United S ta tes Pa tent [ 1 9 ]

[ 1 1 ] Pa tent N u m b er : 4 , 6 7 4 , 0 4 4
Ka lm u s et a l. [ 4 5 ] Da te o f Pa tent: J u n. 1 6 , 1 9 8 7
[ 5 4 ] AUTOMATED S ECURITIES TRADIN G 4 , 5 5 4 , 4 1 8 1 1 / 1 9 8 5 To y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6 4 / 9 0 0
S YS TEM Pr im a r y Ex a m iner - J er r y S m ith
[ 7 5 ] Inv ento r s : L es lie P. Ka lm u s , N ew Yo r k , N . Y. ; As s is ta nt Ex a m iner - G- H a yes
Do na ld R. Tr o j a n, S ta m f o r d, Co nn. ; ' Atto r ney, Ag ent, o r Fir m - Willia m L . B o tj er
B r a dley Mo tt, Do u g la s to n; J o h n 5 7 B S T Cr
S tr a m p f er , Gr eenla wn, b o th o f N Y. [ 1 A RA
_ _ _ Da ta p r o ces s ing b a s ed a p p a r a tu s m a k es a n a u to m a ted
[ 7 3 ] As s lg nee Mef ' r L y' m h Pler ce Fenner 8 tr a ding m a r k et f o r o ne o r m o r e s ecu r ities . Th e s ys tem
S m lth Inc" N ew Yo r k N ' Y' r etr iev es th e b es t o b ta ining b id a nd a s k ed p r ices f r o m a
[ 2 1 ] Ap p ] , N O; 6 9 6 , 4 0 7 r em o te da ta b a s e, co v er ing th e ens em b le o f ins titu tio ns
, o r o th er s m a k ing a m a r k et f o r th e r elev a nt s ecu r ities .
[ 2 2 ] Flled: J a n 3 0 1 9 8 5 Da ta ch a r a cter iz ing ea ch s ecu r ities b u y/ s ell o r der r e
[ 5 1 ] Int. Cl. 4 . . . . . . . . . . . . . . . . . . . . . . . G0 6 F 1 5 / 2 0 ; G0 6 F 1 5 / 3 0 qu es ted b y a cu s to m er is s u p p lied to th e s ys tem . Th e Y
[ 5 2 ] US . Cl. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6 4 / 4 0 8 ; 3 4 0 / 8 2 5 . 2 6 ; o r der is qu a li? ed f o r ex ecu tio n b y co m p a r ing its s p ecif
3 4 0 / 8 2 5 . 2 7 ics a g a ins t p r edeter m ined s to r ed p a r a m eter s . Th e s to r ed
[ 5 8 ] Field o f S ea r ch . . . . . . . . . . . . . . . . . . . . . . . 3 6 4 / 4 0 8 , 2 0 0 , 9 0 0 ; p a r a m eter s inclu de th e o p er a tiv e b id a nd a s k ed p r ices ,
3 4 0 / 8 2 5 . 2 6 , 8 2 5 . 2 7 th e a m o u nt o f s to ck a v a ila b le f o r cu s to m er p u r ch a s e o r
[ 5 6 ] Ref er ences Cited : le, a nd il' nf a x g m lm s u g g leo r der 5 1 2 : d h .
nce qu a 1 1 e , t e o r er 1 s ex ecu te a n t e a p p r o p r i
U' S ' PATEN T DOCUMEN TS a te p a r a m eter s a r e u p da ted. Th e s ys tem p r o v ides inv en
2 , 0 4 6 , 3 8 1 7 / 1 9 3 6 H ick s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4 0 / 8 2 5 . 2 7 to r y ( p o s itio n) co ntr o l a nd p r o ? t a cco u nting f o r th e
3 , 0 8 2 , 4 0 2 3 / 1 9 ' ! 3 S ca m ] ? ! - - - - - -
3 4 0 / 8 2 5 - 2 7 m a r k et m a k er . Fina lly, th e s ys tem r ep o r ts th e ex ecu ted
3 1 2 9 6 5 9 7 6 / 9 6 7 s ca m lm - - - - - ' 3 4 0 / 8 2 5 - 2 7 tr a de deta ils to th e cu s to m er , a nd to na tio na l s to ck p r ice
5 8 m ) r ep o r ting s ys tem s . Up o n a ch a ng e in th e qu o ted p r ice
3 : 7 l6 : 8 3 5 2 / 1 9 7 3 wez iig lir ' " " " IMO/ 8 2 5 : f o r a s ecu r ity, th e s ys tem u p da tes a ll r elev a nt qu a li? ca
4 , 3 3 4 , 2 7 0 6 / 1 9 8 2 To wer s . . . . . . . . . . . . . . . . 3 6 4 / 4 0 8 " 9 " Pa r a m eter s
4 , 4 l2 , 2 8 7 1 0 / 1 9 8 3 B r a ddo ck 3 6 4 / 4 0 8
4 , 4 7 3 , 8 2 4 9 / 1 9 8 4 Cla yto r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4 0 / 7 9 2 1 0 Cla im s , 6 Dr a wing Fig u r es
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6 9 / V @ ( B UY) YES
N 0 ' YES
B / $=B P
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S S Z/ S TK) B S Z/ S TK/
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8 4 YES YES
7 2
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m ) EXEcu TE R$UTIN E ( FIG- 3 )
U. S . Pa tent J u n. 1 6 , 1 9 8 7
FIG- 3
0 RDER EXECUT/ Q N
F 1 - ? ( DM @RDER
OUAL IFICATIN ( FIG- 2 )
+ N OS H
S h eet 3 o f 6
B S Z( S TK) =B S Z( S TK)
N OS H
( DUTPUT MS GS / ~/ 2 2
r
S T< DRE / " 2 7
UPDATE PRIS TK} l3 0
AV CS T( S TK) /
' ' I3 2
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4 , 6 7 4 , 0 4 4 .
U. S . Pa tent J u n. 1 6 , 1 9 8 7 S h eet6 . o f 6
FIG- 5
I8 0
IN T?
/ a 2
- AUT( D = Iv a / v AUT( D /
PRICE
4 , 6 7 4 , 0 4 4
CH AN GED _ ?
UPDATE B S TB ( 5 TK) ,
B S TA ( S TK)
AUT = AUTQ
I N TE RAC Tl V E
TERMIN AL
CQ MMUN ICAT/ ( DN
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REPRCES S FIL E
F0 1 ? AN Y N EWL Y
EXECUTAB L E ( DRDERS
|_ _ _ _ _ _
EXIT
4 , 6 7 4 , 0 4 4
1
AUTOMATED S ECURITIES TRADIN G S YS TEM
B ACKGROUN D AN D S UMMARY OF TH E
IN V EN TION
Th is inv entio n r ela tes to b u s ines s s ys tem s a nd, m o r e
s p eci? ca lly, to a n im p r o v ed da ta p r o ces s ing b a s ed s ys
tem f o r im p lem enting a n a u to m a ted tr a ding m a r k et f o r
o ne o r m o r e s ecu r ities . Th e s ys tem r etr iev es a nd s to r es
th e b es t cu r r ent b id a nd a s k ed p r ices ; qu a li? es cu s to m er
b u y/ s ell o r der s f o r ex ecu tio n; ex ecu tes th e o r der s ; a nd
r ep o r ts th e tr a de p a r ticu la r s to cu s to m er s a nd to na
tio na l s to ck p r ice r ep o r ting s ys tem s . Th e s ys tem a p p a
r a tu s a ls o deter m ines a nd m o nito r s s to ck inv ento r y a nd
p r o ? t f o r th e m a r k et m a k er .
Th er e a r e v a r io u s m o des o f b u ying o r s elling ( tr a d
ing ) s ecu r ities , e. g . , co m m o n s to ck s . As ide f r o m inter
p a r ty p r iv a te tr a ns a ctio ns , s to ck tr a ding is typ ica lly
ef f ected o n a na tio na l o r r eg io na l ex ch a ng e, o r in wh a t
is k no wn a s th e o v er th e co u nter ( OTC ) m a r k et. Fo r
eith er ex ch a ng e o r o v er th e co u nter tr a ding , th er e is o ne
o r m o r e m a r k et m a k er ( ca lled a s p ecia lis t f o r a n ex
ch a ng e) wh o a cco m m o da te th e tr a ding wis h es o f b u y
er s a nd s eller s o f s ecu r ities f o r wh ich th ey m a k e a m a r
k et.
Th e p r incip les o f th e p r es ent inv entio n a r e g ener i
ca lly a p p lica b le to s ecu r ities tr a ding in a ny m a r k et
wh er e th e m a r k et m a k er a cts a s a p r incip a l, i. e. , ? lls
cu s to m er b u y o r der s b y s elling th e s ecu r ity f r o m th e
m a r k et m a k er s inv ento r y p o s itio n ( lo ng o r s h o r t) , b u y~
ing to incr ea s e a lo ng p o s itio n o r r edu ce a s h o r t p o s itio n
f o r cu s to m er s ell o r der s . Fo r p u r p o s es o f illu s tr a tio n
o nly, th e dis cu s s io n h er ein will tr ea t o v er th e co u nter
tr a ding a s a dis cu s s io n v eh icle b eca u s e th e la r g es t nu m
b er o f co m m o n s to ck s a r e tr a ded o n th is b a s is ; a nd b e
ca u s e m a j o r b r o k er a g e h o u s es a r e f r ee to a nd o f ten do
m a k e m a r k ets in s elected o v er th e co u nter tr a ded s to ck s
b u t a r e r es tr icted in th eir a b ility to m a k e a m a r k et f o r
s to ck s lis ted o n a n ex ch a ng e( s ) b y ex ch a ng e r u les .
It is a n o b j ect o f th e p r es ent inv entio n to p r o v ide a n
im p r o v ed da ta p r o ces s ing a p p a r a tu s f o r m a k ing a n a u to
m a ted m a r k et f o r o ne o r m o r e s ecu r ities .
Mo r e s p eci? ca lly, it is a n o b j ect o f th e p r es ent inv en
tio n to p r o v ide a n a u to m a ted m a r k et m a k ing s ys tem f o r
qu a lif ying a nd ex ecu ting o r der s f o r s ecu r ities tr a ns a c
tio ns .
It is a f u r th er o b j ect o f th e p r es ent inv entio n to p r o
v ide a u to m a ted m a r k et m a k ing p r o g r a m co ntr o lled
a p p a r a tu s wh ich m o nito r s th e s ecu r ities p o s itio n o f th e
m a r k et m a k er , a nd wh ich dev elo p s a nd p r o v ides inf o r
m a tio n ch a r a cter iz ing th e m a r k et m a k er s tr a ding p r o f
its .
Th e a b o v e a nd o th er o b j ects o f th e p r es ent inv entio n
a r ev r ea liz ed in s p eci? c, illu s tr a tiv e da ta p r o ces s ing
b a s ed a p p a r a tu s wh ich m a k es a n a u to m a ted tr a ding
m a r k et f o r o ne o r m o r e s ecu r ities . Th e s ys tem r etr iev es
th e b es t o b ta ining b id a nd a s k ed p r ices f r o m a r em o te
da ta b a s e co v er ing th e ens em b le o f ins titu tio ns o r o th er s
m a k ing a m a r k et f o r th e r elev a nt s ecu r ities . Da ta ch a r
a cter iz ing ea ch s ecu r ity b u y/ s ell o r der r equ es ted b y a
cu s to m er is s u p p lied to th e s ys tem . Th e o r der is qu a li
? ed f o r ex ecu tio n b y co m p a r ing its s p eci? c co ntent
? elds with p r edeter m ined s to r ed p a r a m eter s . Th e
s to r ed p a r a m eter s inclu de s u ch a s th e o p er a tiv e b id a nd
a s k ed cu r r ent m a r k et p r ices , th e a m o u nt o f s to ck a v a il
a b le f o r cu s to m er p u r ch a s e o r s a le a s a p p r o p r ia te, a nd
th e m a x im u m a ccep ta b le s ing le o r der s iz e.
2 0
2 5
3 0
3 5
4 5
5 0
5 5
6 0
6 5
2
Once qu a li? ed, th e o r der is ex ecu ted a nd th e a p p r o
p r ia te s to r ed p a r a m eter s a r e u p da ted. Th e s ys tem p r o
v ides inv ento r y ( p o s itio n) co ntr o l a nd p r o ? t a cco u nting
f o r th e m a r k et m a k er . Fina lly, th e s ys tem r ep o r ts th e
ex ecu ted tr a de deta ils to th e cu s to m er , a nd to na tio na l
s to ck p r ice r ep o r ting s ys tem s . Up o n a ch a ng e in th e
qu o ted p r ice f o r a s ecu r ity, th e s ys tem u p da tes a ll r ele
v a nt o r der qu a li? ca tio n p a r a m eter s .
B RIEF DES CRIPTION OF TH E DRAWIN GS
Th e a b o v e a nd o th er f ea tu r es a nd a dv a nta g es o f th e
p r es ent inv entio n will b eco m e a p p a r ent f r o m th e dis cu s
s io n h er einb elo w o f a s p eci? c, illu s tr a tiv e em b o dim ent
th er eo f p r es ented in co nj u nctio n with th e a cco m p a ny
ing dr a wing s , in wh ich :
FIG. 1 is a b lo ck dia g r a m o f th e s ys tem f o r ef f ecting
th e s ecu r ities tr a ding o f th e p r es ent inv entio n;
FIG. 2 is a ? o w ch a r t illu s tr a ting da ta p r o ces s ing f o r
qu a lif ying a n o r der f o r ex ecu tio n;
FIG. 3 is a f lo w ch a r t illu s tr a ting da ta p r o ces s ing f o r
o r der ex ecu tio n a nd a cco u nting ;
FIGS . 4 a nd 4 A a r e f lo w ch a r ts illu s tr a ting da ta p r o
ces s ing f o r inv ento r y a nd p r o ? t u p da ting ; a nd
FIG. 5 is a ? o w ch a r t o f da ta p r o ces s ing u p o n a
ch a ng e in ins ider m a r k et p r ice o f a s ecu r ity.
DES CRIPTION OF TH E PREFERRED
EMB ODIMEN TS
As u s ed h er ein, th e ter m s b u y a nd s ell r ef er to
cu s to m er p u r ch a s es a nd s a les . It s h o u ld b e no ted th a t
wh en a cu s to m er p u r ch a s es s to ck , th e m a r k et m a k er
s ells s to ck f r o m its p o s itio n, eith er r edu cing a lo ng p o s i
tio n, incr ea s ing a s h o r t p o s itio n, o r b o th wh er e th e
nu m b er o f s h a r es s o ld to th e cu s to m er ex ceeds th e initia l
lo ng p o s itio n. Wh en a cu s to m er s ells s to ck s , th e m a r k et
m a k er a dds s to ck to its p o s itio n a nd/ o r r edu ces a s h o r t
p o s itio n in th e s ecu r ity.
Th e s ys tem m a y b e im p lem ented b y a ny dig ita l da ta
p r o ces s ing equ ip m ent p er s e well k no wn to th o s e s k illed
in th e a r t, e. g . , a ny co m m o n b u s s ys tem inter co nnecting
a dig ita l p r o ces s o r , m a nu a l da ta entr y ter m ina l a p p a r a
tu s , o ne o r m o r e m em o r ies ( o ne o f wh ich co nta ins th e
co ntr o lling p r o g r a m ) , a nd o u tp u t s ig na lling a p p a r a tu s
s u ch a s a ca th o de r a y tu b e a nd p r inter . Th e s ys tem m a y
b e co ded in a ny p r o g r a m la ng u a g e p er s e well k no wn to
th o s e s k illed in th e a r t. Th e p r o ces s v a r ia b les m a y b e o f
a ny f o r m wh ich co nf o r m to th e co ns tr a ints o f th e p a r
ticu la r la ng u a g e b eing u s ed a nd th e b elo w lis ted v a r i
a b les a r e f o r p u r p o s es o f illu s tr a tio n o nly.
In th e o p er a tio n o f a n illu s tr a tiv e s ys tem , th e b elo w
lis ted p r o ces s v a r ia b les m a y b e u tiliz ed:
V a r ia b le Fu nctio na l Des cr ip tio n
9 2 2 %
S TK An o r der ? eld identif ying a
p a r ticu la r s to ck a cu s to m er
wis h es to b u y o r s ell.
' N lDS I- l N u m b er o f s h a r es o f s to ck
S TK in a tr a ns a ctio n.
CUS TID Cu s to m er identi? ca tio n.
B / S B u y v is - a - v is s ell b it, iden
tif ying wh eth er th e cu s to m er
wis h es to b u y o r s ell s ecu r ity
S TK
PR/ M An o r der v a r ia b le ? eld co n
ta ining a cu s to m er p r ice f o r
a lim it o r der ( m inim u m p r ice
f o r a s a le o f s ecu r ities o r a
m a x im u m p r ice h e will p a y f o r
a p u r ch a s e) - o r a co de
4 , 6 7 4 , 0 4 4
3
- co ntinu ed
V a r ia b le Fu nctio na l Des cr ip tio n
des ig na ting ' u m a r k et o r der
wh er e th e cu s to m er will
a ccep t th e cu r r ently p r e
v a iling m a r k et p r ice.
S p ecia l ins tr u ctio ns ? eld
( cg . s p ecia l co m m is s io n
s tr u ctu r e o r th e lik e.
Or der nu m b er ( u s u a lly s equ en
tia l) .
Identi? ca tio n o f th e o r ig i
na to r o f th e tr a ns a ctio n
( e. g . . a b r a nch o f ? ce o r
a cco u nt ex ecu tiv e) .
S P
( URN
Q RlGlD
Ma r k et Tr a de
B S TB ( S TK) B es t b id p r ice f o r th e s to ck
S TK a s r etr iev ed f r o m N AS DAQ ,
i. e. , th e h ig h es t p r ice s o m e
m a r k et m a k er is willing to p a y
f o r th e s to ck . Th is is a n
index ed v a r ia b le, o r a r r a y,
h a v ing o ne elem ent f o r ea ch
s ecu r ity h a ndled b y th e s ys tem
p r o p r ieto r . Th e o th er a r r a ys
b elo w a r e s im ila r ly index ed
b y S TK.
B es t a s k ed p r ice f o r th e s to ck
S TK s u p p lied b y N AS DAQ , i. e. ,
th e lo wes t p r ice a m a r k et
m a k er is willing to s ell th e
s to ck S TK.
B u y s iz e. wh ich is th e nu m b er
o f s h a r es o f ea ch s to ck ( th e
a r r a y index S TK) a v a ila b le f o r
cu s to m er p u r ch a s e a t a p a r tic
u la r p r ice f r o m th e s ys tem
p r o p r ieto r
Th e nu m b er o f s h a r es o f ea ch
s to ck S TK th a t th e m a r k et
m a k er will a ccep t f r o m cu s
to m er s a les a t a p a r ticu la r
p r ice ( a s ell s iz e a r r a y) .
Th e m a x im u m a ccep ta b le o r der
s iz e wh ich th e s ys tem o p er a to r
will a ccep t f o r th e s to ck S TK.
B S TA( S TK)
B S Z( S TK)
S S Z( S TK)
Pr o ? ta b ility
V a r ia b les
AV CS T( S TK) Av er a g e co s t o f th e s to ck
S TK.
Th e a m o u nt o f s h a r es
( cu r r ent p o s itio n) o f ea ch
s to ck S TK h eld b y th e m a r k et
m a k er . POS ( S TK) is p o s itiv e
f o r a lo ng p o s itio n a nd neg a
tiv e f o r a s h o r t p o s itio n.
Th e p r ev io u s ( la s t) p o s itio n
o f th e m a r k et m a k er in th e
s to ck S TK b ef o r e ex ecu tio n o f
a cu r r ent tr a de in S TK.
Pr o ? t to da te m a de b y th e
s ys tem o p er a to r o n p u r ch a s es
o r s a les o f s to ck S TK.
POS ( S TK)
L Ptb S ( S TK)
PR( S TK)
Tu r ning no w to th e dr a wing , FIG. 1 illu s tr a tes in
o v er v iew a s ys tem a r r a ng em ent f o r im p lem enting th e
o v er th e co u nter ( o r o th er ) s to ck m a r k et m a k ing s ys tem
o f th e ins ta nt inv entio n. Fo r s p eci? city a nd with o u t
lim ita tio n, o v er th e co u nter s to ck tr a ding is p r es u m ed
a nd it will f u r th er b e a s s u m ed th a t th e m a r k et m a k ing
ins titu tio n ( s ys tem p r o p r ieto r ) is a b r o k er a g e ? r m . Th e
m a r k et m a k ing s ys tem inclu des co m p o s ite dig ita l co m
p u ting a p p a r a tu s 1 0 wh ich inclu des a p r o ces s o r a nd
a ncilla r y m em o r y. Th e m em o r y co ns titu ents o f p r o ces
s o r 1 0 s to r e th e s ys tem co ntr o lling p r o g r a m , a nd a n
a p p r o p r ia te s cr a tch p a d m em o r y s to r es a ll neces s a r y
p r o ces s ing o p er a nds . Dig ita l co m p u ter 1 0 is co nnected
b y a n o u tp u t line 1 2 to a cu s to m er a cco u nt p r o ces s o r 1 3 ,
2 0
2 5
3 0
3 5
4 5
5 0
5 5
6 5
4
f o r ex a m p le th e b r o k er a g e ? r m co m p u ter wh ich h a n
dles a ll o f th e cu s to m er a cco u nt r eco r ds a nd ? les inclu d
ing cu s to m er b a la nces , s ecu r ities p o s itio ns , tr a de r e
co r ds , a nd th e lik e. It s h o u ld b e u nder s to o d th a t CPU 1 0
a nd cu s to m er a cco u nt p r o ces s o r 1 3 co u ld b e co m b ined
in s ing le, integ r a ted co m p u ting equ ip m ent.
Th e p r o ces s o r 1 0 co m m u nica tes o v er a link 1 1 with a
tr a der ter m ina l p o s itio n 1 5 co nta ining a n o u tp u t s ig na l
ling dev ice s u ch a s a ca th o de r a y tu b e dis p la y, a nd da ta
inp u t a p p a r a tu s s u ch a s a k eyb o a r d. Tr a der ter m ina l 1 5
h a s two p o r tio ns . A ter m ina l p o s itio n s ectio n Tl co m
m u nica tes with th e p r o ces s o r 1 0 ; a nd a s ectio n T2 is
co nnected b y link 1 6 to th e N a tio na l As s o cia tio n o f
S ecu r ities Dea ler s Au to m a ted Q u o ta tio n ( N AS DAQ )
s ys tem 1 8 . Th e tr a der ter m ina l 1 5 co m m u nica tes its
cu r r ent b id a nd a s k ed p r ices f o r s to ck s in wh ich it
m a k es a m a r k et to N AS DAQ v ia link 1 6 - a s do o th er
m a r k et m a k er s b r idg ed ( 1 7 ) to link 1 6 . Th e ter m ina l
p o r tio ns T1 a nd T2 m a y b e o ne integ r a ted s m a r t ter m i
na l ( co m p u ter ) a s s em b ly, o r two s ep a r a te dev ices a v a il
a b le to th e tr a der a t th e s ta tio n 1 5 .
Th e p r o ces s o r 1 0 r eceiv es a nd s to r es th e b es t ( h ig h
es t) b id ( p r o ces s ing v a r ia b le B S TB ( S TK) ) f o r ea ch
s to ck ( S TK) in wh ich it m a k es a m a r k et, a nd th e b es t
( lo wes t) a s k ed p r ice B S TA( S TK) f r o m th e N AS DAQ
s ys tem 1 8 v ia a co m m u nica tio ns p a th 2 2 . Th e b es t b id
a nd b es t a s k ed p r ices a s r ep o r ted b y N AS DAQ f o r m
th e s o - ca lled ins ider m a r k et f o r o v er th e co u nter
s ecu r ities . Pr o ces s o r 1 0 co m m u nica tes to th e N AS DAQ
s ys tem 1 8 v ia a link 2 3 ea ch r ep o r ta b le, ex ecu ted tr a de
f o r v a r io u s inf o r m a tio na l a nd r eg u la to r y p u r p o s es . L ink
2 3 a ls o r ep o r ts tr a des to th e Co ns o lida ted Ta p e Au th o r
ity ( CTA) a nd th e N AS D N a tio na l Ma r k et S ys tem
( N MS ) f o r s u b s equ ent r ep o r ting to th e ? na ncia l indu s
tr y a nd g ener a l p u b lic. Co m m u nica tio ns p a th 2 3 a ls o
co nnects p r o ces s o r 1 0 with th e N AS D s m a ll o r der
ex ecu tio n s ys tem ( S OES ) a nd co m p u ter a s s is ted ex ecu
tio n s ys tem ( CAES ) wh ich ca n p a r ticip a te in r ela tiv ely
s m a ll o r der ex ecu tio n.
Inp u t/ o u tp u t netwo r k 2 5 p r o v ides da ta co m m u nica
tio n with th e v a r io u s b r a nch o f ? ces 2 7 o f th e b r o k er a g e
h o u s e. L ine 2 5 p er m its co m m u nica tio n with eith er th e
b r a nch o r der entr y cler k o r dir ectly to th e a cco u nt
ex ecu tiv es a t ea ch b r a nch . Wh ile o nly o ne b r a nch 2 7 ] is
s h o wn in FIG. 1 , it is to b e u nder s to o d th a t a m u ltip lic
ity o f b r a nch es 2 7 , - a r e in da ta co m m u nica tio n with p r o
ces s o r 1 0 . Co m p u ter 1 0 a ls o co m m u nica tes with th ir d
p a r ty ? na ncia l h o u s es 2 9 , - v ia a two - wa y da ta link 2 6
( e. g . , inclu ding IN S TIN ET) .
To ch a r a cter iz e th e FIG. 1 a r r a ng em ent in o v er v iew,
th e o p er a tiv e ( b es t b id, b es t a s k ed ins ide m a r k et) p r ices
f o r ea ch s to ck in wh ich th e s ys tem p r o p r ieto r m a k es a
m a r k et a r e co m m u nica ted o v er link 2 2 f r o m N AS DAQ
a nd r ep o s e in m em o r y a t p r o ces s o r 1 0 . Th e m a r k et
m a k er h a s a p o s itio n in ea ch s ecu r ity in wh ich h e m a k es
a m a r k et a nd th e p a r ticu la r s o f th a t p o s itio n a ls o r ep o s e
in m em o r y with in th e co m p o s ite p r o ces s o r 1 0 . Or der s
f o r tr a des in th e r elev a nt s ecu r ities a r e f u nneled to th e
p r o ces s o r 1 0 in r ea l tim e a s th ey o ccu r . Or der s ca n b e
r eceiv ed in s ev er a l wa ys . Fo r ex a m p le a nd m o s t typ i
ca lly, o r der s m a y b e g ener a ted b y th e b r o k er a g e ? r m s
a cco u nt ex ecu tiv es a t th e b r a nch es 2 7 a nd co m m u ni
ca ted to th e CPU 1 0 v ia th e co m m u nica tio n p a th 2 5 .
Or der s a r e a ls o s u p p lied to th e p r o ces s o r 1 0 f r o m th ir d
p a r ty ? na ncia l s o u r ces 2 9 ( e. g . , o th er b r o k er a g e ? r m s ,
dir ectly f r o m co m p u ter equ ip p ed cu s to m er s , b a nk s o r
th e lik e) o v er co m m u nica tio n netwo r k 2 6 . Ea ch o f th e
4 , 6 7 4 , 0 4 4
5
o r der s inclu des a p p r o p r ia te da ta ? elds o u tlined a b o v e
a nd m o r e f u lly dis cu s s ed b elo w, s u ch a s a n identi? ca
tio n o f th e o f ? ce a nd cu s to m er o r o th er o r ig ina to r o f
o r der , s to ck identi? ca tio n, p r ice p a r ticu la r s a nd s o
f o r th .
Th e p r o ces s o r 1 0 ? r s t deter m ines wh eth er o r no t
ea ch r eceiv ed o r der ca n b e ex ecu ted, i. e. , qu a li? es th e
o r der . Th er e a r e v a r io u s r ea s o ns wh y a n o r der will no t
b e ex ecu ted b y th e m a r k et m a k er . Th u s , f o r ex a m p le,
th e cu s to m er m a y s eek to s ell s to ck a b o v e th e cu r r ent
b id p r ice o r to p u r ch a s e th e s ecu r ity b elo w th e cu r r ent
a s k ed p r ice. A cu s to m er m a y s eek to tr a de a nu m b er o f
s h a r es wh ich ex ceeds th e a m o u nt wh ich th e p a r ticu la r
m a r k et m a k er is willing to a cco m m o da te, eith er in g r o s s
o r f o r a ny o ne o r der . Or der s no t ex ecu ta b le, i. e. , o r der s
no t qu a li? ed, a r e eith er s to r ed in m em o r y in th e p r o ces
s o r 1 0 f o r la ter ex ecu tio n if th ey b eco m e qu a li? ed ( s u ch
a s b y a f a v o r a b le ch a ng e in th e m a r k et p r ice f o r a s ecu
r ity wh ich ca n th en a cco m m o da te th e cu s to m er s p r ice
lim its ) o r a r e f o r wa r ded to o th er m a r k et m a k er s f o r
p o tentia l ex ecu tio n o v er co m m u nica tio n link s 2 3 o r 2 6 .
As s u m ing th a t a n o r der is ex ecu ta b le, th e p r o ces s o r
1 0 ex ecu tes th e o r der , a p p r o p r ia tely a dj u s ting a ll
b a la nces . Inf o r m a tio n ch a r a cter iz ing th e ex ecu ted o r der
is s ent to co m p u ter 1 3 f o r cu s to m er s o f th a t b r o k er a g e
h o u s e o r r ep o r ted to th e a p p r o p r ia te o th er ins titu tio n
v ia link s 2 3 o r 2 6 . Th e s p eci? cs o f a p p r o p r ia te tr a ns a c
tio ns a r e a ls o r ep o r ted to th e N AS D f o r inf o r m a tio na l
p u r p o s es a nd to th e Co ns o lida ted Ta p e Au th o r ity a nd
s o f o r th a nd m a y b eco m e s to ck tick er entr ies .
Th e N AS DAQ s ys tem 1 8 is a p p r is ed o f th e cu r r ent
qu o ta tio ns f r o m a ll tr a der s m a k ing a m a r k et in th e s u b
j ect s ecu r ities v ia co m m u nica tio n p a th 1 6 . Th e ins ider
m a r k et ( b es t b id a nd a s k ed p r ices ) a r e co m m u nica ted to
th e m a r k et m a k er s p r o ces s o r 1 0 v ia link 2 2 . Wh en th e
ins ider m a r k et p r ice ch a ng es ( a v a r ia tio n in th e b es t b id
o r b es t a s k ed p r ice) , th e p r o ces s o r 1 0 in a cco r da nce
with th e ins ta nt inv entio n s ig na ls th e tr a der a t s ta tio n 1 5
wh o is th en g iv en th e o p p o r tu nity to r ea dj u s t h is qu a n
tity o r o th er m a r k et- ch a r a cter iz ing cr iter ia . Fo llo wing
ea ch p r ice ch a ng e, a ll no n- ex ecu ta b le o r der s s to r ed in
th e p r o ces s o r 1 0 m em o r y a r e r ev iewed to deter m ine
wh eth er th ey h a v e b eco m e ex ecu ta b le a nd, if s o , th ey
a r e in f a ct ex ecu ted. Pr o ces s ing th en co ntinu es a s a b o v e
des cr ib ed to a cco m m o da te th e r ea l tim e o r der in? o w.
With th e a b o v e o v er v iew in m ind, a ttentio n is no w
dir ected to FIG. 2 wh ich is a f lo w ch a r t o f da ta p r o ces s
ing f o r qu a lif ying f o r ex ecu tio n a n o r der co m m u nica ted
f r o m a b r a nch o r der entr y cler k o r a cco u nt ex ecu tiv e
2 7 , - . Pr o ceeding f r o m a s ta r t no de 5 0 , th e da ta ? elds
co m p r is ing th is nex t- r eco r ded o r der is lo a ded ( b lo ck
5 1 ) . Th e o r der da ta ? elds inclu de th e na m e o f th e s to ck
( S TK) ; th e nu m b er o f s h a r es f o r th e tr a ns a ctio n
( N S H ) ; cu s to m er identi? ca tio n ( CUS TID) ; a b u y v is
a - v is s ell b it ( B / S ) ; th e cu s to m er s p r ice lim it if h e wa nts
o ne o r , if no t, a m a r k et o r der des ig na to r ( PR/ M) ; s p e
cia l ins tr u ctio ns if a ny ( S P) ; a n o r der nu m b er ( ? RN ) ;
a nd a n o r ig ina to r ( e. g . , o f f ice, a cco u nt ex ecu tiv e, o r
th ir d p a r ty ins titu tio n) identi? ca tio n ( ? RIGID) .
Th e co m p u ter inclu des a nu m b er o f s to r ed v a r ia b les
ch a r a cter iz ing th e m a r k et f o r th e s to ck S TK wh ich th e
cu s to m er wis h es to tr a de, a nd th e m a r k et m a k er s o wn
cr iter ia f o r h is p a r ticip a tio n in S TK tr a ding . Th u s , f o r
ex a m p le, th e co m p u ter s to r es th e b es t b id B S TB ( S TK) ;
th e b es t a s k ed p r ice B S TA( S TK) ; th e b u y s iz e
B S Z( S TK) , i. e. , th e to ta l a m o u nt o f s h a r es o f S TK th e
m a r k et m a k er is willing to s ell f o r cu s to m er p u r ch a s e a t
th e cu r r ent p r ice; th e m a r k et m a k er s s ell I! s iz e
- 5
2 5
4 0
4 5
6 0
6
S S Z( S TK) ; th e m a x im u m s ing le o r der s iz e f o r s to ck
S TK wh ich th e m a r k et m a k er will a ccep t RS Z( S TK) ;
th e p r es ent nu m b er o f s h a r es o f s to ck S TK lo ng o r s h o r t
in th e m a r k et m a k er s p o s itio n PS ( S TK) lo ng b eing
p o s itiv e a nd s h o r t b eing neg a tiv e; th e a v er a g e p er s h a r e
co s t AV CS T( S TK) f o r th e s to ck S TK lo ng o r s h o r t in
th e m a r k et m a k er s p o r tf o lio ; a nd a r u nning p r o ? t to ta l
PR( S TK) o f th e m a r k et m a k er in th e s to ck S TK. B lo ck
5 3 f u nctio ning nex t deter m ines if o r der p r o ces s ing is
o p er a tiv e in th e no r m a l, a u to m a ted m a r k et m o de f o r th e
p a r ticu la r s to ck S TK. If no t ( p lea s e s ee b elo w with
r es p ect to FIG. 5 ) , p r o g r a m ? o w b r a nch es to b lo ck 5 4
to s to r e th e o r der f o r la ter r etr iev a l o r m a nu a l ex ecu
tio n. Pr o g r a m ? o w th en r etu r ns to s ta r t no de 5 0 f o r
r etr iev a l o f th e nex t o r der . As s u m ing no r m a l a u to m a ted
m o de p r o ces s ing ( YES o u tp u t o f tes t 5 3 ) , p r o g r a m f lo w
co ntinu es to tes t 5 5 to v er if y th e inco m ing da ta ( o r der )
to a s s u r e co r r ect r ecep tio n a nd inter na l co ns is tency. If
a n er r o r o ccu r r ed, a n er r o r m es s a g e is p r o du ced ( b lo ck
5 6 ) a nd p r o g r a m ? o w r etu r ns to th e s ta r t no de 5 0 f o r
entr y o f th e inco m ing nex t o r der . In th e u s u a l ca s e, th e
o r der is v er i? ed a t tes t 5 5 , a nd p r o g r a m ? o w co ntinu es
to b lo ck 6 7 to deter m ine if th e o r der is a m a r k et o r der o r
h a s a lim it p r ice ( tes t o f th e PR/ M v a r ia b le) .
If th e o r der is no t a m a r k et o r der b u t r a th er is to b e
ex ecu ted a t o r b etter th a n a cu s to m er s p eci? ed p r ice
( N ? b r a nch f r o m tes t 6 7 ) , p r o g r a m f lo w p r o ceeds to
b lo ck 6 9 wh ich dis ting u is h es a cu s to m er b u y ( B / S =B )
f r o m a s ell o r der ( B / S =S ) . If it is a b u y o r der ( YES ,
( B UY) b r a nch f r o m tes t 6 9 ) , b lo ck 7 0 deter m ines if th e
p r ice a t wh ich th e o r der is to b e ex ecu ted ( co ntents o f
PR/ M) is g r ea ter th a n o r equ a l to th e p r ev a iling a s k ed
p r ice ( B S TA( S TK) ) o f th e s to ck . If th e p u r ch a s e p r ice
o f th e o r der to b e ex ecu ted is g r ea ter th a n th e b es t a s k ed
p r ice ( YES b r a nch o f tes t 7 0 ) , b lo ck 7 2 deter m ines if th e
nu m b er o f s h a r es N ? S H in th e tr a de is les s th a n o r equ a l
to th e s h a r es a v a ila b le f o r p u r ch a s e f r o m th e m a r k et
m a k er , i. e. , les s th a n th e b u y s iz e B S Z( S TK) . If s o ( YES
b r a nch o f tes t 7 2 ) , th e nu m b er o f s h a r es N Q S H in th e
tr a ns a ctio n is co m p a r ed to th e m a x im u m a ccep ta b le
s ing le o r der s iz e RS Z( S TK) - s tep 9 0 . As s u m ing th is
? na l cr iter ia is s a tis ? ed ( N ? ex it) , th e o r der is qu a li? ed
f o r ex ecu tio n, a nd p r o g r a m f lo w co ntinu es to b lo ck 9 2
wh er e a v a r ia b le s to r ing th e la s t p o s itio n in s to ck S TK,
L PS ( S TK) is s et equ a l to PS ( S TK) . Th e p r o g r a m
th er ea f ter p r o ceeds to o r der ex ecu tio n a s deta iled in
FIG. 3 a nd dis cu s s ed b elo w.
If th e p r ice o r b u y s iz e tes ts p er f o r m ed a t b lo ck s 7 0
a nd 7 2 f a il ( N ? b r a nch ) , o r if th e o r der s iz e tes t p er
f o r m ed a t b lo ck 9 0 indica tes th e o r der is to o la r g e ( YES
b r a nch ) , th e o r der is no t qu a li? ed f o r a nd will no t b e
ex ecu ted. Wh en a ny o f th es e co nditio ns o b ta in, p r o
g r a m ? o w b r a nch es to b lo ck 8 6 to s to r e th e o r der f o r
p o s s ib le la ter ex ecu tio n if m a r k et co nditio ns o r m a r k et
m a k er cr iter ia ch a ng e. An a p p r o p r ia te r ep o r t is g ener
a ted a t b lo ck 8 8 v ia ter m ina l 1 5 ( FIG. 1 ) to ch a r a cter iz e
no n- ex ecu ted o r der . Th er ea f ter p r o g r a m f lo w r etu r ns
to no de 5 0 to p r o ces s th e nex t r eceiv ed o r der . - Th e
h u m a n m a r k et s ys tem co ntr o ller r eceiv ing th e r ep o r t
m a y o f co u r s e o v er - r ide a nd co m p lete th e tr a de b y h a nd
o r m a nu a l entr ye. g . , b y a u th o r iz ing m o r e s to ck ( in
cr ea s ing B S Z( S TK) ) if th a t cr iter io n inh ib ited o r der
ex ecu tio n.
Th e f o r eg o ing a na lys is h a s co ns ider ed a lim it b u y
o r der . Retu r ning no w to b lo ck 6 9 , p r o g r a m f lo w f o r a
cu s to m er s a le will nex t b e co ns ider ed. If th e b u y/ s ell
? a g s ig na ls a s a le, p r o g r a m f lo w b r a nch es to b lo ck 8 2
wh er e th e PR/ M lim it p r ice is co m p a r ed to th e b es t b id
4 , 6 7 4 , 0 4 4
7 .
p r ice ( PR/ MB S TB ( S TK) ) . If s o ( YES b r a nch ) , th e
nu m b er o f s h a r es N ? S H in th e o r der is co m p a r ed
a g a ins t th e a v a ila b le s ell s iz e ( N S H S S Z( S TK) ) . If
th er e a r e s u f ? cient s h a r es in th e s ell s iz e ( YES b r a nch ) ,
b lo ck 9 0 deter m ines if th e nu m b er o f s h a r es ( N ? S I- I) is
g r ea ter th a n th e m a x im u m p er m is s ib le s ing le o r der s iz e
( RS Z( S TK) ) . If th e nu m b er o f s h a r es N S H do es no t
ex ceed RS Z( S TK) a ll cr iter ia a r e s a tis ? ed a nd th e s ell
o r der will b e ex ecu ted. Pr o ces s ing p r o ceeds to b lo ck 9 2
wh er e th e la s t p o s itio n inter m edia te p r o ces s ing v a r i
a b le L PS ( S TK) is s et equ a l to PS ( S TK) , a nd o r der
ex ecu tio n p r o ceeds a s s et f o r th in FIG. 3 . If a ny p r ice o r
s ell s iz e tes t p er f o r m ed a t b lo ck s 8 2 , o r 9 0 f a ils , p r o g r a m
? o w b r a nch es to b lo ck 8 6 f o r s to r a g e a nd r ep o r ting
( b lo ck 8 8 ) .
Th e a b o v e des cr ip tio n deta ils o r der qu a li? ca tio n f o r a
lim it p r ice tr a ns a ctio n. In a tr a de th a t is to b e ex ecu ted
a t m a r k et, th e p r ice tes ts p er f o r m ed a t b lo ck 7 0 f o r a
b u y a nd b lo ck 8 2 f o r a s a le a r e b y- p a s s ed. Acco r ding ly,
wh en b lo ck 6 7 deter m ines th a t th e o r der is to b e ex e
cu ted a t m a r k et ( PR/ M=m a r k et) , b lo ck 6 8 is r ea ch ed
a nd b r a nch es th e p r o g r a m to s iz e tes t 8 4 f o r a cu s to m er
s a le a nd tes t 7 2 f o r a cu s to m er p u r ch a s e. Th e s ys tem
th en o p er a tes in th e m a nner a b o v e des cr ib ed, qu a lif ying
th e o r der f o r ex ecu tio n if th e two o p er a tiv e s iz e cr iter ia
a r e s a tis ? ed o r , o th er wis e, s to r ing th e o r der a nd r ep o r t
ing ( s tep 8 8 ) .
FIG. 3 illu s tr a tes da ta p r o ces s ing f o r ex ecu ting a nd
a cco u nting f o r o r der s th a t h a v e b een qu a li? ed f o r ex e
cu tio n b y th e o r der qu a lif ying da ta p r o ces s ing o f FIG.
2 . A b lo ck 1 1 0 deter m ines wh eth er th e o r der is a cu s
to m er p u r ch a s e o r s a le. If th e b u y/ s ell dig it s ig na ls
indica te a cu s to m er b u y, p r o g r a m f lo w b r a nch es to
b lo ck 1 1 2 f o r decr em enting th e a m o u nt o f s h a r es r e
m a ining a v a ila b le f o r cu s to m er p u r ch a s e ( B S Z( S TK) )
f r o m th e m a r k et m a k er . B S Z( S TK) is decr em ented b y
th e nu m b er o f s h a r es o f th e s to ck ( N ? S H ) p u r ch a s ed b y
th e cu s to m er , i. e. , B S Z( S TK) =B S Z( S TK) N S H .
Th e m a r k et m a k er s p o s itio n in th e s to ck is a lg eb r a ica lly
decr em ented b y th e nu m b er o f s h a r es p u r ch a s ed,
PS ( S TK) =PS ( S TK) N S H ( s tep 1 1 5 ) . If a t b lo ck
1 1 0 it is deter m ined th a t th e o r der is a s ell, b lo ck 1 1 6
decr em ents s ell s iz e S S Z( S TK) b y th e nu m b er o f s h a r es
s o ld to th e cu s to m er , S S Z( S TK) =S S Z( S TK) N S H .
Th e m a r k et m a k er s p o s itio n PS ( S TK) in th e s to ck is
u p da ted b y a lg eb r a ica lly incr em enting th e nu m b er o f
s h a r es s o ld b y th e cu s to m er ,
PS ( S TK) =PS ( S TK) +N S H ( s tep 1 1 9 ) .
Af ter th e p o s itio n PS ( S TK) , b u y s iz e B S Z( S TK) ,
a nd s ell s iz e S S Z( S TK) v a r ia b les h a v e b een u p da ted,
p r o g r a m ? o w co ntinu es to b lo ck 1 2 2 wh er e m es s a g es
co n? r m ing ex ecu tio n o f th e tr a de a r e f u r nis h ed to th e
cu s to m er a cco u nt p r o ces s o r 1 3 wh ich s ends o u t co n? r
m a tio ns o f th e tr a ns a ctio n a nd o th er wis e p er f o r m s th e
neces s a r y a cco u nting f u nctio ns f o r th e cu s to m er a c
co u nt. Th e b r a nch cler k o r a cco u nt ex ecu tiv e 2 7 , - is a ls o
no ti? ed o f o r der ex ecu tio n v ia link 2 5 . Th e o r der v a r i
a b les CUS TID, S P, RN a nd RIGID a r e u s ed to
a p p r o p r ia tely dis tr ib u te tr a de r ep o r ting , p r o p er co m
m is s io n co m p u ta tio n a nd th e lik e. Fu r th er , th e tr a ns a c
tio n p r ice is typ ica lly co m m u nica ted to th e N AS DAQ
s ys tem 1 8 a nd th e v a r io u s ta p e s er v ices f o r r ep o r ting .
Th e u p da ted inter na l m a r k et m a k er v a r ia b les ( e. g . ,
S S Z( S TK) , B S Z( S TK) , L PS ( S TK) , PS ( S TK) ) a r e
s to r ed in m em o r y f o r u s e in s u b s equ ent o r der tr a ns a c
tio ns ( s tep 1 2 7 ) . Pr o g r a m ? o w p r o ceeds to b lo ck 1 3 0 to
u p da te th e m a r k et m a k er s a v er a g e p er s h a r e inv ento r y
co s t AV CS T( S TK) a nd p r o ? t PR( S TK) inter na l m a n
- 0
1 5
2 0
2 5
3 5
4 0
4 5
6 0
6 5
8
a g em ent v a r ia b les f o r th e s to ck S TK, th e da ta p r o ces s
ing f o r wh ich is des cr ib ed b elo w in co nj u nctio n with
FIGS . 4 a nd 4 A. Af ter inv ento r y u p da ting a nd p r o ? t
a cco u nting , da ta p r o ces s ing ex its a t no de 1 3 2 r ea dy to
p r o ces s th e nex t tr a de.
FIGS . 4 a nd 4 A a r e th e lef t a nd r ig h t p o r tio ns o f a
f lo w ch a r t f o r th e da ta p r o ces s ing o f b lo ck 1 3 0 ( FIG. 3 )
f o r u p da ting th e inv ento r y co s t ( a v er a g e s h a r e p r ice
AV CS T( S TK) ) o f th e s to ck S TK a nd th e r u nning
p r o ? t PR( S TK) r ea liz ed f r o m th e ex ecu tio n o f ea ch
tr a de. To th is end, th e la s t p o s itio n o f th e m a r k et m a k er
L PS ( S TK) b ef o r e th e j u s t ex ecu ted tr a de is tes ted to
deter m ine wh eth er th e m a r k et m a k er wa s p r ev io u s ly
lo ng o r s h o r t in th e s to ck S TK ( s tep 1 5 4 ) . If
L PS ( S TK) ZO th en th e m a r k et m a k er s p r ev io u s p o s i
tio n wa s lo ng a nd p r o g r a m ? o w p r o ceeds to b lo ck 1 5 3
wh er e th e p r es ent ( p o s t tr a de) p o s itio n o f th e m a r k et
m a k er PS ( S TK) is tes ted to deter m ine if it is lo ng
( PS ( S TK) O? =YES ) o r s h o r t ( N ? ) . If th e m a r k et
m a k er s p r es ent p o s itio n is s h o r t ( N 0 b r a nch ) , th e tr a ns
a ctio n wa s a b r a nch es to b lo ck 1 5 5 to u p da te p r o ? t
PR( S TK) f o r s to ck S TK, a s b y:
Eq. 1 .
In th e r ig h t s ide o f th e p r o g r a m m ing s ta tem ent o f Equ a
tio n 1 , th e v a r ia b le B S TA( S TK) - AV CS T( S TK) is th e
p r o ? t ( o r lo s s ) m a r g in o n th e s a le r ep r es enting th e dif
f er ence b etween th e cu r r ent a s k ed p r ice B S TA( S TK) a t
wh ich th e tr a de o ccu r r ed a nd th e a v er a g e p er s h a r e co s t
AV CS T( S TK) o f th e s to ck . Wh en m u ltip lied b y th e
nu m b er o f s h a r es p r ev io u s ly in th e lo ng p o s itio n
( L PS ( S TK) ) , th e r ig h t f a cto r f o llo wing th e p lu s s ig n
in th e s ta tem ent o f Equ a tio n 1 is th e p r o ? t ( o r lo s s ) f o r
th e tr a ns a ctio n. Wh en a dded to th e p r ev io u s r u nning
p r o ? t to ta l PR( S TK) , th e ? na l r es u lt s to r ed in
PR( S TK) is a n u p da ted r u nning to ta l o f th e p r o ? t o f th e
m a r k et m a k er in th e s to ck S TK s ince th e PR( S TK)
s to r a g e a r r a y elem ent wa s la s t clea r ed.
Th er ea f ter f o r th e a s s u m ed ev ent, p r o g r a m ? o w p r o
ceeds to b lo ck 1 5 6 wh er e th e a v er a g e p er s h a r e co s t o f
th e new s h o r t p o s itio n in th e s to ck is ca lcu la ted. In th is
ins ta nce, th e a v er a g e co s t o f th e s to ck is equ a l to th e
o p er a tiv e a s k ed p r ice, i. e. , AV CS T( S TK) =B
S TA( S TK) . FIG. 4 p r o g r a m m ing th en ex its a t th e
PRCEED no de.
If a t b lo ck 1 5 3 th e m a r k et m a k er s p r es ent p o s itio n is
lo ng ( PS ( S TK) _ > _ O? =YES ) , p r o g r a m ? o w co ntinu es
to tes t 1 6 0 wh er e th e b u y/ s ell dig it deter m ines wh eth er
th e tr a ns a ctio n is a cu s to m er p u r ch a s e o r s a le. If th e
tr a de is a cu s to m er s a le th u s incr ea s ing th e initia lly lo ng
L POS ( S TK) p o s itio n, it is a n inv ento r y tr a ns a ctio n a nd
p r o g r a m ? o w b r a nch es to b lo ck 1 6 3 to u p da te th e a v er
a g e co s t o f th e S TK s to ck p o s itio n:
+( AV CS T( S TK) L PS ( S TK) ) ) / PS ( S TK) . Eq. 2 .
In th e s ta tem ent o f Equ a tio n 2 , N S I- I*B S TB ( S TK) is
th e co s t o f th e s h a r es j u s t p u r ch a s ed f r o m th e cu s to m er
a nd AV CS T( S TK) *L PS ( S TK) is th e co s t o f th e p r e
v io u s L PS ( S TK) inv ento r y. Th u s , b y div iding th e
s u m o f th e new a nd f o r m er p u r ch a s es b y th e nu m b er o f
s h a r es h eld PS ( S TK) th e new a v er a g e co s t
AV CS T( S TK) is deter m ined.
If a t b lo ck 1 6 0 th e tr a ns a ctio n wa s deter m ined to b e a
cu s to m er p u r ch a s e ( m a r k et m a k er s a le) , p r o g r a m f lo w
4 , 6 7 4 , 0 4 4
p r o ceeds to b lo ck 1 6 6 wh er e th e m a r k et m a k er ' s p r o ? t
is u p da ted:
PR( S TK) = PR( S TK) + ( N DS H *( B S TA( S TK
) - AV CS T( S TK) ) ) . Eq. 3 .
Th e a b o v e FIGv 4 p r o ces s ing h a s r ev iewed th e th r ee
p o s s ib ilities b eg inning with a lo ng ( p o s itiv e) m a r k et
m a k er s to ck p o s itio n enter ing a tr a ns a ctio n a s s ig na lled
b y th e co ntents o f L P? S ( S TK) . Co m p a r a b le f u nctio n
ing o b ta ins if th e co ntents o f L PS ( S TK) in tes t 1 5 0 a r e
neg a tiv e, s ig na lling a n initia l s h o r t p o s itio n ( N ? o u tp u t
o f tes t 1 5 0 ) . As s u m ing s u ch a n initia l s h o r t p o s itio n,
p r o g r a m ? o w p a s s es to th a t s h o wn in FIG. 4 A wh ich is
th e a na lo g o f th a t s h o wn in FIG. 4 .
In b r ief , a tes t 1 7 0 o f FIG. 4 A deter m ines wh eth er th e
p r es ent p o s itio n PS ( S TK) is s h o r t o r lo ng . If th e p r es
ent p o s itio n is a ls o s h o r t ( PS ( S TK) < 0 ) , p r o g r a m ? o w
p r o ceeds to b lo ck 1 7 2 wh er e th e b u y/ s ell b it is r ea d. If
th e b u y/ s ell dig it indica tes a cu s to m er b u y, th e tr a ns a c
tio n r ep r es ents a n inv ento r y a ccu m u la tio n ( th e p r ev io u s
s h o r t p o s itio n in L PS ( S TK) b eing incr ea s ed in
PS ( S TK) ) a nd p r o g r a m ? o w b r a nch es ( YES ) to
b lo ck 1 7 4 wh er e th e a v er a g e co s t o f th e s to ck is u p
da ted:
If a t b lo ck 1 7 2 th e tr a ns a ctio n is deter m ined a s ell,
b lo ck 1 7 5 u p da tes th e p r o ? t to ta l:
Eq. 5 .
As a ? na l p o s s ib ility in FIG. 4 A, if a t b lo ck 1 7 0 th e
m a r k et m a k er s p r es ent p o s itio n is lo ng
( PS ( S TK) < 0 ? =N ) , th e tr a ns a ctio n wa s neces s a r ily
a cu s to m er s a le ( m a r k et m a k er p u r ch a s e) , a nd p r o g r a m
? o w b r a nch es to b lo ck 1 7 6 wh er e th e p r o ? t PR( S TK) is
u p da ted:
Eq. 6 .
Th e a v er a g e s h a r e co s t o f th e new PS ( S TK) s h o r t
p o s itio n is th e b es t b id ( tr a ns a ctio n) p r ice
( AV CS T=B S TB ( S TK) ) - b lo ck 1 7 8 6 . Th is co nclu des
th e p r o ? t a nd co s t u p da ting f o r th e tr a ns a ctio n.
In m o s t ins ta nces , m o r e th a n o ne ins titu tio n m a k es a
m a r k et in a p a r ticu la r s to ck . Any m a r k et m a k er m a y
ch a ng e its b id o r a s k ed p r ice a t a ny tim e, tr a ns m itting
th e ch a ng e to th e N AS DAQ s ys tem v ia link 1 6 a s a b o v e
dis cu s s ed. In s u ch a n ins ta nce, it m a y b e neces s a r y to
u p da te th e m a r k et m a k er s o wn p r ices - a s wh er e th e
ch a ng e a f f ects th e ins ider m a r k et Gu es t cu r r ent b id a nd
a s k ed) to a f f o r d th e cu s to m er ex ecu tio n a t th e b es t p r e
v a iling p r ice. FIG. 5 is a f lo w ch a r t illu s tr a ting da ta
p r o ces s ing u p o n r eceip t o f a new m a r k et m a k er qu o ta
tio n f r o m th e N AS DAQ s ys tem 1 8 . B eg inning a t a n
inter r u p t entr y no de 1 8 0 , th e s ys tem is p la ced in no n
a u to m a tic ex ecu tio n m o de ( s tep 1 8 2 ) wh ich p r ev ents
a u to m a tic ex ecu tio n o f a ny o r der s in th e p a r ticu la r
s to ck ( S TK) u ntil th e m a r k et m a k er h a s h a d a ch a nce to
r es p o nd to th e new m a r k et p r ices . If a t b lo ck 1 8 4 it is
deter m ined th a t th e b es t b id B S TB ( S TK) o r b es t a s k ed
B S TA( S TK) p r ice h a s ch a ng ed, p r o g r a m ? o w p r o
ceeds to b lo ck 1 8 6 wh er e th e b es t b id B S TB ( S TK)
5
O
2 0
2 5
3 0
3 5
4 5
5 0
6 0
6 5
1 0
a nd/ o r b es t a s k ed p r ice B S TA( S TK) a r e u p da ted to th e
new v a lu es r eceiv ed f r o m N AS DAQ .
Th e s ys tem th en inter a ctiv ely co m m u nica tes with th e
tr a der ter m ina l 1 5 . A p r o m p t a p p ea r s o n tr a der Tl ter
m ina l 1 5 r equ es ting inp u t r eg a r ding p o s s ib le ch a ng es in
th e m a x im u m a ccep ta b le o r der s iz e ( RS ( S TK) ) , th e
nu m b er o f s h a r es a v a ila b le f o r cu s to m er p u r ch a s e
( B S Z( S TK) ) , a nd th e nu m b er o f s h a r es a ccep ta b le f o r
cu s to m er s a les ( S S Z( S TK) ) . Af ter inp u t o f th e r e
qu es ted p a r a m eter s ( o r initia liz ing to def a u lt v a lu es ) ,
a ny o r der s p r ev io u s ly s to r ed in m em o r y a r e r ep r o
ces s ed ( b lo ck 1 9 0 ) a s th es e o r der s m a y no w b e qu a li? ed
f o r ex ecu tio n du e to th e ch a ng e in p r ice o r o th er p a r a m
eter s . Af ter s to r ed o r der s a r e r ev iewed a nd ex ecu ted if
p o s s ib le, da ta p r o ces s ing is r es to r ed to a u to m a tic m o de
( b lo ck 1 9 2 ) a s b y s im p ly s etting a v a r ia b le AUT to a
p r edeter m ined s ta te ( e. g . , AUT ) , a nd inter r u p t
m o de is ex ited a t no de 1 9 4 . If a t b lo ck 1 8 4 it is deter
m ined th a t th e ins ider m a r k et p r ice wa s no t ch a ng ed b y
th e new m a r k et m a k er qu o ta tio n, p r o g r a m ? o w
b r a nch es dir ectly to b lo ck 1 9 2 to r es to r e a u to m a tic
m o de a nd ex it inter r u p t m o de.
Th e m a r k et m a k ing s ys tem o f th e a b o v e- des cr ib ed
inv entio n h a s th u s b een s h o wn to a u to m a tica lly a cco m
m o da te a r a ndo m , r ea l tim e o r der ? o w f o r s ecu r ity
p u r ch a s es o r s a les . Inco m ing o r der s a r e ? r s t ex a m ined
to a s s u r e th a t th ey s a tis f y cu r r ently o p er a tiv e cr iter ia
r eg a r ding s ecu r ities p r ice, s to ck a v a ila b ility a nd s to ck
o r der s iz e. Th o s e o r der s b eing qu a li? ed u nder th e ex is t
ing cr iter ia a r e ex ecu ted a nd p r o ? t a nd inv ento r y p r ice
inter na l m a na g em ent s to r a g e elem ents a r e a p p r o p r i
a tely u p da ted to r e? ect th e s ev er a l tr a ns a ctio ns ex p er i
enced b y th e s ys tem . Or der s no t qu a li? ed f o r ex ecu tio n
a r e s to r ed a nd r e- ex a m ined f r o m tim e to tim e f o r p o s s i
b le la ter ex ecu ta b ility. Th e s ys tem p r o ceeds a u to m a ti
ca lly with o u t h u m a n inter v entio n, s a v e to u p da te o p er a
tiv e m a r k et m a k er o r der qu a li? ca tio n cr iter ia .
Th e a b o v e- des cr ib ed a r r a ng em ent is m er ely illu s tr a
tiv e o f th e p r incip les o f th e p r es ent inv entio n. N u m er
o u s m o di? ca tio ns a nd a da p ta tio ns th er eo f will b e
r ea dily a p p a r ent to th o s e s k illed in th e a r t with o u t de
p a r ting f r o m th e s p ir it a nd s co p e o f th e p r es ent inv en
tio n.
Wh a t is cla im ed is : .
1 . A_ da ta p r o ces s ing s ys tem f o r m a k ing a tr a ding
m a r k et in a t lea s t o ne s ecu r ity in wh ich th e s ys tem
p r o p r ieto r is a cting , a s a p r incip a l; s a id s ys tem inclu ding
m ea ns f o r r eceiv ing tr a de o r der s f o r s a id a t lea s t o ne
s ecu r ity f r o m s ys tem cu s to m er s , s a id tr a de o r der s in
clu ding ? elds identif ying th e s to ck to tr a ded a nd ch a r
a cter iz a tio n o f th e tr a de a s cu s to m er p u r ch a s e o r s a le,
a nd th e nu m b er o f s h a r es f o r th e tr a ns a ctio n; m ea ns f o r
r etr iev ing a nd f o r s to r ing o p er a tiv e b id a nd a s k ed p r ices
f o r s a id a t lea s t o ne s ecu r ity; m ea ns f o r enter ing a nd f o r
s to r ing o r der qu a li? ca tio n p a r a m eter s , s a id p a r a m eter s
a nd s a id s to r ed p r ices deter m ining wh ich r eceiv ed o r
der s a r e qu a li? ed f o r ex ecu tio n; m ea ns f o r s to r ing da ta
ch a r a cter iz ing p o s itio n, co s t a nd p r o ? t f o r s a id a t lea s t
o ne s ecu r ity; qu a lif ying m ea ns r es p o ns iv e to s a id r e
ceiv ed tr a de o f f er s a nd s a id s to r ed p r ices a nd o r der
qu a li? ca tio n p a r a m eter s f o r qu a lif ying a tr a de o r der f o r
ex ecu tio n wh en th e r eceiv ed tr a de o r der ? elds do no t
v io la te th e s to r ed p r ices a nd qu a li? ca tio n p a r a m eter s ;
m ea ns f o r ex ecu ting ea ch tr a de o r der qu a li? ed b y s a id
qu a li? ca tio n m ea ns ; a nd p o s t- ex ecu tio n u p da ting m ea ns
f o r incr em enting s a id s to r ed p o s itio n in s a id a t lea s t o ne
s ecu r ity b y th e a m o u nt o f a tr a de o r der u p o n ex ecu tio n
4 , 6 7 4 , 0 4 4
1 1
o f a cu s to m er s a le a nd decr em enting s a id s to r ed p o s i
tio n b y th e a m o u nt o f a tr a de o r der u p o n ex ecu tio n o f a
cu s to m er p u r ch a s e a nd m ea ns f o r u p da ting a t lea s t o ne
o f s a id s to r ed co s t a nd p r o ? t u p o n ex ecu tio n o f a tr a de.
2 . A s ys tem a s in cla im 1 , f u r th er inclu ding m ea ns f o r
s to r ing s a id tr a de o r der with o u t ex ecu tio n if s a id tr a de
o r der is no t with in s a id qu a li? ca tio n p a r a m eter s .
3 . A s ys tem a s in cla im 1 , wh er ein s a id s to r ed o r der
qu a lif ying p a r a m eter s inclu de th e a m o u nt o f s a id a t lea s t
o ne s ecu r ity a v a ila b le f o r cu s to m er p u r ch a s e a nd th e
a m o u nt o f s a id a t lea s t o ne s ecu r ity a v a ila b le f o r cu s
to m er s a le, s a id da ta p r o ces s ing s ys tem f u r th er inclu d
ing m ea ns f o r decr em enting s a id a m o u nt o f s a id s ecu r ity
a v a ila b le f o r cu s to m er p u r ch a s e b y th e a m o u nt o f s a id
s ecu r ity in a tr a de o r der u p o n ex ecu tio n o f a cu s to m er
p u r ch a s e, a nd m ea ns f o r decr em enting s a id a m o u nt o f
s a id s ecu r ity a v a ila b le f o r cu s to m er s a les b y th e a m o u nt
o f s a id s ecu r ity in a tr a de o r der u p o n ex ecu tio n o f a
cu s to m er s a le.
4 . A s ys tem a s in cla im 3 , wh er ein s a id s to r ed o r der
qu a lif ying p a r a m eter s inclu de a m a x im u m a m o u nt o f
s a id a t lea s t o ne s ecu r ity a ccep ta b le in a s ing le cu s to m er
tr a de o r der .
5 . A s ys tem a s cla im ed in cla im 1 , wh er ein s a id tr a de
o r der s f u r th er inclu de da ta ch a r a cter iz ing th e o r der a s
b eing ex ecu ta b le a t m a r k et o r with in p r ice s ta ted p r ice
lim it b o u nds , s a id da ta p r o ces s ing s ys tem f u r th er inclu d
ing m ea ns f o r co m p a r ing s a id p r edeter m ined p r ice lim it
2 0
2 5
3 5
4 5
5 5
6 0
6 5
1 2
b o u nds with s a id s to r ed o p er a tiv e b id a nd a s k ed p r ices
to deter m ine if s a id tr a de is ex ecu ta b le.
6 . A s ys tem a s in cla im 1 , wh er ein s a id m a r k et m a k ing
da ta p r o ces s ing s ys tem inclu des m ea ns f o r s to r ing th e
la s t p o s itio n f o r s a id a t lea s t o ne s ecu r ity, a nd m ea ns f o r
ca lcu la ting p r o ? t in a n ex ecu ted tr a ns a ctio n wh ich a lg e
b r a ica lly r edu ces to wa r d o r b eyo nd z er o o n th e nu m b er
line, s a id p o s itio n r ela tiv e to s a id s to r ed la s t p o s itio n.
7 . A s ys tem a s in cla im 1 , wh er ein s a id p o s t- ex ecu tio n
u p da ting m ea ns inclu des m ea ns f o r u p da ting s a id a v er
a g e p er s h a r e co s t o f th e s to ck s in s a id p o s itio n.
8 . A s ys tem a s in cla im 1 , f u r th er inclu ding inter r u p t
m ea ns f o r h a lting da ta p r o ces s ing u p o n r etr iev a l o f a
ch a ng ed b id o r a s k ed p r ice, s a id da ta p r o ces s ing s ys tem
f u r th er inclu ding m ea ns f o r u p da ting s a id b id a nd a s k ed
p r ices u p o n r eceip t o f a new o p er a tiv e b id o r a s k ed
p r ice f o r s a id a t lea s t o ne s ecu r ity, inter a ctiv e m ea ns f o r
m a nu a l entr y o f u p da ted o r der qu a li? ca tio n p a r a m eter s ,
a nd m ea ns f o r r ep r o ces s ing s a id u nex ecu ted s to r ed
tr a des .
9 . A s ys tem a s in cla im 1 , f u r th er inclu ding m ea ns f o r
co m m u nica ting da ta r eg a r ding ex ecu ted tr a des to f u r
th er da ta p r o ces s ing a p p a r a tu s .
1 0 . A s ys tem a s in cla im 1 , wh er ein s a id m ea ns f o r
r eceiv ing tr a de o r der s inclu des b o th r ela ted a nd u nr e
la ted, th ir d p a r ty o r der o r ig ina tio n m ea ns , a nd netwo r k
m ea ns inter co nnecting s a id o r der o r ig ina tio n m ea ns
with s a id m a r k et m a k ing da ta p r o ces s ing s ys tem .
I it it * *