US005970479A

Ulllted States Patent [19] [11] Patent Number: 5,970,479 Shepherd [45] Date of Patent: Oct. 19, 1999

[54] METHODS AND APPARATUS RELATING TO OTHER PUBLICATIONS THE FORMULATION AND TRADING OF

“The DTB—West Germany’s NeW Options and Futures RISK MANAGEMENT CONTRACTS Exchange. (2 of 2),” Business Brie?ng published in Insti

[75] Inventor: Ian K. Shepherd, Toorak, Australia rational Investm; Aug‘ 31’ 1989' Murphy, “Soffex Well—Established After First Six Months,”

[73] Assignees: SWychco Infrastructure Services Pty. 81115;; Brie?ng pubhshed by Reuters News Servlce’ NOV' Ltd., Melbourne, Australia; SWychco Support Services Pty. Ltd., Sydney, (List continued on next page.)

Austraha Primary Examiner—Gail O. Hayes Assistant Examiner—Barton L. Bainbridge

[21] Appl- NOJ 08/070,136 Attorney, Agent, or Firm—Sterne, Kessler, Goldstein & Fox

[22] Filed: May 28, 1993 P'L'L'C' 57 ABSTRACT

[30] Foreign Application Priority Data [ 1 M 29 1992 [AU] A t 1_ PL 2677 Methods and apparatus Which deal With the management of

ay ’ us Tale """""""""""""""" " risk relatin to s eci?ed, et unknown, future events are Jun. 30, 1992 [AU] Australia .............................. .. PL 3216 disclosed g p y

[51] Int. Cl.6 .................................................... .. G06F 17/60 _ ‘Sponsor’ stakeholders specify a particular product relating

[52] US. Cl. ................................................. .. 705/37, 705/4 to an event or phenomenon for which there is a range of

[58] Field Of Search ............................... .. 364/408; 705/4, possible future Outcomes, 705/37

‘Ordering’ stakeholders then offer contracts relating to the _ predetermined phenomenon and corresponding range of

[56] References Clted outcomes. The offered contracts specify an entitlement or (pay-off) at the future time of maturity for each outcome, and

Us PATENT DOCUMENTS a consideration (or premium) payable, in exchange, to a 3 573 747 4/1971 Adams et a1 ‘counter-party’ stakeholder.

473467442 8/1982 Musmanno ' Independently of the offered contracts, the ‘counter-party’ 4’376’978 3/1983 Musmanno ' stakeholders input data as to their vieW of the likelihood of

_ _ occurrence of each outcome in the predetermined range into (LISI COIlIlIllled 0H IleXI page.) the future, or speci?cally at the predetermined date of

maturity. FOREIGN PATENT DOCUMENTS

Each offered contract is priced by calculating counter-party 90123894 12/1990 European Pat- O?- - premiums from the registered data, and a match attempted

g European 5“? ~ by a comparison of the offered premium With the calculated uropean a . . . '

0 512 702 A2 11/1992 European Pat. Off. . premlumsi

1 ggggg? ' Matched contracts can be further traded until maturity, and W0 9O/11571 “V1990 WIPO g ' at-maturity processing handles the exchange of entitlement

91/14231 9/1991 WIPO as betWeen the matched parties to the contract.

WO 93/15467 8/1993 WIPO .

WO 94/20912 9/1994 WIPO . 39 Claims, 101 Drawing Sheets

/11 E

i g 1 ‘27503232 ‘ m2 Product Sponsors

1 \ T 1

C d z / ‘ i oE?iheesesn 1M Processlng Unlts I 1

Transfer Entilles J m‘

Re mayors 15 Potential Product ‘

L g E’ W Counterparties 1 L111”, 7 7 my

Counterpa ‘ Guarantcrs }

5,970,479 Page 2

US. PATENT DOCUMENTS

4,674,044 6/1987 Kalmus. 4,722,055 1/1988 Roberts ................................. .. 364/408

4,739,478 4/1988 Roberts. 4,751,640 6/1988 Lucas. 4,766,539 8/1988 FOX ........................................... .. 705/4

4,823,264 4,831,526 4,839,804 4,903,201

4/1989 Deming . 5/1989 Luchs .

6/1989 Finnerty . 2/1990 Wagner .

4,933,842 6/1990 Durbin . 4,953,085 8/1990 Atkins. 4,975,840 12/1990 DeTore . 4,980,826 12/1990 Wagner . 5,077,665 12/1991 Silverman .

5,101,353 3/1992 Lupien . 5,126,936 6/1992 Champion et al. ................... .. 364/408

5,136,501 8/1992 Silverman et al. 705/37

OTHER PUBLICATIONS

“A NeW Futures and Options Exchange to Come into Effect in 1990. (2 of 3),” Business Brie?ng published in Euromoney Supplements, Nov. 17, 1989. “Heavy Losses Have Been Chalked Up by City Punters Betting on the Financial Markets,” Evening Standard, Oct. 22, 1987, p. 39. “A Number of City Brokers and Dealers are Facing Finan cial Ruin as a Result of Losses They Have Incurred by Gambling on Future Movements in Stock Market Indices,” Evening Standard, Oct. 30, 1987, p. 59. “Christopher Hales, the Managing Director of City Index, the Organisation that AlloWs Punters to Bet on the FTSE Index, Has Not Yet Been Offered a Porche . . . ” Evening

Standard, Nov. 2, 1987, p. 50. “The Game of Professional Investment is Intolerably Boring and Over—Exacting to Anyone Who is Entirely Exempt from the Gambling Instinct, While He Who Has it Must Pay to this Propensity the Appropriate Toll, ” Planned Savings, Dec. 1987, pp. 50—51. “UK: LaW Prohibiting Stock Market Betting Agencies from Suing Clients Overturned in Recent Legislation,” The Times, Jul. 24, 1990. “UK: Court Rules Gamblers OWing Money on Bets on Stock Market Have to Pay Up,” Mail on Sunday, Jul. 29, 1990, p. 61. “UK: Independent LaW Report—Stock Market Movement Bet Claimed,” Independent Aug. 3, 1990, p. 13. “UK: City Index Successfully Sues Spencer Leslie for £35,000,” Euroweek Aug. 3, 1990, p. 23. “UK: Times LaW Report—Differences Contract is Enforce able,” The Times, Oct. 3, 1990. “UK: Current LaW—City Index Ltd. v. Leslie; Gaming Contracts are Unenforceable Unlike Business Contracts,” Chartered Surveyor Law Report, Oct. 18, 1990, p. 132. “UK: Court of Appeal Rejects Market Gambler Case,” Financial Times, Mar. 15, 1991, p. 7. “UK: Personal Finance (Savings Snips)—City Saver—City Index Link,” Observer; Mar. 7, 1993, p. 35. “UK: Spread Your Bets for Dodgy Deregulation,” Evening Standard, Apr. 7, 1995. “UK: HoW to Make a Winning Spread Bet This Summer— The NeW Gambling—CoverStory,” The Times, Apr. 8, 1995 . “UK: Family Finance—Do You Fancy a Financial Flutter?” Sunday Telegraph, Apr. 9, 1995, p. 9. Nigel Cope, “UK: Where Bookie Meets Broker,” Manage ment Today, May 1995, p. 76.

Jonathan Davis, “UK: Your Money—Spread Betting—Risk and ReWard in Selling the Ivory Coast Short,” Independent, May. 27, 1995, p. 21. “UK: Register—Meal Quarterly Summary—Jun. 1995— City Index Ltd.,” Register—rMeal, Jun. 14, 1995. “UK: Scrum on DoWn for NeW Way of Betting,” Mail on Sunday, Jun. 18, 1995. Lucy Roberts, “UK: City Diary—City Index Weather Fore casts,” Independent, Jun. 23, 1995, p. 26. “UK: Christmas Day SnoW Index Launched,” Evening Stan dard, Dec. 8, 1995. Joe SaumareZ Smith, “Australia: City—Bookie’s Move to Hit Betting Duty,” Sunday Telegraph, Dec. 24, 1995, p. 2. “UK: City Diary—Spreading the Word,” Daily Telegraph, Mar. 21, 1996, p. 21. “UK: City Diary—Index Link a Fairly Safe Bet,” Daily Telegraph, Jul. 16, 1996, p. 25. “UK: IG Index Comments on Rivals Merger Plans,” Evening Standard, Jul. 17, 1996. “UK: City Index—Partners,” Financial Times, Oct. 14, 1996, p. 14. “UK: Reuters Launches TWo UK Stock Indices,” Reuters Limited, Nov. 8, 1996. Paul Stokes, “UK: NeW Index Sparks a WorldWide Market for Scotland,” Scotsman, Nov. 9, 1996, p. 21. “UK: City Diary—Bookmaker Chief Appointed,” Daily Telegraph, Mar. 24, 1997, p. 26. “UK: Family Finance—Bond Pep From Age Concern— Savings Scene,” Sunday Telegraph, Sep. 14, 1997, p. 10. Raymond Snoddy, “UK: Mirror to Launch Online Betting Service With PA—The Mirror Group—PA News,” The Times, Sep. 19, 1997, p. 25. “A NeW Futures and Options Exchange to Come into Effect in 1990. (3 of 3),” Business Brie?ng published in Euromoney Supplements, Nov. 17, 1989. “The Success of Soffex—The World’s First Fully Auto mated Exchange,” Business Brie?ng, Nov. 17, 1989. Curtis M. Elliott and Emmett J. Vaughan: “Fundamentals of Risk and Insurance,” John Wiley & Sons, Inc. 1972. William A. Spurr and Charles P. Bonini: “Statistical Analysis for Business Decisions,” Richard D. IrWin, Inc. 1974. John W. LabusZeWski and John E. Nyhoff: “Trading Options on Futures—Markets, Methods, Strategies and Tactics,” John Wiley & Sons, Inc. 1988. Edgar E. Peters: “Chaos and Order in the Capital Mar kets—A neW View of Cycles, Prices, and Market Volatility,” John Wiley & Sons, Inc. 1991. David Mayers and Clifford Smith: “The Corporate Insurance Decision”—journal article reprinted in “The Revolution in Corporate Finance” edited by Joel M. Stern & Donald H. CheW, Jr., BlackWell Finance, 1992. Charles Smithson and Clifford Smith: “Managing Financial Risk”—journal article reprinted in “The Revolution in Cor porate Finance,” edited by Joel M. Stern & Donald H. CheW, Jr., BlackWell Finance, 1992. Donald R. Lessard: “Finance and Global Competition: Exploiting Financial Scope and Coping With Volatile Exchange Rates”—journal article reprinted in “The Revo lution in Corporate Finance” edited by Joel M. Stern & Donald H. CheW, Jr., BlackWell Finance, 1992. Alan C. Shapiro and Sheridan Titman: “An Integrated Approach to Corporate Risk Management”—journal article reprinted in “The Revolution in Corporate Finance” edited by Joel M. Stern & Donald H. CheW, Jr., BlackWell Finance 1992.

U.S. Patent

18

Miscellaneous Parties

Consideration/

Oct. 19, 1999

11

Application Promoters

A

Sheet 1 of 101

Entitlement Transfer Entities

Regulators

V Processing Units

5,970,479

12

Product Sponsors

13

a

25

15

Counterparty Guarantors

FIG. 1

> Product Ordering Parties

Potential Product Counterparties

U.S. Patent Oct.19,1999 Sheet 2 of 101 5,970,479

U.S. Patent Oct. 19, 1999 Sheet 3 of 101

,_ 2002

200l /

/

5,970,479

/_ 2003

2006 _/

,_ 2004

,_ 2005

Fig. 2b

U.S. Patent Oct.19,1999 Sheet 4 of 101 5,970,479

INVENTCO, 10

INVENTCO SYSTEM #N

INVENTCO SYSTEM #2

INVENTCO SYSTEM #1

M-INVENTCO

I-INVENTCO

AXSCO'

VIRPRO

Fig. 3

U.S. Patent Oct. 19,1999 Sheet 5 of 101 5,970,479

M - INVENTCO

" ‘MARKETS’ COLLECTION #N

I'MARKETS' COLLECTION #2

'MARKETS‘ COLLECTION #1 (CONTRACT APPS)

CONTRACT APP #M

CONTRACT APP #1

Fig. 4

U.S. Patent Oct.19,1999 Sheet 6 of 101 5,970,479

CONTRACT APP #M

PROCESS #9

PROCESS #2

PROCESS #1

Fig. 5

U.S. Patent Oct. 19,1999 Sheet 9 of 101 5,970,479

610

Order sequence management

625 -\\ /Order authorisation <—_-® (Fig 9)

I

Order matching 640 _\\ (Fig 11)

Matched order

650 -\,\ con?rmation (Fig 16)

Fig. 8

U.S. Patent 0a. 19, 1999 Sheet 10 of 101 5,970,479

From "START" (610) or "A"

1010 \\ Determine which ?le to process

ew orders PORD_NEW ? PORD_QUEUE

1040 1070 v v

Load new order Loaigdueiued 1030 /“ L

\ 1060

\

Order authorisation 1 _\ (Fig 10)

"Order Matching“ (640)

Fig. 9

U.S. Patent Oct.19,1999 Sheet 11 of 101 5,970,479

From "Load New Order" (1030)

1 100 \ N Assign unique identi?cation to OID

PPRODUCT

r

Load product details and

set PMAT, PCUR, 1110 5 PNCUR, PC/ED, PMIN,

PMAX, PSTEP

1120

1150

1 130 Reject order

HISTORY

Report to 1152

"Order Matching" Orderlng ADMIN

1 162

Fig. 10

U.S. Patent Oct. 19,1999

From "Order Sequence Management" (625)

Sheet 12 of 101

1200 ' etention YES time expired Reject order

7 \ 1210

1240 '\\ Get product ‘' counterparty short list _

(Fig 12) Report to ordering P311)’

\ \ A

" 1230

Calculate counterparty

1250 \ bid process l\ (Fig 13)

1255 Select counterparty bid prices from short list and

queue order

\ 1256

1260 _\\ Match with potential oounterparty from short list

(Fig 15)

atche 1261 Order

‘?

"Matched Order Con?rmation" (650)

Fig. 11

5,970,479

PORD_REJ

1220

HISTORY

1222

~@

ADMIN

1232

PORD_QUEUE

1257

U.S. Patent Oct. 19,1999 Sheet 13 of 101

From "Retention time expired?" (1200)

1 Empty potential product

1300 \\ counterparty short list

7

Get available product \ counterparties using BID, PD and set SID

(OANON and MANUAMSIDD or (OMANUAL and ANON(SID))

PDEAL_LIST

133 5 \ Determine the de?ned

circumstances identi?cation for the

current order and store in DCID

1 Select pricing parameters

1340 "~\ using 511), PID, DCID

ricing and rates

offered by counterparty 7

NO

1360

YES

Fig. 12

1320

"Calculate Product

Counterparty Bids" (1250)

1336

PSEL_PRICE

1350

Add counterparty-to short list and set

PRICEFUNC(S1D), CR(SID), DR(SID), C-CXCHANG(SID),

C-NCXCHANG(SID), C-C/EXCHANQSID), E-CXCHANG(SLD), E-NCXCHANG(SID), E-C/EXCHANG(SID),

ANON(SID), MANUAL(SID)

1370

5,970,479

U.S. Patent Oct.19,1999 Sheet 14 of 101 5,970,479

From "Get Product Counterparty Short List" (1240)

i For each counterparty

1400 x in short list

ext available

counterp arty (1255)

PRICE(S1D) = CALC_FUNC(PRICEFUNC(SID), PAYFUNC, PAYPARAM) (Fig 14)

I

\ 1420

MT_DAY = PMAT - cUR_DATE '\

i 1430 1= 1 _

DIV : 1.0 \

DIV = DIV * (1.0 + ((DR(S1D)/l00)/365)) I : 1 + l

1460 ~/‘

PR1CE(S1D) = PR1CE(S1D)/D1V ‘ I

1470~/

V

PR1CE(SID) = PR1CE(S1D) + ((CR(SlD)/100) * PRICE(S1D)) '"\

1480

Fig. 13

U.S. Patent Oct. 19,1999

(From 1420)

1 INDEX = PMIN

PRICE(SID) = 0

1490 \

YES 1520 \

\

P1 = PRICEFUNCGNDEX)

1530 \ l \

P2 I PAYFUNCUNDEX)

l

Sheet 15 of 101 5,970,479

PR1CE(S1D) = PR1CE(S1D) *

E-CXCHANG(SID) *

E-NCXCHANG(SID) *

E-C/EXCHANG(S1D) \\

i 1510 (Block 1430)

PRICE(SID) = PR1CE(SID) + (P1 * P2)_\

1540

‘

INDEX = INDEX + PSTEP _\

1550

Fig. 14

U.S. Patent Oct. 19,1999 Sheet 16 of 101 5,970,479

(From 1260)

1560 Any potential . . 6 NO

counterparties in short list

7

1570 \

Pick lowest priced counterpart)’ and store BPRICE and SID

1600

YES No match possible with MAXCONSID current counterparty

'-’ short list ($11) = 0)

159O\ Select counterparty limit details and set CEL2(SID),

\ CEL3(SID), CEL4(SID),CELS(SID),ELL1(SID), ELL2(SID), ELL3(S11)), ELL4(SID), ELL5(SID), MC(SID), MCC(SID), CAL2(SID), ALL1(SID),

ALL2(SID), ELPUNC(SID), EVFUNC(SID), EVL1(SID)

EL(S1D) = CALC_FUNC(ELFUNC(S1D), PAYFUNC, PAYPARAM) \ AL(SID) = (PAYPUNC, PAYPARAM) EV(S1D) = CALC_FUNC(EVFI INC(SID), PAYFUNC, PAYPARAM)

1 Determine what part of the order will

'\ not violate any counterparty limits 161-6

ORD_QUEUE

1602 x

1604 —\

Remove

counterparty from short list

\\ 1614 1608 ' \\

SID set to identi?cation Queue part of of matching counterparty order un-matched

l "Matched Order?"

1228 Fig. 15 ( )

U.S. Patent Oct. 19, 1999

From "Order Matching"(640)

Sheet 17 of 101 5,970,479

Send manual

authorisation requests

1622

1625

Make consideration "payment"

SHADOW

1626

ayment O _

M () R?j?ct order

1631 Update matching counterparty‘s current accumulated expected and

absolute losses \

V 1630 162

3 “\ OPRICE = PRICE(S[D) 1636 SPRICE = 511)

v PORD_CONF _

Order matched and \ con?rmed 1634

Report to ordering party, “\ 16w 5 matching counterpart)’, 1638

3 guarantor, regulator, application promoter v

1639 ‘ Report to

‘ orderin artv

g p '“\

d) Fig. 16

l

1629

1641

640