Automated futures trading exchange - Patent Review 4903201

Claims

I claim:

1. A computerized open outcry exchange system for transacting sales of a particular futures commodity contract in varying volumes or lot sizes by members of a futures trading exchange as principals or agents for others wherein bids to purchase or offers to sell said particular commodity contract are made by said principals or agents through remote terminals, said system comprising:

a. means for receiving and storing bids and offers from said remote terminals and automatically completing a transaction of matching bids and offers on a first-come, first-served basis thereby establishing a trading system,

b. means for storing CFTC requirements and regulations to be observed on said buy and sell transactions thereby establishing a clearing system,

c. means coupling said stored CFTC requirements and regulations in said clearing system to said trading system for comparing said transaction with said stored requirements and regulations thereby determining the validity of each transaction,

d. means for storing predetermined compliance criteria necessary to detect illegal trade practices or trade patterns which would adversely affect said commodity market thereby establishing a compliance system, and

e. mean coupling said stored compliance criteria in said compliance system to said trading system and said clearing system for automatically comparing said transaction determined to be valid to said predetermined compliance criteria thereby enabling detection of illegal trade practices and trade patterns which would adversely affect said commodity market.

2. A system as in claim 1 further including:

a. means in said remote terminals for identifying by code said member, as agent or a principal, making said bid or offer, and

b. a central processor in said trading system having means for recording said identify code whereby said agent or principal may be identified.

3. A system as in claim 2 further including:

a. means in said central processor for storing relevant information relating to each received bid or offer including prioritizing each received bid or offer on the basis of price, lot size and time received by said central processor, said

b. display means in said remote terminals coupled to said central processor for receiving said prioritized bids and offers and displaying at least a part of all bids in descending price order and all offers in ascending price order.

4. A system as in claim 3 further including:

a. a movable cursor on said remote terminal display for identifying said member's bid or offer, and

b. keyboard means in said remote terminal for modifying said member's bid or offer identified by said movable cursor by entering data through said keyboard modifying said selected bid or offer.

5. A system as in claim 2 further including:

a. means coupled to said recording means in said central processor for accessing relevant information relating to at least a part of said stored bids and offers for a particular commodity contract, and

b. means coupled to said accessing means for determining the breadth of the market for that commodity contract by displaying the number of bids for any particular number of offers based on said relevant information.

6. A system as in claim 2 further including:

a. means coupled to said recording means in said central processor for accessing relevant information relating to said stored bids and offers for a particular commodity contract, and

b. means coupled to said accessing means for displaying bid or offer lot sizes, last sales price, daily price ranges, and volume of trades of said commodity contracts occurring over any predetermined period of time.

7. A system as in claim 6 wherein said display means displays the variations in lot size, last sales price, daily price ranges, and volumes of trades of said commodity contracts that occur between various ones of said predetermined periods of time.

8. A system as in claim 2 further including printing means at each remote terminal coupled to said central processor for printing the execution of each transaction initiated by a particular terminal including date, time, lot size and price of said commodity contract.

9. A system as in claim 2 further including:

a. means in said central processor for establishing trading limits in dollar volume for any particular remote terminal, and

b. means in said clearing system coupled to said remote terminals for rejecting any bid or offer from said remote terminal that exceeds the trading limits established for each of said terminals.

10. A system as in claim 2 further including:

a. means in said compliance system for accessing said storage means in said central processor, and

b. means coupled to said accessing means for detecting patterns of trading which may be manipulative by displaying times of receipt of said bids and offers, the agent or principal making said trades, or the history of trading of said agent or principal.

11. A system as in claim 2 further including:

a. a printer coupled to said central processor, and

b. means selectively coupling said central processor storage to said printer for printing the volume of trading of any commodity contract over any predetermined period of time.

12. A system as in claim 2 further including:

a. a portable hand-held terminal for receiving and generating buy and sell data for features commodity contracts,

b. a modem coupled to said portable hand-held terminal for converting said generated data to information capable of being transmitted to said trading system and converting said received data to information capable of being used by said portable terminal, and

c. telephone lines coupling said modem converted information to and from said trading system.

13. A system as in claim 12 wherein said portable hand-held terminal further comprises:

a. a display,

b. a keyboard containing commodity keys, buy and sell keys, numerical entry keys and control keys,

c. means for generating said member identification code uniquely identifying a particular hand-held terminal, and

d. means for storing said transaction in said member remote terminal and only displaying said transaction at said portable terminal.

14. An automated system for transacting a sale of a particular futures commodity contract in predetermined volumes or lot sizes by members of the trading system as principals or agents for others wherein bids to purchase or offers to sell are made by said principals or agents for said particular commodity contract, said system comprising:

a. remote terminals for initiating and transmitting transaction data including buyer's bids and seller's offers,

b. a central processor for receiving said buyer's bids and seller's offers thereby forming a trading system,

c. means in said central processor for completing a transaction by comparing received bids with received offers to find a matching bid and offer,

d. means coupled to said trading system and said remote terminals for storing predetermined trading constraints and approving only those bids and offers coming within said constraints thereby forming a clearing system,

e. means coupled to said trading system and said clearing system for storing predetermined criteria representing fraudulent trading practices and comparing said transaction data with said predetermined criteria thereby establishing a compliance system for enabling detection of said fraudulent trading practices, and

f. means in said central processor for notifying the remote terminals of a completed transaction when a matched bid and offer are found.

15. A system as in claim 14 further including:

a. a storage means in said central processor and

b. means coupled to said storage means for storing said received bids and offers according to time, price and lot size for a particular commodity contract.

16. A system as in claim 15 further including:

a. means in said central processor for matching said bids and offers on a priority basis where first received bids and first received offers are matched, and

b. means coupled to said matching means for completing said transaction of said matched bids and offers on a first received in time basis.

17. A system as in claim 14 wherein said received bids and offers are stored in respective memory queues according to commodity contract by time, lot size, and price.

18. A system as in claim 17 further including means in said central processor for reporting to said remote terminals last sales of a commodity contract by time, lot size, and price.

19. A system as in claim 17 further including means in said central processor for reporting to said remote terminals bids and offers by type of commodity contract as received by time, quantity, and price.

20. A system as in claim 17 further including means in said central processor for notifying remote terminals of filled and unfilled orders.

21. A system as in claim 17 further including memory means in said central processor for maintaining a complete trading history of each trading system member.

22. A system as in claim 14 further including:

a. means for identifying each exchange member by an electronic code,

b. means in said clearing system for storing limits of trade for each member, and

c. means in said central processor coupled to said trade limit storing means and said exchange identifying means for rejecting any proposed trade from a member that exceeds the established position limits.

23. A method of transacting a sale of a particular futures commodity in varying volumes or lot sizes by members of a futures trading exchange as principals or agents for others wherein bids to purchase or offers to sell are made by said principals or agents for said particular commodity, said method comprising the steps of:

a. receiving in a central processor buyer bids and seller offers on a particular commodity from remote terminals,

b. storing in said central processor said bids and offers in the form of time, price and lot size of each of said received bids and offers,

c. comparing said received bids and offers and matching equal bids and offers on a first cone, first served basis according to the time of receiving said bids and offers thereby storing a trading system,

d. storing buy and sell constraints on each member of said exchange thereby forming a clearing system,

e. coupling said clearing system to said trading system for approving execution of a transaction only when said transaction falls within said predetermined buy and sell constraints,

f. executing the buy and sell transaction for a particular commodity for which said offer and bid have been matched and approved by said clearing system,

g. storing predetermined compliance criteria necessary to detect illegal trade practices thereby forming a compliance system,

h. coupling said compliance system to said trading system and said clearing system for detecting any illegal trade practices as indicated by said stored predetermined criteria, and

i. confirming the execution of an approved transaction immediately to both buyer and seller at the remote terminals whose bid and offer are matched.

24. A method as in claim 23 further comprising the steps of:

a. identifying by code at said remote terminals whether an agent or a principal has made said bid or offer, and

b. recording said identity code in said central processor whereby said agent or principal may be identified.

25. A method as in claim 24 further comprising the steps of:

a. prioritizing each received bid or offer on the basis of price, lot size and time received by said central processor, and

b. receiving said prioritized bids and offers and displaying all bids in descending price order and all offers in ascending price order.

26. A method as in claim 25 further comprising the steps of:

a. providing a keyboard and a movable cursor on said remote terminal display,

b. modifying a bid or offer by moving said cursor to said displayed bid or offer, and

c. entering modifying data through said keyboard.

27. A method as in claim 24 further including the step of printing the execution of each transaction initiated by a particular remote terminal coupled to said central processor including date, time, lot size and price of said transaction and the name of the other member completing said transaction.

28. A system as in claim 24 wherein said step of detecting illegal trade practices comprises:

a. accessing said storage means in said central processor, and

b. displaying times of receipt of said bids and offers, the agent or principal making said trades, and the history of trading cf said agent or principal whereby illegal trade practices are made manifest.

29. A method as in claim 23 further comprising the steps of:

a. accessing said stored bids and offers for a particular commodity, and

b. determining the breadth of the market for that commodity by displaying the number of bids for any particular number of offers.

30. A method as in claim 23 further comprising the steps of:

a. accessing said stored bids and offers for a particular futures commodity, and

b. displaying bid or offer lot sizes, last sales price, daily price ranges, and volume of trades of said futures commodity occurring over any predetermined period of time.

31. A method as in claim 30 further including the step of displaying the variations in lot size, last sales price, daily price ranges, and volumes of trades of said commodity that occur between various ones of said predetermined periods of time.

32. A method as in claim 23 further comprising the steps of:

a. storing in at said central processor trading limits in dollar volume for any particular remote terminal, and

b. rejecting any bid or offer from any said remote terminal that exceeds the stored trading limits for each of said terminals.

33. A method as in claim 24 further comprising the steps of:

a. coupling a printer to said central processor, and

b. selectively coupling said central processor storage to said printer for printing the volume of trading of any commodity over any particular period of time.

34. A method of storing an automated futures trading system for transacting a sale of a particular commodity in predetermined volumes or lot sizes by members of the trading system as principals or agents for others wherein bids to purchase or offers to sell said particular commodity are made by said principals or agents, said method comprising the steps of:

a. initiating and transmitting buyer's bids and seller's offers from remotely terminals,

b. determining whether said buyer's bids and seller's offers are valid,

c. comparing received valid bids with received valid offers to find a matching bid and offer on a first-come, first-served basis,

d. reviewing said valid bids and offers to detect illegal trading practices, and

e. notifying the remote terminals of a completed transaction when a matched bid and offer are found.

35. A method as in claim 34 further comprising the steps of:

a. forming a storage means in said central processor, and

b. storing said received bids and offers according to time, price and lot size for a particular commodity in said storage means.

36. A method as in claim 35 further comprising the steps of:

a. matching said bids and offers stored in said central processor on a priority basis where first received bids and first received offers are matched, and

b. completing said transaction of said matched bids and offers on a first received in time basis.

37. A method as in claim 34 further including the step of storing said received bids and offers in respective memory queues according to time, lot size, price and commodity.

38. A method as in claim 37 further comprising the step of reporting to said remote terminals last sales by time, lot size, price and commodity.

39. A method as in claim 37 further comprising the step of reporting to said remote terminals bids and offers as received by time, lot size, price and commodity.

40. A method as in claim 37 further comprising the step of notifying remote terminals of filled and unfilled orders.

41. A method as in claim 37 further comprising the step of maintaining a complete trading history of each trading system member.

42. A system as in claim 34 further comprising the steps of:

a. identifying each exchange member by an electronic code,

b. establishing limits of trade for each member, and

c. rejecting any proposed trade from a member that exceeds the established position limits.

FIELD OF THE INVENTION

The present invention relates to a futures trading exchange and in particular to an automated open outcry futures trading exchange having a central processor associated with one or more remote terminals through which trades can be made by members of the exchange who enter offers or bids at the remote terminal and couple them to a central processor which compares any bid with offers on a priority basis, finds a match and completes the execution of the transaction.

The major purpose of the futures marketplace is to provide a facility whereby large numbers of people can make bids and offers through a central location on a commodity contract in order to determine its market value. A second purpose of the futures market is to spread the risk of price changes in a business from a small group of people to a larger group of people. This process is known as risk management. The reason the risk can be spread is that speculators, in addition to hedgers, enter the market and provide liquidity when they recognize an economic benefit from changes in the prices of commodity contracts. The larger number of participants allows a hedger to identify a price level which takes into account his cost of doing business and his desired profit level and then to lock-in a price level by offsetting losses in the cash market with equal gains in the futures market. All of this must be done in such a way as to minimize fraud and manipulation of the marketplace and is conducted with the oversight of and under the direction of the federal government which establishes the required rules and regulations.

BACKGROUND OF THE INVENTION

The method or process of trading futures contracts has remained virtually the same since the markets first opened in the 1800's. Use of state of the art technology in present systems has been limited thus resulting in major inefficiencies and opportunities for abuse. The futures trading system and markets, as they exist today, are the remnants of an archaic system. When an investor (hedger or speculator) wishes to trade on any of the futures exchanges, he is many times removed from access to firsthand trade data unless he is a floor trader. He must first call his broker who may have a direct line to a floor clerk but, generally, must call the trading room of the broker headquarters. The trading room calls the floor clerk who in turn relays the information to a runner. The runner relays the request for information or execution of a trade to the floor trader. The floor trader stands in a "pit" and executes a trade by shouting out his offer to sell, or buy, until someone across the pit signals that they will take the offered price (bid). When a trader thinks he has made a trade, he marks a trading card and a portion of the card is given to the exchange to begin the clearing process or accounting and funds collection process. This is known as the "open outcry" system because trading takes place in a central location in open view of a variety of participants. Most exchanges require that the trader enter the trade within one-half hour of the time a trade has been executed.

As can be imagined, there are many problems with the present archaic system. The markets were originally designed when there were a relatively few number of people who wished to participate in the process. As the number of participants have increased, it has meant that those who are directly on the floor of an exchange are at a distinct advantage over those who are not physically present. First, when a customer asks a question as to what is taking place, the question is relayed through four or five people. An answer to a question is at most subjective because it is based on the observation of those who are on the floor. The floor trader will tell what he thinks is happening but he does not have the tools to be sure that his observation is correct. The advantage that a floor trader has is that if his observation is not correct, he can make an additional trade to correct the situation for himself. But a retail broker or customer may not be advised of a change and at worst may simply be given inaccurate information.

The opportunity for mistake or abuse has been acknowledged by regulators and exchanges alike. As the system presently exists, trades are not confirmed until after an exchange is closed for the day. Therefore, if a floor trader has traded in front of a customer in order to obtain a better price or has failed to execute a trade for fraudulent reasons, it is difficult to detect. Even when a trade has been properly executed the opportunity for abuse or mistakes is still high as will be discussed hereinafter.

On a traditional exchange, after a trade is made a card is handed to an exchange employee who then keypunches the data into the computer. At the same time trading cards must be manually sorted to match trades. At the end of the day the computer lists are checked against the trading cards to reach agreement as to the trades which have been made. As can be well understood, there, first, may have been a mistake in the keypunching process. Secondly, there may be a difference given in the two cards as to the price at which a trade was made and thirdly because the trades are based on eye contact, there may be a difference in opinion as to whether a trade was actually made at all. When there is disagreement, a list of "out trades" is made and agreement must be reached as to whether the trade was made at all and if so at what price. The nature of the discrepancy determines whether the trader, the broker, or the customer must bear the cost of an out trade. Again, because the customer is at a lengthy distance, he is at a disadvantage because he takes no part in the resolution process.

The accounting process also has its problems. Once the matching of trades takes place, the information is fed into the clearing process of an exchange. The present clearing process in most exchanges is a computerized process. However, since information is manually entered, after the fact of the trade, its value lies only in the accounting process and not in the control of the exchange process. The exchange only knows at the end of the day if a trader has exceeded his position limits or has incorrectly identified a clearing member or has provided other incorrect information. On most exchanges 300 to 400 individuals are required to process trading cards and complete the clearing function.

The surveillance of the system as it now exists (to insure proper operation and minimize mistakes and abuse) also has numerous problems. Surveillance is completed on existing exchanges through live observation. An exchange employee stands in the middle of a ring and observes trading as it takes place. With close to a 1,000 people on the floor of an exchange, observation is spotty at best. Some exchanges have programs for detecting illegal trade practices which are repetitive but even when such practices are detected often the information available as evidence is inaccurate and unreliable.

The present invention, the automated futures trade exchange, has created an entire automated process for trading futures contracts which provides accurate and precise information, trading based on factual data, assurance of execution and immediate confirmation of the contracts, control through real time processing of information and electronic surveillance, and the use of computer hardware to implement the process. It does not separate clearing and surveillance from the futures trading process as do other exchanges because it is the combined process which allows the markets to function properly.

All trading conducted on the automated futures trading system will be effected through a central computer complex programmed to handle orders for the exchange's futures contracts. Access to this central computer will be available only through specially programmed remote computer terminals which will be distributed only to exchange members who will have a coded membership number. Each remote terminal will consist of a keyboard, a printer, on-line storage and a video monitor, the latter displaying a variety of information regarding the futures contracts traded on the exchange. Members will be able to utilize these terminals to transmit to the central computer bids and offers for their own accounts as principals or for the accounts of customers for whom they are agents. However, the system does not allow direct negotiations between members of the exchange as in the system disclosed in U.S. Pat. No. 3,573,747. Instead, the system acts as an intermediary among members and matches bids and offers and completes the transaction. Thus, the present novel system is an open outcry system since trading takes place in a central location in open view of a variety of participants.

When an order is transmitted to the central computer, its pertinent characteristics will be recorded including quantity, price, the time that the order was placed, and the capacity in which the order is entered; that is, whether as agent or principal. The exchange central computer will retain all orders received, arranging each bid and offer on the basis of its price, quantity and entry time and displaying all bids in descending order of price and all offers in ascending order of price. Thus, each bid or offer will become part of the market data displayed in every member's remote terminal video monitor. The breadth of the market will also be indicated. That is, whether a bid of 200 contracts represents one offer to buy 200 contracts or 20 offers to buy 10 contracts.

In addition, the video monitor of each remote terminal will display lot sizes, last sale prices, daily price ranges, the volume for each contract month, the spread relationships or price differential among the various contract months, and allows simultaneous spread trades (both in time and by commodity) to take place.

Pertinent to this process is the capability to modify prices at a remote terminal by moving a cursor on the video display to the bid or offer desired to be modified by the user which modification is then accomplished through the keyboard. The capability to see the display of buys and sells is analogous to the open outcry system of trading and is pertinent to good trading because it shows the supply and demand in the market. On the floor of an existing exchange, a trader would have a "feel" for the market but would not be able to relay to a customer with any degree of accuracy information pertaining to the distribution of bids and offers.

The exchange central computer will automatically match equal bids and offers on a first come, first served basis thereby executing the transaction. Each transaction execution will be immediately confirmed to the members on both sides of the trade by the printing mechanisms of those members terminals. Each execution report will include information regarding the date, time, quantity and price of the transaction. The exchange central computer will be able to handle a full array of futures orders including straddles, limit orders and stop orders. Because bids and offers are transmitted from the remote terminals directly into the computer there will be no chance for an "out trade", that case where a trade is made but the bid and offer do not match. Moreover, because trading will be effected solely by the computer, a record will exist of the precise time each order was entered, the precise time it was executed and the precise time an execution report was transmitted.

Another important factor in trading is the capability to determine the liquidity of the market. Again, on the floor of an exchange a trader may note that trading is active but by the time information is relayed back and forth between the principal and the trader the price may have moved considerably or the bids and offers may no longer be present. No presently existing exchange can determine with accuracy during the trading the volume of trading immediately taking place. The present system will record trades exactly as they are made, when they are made, and thus a member would be able to determine the volume of trading taking place at any particular time and would have the information necessary to determine whether it is likely that he can come in and out of the market at his desired price level.

Each terminal on the system will be specifically designated to trade a certain number of contracts. Position limits for each principal are thus determined by the fiduciary capabilities of the participant. Under the present system of trading on exchanges, a member may execute trades far in excess of his limit without detection by the exchange. In the present trading system, limits will be programmed into each individual terminal thus further eliminating the possibility of "out trades" because an individual trader has exceeded his limits. During trading times live surveillance of the market will take place through control terminals at the exchange. Information may be fed directly into the surveillance system to detect the patterns of trading which may be manipulative and since all information is recorded as trading takes place, accuracy is assured.

All information from the trading system will be moved directly to the clearing system. Thus, there is no manual matching of trades and accuracy of the data is assured. Earlier and more rapid transfer of funds will be possible thus increasing the financial viability of the exchange as a whole.

It has been recognized for some time in the futures industry that multiple factors determine the pricing of commodities. Thus, the use of computerized analysis has rapidly developed and multiple tools for graphing and receiving information has been developed. But the process for trading and processing trades remains archaic. The present system provides a means of executing trades, validating the information, and notifying parties of pertinent changes without bias to those who participate. Thus, a larger more efficient marketplace may be accommodated at lower cost.

SUMMARY OF THE PRESENT INVENTION

The present invention relates to a computerized open outcry trading exchange system for transacting sales of futures commodity contracts in varying volumes or lot sizes by members of the trading system as principals or agents for others wherein bids to purchase or offers to sell a particular commodity are made by said principals or agents through remote terminals, said system comprising a trading system for receiving buyer bids and seller offers on a particular commodity contract from said remote terminals and automatically completing a transaction of matching bids and offers, a clearing system for establishing requirements and regulations to be observed on said buy and sell transactions, means coupling said clearing system to said trading system for determining the validity of each transaction by comparing said transaction to said requirements and regulations, a compliance system for establishing predetermined criteria necessary to detect illegal trade practices or