matches said subscriber order; and,
if said intent potentially matches said subscriber order then determining if said intent and said subscriber order originate from an identical firm; and,
if said intent and said subscriber order originate from an identical firm then attempting to internalize said subscriber order with said intent; if said intent potentially matches said subscriber order then determining if said intent and said subscriber order originate from different firms; and,
if said intent and said subscriber order originate from different firms then attempting to match said subscriber order with said intent as trade between firms;
if one of said attempts are successful then executing a trade based on said one of said attempts; and,
if said subscriber order cannot be matched with said intent then forwarding said subscriber order to said trading engine for matching with another order.
9. The system of claim 8 wherein said attempting to internalize said subscriber order with said intent comprises: determining if matching said intent with said subscriber order would conflict with a best bid or offer ("BBO"); and if matching said intent with said subscriber order conflicts with said best bid or offer ("BBO") then
determining if said intent can be adjusted to improve over said BBO; if said intent can be adjusted to improve over said BBO then adjusting parameters of said intent to improve over said BBO;
if said intent cannot be adjusted to improve over said BBO then forwarding said subscriber order to a trading engine for matching with another order.
10. The system of claim 8 wherein attempting to match said subscriber order with said intent comprises: determining if matching said intent with said subscriber order would conflict with a best bid or offer ("BBO"); and if matching said intent with said subscriber order conflicts with said best bid or offer ("BBO") then determining if said intent can be adjusted to improve over said BBO; if said intent can be adjusted to improve over said BBO then adjusting parameters of said intent to improve over said BBO;
if said intent cannot be adjusted to improve over said BBO then forwarding said subscriber order to a trading engine for matching with another order.
11. The system of claim 8 wherein an improvement criterion is associated with said intent.
12. The system of claim 11 wherein said improvement criterion is a specific parameter included with said intent.
13. The system of claim 11 wherein said improvement criterion is predefined.
14. The system of claim 8 wherein if said intent and said subscriber order originate from different firms then only attempting to match said subscriber order with said intent if a volume of a potential trade between said different firms based on said subscriber order and said intent exceeds a predefined threshold.
15. An alternative trading engine in a system for matching orders comprising: a plurality of workstations; at least a portion of said workstations belonging to one firm and a remainder of said works stations belonging at least one other firm; a network interface connected to said workstations for receiving an intent and an order therefrom; a trading engine connected to said network interface for processing said orders; said alternative engine connected to said network interface for processing said intents and certain ones of said orders; said alternative engine configured to: determine if said intent potentially matches said subscriber order; and,
if said intent potentially matches said subscriber order then determining if said intent and said subscriber order originate from an identical firm; and,
if said intent and said subscriber order originate from an identical firm then attempting to internalize said subscriber order with said intent;
if said intent potentially matches said subscriber order then determining if said intent and said subscriber order originate from different firms; and, if said intent and said subscriber order originate from different firms then attempting to match said subscriber order with said intent as a trade between firms;
if one of said attempts are successful then executing a trade based on said one of said attempts; and,
if said subscriber order cannot be matched with said intent then forwarding said subscriber order to said trading engine for matching with another order.
16. The alternative trading engine of claim 15 wherein said attempting to internalize said subscriber order with said intent comprises: determining if matching said intent with said subscriber order would conflict with a best bid or offer ("BBO"); and if matching said intent with said subscriber order conflicts with said best bid or offer ("BBO") then
determining if said intent can be adjusted to improve over said BBO; if said intent can be adjusted to improve over said BBO then adjusting parameters of said intent to improve over said BBO;
if said intent cannot be adjusted to improve over said BBO then forwarding said subscriber order to a trading engine for matching with another order.
17. The alternative trading system of claim 15 wherein attempting to match said subscriber order with said intent comprises: determining if matching said intent with said subscriber order would conflict with a best bid or offer ("BBO"); and if matching said intent with said subscriber order conflicts with said best bid or offer ("BBO") then
determining if said intent can be adjusted to improve over said BBO; if said intent can be adjusted to improve over said BBO then adjusting parameters of said intent to improve over said BBO.
if said intent cannot be adjusted to improve over said BBO then forwarding said subscriber order to a trading engine for matching with another order.
18. The alternative trading engine of claim 15 wherein an improvement criterion is associated with said intent.
19. The alternative trading engine of claim 18 wherein said improvement criterion is a specific parameter included with said intent.
20. The alternative trading engine of claim 18 wherein said improvement criterion is predefined.
21. The alternative trading engine of claim 18 wherein said if said intent and said subscriber order originate from different firms then only attempting to match said subscriber order with said intent if a volume of a potential trade between said different firms based on said subscriber order and said intent exceeds a predefined threshold.
PCT/CA2007/000524 2006-08-16 2007-03-30 Computer based method and system for matching orders WO2008019465A1 (en)

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