Patent Issued for Opening Cross in Electronic Market

By a News Reporter-Staff News Editor at Journal of Engineering -- A patent by the inventors Hatheway, Frank (Chevy Chase, MD); Moore, Daniel F. (New Haven, CT); Cox, Timothy E. (Brooklyn, NY); Martyn, Peter J. (Ridgewood, NJ); Franks, Dan B. (Clearwater, FL); Nunes, Adam S. (Brooklyn, NY); McCormick, Timothy (Rockville, MD), filed on November 2, 2010, was cleared and issued on December 4, 2012, according to news reporting originating from Alexandria, Virginia, by VerticalNews correspondents.

Patent number 8326737 is assigned to The NASDAQ OMX Group, Inc. (New York, NY).

The following quote was obtained by the news editors from the background information supplied by the inventors: "The invention relates to trading systems, particularly financial trading systems.

"Electronic equity markets collect, aggregate and display trade information to market participants. Market participants initiate trades of securities by sending trade information to the electronic market on which the securities are traded. The trade information includes continuous orders for execution during a market trading session.

"In a trading system or market, there exists the possibility that at the opening of trading, the volume and prices of buy orders will not balance the volume and prices of sell orders. This could occur for many reasons or for no apparent reason. For example, events may trigger buying or selling pressure in a particular security or the market in general. In addition, simple fluctuations in supply/demand could produce an imbalance at the opening.

"In an electronic market that uses a dealer model, a lock/cross condition can exist at the opening. In a locked situation, a market participant enters a quote or order having a bid price that is the same as the best, i.e., lowest displayed offer or enters an offer price that is the same as the best, i.e. highest displayed bid quote price. In a crossed situation, the quote or order bid price for the security is higher than, i.e., crosses the offer quoted price, or conversely the quote or order has an offer price that is lower than the currently best displayed bid price. Locked/crossed conditions are undesirable for maintaining orderly markets."

In addition to the background information obtained for this patent, VerticalNews journalists also obtained the inventors' summary information for this patent: "The opening process uses an auction mechanism for opening an electronic market. In the auction process, all eligible orders, may be used to open trading in a security. In addition, quotes of quoting market participants may also be used. The opening process executes an electronic clearing auction that incorporates the continuous market that precedes the opening process and the continuous market that will follow the opening process, as well as orders that are expressly entered for the auction.

"According to an aspect of the present invention, a method, executed in a computer system, for opening an electronic market for trading of a security includes receiving by the computer system eligible orders and orders for the security traded in the electronic market and disseminating an order imbalance indicator indicative of predicted trading characteristics of the security at the open of trading. The method also includes determining by the computer system a price or prices at which the maximum shares would be executed and determining which price would minimize any imbalance of eligible orders and executing at least some of the eligible orders at the determined opening price.

"The following are within the scope of the present invention, The eligible orders comprise market on open orders, limit on open orders and imbalance only orders, extended day orders, and Early and Late orders. The computer system determines whether the determined opening price is within a threshold amount of a benchmark price. The benchmark is a Volume Weighted Average Price ('VWAP') based on the market executions over the period from 9:29:55 to 9:30. If the determined price is outside the preset boundary of the benchmark, the market will change the determined price such that it is within the boundary. The computer system periodically calculates the order imbalance indicator over a series of time periods. The order imbalance indicator at a first of the series of time periods includes at least one of: an Inside Match Price, the number of shares paired at the Inside Match Price; order imbalance at the Inside Match Price; the buy/sell direction of that imbalance at the Inside Match Price, and an indicative clearing price range at which the market opening would occur if the market opening were to occur at that time and the percent by which that indicative price varies from the Inside Match Price.

"After executing at least some of the orders, the computer system computes a new inside quote price based at least in part on prices of ECN quotes, and orders that do not participate in the opening. Computing a new inside quote includes determining by the computer system the new inside quote price based at least in part on prices of quotes ECN quotes, DAY and GTC orders that did not execute during the opening to add to those orders and quotes to the order book stored in the computer system.

"The determined price is for selected securities in the market and for other securities the market uses a different opening method. The different opening method includes determining by the computer system all eligible orders for execution such that those orders would not lock or cross the market will be on a order book structure stored in the computer system and all other eligible orders will be an 'In Queue' state queue stored in the system and executing by the computer system 'In Queue' orders, including market orders, in strict time priority order regardless of order type. The different opening method includes activating by the computer system limit orders that have a time-in-force of Day or Good Till Canceled (GTC) and placing those limit orders whose limit price does not lock or cross the book on the order book with remaining orders whose limit price does lock or cross the book being placed in an 'In Queue' state queue stored in the computer system in strict time priority and activating 'reverse Pegged' orders and placing those reversed pegged orders whose limit price does not lock or cross the book on the order book stored in the computer system with remaining reversed pegged orders whose limit price does lock or cross the book being placed in an 'In Queue' state queue stored in the computer system in strict time priority and activating regular Pegged orders in strict time priority to add shares of the security to the order book at the prices in the order book.

"According to an additional aspect of the invention, a system that is part of an electronic market for trading of securities includes a client station for entering a opening order for a security traded in the electronic market, a server system including a computer readable medium for storing a computer program product, comprising instructions for causing the server system to receive eligible orders and quotes for the security traded in the electronic market, disseminate an order imbalance indicator indicative of predicted trading characteristics of the security at the open of trading, determine a price or prices at which the maximum shares would be executed and determining which price would minimize any imbalance of eligible orders, and execute at least some of the eligible orders at the determined opening price.

"According to an additional aspect of the invention, computer program product resides on a computer-readable medium for use in an electronic market for trading of securities. The computer program product includes instructions for causing a system to receive eligible orders and quotes for the security traded in the electronic market, disseminate an order imbalance indicator indicative of predicted trading characteristics of the security at the open of trading, determine a price or prices at which the maximum shares would be executed and determining which price would minimize any imbalance of eligible orders, and execute at least some of the orders at the determined opening price.

"One or more aspects of the invention may provide one or more of the following advantages. The opening cross provides a more robust open that allows for price discovery and an execution that results in an accurate and tradable opening price, in an electronic dealer market.

"The opening cross can use a matching engine to algorithmically evaluate all eligible prices at which an opening cross can occur, identifies the price or prices at which the maximum shares would be executed, determines which price would minimize the imbalance of eligible orders and the single price that would minimize the difference in price from a determined opening crossing price to the final pre-opening market bid-ask midpoint. After the opening cross is completed a new inside quote is computed, since the market would at that point include other interest that was not reflected in the opening cross such as ECN quotes DAY and GTC orders. The opening cross determines whether the price discovery mechanism at the open functioned as expected. The opening cross includes process to protect against unusual occurrences

"The details of one or more embodiments of the invention are set forth in the accompanying drawings and the description below. Other features, objects, and advantages of the invention will be apparent from the description and drawings, and from the claims."

URL and more information on this patent, see: Hatheway, Frank; Moore, Daniel F.; Cox, Timothy E.; Martyn, Peter J.; Franks, Dan B.; Nunes, Adam S.; McCormick, Timothy. Opening Cross in Electronic Market. U.S. Patent Number 8326737, filed November 2, 2010, and issued December 4, 2012. Patent URL: http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=23&u=%2Fnetahtml%2FPTO%2Fsearch-bool.html&r=1148&f=G&l=50&co1=AND&d=PTXT&s1=20121204.PD.&OS=ISD/20121204&RS=ISD/20121204

Keywords for this news article include: The NASDAQ OMX Group Inc.

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