Matching computer of a negotiated matching system

Abstract

A matching computer is provided for a negotiated matching system that includes a plurality of remote terminals associated with respective potential counterparties, a communications network for permitting communication between the remote terminals, and the matching computer. Each user enters first parameters for a trading instrument into his or her remote terminal. The matching computer uses the trading parameters from each user to identify potential transactions between counterparties that are mutually acceptable based on the first parameters, thereby matching potential counterparties to a potential transaction. Once a match occurs, the potential counterparties can transmit negotiating messages to negotiate some or all terms of the transaction. Thus, the matching computer first matches potential counterparties who are acceptable to each other based on first trading parameters, and then enables the counterparties to negotiate and finalize the terms of a transaction.

Description

CROSS-REFERENCE TO RELATED CASES [0001] This application is a continuation of U.S. application Ser. No. 10 / 266,939 filed Oct. 9, 2002, pending application; which is a continuation of U.S. Ser. No. 09 / 313, 216 filed May 18, 1999, abandoned; which is a divisional of U.S. Ser. No. 08 / 475,499 filed Jun. 7, 1995, patented, which are expressly incorporated herein by reference.FIELD OF THE INVENTION [0002] The present invention relates to a matching computer of a negotiated matching system that identifies potential counterparties to a transaction using criteria input by each user of the system and then reveals the identity of the counterparties so that the counterparties may negotiate the final terms and / or details of the transaction. BACKGROUND OF THE INVENTION [0003] Automated dealing systems (e.g., for trading currencies, commodities, and the like) are increasingly replacing the conventional manner of dealing using a broker as an intermediary. When a broker is used to complete a transac...

AI Technical Summary

Benefits of technology

[0016] A benefit of a matching computer of the negotiated matching system according to embodiments of the present invention may be that the complex and confidential credit evaluation and risk management procedures of various financial institutions may be taken off line completely and left up to each individual party. This can greatly simplify the system needed to accommodate numerous financial institutions, may not require standardization of institution financial practices, and can allow the institutions to keep their credit practices confidential. Furthermore, a matching computer of the negotiated matching system according to the present invention can match potential counterparties without necessarily automatically executing transactions. The discretion to execute a transaction thus may remain with the traders themselves and may not be surrendered to the system.

Problems solved by technology

However, the known automated trading systems are not capable of accommodating types of financial instruments that are traded using more subjective, less-quantifiable criteria.

For example, known automated trading systems do not provide traders with the opportunity to filter out potential deals with other traders who may be unacceptable trading partners on the basis of subjective criteria other than the party's credit, for example, geographic location or political or other competitive criteria.

Second, the marketplace may create new, non-standardized types of trading instruments to fit its specific needs.

The known electronic trading systems are not capable of accommodating these non-standardized trading instruments because the instrument specifications in these systems are pre-defined based on standardized trading instruments.

Third, in the known automated trading systems, once a trader has entered a bid or offer, the trader no longer has the discretion of negotiating the entered terms of the bid or offer.

The known systems provide no means by which a trader can input a mere “expression of interest” in a particular transaction wherein the trader need not provide predefined objective criteria which would make the expression of interest firm.

These systems do not provide a means by which two parties who are potentially interested in dealing with one another may be introduced to one another based on preliminary information input into the system, and then allowed to negotiate the terms of a transaction using a communication link.

Fourth, the known automated trading systems cannot accommodate credit-complex trading instruments.

Credit-complex trading instruments are those for which the calculation of a trading party's risk or exposure at a given time is based on multiple elements and is therefore too complex to integrate into a large-scale trading system.

Credit risk is the effect of the transaction on the bank's overall books if the counterparty goes bankrupt before the transaction is completed.

Settlement risk is the risk that a bank will complete its half of the transaction and the counterparty will be unable to complete its half of the transaction, for example, because the counterparty goes bankrupt prior to settlement.

Liquidity risk is the risk that the holder of an instrument will not be able to sell that instrument at a reasonable price when the holder wishes to liquidate the position.

However, the complexity of calculating credit risk increases significantly as the settlement period increases.

Clearly, there is a greater risk that a counterparty will go bankrupt within this longer period of time prior to settlement.

As a result, banks' methods of calculating their long term exposure, including both settlement and credit risk, become increasingly complex and take into account multiple factors.

Therefore, banks and other financial institutions use complex formulae and methods to calculate their potential exposure for each transaction based on a highly complex evaluation of the time decay of the value of money and risk, the institution's total exposure, and numerous other factors.

These credit and risk management procedures are highly confidential and not standardized by any means.

Neither of these options is a practicable solution to this problem because banks are not likely to standardize their credit and risk management processes and a customized trading system would be economically infeasible.

Also, banks and other trading institutions are extremely protective of information regarding their credit and risk management procedures and may be unwilling to give out this information to third-party programmers who are designing a system or to put this information on line where other parties may be able to access it.

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