As part of the submission of credit limits, as well as indicating how much credit a customer extends to trades with each counterparty, the customer notifies the auction system of credit limits it is willing to lend to various counterparties trading on the system.
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The administration interface 30 includes the following functionality:
By setting a minimum amount, the system can be reserved for the trading of amounts greater than a certain value, for example greater than the amounts usually traded on conventional anonymous trading systems. Preferably, participants can take part in the auction not only by submitting orders but also by making their credit available to third parties to increase the liquidity of the auction market.
Such participants submit credit limits for use in matching orders between other participants lacking bilateral credit.
Preferably the participant also submits an identification of other participants whose credit limits may be used to match orders entered by the participants. The matching engine can then match orders received from participants who do not have bilateral credit, using the credit of an intermediary having bilateral credit with the participants submitting the matched orders.
The intermediary may comprise a single participant or a chain of intermediary parties, each party in the chain having bilateral credit with adjacent parties in the chain, a first of said chain of intermediary parties having bilateral credit with the participant submitting one side of the matched order and a second of said chain of intermediary parties having bilateral credit with the participant submitting the other side of the matched order.
This daisy chaining of credit further increases the liquidity of the auction market thus making it more likely that orders will be matched. The invention also provides, according to a second aspect, a method of trading a fungible instrument, comprising: This aspect of the invention has the advantage that orders entered are tied to benchmark prices. This enables them to be matched immediately even though the orders are not executed until the benchmark indicated in the order is fixed.
As a result, the trader does not have to wait until the trade takes place at periodic times through the trading day to see that his position is covered. This prevents any rush into the market by traders anxious to cover their positions once the results of an auction become known. Embodiments of the invention will now be described, by way of example, and with reference to the accompanying drawings, in which: Referring to the figures, the system embodying the invention to be described is an auction based system.
Potential trading parties submit orders into the system and auctions are held at predetermined intervals, for example, once or twice daily. Participants in the auction need only make credit available for the duration of the auction. If it has been reserved, or blocked off, by the institution participating in the auction, but not used in the auction, it can be swiftly made available again to other parts of the institutions' trading systems.
The auction is anonymous but customers submit orders rather than quotes into the system. A quote requires both a price and a quantity. Orders submitted in this embodiment are limit type orders. Thus they are buy or sell orders either at a specified price or better. This greatly increases the chances of a match being made. Thus, there are no bids or offers submitted to the system. At the designated auction time, a matching engine matches the orders entered into the system and notifies the successful parties of the orders that have been executed.
No other parties are notified of the successful deals. Unsuccessful orders remain wholly anonymous. Potential participants are notified of the auction time for a given financial instrument or instruments.
A cut off point of a given time before the auction is set, for example, 1 minute. Orders received after than time will not be considered in the auction. Orders are matched on the basis of bilateral credit existing between counterparties. Each potential party must submit credit allocation to other counterparties into the system before the auction can take place.
Again, this may be required to have been completed a set time before the auction takes place, for example 1 minute. Once allocated to the auction system, if the party allocating the credit chooses to reserve the credit, the credit may not be used for any other purpose.
However, the participants are notified of the results of the auction directly after the auction, for example no later than two minutes after the auction. This allows them to reduce the credit to reflect transactions made during the auction and to unreserve any unutilised credit. Credit is reassigned for each auction. This may be done either by customers submitting fresh credit limits or by reviewing the limits for the previous auction automatically.
Matching may be performed using a matching engine of the type disclosed in EP-A in which matching is performed by the arbitrator. The matching algorithm in existing anonymous trading system matches on a price, time priority such that if two equally priced orders could be matched, the first order to be submitted is matched.
This paradigm is not appropriate for the present auction based system and matching is performed by attempting to give the best price available to a customer based on its bilateral credit whilst attempting to maximise the trading volume and surplus. For any trading system to operate effectively, there must be liquidity in the market.
The lack of credit between possible counterparties has a detrimental effect on liquidity as potential deals cannot be executed. This may be overcome by market participants offering their credit to counterparties by acting as prime brokers.
Customers may indicate whether they are willing to trade through a prime broker and whether they are willing to act as a prime broker. Where they act as a prime broker they indicate to the system those customers on whose behalf they are willing to act and the limits for each customer. The manner of this loaning of credit is discussed below.
The auction system, which comprises a computerised matching engine and a store for credit limits, prime broker credit limits and orders, is illustrated at 10 and receives, for each auction, orders for the auction 12 from customers. These may be received in any form, for example by e-mail or as a spreadsheet file, or in EBS or other user interface format.
Other ways of entering the order are possible. Thus, orders are entered into the auction system by an electronic message sent to the auction system by customers and stored by the system until the auction. Similarly credit limits 14 are allocated to the auction system in an electronic message sent to the system by customers and stored until the auction. The credit information may be in any suitable format, such as those mentioned above.
On completion of an auction, the system outputs electronic messages containing information about done deals. These done deal messages 16 are sent by a notifier to the parties to the done deals only and are also in any suitable format.
A credit notifier sends electronic messages to participants notifying them of any unused credit with the participants may then unreserve. The auction system may exchange messages with a database or series of databases 18 which hold information relevant to an auction.
This may include the details of the instrument the subject of the auction; credit limits, where these limits are updated automatically from previous auctions; customer profiles, including a willingness to act through or as a prime broker; and a deal log. The databases may be any convenient commercially available databases. In the embodiment described, the central matching engine in the system may support trading of any financial instrument and details of the instrument are provided from the database Alternatively, the system could be limited to one or a few instruments which are stored on the system.
The trading system including the matching system stores and database is shown at 20 and is connected to customers through user interfaces The matching system communicates with the user interfaces 22 via a wide area communications network such as the Internet or a private communications network A single user interface 22 is shown. In practice, there are many interfaces, one per customer or per trader at a customer. The interface at each customer is provided as a conventional computer workstation.
The auction system 22 also communicates with a deal feed server 26 which receives completed deal information from the auction system 20 on completion of an auction. The server 26 transmits this information over a telecommunications network 24 to a deal feed client Not all parties operating on the system will use the deal feed server. For those that do not, the notifier sends the trader terminal an electronic deal notification message. In practice there will be many deal feed clients.
The deal feed clients pass the deal information to back office computer systems at the institutions participating in successful auctions for settlement of the deals that have been made. As shown in FIG. These credit limits are specific to the auction system. These limits must be submitted by a predetermined time, for example 1 minute, before the predetermined auction time.
Once an auction has taken place, customers may either renew their credit limits automatically, effectively applying the same limits as the previous auction or resubmit fresh limits for a given auction. In the auction system described, for the system to be viable, it is important that there is sufficient liquidity available. The liquidity is enhanced, in a preferred embodiment of the invention, by allowing customers to lend their credit to one another.
As part of the submission of credit limits, as well as indicating how much credit a customer extends to trades with each counterparty, the customer notifies the auction system of credit limits it is willing to lend to various counterparties trading on the system. Again this notification may be in any of the forms discussed above and is made by a predetermined time, such as 1 minute, before the auction takes place.
Similarly, customers may notify the system if they are willing to borrow credit from another lender and, if so, how much. Conveniently, these notifications may be sent with the other credit limit notifications. The orders submitted must be submitted before the cut-off time mentioned above. However, orders may be withdrawn up to a predetermined period before the auction commences, for example 5 seconds. Orders are submitted either as buy or sell orders or both. Although the auction system knows the identity of the participating party, the orders are submitted anonymously and remain anonymous as no other party on the system is made aware of the order.
The only exception is the counterparty to a successful auction who is notified of the party which whom they have dealt. This is necessary for settlement purposes. Orders are submitted as limit orders at a specific price or better. Once the auction time arrives, the auction system matching engine takes all orders that were received before the cut-off time and not subsequently withdrawn, and attempts to match them based on an algorithm that attempts to maximise trading volumes and maximise the surplus.
Matching is based on bilateral credit and matches are made to give the best price to the customer either based on its own credit or third party credit if credit has been borrowed. Once the matching has been completed, all unmatched orders left in the auction are cancelled. The customer is informed of the amount outstanding of each order they posted to the system. The customer can then unreserve assigned credit if appropriate and reduce credit by the amount of the transactions.
The auction lasts for a very short time with matching being near-instantaneous. It will be appreciated, therefore, that credit needs to be allocated, and reserved if this is how a particular institution handles credit, to the auction system for a very short time. If orders are submitted with credit allocating at the last possible time 1 minute before the auction and the participant notified of unutilised credit 1 minute after the auction so that it can be unreserved, the credit has been assigned only for 2 minutes per auction.
In practice, the time is likely to be a little longer but is very considerably less than the time for which credit is assigned and reserved to a conventional anonymous trading system. The matching engine used may be similar to that used in the present system of the applicant referred to in the introduction and disclosed in EP-A or it may be based as the broker model disclosed in GB-A Matching engines are well known to those skilled in the art.
Once the auction has been completed, customers will be notified of deals through one of the interfaces described above with reference to FIG. The deal notification is sent a very short time after completion of the deal, for example, no more than one minute.
Where the customer includes a deal feed client, done deals are received from the deal feed server 24 at the deal feed client 26 as described above in relation to FIG. As the system is completely anonymous, and in contrast to other anonymous trading systems, deals are not reported to the financial markets or incorporated into price feeds supplied to the markets.
As mentioned above, no orders are displayed to customers so that customers cannot see what other prices have been submitted to the system. Nor can they see what deals have been completed. The customer user interface 22 is used simply to input auction data into the system and to receive notifications from the system, for example of auction times and instruments to be auctioned.
The customer user interface provides for the following customer functionality: Multiple orders may be submitted at different prices or different amounts for the same auction; 2. Customers define credit limits for counterparties to which it is willing to lend credit. These limits define how much trading the counterparty can do in this counter's name; 3.
These define the credit limits for counterparties with which it is willing to trade. The limits define how much trading this customer can do with each counterparty; 4.
The customer defines credit limits for lenders from which it is willing to borrow credit; 5. Customers can set up settlement instructions; and 6. Customers may view the deals they have done on the auction system. The administration interface 30 includes the following functionality: The definition of new instruments to be auctioned, and their characteristics, such as the minimum amount to be traded and their price format; 2. This allows new customers to be registered on the system to participate in auctions; 3.
This allows the times of auctioning to be set at various times in the trading day for various instruments; 4. Customer profiles may be kept by the administrator and may include a unique identifier, name, contact option e-mail, file interface etc. This allows the administrator to broadcast certain messages through the system to all customers. Broadcast messages may include auction times, a new instrument or a new customer joining the system.
The latter is important as existing customers need to set credit limits for that customer. The loaning and borrowing of credit will now be described in more detail. In order to increase the liquidity of the auction market, customers can act as prime brokers by lending their credit to other counterparties.
They do not have to put orders into the system to participate in the auction and so add liquidity. An example of the trader terminals 32 is shown at branch 30 connected to bank node 20b. It will be appreciated that if broking nodes are used instead of arbitrators, the market distributors functionality forms a part of the functionality of the broking node. An example of the system using broking nodes 22, 24, 26, 28 is shown in FIG.
As shown in FIGS. The links between passive arbitrators are not used. As soon as a different arbitrator becomes active, some of the previously passive links are used. For example, when arbitrator 12 becomes active, the links between arbitrator 12 and the other arbitrators 10, 16 and 14 become active. It will be seen, therefore, that the active network links always form a tree. The active arbitrator performs all broking functions. Only the active arbitrator may initiate deals and serves as the central repository of market books.
The market distributors, including the passive arbitrators must, by definition, also have complete books but they only update their market book information when that information is distributed to them by the active arbitrator or where there is more than one market distributor in the branch, by an upstream market distributor who ultimately received the updated information from the active arbitrator.
Credit information may be stored at the active arbitrator in which case either each arbitrator holds all the credit information all the time or receives changes in credit information switched from one active arbitrator to the next when that active arbitrator becomes a passive arbitrator.
The market distributors, including the inactive arbitrators, are responsible for maintaining their copy of market books and passing information about book updates to any downstream market distributors. The arbitrators, broking nodes and market distributors may have bank nodes connected directly to them.
In this case the market distributor or arbitrators are responsible for preparing the market view for the branch node. In doing this the market distributor or arbitrator will not pass to the bank node any prices which are not dealable i. This assumes that the arbitrator has the necessary credit information.
If credit information is stored elsewhere, such as at a bank node, then the bank node must prepare the market view for the trader terminals and the credit information must be stored in such a way as not to be accessible by the trader terminals.
When a trader inputs a new quote into a trader terminal, the quote is submitted directly to the active arbitrator. The quote may automatically be sent to the closest market distributor who will use it to generate a market view for the bank and then send the quote to the active arbitrator.
Thus, referring to FIG. Alternatively, the quote is passed first to market distributor 18a which updates the bank market view and then passes the quote to active arbitrator The updated market view is passed down to the bank node 20b.
The active arbitrator will attempt to automatch the new quote. If the credit check is unsuccessful the deal will be terminated. If the arbitrator finds no automatch, or can only automatch an amount less than the whole bid amount, the active arbitrator adds the quote, or the residual amount, to the book and informs the immediate downstream market distributors in market update messages.
In practice, it is possible that some participating banks may agree to have their credit information stored at the arbitrators and some may not. Banks are often reluctant for sensitive credit information to be stored off site. In that case, the procedures for credit checking will be a hybrid of that described below. Although the system is anonymous, the arbitrator will have the identity of the quote owner. If that party has its credit limits stored centrally it can check credit centrally, at least for the quote owner.
If the counterparty does not have its credit limits stored at the arbitrator it will have to perform credit checking at the relevant bank node.
When a trader sees a price with which he wishes to deal, he will hit that price. A hit message is sent from the trader terminal to the appropriate bank node and then to the active arbitrator directly.
The arbitrator is then responsible for matching the hit. As described above, the credit checking process may differ if credit data is held at the arbitrator.
In the following discussion, references to the active arbitrator include the active broking node as it is the arbitrator functionality in the broking node which is active. The active arbitrator is switched such that the geographical location of the active arbitrator corresponds to the market which is most active. Thus, in the example of the figure, one of the four arbitrators will be located in London, one in New York, one in Tokyo and the fourth will be a back up.
The back up will only be active if one of the other three fails whereas the other three will rotate the position of active arbitrator throughout each day as each regional market opens and closes. Switching between arbitrators to activate a fresh arbitrator as the active arbitrator could be manual, or, for example, time based such that when a given market opens, the arbitrator local to that market becomes the local arbitrator.
It is preferred, however, to switch arbitrators on the basis of network volume. The active arbitrator constantly monitors the number of new quotes and hits originating from all the sub-trees belonging to the different passive arbitrators and compares them with the number of new quotes and hits originating in the active arbitrator.
Based on this information the system can determine when to switch to a different arbitrator and also which the next active arbitrator should be. One possible condition would be to switch arbitrators if the number of quotes and hits at the active arbitrator over a period of time, say two minutes, is exceeded by the number of quotes and hits at another passive arbitrator over the same time period then that passive arbitrator becomes the active arbitrator.
In practice, there is a portion of the trading day when both the London and New York markets are trading simultaneously and it is possible that short busts of activity on each side of the Atlantic could cause the active arbitrator to switch very rapidly backwards and forwards, this is undesirable and system rules prevent excessive moves made in response to random activity. When the active arbitrator switch is made, the former active arbitrator will first send a message to the new active arbitrator informing it that there is to be a switch and that it is the new active arbitrator.
The former active arbitrator then stops initiating any new deals although partly completed deals are unaffected and will be completed by the former active arbitrator. However, if one of these pending deals fails, it does not perform any rematch; a process in which the arbitrator looks for another quote to match with the quoting party.
Instead, the former active arbitrator sends all the deal data to the new active arbitrator which performs the rematch. The former active arbitrator will then send all new quotes and deals received from bank nodes to the new active arbitrator.
In this respect it has started to act as a passive arbitrator. Finally, it starts to act as a market distributor sending market book information received from the new active arbitrator down the line to the next market distributor. If the next node is a bank node it will also prepare the market view for that bank. The new active arbitrator will first activate, or establish if they do not already exist, connections with all passive arbitrators and then broadcast the new active arbitrator location over the whole of the network.
This ensures that all quotes and hit messages sent in the future are directed to the new active arbitrator. The messages sent will contain the sequence number of the last market update message that was sent by the former active arbitrator.
The arbitrator then starts to act as an active arbitrator. At the moment that the switch message is received, the book of the new active arbitrator is identical to that of the former active arbitrator at the moment the latter ceased to perform matching.
This ensures that the switch is transparent and, for example, that rematch can occur in the new arbitrator if a deal has failed in the previous arbitrator. It also ensures that only one arbitrator will initiate each potential deal avoiding the possibility of the new active arbitrator trying to initiate a deal that was initiated by the previous active arbitrator. When remaining passive arbitrators receive the arbitrator switch message, they will compare the sequence number in the switch message and the sequence number of the last market update message.
If, as a result of the comparison, the passive arbitrator decides that it has not yet received all the market update messages it will wait until the missing messages are received from the former active arbitrator before processing market update messages from the new active arbitrator.
This scenario could arise, for example, if the one of the passive arbitrators is nearer the new active arbitrator than the old active arbitrator. Messages from the new active arbitrator could arrive before earlier messages from the old active arbitrator. All other nodes on the network will note the new arbitrator's location when they receive the arbitrator switch message broadcast by the new active arbitrator and will use that location for all new quote and hit messages.
It will be appreciated from the foregoing that whichever of the FIG. It is only the deal matching and execution functionality which is switched. One possible difficulty with the system discussed above is the need to pass the trading book from one node to another as responsibility shifts.
This will take time. In an alternative embodiment, more than one, but not all, of the arbitrators are active at any one time. It is preferred in this embodiment that two arbitrators are active at any one time. In a still further embodiment, more than one arbitrator, but not all the arbitrators, are active for some but not all of the time.
When the present active arbitrator signals that responsibility is to pass to another arbitrator the old and new arbitrators both become active for a set period of time. This enables the trading book to be transferred without any loss of matching and deal execution capacity. The system described has the advantages of retaining a central matching functionality, as used in the Reuters System described earlier while retaining the advantages of having arbitrators in different locations as used in the EBS System described earlier.
The system provides, in essence, a variable location host system. In addition, all matching and deal execution is performed in one place at any one time but the location of deal matching and deal execution changes over time depending on market activity. This reduces the distance between most of the market participators and the matching engine ensuring that the system reacts faster and is easier for traders to use. The system may be implemented on a private network such as is used, for instance, by the present Reuters System or could use dedicated links over a public communications system.
Alternatively the system could be Internet based. Whichever implementation is adopted, the functionality of the system is the same. Various modifications and developments are possible and will occur to those skilled in the art without departing from the scope of the invention which is defined in the claims appended hereto. In one possible modification, the matching, deal execution and market distribution functionality could be combined into a single broking functionality.
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Anonymous trading is primarily used to avoid tipping off the market of a pending action, which could lead to front-running behavior, tracking of proprietary trading, or jockeying for the best position in an order book. An anonymous computerised trading system matches orders by conducting auctions at specified times. As well as entering orders, participants assign credit limits for the duration of the auction, thus minimizing the time for which credit is allocated to the system.
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