Automated auction protocol processor

Details Automated auction protocol processor Automated auction protocol processor

1999-04-20

2003-05-06

Myhre, James W. (Department: 3622)

Data processing: financial, business practice, management, or co

Automated electrical financial or business practice or...

Finance

C705S035000, C705S03600T

Reexamination Certificate

active

06560580

ABSTRACT:

FIELD OF THE INVENTION
The present invention relates to data processing systems for assisting in financial transactions. More particularly, the present invention relates to a data processing apparatus and method for the managed trading of select classes of securities or other commodities in accordance with specific protocols in an auction format with controlled sequence of auction events. The inventive system is presented in the context of selected fixed income auction protocols for fairly and quickly transacting offer-bid trading.
BACKGROUND OF THE INVENTION
Economic activity has at its centerpiece the buyer-seller transaction for all goods and services produced and consumed in a market economy. It is the fundamental mechanism to which resources are allocated to producers and output to consumers. The operation of the buyer-seller mechanism can and often is a critical determination of economic efficiency and when operated properly, will substantially enhance market performance.
Through history, there have been many different approaches adopted to bringing buyers and sellers together, each with the key objective of permitting transactions at or as close as possible to the “market” price of the goods satisfying. By definition, the market price is the price (in given currency terms) that a fully educated market, given full access will transact select goods. Discovery of the market price can only be accomplished by permitting full access to the transaction by essentially all potential buyers and sellers and allowing expression of each party's desires. However, the buyer-seller transaction must be structured to operate at very low costs—or it will distort the market price of goods with artificially high transaction costs. Thus, the two keys to effective buyer/seller transactions—full access of expression and knowledge coupled with low transaction costs—can be and are often conflicting, necessitating trade-offs between trading efficiency and market knowledge.
One well-known and particularly successful trading system is known as the “open outcry auction”. This involves a process wherein buyers and sellers collect in one location and prices for select goods are presented to the group through a broker, via simple vocal offerings. This approach has been used for almost all to kinds of goods, but is particularly useful where there are no established trading locations or markets for the selected items. It is the dominate trading forum for exotic items such as rare pieces of art and the like. Although successful in bringing interested parties to the transaction, the overall process can be very expensive, adding significantly to the market-distorting transaction costs.
Open outcry auction techniques, modified over time, have also found successful application in many trading activities, including the buying and selling of farm produce and livestock, commodities contracts, futures contracts on a variety of items and—particularly germane to the preferred embodiment of the present invention—fixed income securities. These trading activities focus on the buying and selling of essentially fungible items, that is, items that are without meaningful differentiation from like items on the market. For example, a bushel of wheat for February delivery is considered for sale and delivery at a price independent of its source. Similarly, a 30-year U.S. Treasury bond paying a coupon rate of 8 percent and having a July 1996 issue date is indistinguishable from other 30-year treasuries having the same properties. Accordingly, the price buyers are willing to pay and sellers are willing to accept defines the market price of all 30-year treasury bonds of that same vintage, allowing a source transparent application of open outcry auction trading.
The fixed income securities issued by the United States government are known as U.S. Treasuries. These instruments typically span maturities of 13 to 52 weeks (T-bills), one to ten years (notes), and up to 30 years (Bonds). T-Bills are pure discount securities having no coupons. Almost all other Treasuries having longer terms are coupon notes or bonds, with a defined interest payment cycle of semi-annual payments to the holder. An additional and more recent type of Treasury.
Treasuries have characteristic properties that make them especially useful for the purpose of the present invention and, therefore, are used exclusively in the following discussions with the fundamental tenant that the principles may be applied to other types of fixed income securities without departing from the inventive concepts. One important attribute of treasuries, in the context of the present invention, is the minimal and uniform default risk; the issuance of U.S. government paper removes the default risk as a defining criteria in the relative pricing of treasuries in the market place when they are backed by the full faith and credit of the U.S. government.
New Treasury securities are auctioned by the U.S. government at preestablished auction dates. The auction prices for newly issued Treasuries having a face value with a set coupon rate defines the Treasuries' yields when issued. After the auction, the Treasuries enter the secondary market and are traded typically “over the counter,” i.e., without a defined exchange. As inflation expectations and supply and demand conditions change, the prices of recently auctioned Treasuries fluctuate on the secondary market. The new prices are reflected by competing bid and offer prices communicated among institutions, banks, brokers, and dealers in the secondary market. For example, the yield of a treasury note increases as its price drops in the market, typically reflecting an overall increase in the interest rates for that term of security.
The newly auctioned securities are traded with and in conjunction with the securities issued in earlier auctions. In this context, some securities are traded more often than others and are called the “actives”; the actives usually correspond to the recently issued securities as opposed to the older securities in the market. Indeed, some older securities are infrequently traded, creating an illiquid market that may or may not reflect the current market-determined interest rate for that maturity length security.
Accordingly, the very size and diversity of the treasury market requires a high level of sophistication by market participants in the bidding, offering, buying, and selling transactions involving these securities. The very complexity associated with the transaction and the scale of trading undertaken by banks, brokers, dealers, and institutional participants necessitates a rigidly structured approach to trading.
In the past, open outcry auction bond brokering has served its customers well, providing highly efficient executions at near perfect market pricing. The open outcry auction applied to bond trading was implemented by a broker working with a collection of customers to create and manage a market. Typical customer representatives—both buyers and sellers—at a common location (e.g., a single room) where the representatives of the customers would communicate with each other to develop pricing and confirm transactions. This process employed the expression by the representatives of various bid and offer prices for the fixed income security at select volumes (i.e., how many million dollars of bonds at a given maturity). This expression would involve the loud oral “cry” of a customer-proposed bid or offer and the coordination with the fellow representatives regarding the extraction of complimentary positions—until a transaction match is made and a deal is done. This “trade capture” process relies on after-the-fact reporting of what just transpired through the oral outcry trade.
Recently, the trade capture process was performed by having designated clerks input data into electronic input devices. An input clerk would attempt to interpret the open outcry of many individual brokers simultaneously who sequentially are making verbally known their trading instructions of their customers. The quality of the data

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