WO2007014892A2 - Electronic market transaction - Google Patents

Description

Electronic Market Transaction

The invention relates to a method of completing a transaction related to a financial instrument being traded on the electronic market.

A financial market is commonly made up of a number of market participants trading financial instruments such as bonds, stocks and future contracts. A trend in financial market trading is to move from traditional trading over the phone (voice broking) and on the trading floor to making the trades electronically. The traditional method of trading involves a number of traders meeting up in a physical location, "the trading floor", where they buy and sell financial instruments for their clients. The clients may telephone a broker with their orders, who in turn will contact their colleagues on the trading floor. The traders on the trading floor will seek out other traders, fulfil the client's orders and report back to the broker, which in turn will report to the client. In an electronic market, the trading floor is replaced by a central server that automatically matches bids and offers entered by brokers and investors using terminals connected to the server. The brokers can therefore be located remotely of each other. Moreover, the bids and offers are matched more efficiently. NASDAQ is an example of a purely electronic market.

However, voice broking and the trading floor have some advantages for big clients that are difficult to implement in a purely electronic market due to the inherent problems of the transparency of setting and publishing prices electronically. Some of these advantages are outlined below.

An example of a big client that may benefit from voice broking and the trading floor is a Market Maker. For each instrument being traded on a market there are one or more Market Makers. The function of the Market Maker in the market is to provide liquidity. They are obliged to sell when there is an excess of buy orders on the market and to buy when there is an excess of sell orders. Many of the market making firms also have proprietary trading departments that are trading the firm's capital for a profit. Compared to individual traders, the traders in the Market Maker's trading departments are usually much better capitalized and more informed. In return for making a market, the Market Makers are granted some privileges. Moreover, considering that the volume of a Market Maker's transactions is usually much higher than that of individual investors, brokers earn a much higher commission from Market Makers and are therefore more inclined to give favours to the Market Makers. Moreover, the traders of the Market Maker get quickly well connected on the trading floor. AU these factors lead to that the traders on the trading floor often give the Market Makers privileges. Some privileges are stipulated as a return for the market making activities in the rules of the market and some are at the discretion of the brokers and the traders on the trading floor. Moreover, some brokers and floor traders through experience learn about the trading habits of the Market Maker and with time are given permission by the Market Maker to independently make decisions in the name of the Market Maker.

For example, when a bond is traded on the floor, the Market Maker MM for that bond may tell the representatives of his broker firm Bl on the floor the price at which he is willing to buy a particular bond and the price at which he is willing to sell. The Market Maker may for example be willing to sell 20 million units (mio) at £5 each and buy 20 mio at £4 each. At the same time a Member Dealer, MDl, a market participant who is not a Market Maker, calls the broker firm Bl and says that he is willing to buy 20mio for £4.20 each. The trader on the floor seeks out a number of other traders and enquires about their prices. Broker firm B2 has got a Member Dealer MD2 who is willing to sell 20 mio at £4.20. Broker Bl knows from experience that the Market Maker is willing to buy for £4.20 but is not prepared to risk making too low profits by setting a bid price of £4.20. Bl also considers that the Market Maker is a good client. Accordingly, he decides to give the Market Maker and the Member Dealer 10 mio each of the trade.

In an electronic market, the Member Dealer has obligations to publish prices. It publishes that it is willing to buy 20mio at £4 each and sell 20mio at £5 each. Thus, any person entering an order to sell stock at £4 or buy stock for £5 would immediately be matched by the server at the electronic exchange to the Market Maker and the transaction will automatically complete. Also, a smaller Member Dealer, MDl, can log into the trading platform, analyse the prices entered by the Market Makers and make a bid to buy stock at £4.20. The bid is stored at the server of the electronic market. The market maker MM has previously registered that he is only prepared to sell the stock at £5. Consequently, the bid of MDl and the offer of MM are not matched. However, after a while Member Dealer MD2 checks the trading platform and decides to meet the order registered by MDl. He registers an order at the electronic market to sell 20 mio at £4.20. As a result, the bid of MDl is matched to the offer of MD2, and the transaction completes without the Market Maker getting an opportunity to participate in the transaction. If the broker had been involved in completing the transaction, he would have known that the Market Maker was probably prepared to buy stock for £4.20, but the server does not take this into account.

It is clear from the above scenario that the Member Dealers benefit more from an electronic market than the Market Makers. The Market Makers are unwilling to publish two-way price quotes with too narrow a spread, since they want to maximise their profits. Consequently, the smaller Member Dealer can always front-run the Market Makers with smaller offers and bids and thereby win business. Thus, many Market Makers use voice brokers rather than electronic markets, resulting in that it can sometimes be difficult to get firms to provide liquidity to electronic markets.

In order to move from using voice brokers to trading on electronic markets, it would desirable to automate the function of the broker and the floor trader electronically. This might be achieved by designing a system wherein there is one quasi-independent server for each broker. Each quasi-independent server would be controlled by software that emulates the functions of the broker and the floor trader. Each quasi-independent server would also communicate with terminals belonging to the market participants. Thus, the Market Makers and the Member Dealers would be divided into groups, wherein each group is registered with a server. If a market participant has more than one broker, the market participant may be registered with more than one group and be connected to more than one server. Moreover, the system would need to be designed such that the servers can communicate in selective groups. The prices of the financial instruments would be negotiated within the groups and the negotiations would need not be transparent to - A -

the entire market in order for the functions of the floor trader to be emulated appropriately.

Furthermore, different priority rules would need to be implemented for the members of each group. Some of these priority rules would also not be fully transparent to the market participants. Furthermore, the knowledge of a market participant's buying and selling habits would need to be translated into instructions at the server handling each group. Moreover, the buying habits of an investor are generally dependent on the movements of other markets and other instruments, to which the central server in a conventional electronic exchange does not have access. In order to implement the market knowledge of the floor trader and the broker in the server emulating the role of the floor trader and the broker, software that learns and adapts and has access to vast amounts of market data would need to be developed. Such software does not exist on the market today and it is not likely that it would be trusted with the capital of the Market Makers and the Member Dealers. Thus, the electronic automation of the functions of the broker and the floor trader is not technically realistic.

The invention provides an alternative technical solution by controlling the functionality of the central server of the electronic exchange.

The Chicago Mercantile Exchange has developed a program for giving Market Makers privileges. If a Member Dealer makes a better bid than a Market Maker, and the market maker enters a bid at the same price before the bid has been matched by an offer at the same price, the Market Maker gets a predetermined percentage of the offer although the Member Dealer has priority. However, this solution only provides the Market Maker with a share if he makes the bid before it is matched by an offer. Thus, the broker's actions are not simulated satisfactorily.

According to the invention there is provided an apparatus for performing a transaction related to a financial instrument being traded on an electronic exchange comprising means for matching a bid with an offer for the financial instrument; means for freezing a transaction based on a match between at least one bid and at least one offer at a price determined from the at least one bid and the at least one offer; communication means for informing a market participant of said price; means for releasing the market in response to the market participant participating in the transaction.

The electronic exchange may comprise at least one server and the means for matching a bid with an offer, the means for freezing the transaction, the communication means and the means for releasing the market may all be located in the at least one server. The apparatus may further comprise a plurality of terminals operable to communicate with the server. Thus, a Market Maker communicating with the server using a terminal will be allowed to participate in a transaction even if he had not previously entered a bid/offer at the matched price.

The means for releasing the transaction are further configured to release the transaction after a predetermined time even if the second signal has not been received.

The means for freezing the transaction may comprise means for suspending the processes for allocating the financial instruments to the market participants responsible for the at least one bid and the at least one offer and the means for releasing the transaction may comprise means for starting the processes for allocating the financial instruments to the market participants responsible for the at least one matched bid and the at least one matched offer. During the time the market is frozen, the means for matching a bid and an offer may be configured to accumulate bids and offers at said price and the allocation of the financial instrument to the participants responsible for the at least one matched bid and the at least one matched offer at the time of releasing the transaction may be dependent on the accumulated bids and offers.

According to the invention there is also provided a method of performing a transaction related to a financial instrument being traded on an electronic exchange comprising matching a bid with an offer; freezing a transaction based on a match between at least one bid and at least one offer at a price determined from the at least one bid and the at least one offer; informing a market participant of said price; and releasing the market in response to the market participant participating in the transaction.

According to the invention, there is also provided a computer program product comprising code for performing the method.

Embodiments of the invention will now be described, by way of example, with reference to the accompanying drawings, in which: Figure 1 is a schematic drawing of a system according to the invention;

Figure 2 is a schematic diagram showing the components of a server according to the invention;

Figure 3 shows an example of a screen displayed to the market participants; Figure 4 shows the screen of Figure 3 when the market freezes according to an embodiment of the invention;

Figure 5 shows the screen of Figure 4 after the market has been unlocked by a Lead Market Maker;

Figure 6 shows the screen of Figure 4, after the market has been unlocked after the expiry of a predetermined time period; Figure 7 shows the screen of Figure 3 when the market freezes according to another embodiment of the invention;

Figure 8 shows the screen of Figure 7, after the market has been unlocked by a Lead Market Maker;

Figure 9 shows the screen of Figure 3, when the market freezes according to yet another embodiment of the invention;

Figure 10 shows the screen of Figure 9, when the market has been unlocked by a Market Maker;

Figure 11 shows the screen of Figure 9 as seen by a Market Maker; Figure 12 illustrates a method of making a transaction according to the invention.

Referring to Figure 1, a system 1 according to the invention comprises an electronic exchange 2, in the form of a server system, for selling and buying bonds and a number of market participants 3, 4, 5 connected to the electronic exchange. There are three types of market participants allowed to trade on the electronic exchange 2, namely Lead Market Makers (LMM) 3, Cash Market Makers (CMM) 4, and Member Dealers (MD) 5. Each type of market participant has associated privileges and obligations. The LMMs always have to be prepared to sell and buy bonds on the electronic exchange and they have a duty to publish their bid and offer prices. The member rules for trading at the exchange may specify a maximum spread between the prices at which the LMMs buy and sell bonds. The LMMs are also permitted to send orders to the market. The CMMs are permitted to submit two-way prices and orders to the market; however there are no obligations on them to do so. The third type of market participant, the MDs, cannot insert two-way prices. They are only allowed to enter orders.

Lead Market Makers and Cash Market Makers are usually large trading firms, and they may employ a large number of traders that are all allowed to access the electronic exchange. Each trader may use a terminal 6, and the address of the terminal is recognised by the electronic exchange to belong to the Lead Market Maker or the Cash Market Maker. Alternatively, the traders may need to log in using a username and a password, and the server at the electronic exchange may store an association between the username and the ID of the Lead Market Maker or Cash Market Maker. For example, terminals 6a-6d may all be recognised as belonging to Lead Market Maker LMMl whereas terminals 6e and 6f may be recognised as belonging to Cash Market Maker CMMl . Moreover, there may further be individuals with enough financial capacity to act as a Cash Market Maker. CMM 2 is an example of such a Cash Market Maker. He accesses the electronic exchange through terminal 61. The Member Dealers 5 may be trading companies or individuals trading from terminals 6g-6k respectively. In a similar way to the Market Makers, the address of the terminal, or a username, may disclose the details of the Member Dealer to the server at the electronic exchange. A number of Member Dealers MD3-MD6 may be connected to a gateway 7 that connects the Member Dealers MD3-MD6 to the electronic exchange. Another scenario involves that a gateway 8 itself is the Member Dealer, MM2, and it takes responsibility for the bids and offers traded through the gateway by individuals at terminals 6m, 6n, 6o, connected to the gateway. The terminals communicate with the electronic exchange server using known protocols, such as TCP/IP.

The electronic exchange for selling and buying bonds 2 is further in communication with a Futures Exchange, for example Eurex, for buying and selling future contracts related to bonds. The connection between the electronic exchange 2 and the Future Exchange 9 allows the market participants to automatically buy and sell a basis. Buying a basis means buying X amount of bonds at electronic exchange 2 and selling the same amount of future contracts at the Futures Exchange 9. Selling a basis means selling X amounts of bonds at the electronic exchange server 2 and buying X amounts of future contracts at the Futures Exchange 9. The agreement between the electronic exchange and the Futures Exchange allows the participants at the electronic exchange to buy and sell the futures at the price displayed at the Futures Exchange at the time the bond was traded at the electronic exchange 2. In addition to being connected to the Futures Exchange 9 through the electronic exchange 2, the Cash Market Maker CMM3 and the gateway 7 are also connected directly to the Futures Exchange 9.

Moreover, a Lead Market Maker and a Cash Market Maker may register for the service provided at the gateway 8 and thereby trade through the Member Dealer MD2. As a result, the Lead Market Makers and the Cash Market Makers can trade anonymously at the electronic exchange 2.

Referring to Figure 2, the central server at the electronic exchange 2 comprises a number of processing and storage units for performing a transaction related to a bond according to the invention. The processing and storage units can be implemented using software, hardware, or a combination of software and hardware. The server comprises a receiver unit 10 for receiving orders and two-way price quotes from the market participants 3, 4 and 5. It further comprises a screen generator unit 11 for preparing the market information to be communicated to the market participants. The two-way price quotes received from the Market Makers and the Cash Market Makers at the receiver unit 10 are sent to a quote storage unit 12. Similarly, the orders received at the receiver unit 10 are sent to an order storage unit 13. The orders stored in the order storage unit 13 are extracted and sorted by a sorting unit 14. The bids are sorted from the best bid, the highest price, to the worst bid, the lowest price. If there are two bids at the same price, the bid entered at an earlier time is ranked higher in the list. The bid list is then stored in the sorting unit 14 in a bid list 15. In a similar way, the offers are sorted from the best offers, lowest price to the worst offers, highest price. If there are two offers at the same prices, the offer entered earliest is ranked highest on the list. The list of sorted offers is then stored in an offer list 16 in the sorting unit 14. A predetermined number of the best offers and the best bids are sent to the screen generator unit 11 to be displayed on the screen seen by the market participants. The two-way price quotes stored in the quote storage unit 12 may also be sent to the screen generator unit 11. The quote storage unit 12, the order storage unit 13, the bid list 15 and the offer list 16 store the size of each bid and offer and the IDs of the market participants who entered the bids and the offers.

A bid/offer matching unit 17 compares the best bids in the bid list unit with the best offers in the offer list unit and sends the best bid and the best offer to the screen generator unit 11 to be displayed to the market participants. The bid/offer matching unit 17 further determines whether the best bid matches the best offer, i.e. if the best bid is higher or equal to the best offer. If there is a match, the bid/offer matching unit generates a new transaction number, communicates the transaction number together with the IDs of the parties to the transaction, the size, the price and the time of the bids and offers to a transaction storage unit 18. If two offers at the same price were entered before the first offer is matched by a bid at the same price, the bid/offer matching unit 17 checks whether the bid size exceeds the offer size of the first offer. If the bid size exceeds the first offer size, the excess goes to the participant that made the second offer. Thus, three or more participants may be involved in the transaction.

The bid/offer matching unit further sends a message to a freeze unit 19, informing it that a new transaction is ready for completion. The freeze unit 19 retrieves the parties to the transaction from the transaction storage unit 18. It checks the type of each party in a participant database 20, which stores details of all the participants. If one of the parties to the transaction is a Lead Market Member 3, the freeze unit 19 informs the bid/offer matching unit 17 that the transaction has been accepted and it forwards the transaction number to a transaction completion unit 21. The bid/offer matching unit 17 then continues to match the next best offer with the next best bid.

The transaction completion unit 21 extracts information about the parties to the transaction and the size and time of each offer from the transaction storage unit 18, and the account details of each party from the participant database 19. The transaction completion unit subsequently calculates the number of bonds allocated to each party in the transaction, updates the accounts of the parties involved in the transaction and sends details of the transaction to the screen generator unit 11. Furthermore, notification messages may be sent to each party. If the whole offer/bid of one of the parties is not satisfied, the remaining offer/bid is communicated to the order storage unit 13, such that it can be matched by the bid/offer matching unit 17 to another bid/offer.

However, if the freeze unit 19, after having checked the type of each party to the transaction, determines that no Lead Market Maker is involved in the transaction, it sets a freeze market flag, starts an internal clock, and informs the bid/offer matching unit that the transaction has been frozen. The Freeze unit 19 further communicates the price at which the market was frozen to an LMM message unit 22 together with the size of the bid and the offer at that price. The LMM message Unit 22 retrieves the addresses of all Lead Market Makers for the bond from the participant database 20 and sends messages to the Lead Market Makers reporting that a transaction has been frozen, the price of the bond at which the market was frozen and the size of the offer and the bid. The message may also include the price of future contracts in that bond at the time of freezing the transaction, in case the Lead Market Maker wants to buy or sell a basis.

The market will remain frozen for a predetermined time provided that none of the Lead Market Makers respond to the message and unlocks the market or that none of the participants that caused the market to lock withdraw their orders. If no Lead Market Maker responds to the message, the freeze unit 19, at the end of the predetermined time period, informs the transaction completion unit that a new transaction is ready for completion. However, it is possible that during this time, more bids and offers have been entered at the price at which the market froze. During the time the market is locked the bid/offer matching unit continues to monitor the best offers and the best bids in the bid list and the offer list. In addition to updating the sizes of the total bid and the total combined offer at the frozen price, the bid/offer matching unit also compares the next best bid and the next best offer. Both the bids and offers at the frozen price and the next best bid and the next best offer are forwarded to the screen generator unit 11, which communicates the information to the market participants. When the predetermined time period expires, the bid/offer matching unit returns to normal operation, i.e. it only compares the best bid and the best offer. While the freeze flag is set in the bid/offer matching unit 17, the Bid/offer matching unit does not forward any transaction numbers to the transaction completion unit, it only updates the information sent to the screen generator unit 11. While the market for a bond is frozen, no new transactions related to that bond are completed. Consequently, the whole market for that bond is frozen.

If a Lead Market Maker wants to respond to the invitation to participate in the frozen transaction, he sends a message to the exchange and the LMM message unit 22 forwards the message to the freeze unit 19. The freeze unit 19 adds the bid/offer made by the Lead Market Maker to the transaction storage unit and specifies that the order of the Lead Market Maker was made in response to a frozen market invitation. As soon as one Lead Market Maker has responded to the message, the market automatically unlocks and the freeze unit 19 sends a message to the transaction completion unit 21 that there is a new transaction to be completed. When the transaction completion unit retrieves the details of the parties from the transaction storage unit 18 and starts to allocate the bought and sold bonds it will ensure that the Market Maker that responded to the invitation is guaranteed a percentage of the original bid/offer that locked the market. However, if the order from the Market Maker was not in response to a message but came in through the normal route through the order storage unit 13, the Market Maker is not guaranteed participation in the transaction. The receiver unit 10 also receives orders to amend or cancel a previous bid or offer. The order is forwarded to the order storage unit 13, which updates the database of current orders and bids; the update is in turn forwarded to the bid list 15 and the offer list 16. The bid/offer matching unit 17 continuously checks the bid and offer lists 15 and 16, and if one of the bids or offers that locked the market is withdrawn, the bid/offer matching unit informs the freeze Unit 19, which unlocks the market and cancels the transaction. Thus, a locked market can be unlocked in three ways, by the predetermined time period expiring, by an LMM responding to the invitation to participate in the frozen transaction or by one of the orders that caused the market to lock being withdrawn.

The screen generator unit 11 continuously retrieves the updated bid and offer lists from the bid list unit 15 and the offer list unit 16. A certain number of the best bids and the best offers are then displayed to the market participants. An example of a display on one of the market participant's terminals is shown in Figure 3. The display comprises three windows, 23, 24 and 25. In window 23, the name of the bond to which the information in the window relates is shown in field 26. The window further shows the size 27 and the price 28 of the best bid and the price 29 and the size 30 of the best offer. This information is received from the bid/offer matching unit 17. The information shown in window 24 includes the price 31 and the size 32 of the last transactions, as retrieved from the Transaction completion unit 21. The window 25 shows the order book for the bond. It shows a certain number of the best bids 33 and a certain number of the best offers 34. In Figure 3, the IDs of the participants that made the offers are shown, however, in a preferred embodiment the IDs are hidden. The IDs are only shown in Figure 3 to aid in the understanding of the invention. The information shown in window 25 is retrieved from the bid list 15 and the offer list 16. The participant may also be allowed to see the two-way price quotes from all the LMMs (not shown). This data is supplied to the screen generator unit 11 from the quote storage 12. In an alternative embodiment, only window 23 is shown to the participants of the market. Alternatively, all windows are shown but each participant has the option to publish its order or not. As shown in window 23 of Figure 3 the current best bid for bond A is 20 mio at the price of 0.7725 each. The current best offer is 45 mio for 0.7775 each. As can be seen from the order book window 25, the best bid is made by Member Dealer 1, MDl, and the best offer is made by Member Dealer 3, MD3, and Cash Market Maker 2, CMM2. Member Dealer 3 entered the offer of 25 mio at 0.7775 earlier than CMM2 entered the order of 20 mio at 0.7775. Thus, the offer of Member Dealer 3 has time priority over the offer of CMM2 and the offer of MD3 is ranked higher than the offer of CMM2 in the order book. The offer size of the best offer shown in field 30 corresponds to the combined offer of Member Dealer 3 and Cash Market Maker 2.

Example 1

Figure 4 shows a screen for bond A when the market freezes according to the invention. Member Dealer 6, MD6, has adjusted his offer of 30 mio at 0.7825, shown in Figure 3, to 30 mio at 0.7725 in order to match the current best bid, made by Member Dealer 1. The bid/offer matching unit 17 matches the bid of the Member Dealer 1 and the Member Dealer 6 and sends the transaction number to the Freeze Unit 19. The Freeze Unit determines that neither MDl nor MD 6 is a Market Maker and, consequently, it freezes the transaction. It further instructs the LMM Message unit to send a message to all Market Makers inviting them to participate in the transaction at a price of 0.7725. The bid/offer matching unit 17, in response to the information received from the freeze unit 19 that the transaction has been frozen, sends the details of the offers and bids at the frozen price to the screen generator unit 11 together with information about the next best offer and the next best bid. The second line in window 23 shows that the next best bid is 75 mio at a price of 0.7700 and the next best offer is 45 mio at a price of 0.7775. The order book window 25 shows that the next best bid is made up by Member Dealer 2 and Cash Market Maker 1. The order book window 25 further shows that the next best offer is made up by MD3 and CMM2.

AU the LMMs now have the option to participate in the locked transaction. If no LMMs respond to the message, the market will be locked for a predetermined time and the transaction will then proceed without any Market Makers. However, if a Market Maker decides to respond, it is guaranteed a percentage of the locked transaction. In the description below, the guaranteed percentage is 50%. Moreover, the time period for which the market remains locked if no Lead Market Maker responds is 10 seconds. However, it should be understood by the skilled person that the guaranteed percentage may be any percentage between 0% and 100% and the market may be set to remain locked for any suitable time longer or shorten than the example of 10 seconds.

Figure 5 shows the screen after LMMl has responded to the locked market invitation and the market has been released. LMMl responded with an order to buy 20 mio at the frozen price. LMMl is guaranteed to get 50% of the potential locked trade, which is 50% of the 30 mio offered by MD6, i.e. 15mio. MDl gets the remaining 15mios. Thus, the outcome of the trade is:

The remainder of MDl 's bid, the 5 mio for 0.7725 each, is left on the system. In contrast, the remainder of LMMIs bid is cancelled. Alternatively, the rules of the market may specify that the remained of LMMl 's bid stays on the system. The rules may further specify that if MDl had only wanted lOmio, then LMMl would have got the remaining 5 mio before LMMl 's bid was cancelled.

Window 23 of Figure 5 shows that the best bid, after the market is unlocked and the locked transaction completed, is the 5 mio that remains of MDl 's bid. The best offer is the offer of Member Dealer 3 and Cash Market Maker 2 at 0.7775.

Furthermore, window 24 shows the two transactions that resulted from the locked market, the sale of 15 mio from MD6 to LMMl and the sale of 15 mio from MD6 to MMl. Figure 6 shows the state of the market if LMMl had not responded to the locked transaction. After the time period of 10 seconds had expired, the freeze unit 19 would have released the transaction to the transaction completion unit 21. The transaction completion unit would have transferred 20mio from Member Dealer 6 to Member Dealer 1. The 10 mio left of Member Dealer 6's offer would have remained on the system, as shown in window 23 of Figure 6. The best offer is the lOmio at a price of 0.7725 that remains of the offer made by MD6. The best bid is the original next best bid made by Market Dealer 2 of 50 mio at a price of 0.7700.

Alternatively, either MDl or MD2 could have withdrawn their offer before the expiry of the time limit and the transaction would not have been completed.

Example 2

Figure 7 shows an example involving what would have happened if during the time the market was frozen, a number of additional bids and offers at the locked price was entered. As can be seen from window 25, during the time the transaction has been frozen, LMM2 has entered a bid of 20 and CMMl has entered a bid of 20.

Thus, the total number of bonds wanted at 0.7725 is 40 mio and the total number of bonds offered is 50 mio as shown in window 23. It should be noted that the bid made by LMM2 is a normal order and not a response to the invitation to participate.

Thus, the market does not unlock at the time of the bid made by LMM2.

Moreover, CMM3 has made an offer of 20 mio at a price of 0.7750, which is better than the previous next best offer shown in Figure 4. Thus, the next best offer in window 23 has been updated to show 20mio at 0.7750. As in the previous example, LMMl unlocks the market by bidding 20 mio at 0.7725. Thus, LMMl gets the first 15mio of the MDό's offer. MDl gets the remaining 15. MDl then gets its remaining 5 from CMMl. CMMl then have an additional 15 left to offer that go to LMM2. The remaining 5 mio of LMM2s bid gets left on the system since LMM2's order was a normal order. The transaction is shown in the table below.

The screen after the transaction is completed is shown in Figure 8. The state of the market shown in Figure 23 includes a bid of 5 mio at the price of 0.7725, the remainder of LMM2's bid, and an offer of 20 mio at 0.7750 by CMM3.

Example 3

In the two previous examples, the Market Maker has unlocked the market by making a bid. The Market Maker may also unlock the market by making an offer. The transaction that is locked may further have more than two parties. In this example, the initial state of the market is the same as in the previous two examples. The initial state is shown in Figure 3. MDl has made a bid for 20mio at 0.7725 and MD3 and CMM2 has made a combined offer of 45 mio at a price of 0.7775. In this example MD5 makes a bid that matches the offers of MD 3 and CMM2 as shown in Figure 9. The state of the locked market is now a bid of 40 mio by MD5 at a price of 0.7775 and an offer of 45 mio by MD3 and CMM2. Since MD5's bid is larger than MD3's offer, CMM2 is also included in the transaction. However, CMM2 entered its bid after MD3's bid and consequently MD3 has time priority to MD5's offer. None of the parties are Lead Market Makers so the transaction freezes and invitations to participate are sent to the Lead Market Makers. The bid/offer matching unit continues to match the next best bids and offers as shown in window 23 of Figure 9. The next best bid is now the bid of 20mio at a price of 0.7725 by MDl and the next best offer is an offer by MD6 of 30mio at a price of 0.7825. Even if these offers had matched, or if matching offers are entered while the market is frozen, the transactions do not get completed until the frozen transaction has been completed or abandoned. In this case LMM2 responds to the message with an offer of 15mio. LMM2 is entitled to 50% of MD5's bid, i.e. 20mio, however LMM2 only wants 15mio. Thus, 5 mio of the 50% remains. In this case, even though MD5 has time-priority over CMM2, a Cash Market Maker has a slightly higher status than a Member Dealer and therefore CMM2 gets priority to what is left of the 50% guaranteed to the Lead Market Maker. CMM2 is entitled to sell 10% of the potential trade size, which is 4 mio. MD3 sells the remaining 21 mio. Thus, 4 mio belonging to MD3 remains to be sold and 16 mio belonging to CMM2 remains to be sold.

However, if CMM2 entered the bid after the transaction had been frozen, no priority is given to CMM2. Moreover, if LMM2 had not unlocked the market, the CMM would still get priority to 10%.

When the market is locked, the Lead Market Makers see, in addition to the screens shown in Figure 4, 7 and 9, a message inviting them to participate in the locked transaction. Figure 11 shows the screen of Figure 7 in the way a Market Maker would see it. The message displays the price of the bond in the locked market, and two buttons 36 and 37. By clicking the "yes" button 26, the LMM chooses to participate in the trade. By clicking the "yes" button it is contemplated that the LMM is directed to further forms for entering the size of the order, etc. If the LMM chooses the "no" button, the LMM chooses not to participate in the transaction and the window displaying the message is closed. The message may further include the price of a future contract in the bond at the time the market was frozen. Thus, the LMM has the option to buy and sell a basis at the locked prices. The electronic exchange 2 and the Future Exchange 9 guarantee that the future contracts can be bought/sold at the frozen price. However, for all other transaction performed through the electronic exchange, the price of the future contracts is not frozen.

The LMM terminal may be set to automatically answer the invitation according to predetermined criteria. Alternatively, a trader may see the message and make a decision whether to participate in the trade or not before the 10 seconds, during which the market remains locked, expires. The first Market Maker that responds to the invitation unlocks the market. After the first Market Maker has responded, no more Market Makers can respond. The server 2 may recall the message 35 after a first response has been received at the LMM message unit 22.

Referring to the flow diagram of Figure 12, the method for performing a transaction according to the invention will now be described in more detail. At step Sl 2.1 the bid/offer matching unit 17 retrieves the best bids and offers from the bid list 15 and the offer list 16 and compares the best bids with the best offers. At step Sl 2.2, the Unit 17 determines if there is a match between the best bid and the best offer. If there is no match, the server returns to step S 12.1, checks if the bid list 15 and the offer list has been updated and compares the new best bid and new best offer.

If, at step Sl 2.2, there is a match between the best bid and the best offer, the procedure continues to step Sl 2.3, and the Freeze Unit 19 checks whether any of the parties to the transaction is a Lead Market Maker. If at least one of the parties is a Lead Market Maker, the procedure continues to step Sl 2.9 and the transaction is completed. If, on the other hand, none of the parties to the transaction is a Lead Market Maker, the transaction is locked at step S 12.4.

After the transaction is locked, the server will initiate a loop that starts at step S12.5. The loop will continue until an action that causes the market to unlock is detected. The loop is divided into three steps. At step S12.5, the Freeze Unit 19 checks the internal clock to determine if a predetermined time period from the time the market froze has expired. At step Sl 2.6, the Freeze Unit checks whether the Bid/Match Unit has reported that any of the orders of the locked transaction has been withdrawn. Finally, at step S 12.7, the Freeze Unit checks whether the LMM Message Unit 22 has reported that a response from a Lead Market Maker has been received. If the answer to the questions at step S12.5, S12.6 and S12.7 is no, i.e. the time has not expired, none of the orders have been changed or withdrawn and a response from a Lead Market Maker has not been received, the loop goes back to Sl 2.5 and the Freeze Unit checks the counter of the internal clock. On the other hand, if the time has expired at step S12.5, the procedure continues to step S 12.8, the transaction completion unit retrieves all orders at the locked price from the transaction storage unit 18, even the orders that have been entered after the market was frozen. Each order has a priority, depending on the type of the market participant that made the order and at what time the order was made. The transactions are thereafter completed at step Sl 2.9.

If at step S12.7 it is noticed that one of the bids and offers has been withdrawn, and the withdrawal means that the transaction cannot go ahead because there are no matching bids or offers, the procedure goes back to step S12.1. The bid/offer matching unit retrieves the updated best bids and offers from the updated Bid list 15 and Offer list 16 and compares the best bids and the best offers.

Finally, if at step Sl 2.7, a response from a Lead Market Maker has arrived at the LMM message unit 22, the Freeze unit 19 unlocks the market and the procedure proceeds to step S12.8. The transaction completion unit retrieves all orders at the locked price from the Transaction storage unit 18, even the orders that have been entered after the market was frozen. Each order stored in the Transaction storage unit 18 has a priority, depending on the type of the market participant that made the order, what time the order was made, and in the case of a Lead Market Maker, if the order was a normal order or if it was a response to an invitation to participate in the frozen transaction. The transactions are thereafter completed at step Sl 2.9, according to the priority rules of each party to the transaction.

Although the invention has been described hereinbefore with respect to a market for trading bonds, it should be understood, that the invention could be used in trading any type of financial instrument. Moreover, the priority rules for the different type of market participants may be adapted to any type of market. For example, there may be fewer or more than three types of market participants.

Claims

Claims

1. An apparatus for performing a transaction related to a financial instrument being traded on an electronic exchange comprising means for matching a bid with an offer for the financial instrument; means for freezing a transaction based on a match between at least one bid and at least one offer at a price determined from the at least one bid and the at least one offer; communication means for informing a market participant of said price; means for releasing the market in response to the market participant participating in the transaction.

2. The apparatus of claim 1 wherein the electronic exchange comprises at least one server, the means for matching a bid with an offer, the means for freezing the transaction, the communication means and the means for releasing the market are all located in the at least one server, the apparatus further comprising a plurality of terminals operable to communicate with the server.

3. The apparatus of claim 2 wherein the communication means are configured to transmit a first signal incorporating information about the frozen transaction to at least one of said plurality of terminals.

4. The apparatus of claim 3 wherein the at least one of said plurality of terminals is operable to receive the first signals from the communication means and to transmit a second signal comprising information indicating that the market participant wants to participate in the frozen transaction.

5. The apparatus of claim 4 further comprising means, located in the at least one server, for receiving the second signal and releasing the transaction in response to the reception of the second signal.

6. The apparatus of any preceding claim wherein the means for releasing the transaction are further configured to release the transaction after a predetermined time even if the second signal has not been received.

7. The apparatus of any preceding claim wherein the means for freezing the transaction comprises means for suspending the processes for allocating the financial instruments to the market participants responsible for the at least one bid and the at least one offer and the means for releasing the transaction comprises means for starting the processes for allocating the financial instruments to the market participants responsible for the at least one matched bid and the at least one matched offer.

8. The apparatus of any one of the preceding claims wherein during the time the market is frozen, the means for matching a bid and an offer is configured to accumulate bids and offers at said price and wherein the allocation of the financial instrument to the participants responsible for the at least one matched bid and the at least one matched offer at the time of releasing the transaction is dependent on accumulated bids and offers.

9. A method of performing a transaction related to a financial instrument being traded on an electronic exchange comprising matching at least one bid with at least one offer; freezing a transaction based on the at least one bid and at least one offer at a price determined from the at least one bid and the at least one offer; informing a market participant of said price; and releasing the market in response to the market participant participating in the transaction.

10. The method according to claim 9 further comprising releasing the market if the market participant has not made an attempt to participate within a predetermined time of freezing the market.

11. The method of claim 9 or 10, wherein the market participant is a first market participant, the at least one bid is provided on the market by a second participant and the at least one offer is provided on the market by a third market participant, and the method further comprises in response to matching the at least one bid and the at least one offer checking the status of the second participant and the third participant.

12. The method of claim 11 wherein if the status of the second participant and the third participant is lower than a status of the first market participant performing the freezing of the market.

13. The method of any one of the preceding claims wherein participating in the transaction comprises providing an offer at the same price at the at least one offer or providing a bid at the same price as the at least one bid.

14. A computer program product comprising code for performing the method of any one of claims 9 to 13.