Method and system for obtaining a discovered price

Abstract

A method and system for determining an optimal price at which to perform a batch auction of financial assets. Orders, according to a variety of predetermined order types, are received from qualified market participants and communicated to an auction system according to the invention. The auction system takes into account each order and its impact upon relative supply and demand to determine by a preset algorithm an optimal price and share transaction quantity. The optimal price is selected by identifying a particular price at which trade volume would be maximized and which reflects the appropriate effect of supply and demand imbalances. Trades are executed at the optimal price, and portions of the transaction quantity are allocated to each investor on a fair basis dependent upon their submitted orders. In another aspect, the auction system includes a computer system and network designed to automatically perform one or more steps of the above method. Such a system is preferably connected to one or more ECNs such that non-executed shares can be automatically sent to outside sources for execution, and connected to real time quote services to obtain current market information.

Description

FIELD OF THE INVENTION [0001] This invention relates generally to securities markets. Particularly, the invention relates to a system and method for determining an optimal price at which to conduct batch auctions of securities and other assets. BACKGROUND OF INVENTION [0002] A securities trading mechanism can be thought of as a set of protocols that translate a group of investors' latent demands into realized prices and quantities. [0003] Batch auctions are often used as the blueprint trading mechanism for new, automated trading systems such as that disclosed by U.S. Pat. No. 5,873,071 to Ferstenberg et al. and the systems in use by the Arizona Stock Exchange (“AZX”) and the Pacific Stock Exchange (“PSE”). A batch auction is a type of financial market transaction whereby a series of traders simultaneously buy or sell one or more securities at an agreed upon price for each security. [0004] The Ferstenberg et al. patent discloses a method and system for performing off-market intermedi...

AI Technical Summary

Benefits of technology

[0019] Another embodiment of the present invention comprises an electronic system for conducting batch auctions of securities. Such a system can be comprised of a computer network designed to accept a plurality of orders from a variety of sources. At a predetermined time, all current orders are crossed according to a preset price discovery algorithm to determine an optimal share price and quantity for each security being traded. A trade of shares in an amount equal to the quantity is automatically executed by the system at the discovered price, and then fairly allocated to each order source. Therefore, a computer system according to the present invention, comprised of software and accompanying hardware, would permit auction participants electronically and automatically to carry out the intermediated exchange of assets at a market determined optimal price.

Problems solved by technology

Collectively, these attributes put may put traders at informational disadvantages or lead to “gaming” (price manipulation by traders), thus preventing accurate price formation and discouraging order entry.

This result is very undesirable to traders, especially when large blocks of shares are traded as is commonly done in batch auctions.

This priority feature often causes the inherent drawback of disparities in fill rates and prices among participating traders which are undesirable in the financial community.

Furthermore, the complexity of the order entry process, including the completion of a price matrix for each asset desired to be traded and the lack of market order support, makes such a system unfriendly to traders.

This system however does not solve the problems attendant in batch auction methods and systems where providing optimal price determination is hampered by gaming and low liquidity.

The existence of order books having high levels of transparency and different execution priority rules, as used by the AZX, produce undesirable disparities in fill rates, discourages order entry and may lead to gaming.

An additional drawback of such a batch auction design is that it often is not sufficient to produce accurate pricing in low liquidity, high volatility markets as is present for thinly traded stocks.

Price discrimination among traders within a single auction based upon their order types and the use of highly complex order formats, as done by the PSE OptiMark system and the Lupien patent, can cause dissatisfaction among participating traders with the outcome produced by the auction system.

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