Detection and mitigation of effects of high velocity price changes

Abstract

The disclosed embodiments relate to mechanisms to rapidly detect and respond to situations where a market is not operating in a fair and balanced manner or otherwise where the market value is not reflective of a true consensus of the value of the traded products among the market participants. In particular, the disclosed embodiments continually scan for, rapidly detect and respond to extreme changes, either up (“spike”) or down (“dip”) in the market, such as a “flash crash,” where a precipitous market move occurs. Generally, the disclosed embodiments determine when a market for a particular product moves too quickly in too short of period of time, e.g. the velocity of the market exceeds a defined threshold limit.

Description

REFERENCE TO RELATED APPLICATIONS[0001]This application is a continuation under 37 C.F.R. §1.53(b) of U.S. patent application Ser. No. 13 / 633,703 filed Oct. 2, 2012 (Attorney Docket No. 4672-12012BUS) now U.S. Pat. No. ______, which claims the benefit of the filing date under 35 U.S.C. §119(e) of U.S. Provisional Application Ser. No. 61 / 704,173 filed Sep. 21, 2012, which is hereby incorporated by reference.BACKGROUND[0002]A financial instrument trading system, such as a futures exchange, referred to herein also as an “Exchange”, such as the Chicago Mercantile Exchange Inc. (CME), provides a contract market where financial instruments, for example futures and options on futures, are traded. Futures is a term used to designate all contracts for the purchase or sale of financial instruments or physical commodities for future delivery or cash settlement on a commodity futures exchange. A futures contract is a legally binding agreement to buy or sell a commodity at a specified price at a...

AI Technical Summary

Benefits of technology

The patent text describes a financial instrument trading system, such as a futures exchange, that allows traders to electronically submit orders and receive confirmations, market data, and other information. These electronic markets have largely replaced the traditional pit-based trading systems where traders physically stand in a designated location and trade with each other. Electronic trading systems offer more efficient, fair, and balanced markets where market prices reflect a true consensus of the value of traded products among the market participants. However, the speed at which trades are executed through electronic trading systems can also facilitate the propagation of problems, such as extreme market activity, if not properly managed. The patent text proposes a solution to address this problem by incorporating a clearing house that acts as a buyer and seller of futures contracts, responsible for settling trades and protecting against credit risk. The clearing house helps to mitigate credit risk by assuming the responsibilities of a novation, or a party who stands in the position of buyer or seller in a futures contract. The patent text also discusses the advantages and disadvantages of electronic trading systems and the importance of maintaining a fair and balanced market.

Problems solved by technology

Unfortunately, this improved speed and efficiency also improves the speed at which problems may occur and propagate, such as where the market ceases to operate as intended, i.e. the market no longer reflect a true consensus of the value of traded products among the market participants.

Such problems are typically evidence by extreme market activity such as large changes in price, whether up or down, over a short period of time or an extreme volume of trades taking place.

In particular, traders, whether human or electronic, may not always react in a rational manner, such as when presented with imperfect information, when acting in fraudulent or otherwise unethical manner, and / or due to faulty training or design.

For example, while communications technologies may have improved, inequities in access to information and opportunities to participate still exist, which may or may not be in compliance with legislative, regulatory and / or ethical rules, e.g. some traders receive information before other traders, some traders may be able to place trader orders more quickly than others.

In many cases, irrational trader behavior may be triggered by a market event, such as a change in price, creating a feedback look where the initial irrational reaction may then cause further market events, such as a continued price drop, triggering further irrational behavior and an extreme change in the price of the traded product in a short period of time.

High speed trading exacerbates the problem as there may be little time for traders, or those overseeing them, to contemplate their reactions before significant losses may be incurred.

The problem may occur when one or more trades bring many stop orders into the market.

However, extreme market moves can occur that are not precipitated by Stop Orders, thereby making such “Stop Price Logic” ineffectual.

In addition, it will be appreciated that electronic trading systems further impose additional expectations and demands by market participants as to transaction processing speed, latency, capacity and response time, while creating additional complexities relating thereto.

However, setting either a maximum or minimum price limit and continuing to allow trading may not address the underlying problem which caused the extreme market movement and the market may reverse and undergo an extreme movement away from the set limit, such as due to the reaction of algorithmic trading systems.

Additionally, the illustrations are merely representational and may not be drawn to scale.

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