Continuous auction order book trading system
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Current markets employ a variety of different auction methods, including the single-sided English auction, the two-sided English auction, and the Dutch auction.
Current markets in which fungible assets are traded typically employ a public auction process to discover the price at which a particular quantity of a particular fungible asset may be bought or sold at a particular point in time. A call auction is a form of trading that died out in the pre-computer age but is making its reentrance today as an electronic marketplace. The method of claim 16 , further comprising repeating b and c if a new continuous auction trade occurs before the delay period ends. For example, the market system may start the pre-open mode at AM each weekday. Exchange listed stocks. Glosten , L. Automated continuous double auction 6.
The most common conventional auction process employed in markets for fungible assets is the continuous two-sided English auction. In this auction process, the market continuously attempts to match the seller or sellers willing to sell a particular asset at the lowest price with the buyer or buyers willing to buy the asset at the highest price.
To participate in a continuous two-sided English auction market, a buyer participant places an order to buy a particular quantity of a particular asset at a particular price, and a seller participant places an order to sell a particular quantity of a particular asset at a particular price. For a particular asset trading in a particular market, the best bid is the bid at the highest price, and the best offer is the offer at the lowest price.
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The market attempts to match best bids and best offers to accomplish a trade. Participants negotiate in the market by adjusting their bids and offers. Whenever a buyer is willing to buy at the best offer price, or a seller is willing to sell at the best bid price, a trade occurs between the parties.
Impact of the auction batch size and the order book size on the latency.. Auction frequency. implements a continuous model for intraday power trading. The CAM model The system publishes public market data. Note that the. which orders are executed through the trading system of Wiener Boerse, and the type Instruments can be traded in the trading model “Continuous Auction with Issuer” Orders in the order book are executed according to price/time priority.
In continuous markets, there is normally a gap or spread between the best bid price and the best offer price, with the bid price being lower than the offer price. As soon as the spread becomes zero or when the best bid price exceeds the best offer price, the orders constituting the best bid and the best offer are matched and executed, subject to any volume constraints, and a trade occurs.
After the trade, the market returns to its normal condition with a spread between the current best bid and offer prices.
To attract more orders, continuous markets typically advertise the currently prevailing best bid and offer in what is called a market quotation. Each market quotation describes for a particular fungible asset trading in a particular market the currently prevailing best bid price, best offer price, the quantity of the asset in demand at the best bid, and the quantity of the asset available at the best offer. High speed telecommunications networks typically distribute market quotations so that they are available to participants in real-time. The continuous auction trading model is very successful.
It does, however, present a number of problems for certain buyers and sellers.
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For one, broadcasting market quotations informs the marketplace participants about the trading intentions of the most aggressive buyers and sellers in the market. In some cases, these aggressive buyers and sellers may wish to trade without publicly disclosing their trading intentions. For example, participants who seek to buy or sell large quantities big blocks of a particular fungible asset often do not want their intentions to become public, because the order information affects prices.
The market tends to react to the perception of supply or demand created by the large order size, making prices higher or lower than they otherwise would have been. There are also many other types of participants who, and reasons to, wish to keep their orders secret. Moreover, even if a participant tries to keep their orders from appearing as quotations by bidding or asking at the current market price, public quotation can still occur.
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Specifically, participants place orders to participate in an auction and, ultimately, a trade, and the markets matches all orders continuously. Because there are inherent delays in placing a new order in a market, a particular order may not be executed when it is entered if another new order gets to the market first. Instead, it may end up constituting the best bid or offer and consequently be disseminated widely as a market quotation. In addition, many markets, such as the NASDAQ, use an open book order system, where all orders are available for public inspection regardless of whether they happen to appear as market quotations.
Another problem is the limited amount of information supplied by conventional market quotations and open book order systems. An order or quotation reveals only the prices and quantities of the best orders in the order book at that time. A market quotation does not represent the complete and accurate intentions of the participants interested in the particular fungible asset and market.
For example, a participant who wishes to sell a large block, typically does so as several small orders. So information on the small orders does not reveal the complete and accurate intentions of the participants. For a participant that wishes to trade quantities of a particular fungible asset that are substantially larger than the quoted quantities in the market, such as institutional investment managers, the continuous auction model typically does not supply information about the prices at which these larger quantities can be traded. It is desirable to solve the problems continuous auction models present to large quantity buyers and sellers.
Conventional continuous auction markets have another problem that stems from the delay between when an order is placed and when the order is executed. Conventional market participants may place what is referred to as a market order. A market order is an order for which no particular price is specified. Market orders are matched against the currently prevailing best bid or best offer at the time the order is received and processed.
Since the market matches orders continuously, the best bid or offer may change after a particular market order has been submitted and before it is executed. The result is that a participant does not know with certainty at what price the order will execute, although the participant placed the order based on the most current market quotation.
Similarly, if the quantity of the market order exceeds the quantity available at the current best bid or offer, then the participant will not be able to anticipate the prices at which the entire order will be filled, because typically he only sees the best quotation, and there is no information available to him about the price and size of the next best bids or offers at the time the market order is placed.
Another problem affects buyers or sellers who wish to trade as market price takers rather than as market price setters. These participants wish to trade when the market achieves a particular price level. The continuous auction process provides no way for these participants to react to a particular quotation price, because the price may have changed before a new order can be entered and matched at the desired price indicated by the quotation. There are current systems that address some aspects of these problems. In temporal call markets, buy orders and sell orders for a particular fungible asset are matched at a price taken from another market at a particular instant in time.
In some cases the particular time is chosen at random and is unknown to all participants. In other cases, the time is predetermined to be the same time each day, which is known to participants in advance. In other cases, a special price, such as the closing price of the asset in another market, is used. Call markets, however, present their own problems. For instance, the selection of a price determined by another market does not typically reflect the price at which participating buyers and sellers would have chosen, or are willing, to trade, regardless of when the pricing occurs.
Another problem is that the selection of a price other than the price of the orders of the involved buyers and sellers leaves the temporal call auction price open to manipulation by participants or non-participants.
I. Introduction
Another problem is that temporal auctions that run at either pre-defined times or at random times do not typically coincide with the time at which participating buyers or any sellers wish to trade. Unless both buyers and sellers are interested and able to place orders at the time that the temporal auction runs, matches are unlikely. At least one system has been proposed using temporal call auction techniques to address unfairness in the market due to communication network delays that would otherwise disadvantage certain market participants. This system, therefore, is addressed to solving problems other than those identified above.
Accordingly, it is desirable to develop a system that addresses all the problems of call markets for fungible assets. Trading systems, computer programs, and methods consistent with the present invention dynamically launch and run a temporal call auction at points in time when buyers and sellers have demonstrated an interest in trading, at a price determined by interested buyers and sellers. More specifically, one embodiment of the invention comprises i an order-driven, continuous auction market in which participating orders are matched as they are entered, and ii a follow-on call auction market in which participating orders are subsequently matched at a trade price for a particular fungible asset established as a function of the continuous market trade price.
Other embodiments according to the invention provide methods, systems and computer program products for trading fungible assets. The methods, systems and computer program products may perform operations comprising obtaining a price for an asset from a continuous auction trade, accepting a plurality of follow-on auction orders for the asset, conducting a follow-on auction for the asset at a price determined as a function of the price obtained for the asset from the continuous auction trade, wherein the plurality of follow-on auction orders are matched, and executing the matched follow-on auction orders.
Other embodiments according to the invention provide methods, systems and computer program products for trading fungible assets that may perform operations comprising obtaining a price for an asset from a continuous auction trade, accepting a plurality of follow-on auction orders for the asset, conducting, after a delay period, a follow-on auction for the asset based on the price obtained for the asset from the continuous auction trade, during which the plurality of follow-on auction orders are processed for matches, if any, and facilitating execution of any matched orders.
Yet another embodiment consistent with the invention provides a fungible asset market order comprising an order type from a group comprising: bid and offer, an order price, and an auction eligibility marker from a group comprising: continuous auction, follow-on auction, and both continuous and follow-on auction. Still other embodiments consistent with the invention provide methods and systems for trading fungible assets that include operations comprising: obtaining a parameter regarding a continuous auction trade, determining whether the parameter meets a threshold, and conducting a follow-on auction for the asset, at a price established by the continuous auction trade, if the parameter meets the threshold.
Many objects and advantages of the invention will be set forth in part in the description which follows, and in part will be obvious from the description, or may be learned by practice of the invention. It is to be understood that both the foregoing general description and the following detailed description are exemplary and explanatory only and are not restrictive of the invention.
The accompanying drawings, which are incorporated in and constitute a part of this specification, illustrate embodiments consistent with the invention and together with the description, serve to further explain the invention. Consistent with the present invention, systems, computer programs, and methods are provided for anonymously negotiating and matching buy and sell orders in a fungible asset trading market. Furthermore, systems, computer programs, and methods consistent with the present invention use the trading price for a fungible asset established in a continuous auction market as the set price for a call auction for the asset that occurs some time after the continuous market trade that establishes the set price.
Interested participants may submit orders at the established set price that will be matched with compatible orders, if any have been submitted, when the call auction occurs, and a trade will be executed. Such a market may be implemented in a system using conventional data processing equipment and communications networks and custom software. In the embodiment shown, the market system starts each session in a pre-open mode For example, the market system may start the pre-open mode at AM each weekday.
In the pre-open mode , participants may place new orders for an asset, or change or cancel existing orders, but no matching occurs. Next, the market system transitions to an opening mode to clear any pending open executable orders for each asset in the market.
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For example, the market system may enter opening mode at a. In opening mode , existing orders for each security are matched, for example on the basis of price and time of entry priority, and trades are executed for matching orders. In one embodiment, if the terms of an order e. In one embodiment, the system calculates an execution price of the opening trades, which is known as the Calculated Opening Price COP. For example, the COP may be calculated as the mid-point of the range of prices that results in the maximum execution quantity.
When no more trades can be executed for a particular asset in opening mode , the system enters continuous auction mode CAM for that asset.
In continuous auction mode , the system compares new and changed orders for an asset with existing orders for the asset based on factors such as price, order time priority, special terms, and fill size constraints. If one or more matches are recognized, the system executes a trade in the CAM An executed trade for a particular asset in the CAM triggers the system to enter the follow-on auction mode FOAM for that asset.
In the FOAM , the system optionally collects orders for a period of time and then holds a temporal call auction at a price related to the triggering continuous auction price. In one embodiment, the mode of each asset in the market is independent, such that when a particular asset enters a mode such as FOAM , this does not affect the modes of other assets in the market. At the call auction time, the system matches the call auction orders and executes trades.
After the FOAM completes, the system transitions to the opening mode to match and execute any accumulated continuous auction orders for the asset, then transitions again to the CAM This cycle can occur zero or more times per day. At the end of a trading session when the market closes, the system transitions to the closed state For example, the 'system may transition to the closed state at pm weekdays.
At the pre-opening time of the next trading session, for example am on weekdays, the system transitions from closed mode to pre-open mode Various embodiments of the invention provide variations to the described states and transitions. For example, a trade execution in the opening mode may trigger a transition not shown to follow-on auction mode for the traded asset. As shown, the process begins by obtaining a price for an asset from an executed trade for the asset in a continuous auction step Next, the system executing the process notifies market participants, for example via instant messaging or a pop-up window on a user interface, that a call auction for the asset will be held at a specified time at a price based on the continuous auction trade price step The process then enters a loop, checking whether the call auction time has arrived step , and if not step , No , accepting orders for the asset that is the subject of the call auction step When the specified call auction time arrives step , Yes , the system performs the call auction, matching buy and sell orders for the asset at the specified price step Finally, the system executes trades among the matching call auction orders step In one embodiment, a market according to the invention includes a central order book and means for a plurality of participants to submit a plurality of orders to it.
Each order submitted to the central order book is either a sell order or a buy order. Each sell order is a commitment made by a selling participant to sell up to a specified quantity of a specified fungible asset at a price no less than a specified limit price.
Each buy order is a commitment made by a buying participant to buy up to a specified quantity of a specified fungible asset at a price no higher than a specified limit price. A limit price is a constraint on the price at which a particular buy order or sell order may be executed. In the case of an order to sell, the limit price is the minimum price that the seller will accept for each unit of the fungible asset sold. A higher price, however, is both acceptable and preferable. In the case of an order to buy, the limit price is the maximum price that the buyer is willing to pay for each unit of fungible asset purchased.
A lower price, however, is both acceptable and preferable. The price of an order may be an absolute price e. Acceptable values for a relative price include bid, mid, and ask.