WO2001080539A2

WO2001080539A2 - A system and method for finding and matching transaction counter parties in less liquid markets

Info

Publication number: WO2001080539A2
Application number: PCT/US2001/012232
Authority: WO
Inventors: Gregory E. Smith; Peter D. Scutt; Hubert B. Holmes
Original assignee: Bond Desk, Inc.
Priority date: 2000-04-14
Filing date: 2001-04-16
Publication date: 2001-10-25
Also published as: AU2001251628A1; WO2001080539A8

Abstract

An on-line trading system and method for finding and matching the most likely counter parties to a transaction and for aggregating sufficient trade data from securities custodians or other data suppliers, to more accurately estimate a security's fair value and simultaneously communicate with a trade order the estimate of the security's fair value. The on-line trading system includes trading client systems, a message server, custodial systems, and trade management systems. Traders, associated with participants of the inventive system, use the trading client systems to send trades to the message server. The message server process orders and filters them against bond holding and transaction data of multiple custodians. As there is only likely to be a few buyers or sellers for a given fixed income security at a particular time, the inventive system solves the liquidity issue by effectively informing of most likely counter parties of an offer through its filtering process. By publishing on the trading clients all orders and price and volume details of completed trades; by using historic transaction data from multiple data suppliers to more accurately estimate a security's fair value and then publishing these estimates with messages regarding an order, the inventive system offers trading and price transparency to market participants.

Description

A System and Method for Finding and Matching Transaction Counter Parties in Less

Liquid Markets

Inventors: Gregory E. Smith, Peter D. Scutt and Hubert B. Holmes 5

RELATED APPLICATIONS

This application is related to U.S. Utility Application Serial Number 09/550,075 filed April 14, 2000,which is herein incorporated by reference in its entirety.

10 FIELD OF THE INVENTION

The present invention relates to an on-line system and method for trading securities, and more particularly, to an on-line system and method for finding and matching transaction counter parties in less liquid markets for securities and for filtering trading preferences against offered securities to effectively and efficiently find and match counter 15 parties in a trading transaction.

BACKGROUND OF THE INVENTION

Markets for securities, commodities and goods (herein after collectively referred to as 'securities') can be characterized in many different ways. One way to characterize them

20 is their level of liquidity. Liquid markets have large outstandings of fungible securities that are widely held. The many buyers and sellers, in aggregate, provide a continuous stream of bids and offers, such that, at any given point in time, a buyer or seller can enter the market and immediately find a counter party to their trade at a close to market price. Less liquid markets are those where there tend to be small outstandings of non fungible

2.5 securities that are narrowly held and as a consequence the probability of finding a counter party to a trade order at a particular point in time is low.

Online electronic trading systems are emerging as a more efficient means to trade securities than the human based systems of the past. However, the electronic systems that we see today (often referred to as Alternative Trading Systems 'ATS' or Electronic Communications Networks 'ECN'), which attempt to amass the orders of many buyers and sellers to generate continuous liquidity, are not viable solutions in less liquid markets, such as non-government fixed income securities. It should be noted that trading includes buying, selling, issuing, borrowing, lending, or otherwise exchanging securities between multiple parties.

Fixed income markets can be used to illustrate some of the characteristics of less liquid markets and their implications for electronic trading paradigms. Markets for trading fixed income securities, such as corporate bonds, are usually over-the-counter principal markets, whereby trades occur privately between an issue holder and a dealer and between the dealer and a buyer. When a fixed income security is initially issued, institutional investors, such as insurance companies, mutual funds and banks, usually purchase it. Thereafter, the initial purchaser of the fixed income security may resell it on a secondary market to other buyers, typically through dealers who set the prices on the secondary market. Since in fixed income markets there has been no requirement to report trading transactions for broad dissemination, there is little transparency of transaction prices. In addition, outside of the U.S. Treasury market, few fixed income issues are of sufficient size and/or have broad holding patterns to sustain a liquid trading market, and many fixed income securities trade infrequently. Therefore, many sellers in the secondary market contact a dealer or an original underwriter of the security to determine its selling price. The dealer often estimates prices for many securities in the secondary market by referencing recent prices of other similar securities or other information, such as the credit rating on the security, the issuing corporation's industrial sector and the security's relationship to U.S. Treasury bonds. The dealer also has a rolodex, i.e., a list of previous investors/buyers who might be interested in, or own a particular type of security or have similar securities in an investment portfolio. Based on information used by the dealer to estimate prices in the secondary market, the dealer quotes a price and in competition with other dealers, may purchase the security from the seller. Thereafter, the dealer sells the security to a buyer, and the difference between the purchase price, from the seller, and the selling price, to the buyer, is the dealer's spread, which the dealer keeps. Since few market participants have sufficient transaction information to estimate a security's "fair (market) value" with accuracy, it is difficult to assess whether a trade occurs at "fair value" or to adequately calculate the dealer's spread and commission for trading a security.

Interest rate volatility and a lack of liquidity in fixed income securities, coupled with the shift in market power to large asset management firms, have increasingly caused dealers to act as brokers rather than as principal counter parties, except for very large fixed income issues with broad holding patterns. The result is that buyers executing secondary trades and debt issuers attempting to issue new bonds, effectively "rent" a dealer's rolodex and a dealer's sales and trading desk calling services. Hence, the distribution of a security offered on the secondary market is limited to the active customers of the transacting dealer, i.e., customers to whom the dealer can communicate the offer within a reasonable time. In addition, the cost of renting the dealers services is unclear. This lack of trading transparency reduces market efficiency, leaving buying or selling firms unsure of whether they have achieved the best execution, i.e., finding the counter party with the most competitive price while paying the lowest execution fee.

Electronic trading systems for securities offer certain benefits over dealer-based markets. They incorporate features that are attractive to institutional investors and traders, such as anonymity of market participants, speed, and non-disclosure of trading interests. These features can lead to better execution of trade orders through price improvement, reduction in market impact costs and lower dealer spreads and commissions.

In order to provide value to users, electronic trading systems must generate sufficient order flow to create a liquid market, i.e. a market where there is a high probability of finding a counter party to a trade at any given moment. Successful paradigms have either focussed on generating sufficient order flow to support continuous liquidity or concentrating the order flow in discrete call cycles at specific times. While electronic trading systems are enormously valuable businesses, they are inherently difficult to build. Typically, the factor that is most important to the success of creating an electronic trading system is the speed at which it can build liquidity. This involves overcoming a "chicken and egg" liquidity hurdle, whereby investors only want to participate in the electronic market when liquidity is already evident; however, building liquidity requires many investors' participation. Thus, building early transaction flow is a non-trivial and expensive challenge. Liquidity is generally feasible in markets where there are large outstanding amounts of fungible securities and where the holdings of securities are broadly disbursed, i.e., markets with large numbers of buyers and sellers at any given time, such as equity and foreign exchange markets. Thus, electronic trading systems are well established in the equities market and have been successfully launched in other markets, such as inter-dealer foreign exchange transactions and exchange-traded derivatives. However, there has yet to be a proven comprehensive electronic trading platform in less liquid securities markets, such as investment grade fixed income. Fixed income security markets are much more fragmented than the equity market.

Apart from U.S. Treasury securities, most bonds are not fungible, resulting in smaller pools of outstanding securities with narrow holding patterns. As a result, there tends to be much smaller numbers of potential buyers and sellers of a particular fixed income security at a given time. The probability of finding the counter party for a trade at any given moment is very small, thus creating an ongoing problem for the viability of electronic trading systems in fixed income markets. This problem is substantially magnified during the start-up phase of an electronic trading system when there is a need to build transaction flow and traders' interest. Thus, current electronic trading systems in fixed income security markets have been unable to build the necessary critical mass of liquidity to deliver potential benefits to market participants.

In addition, current paradigms for generating order flow and liquidity require active participation by users of the system. Users have to actively watch order flow or continuously describe in detail their trading interests. If they do this several times without the satisfaction of completed trades, they tend to stop using the trading system. Thus, in less liquid markets, where the probability of matching transaction counter parties is low, the opportunity cost of pro-actively engaging in electronic trading systems can be too high to build participation. Moreover, unlike stocks that trade on public exchanges, thereby facilitating price discovery through publishing real time bids and offers, and by publishing price information on completed trades, fixed income security trading occurs over-the-counter, based on negotiated private transactions with dealers who make money through owning and managing the information flow. In addition, many securities trade infrequently. Few people have access to the vast amount of transaction data needed to confidently imply a relative value for a fixed income security. This uncertainty as to the current market price is an inhibitor to electronic trading and entrenches the role of dealer as intermediary. Current fixed income security electronic trading systems solve one or more problems in fixed income markets without comprehensively solving the liquidity problems or the problem of assessing the market price or fair value of a security. One current electronic trading system provides a means for seeking simultaneous quotes for U.S. Treasury securities from multiple dealers. It is a quote-driven dealer system that replaces the existing inefficient phone-based process for only the most liquid sector of the fixed income market. However, this system has not attempted to facilitate investor-to-investor trades. Another system's strategy is to target low to middle volume corporate bonds. Its primary feature is facilitating private negotiations between parties. The system does not completely solve the pricing transparency and liquidity issues.

Other fixed income security electronic systems serve as auction platforms for certain types of fixed income securities. One fixed income security electronic system is a continuous auction market for high yield bonds. It offers price transparency and anonymity. Another fixed income security electronic system is a continuous auction market for non-government bonds that primarily targets retail oriented dealers and brokers instead of institutional investors. Net another electronic system is a continuous auction system that is designed to initially target U.S. Treasury securities and Euro-denominated instruments.

Other fixed income securities electronic systems primarily try to solve the fixed income liquidity issue without addressing the transparency issue, or vice versa. One fixed income security electronic system creates a call market for bonds that crosses trade orders once per day. A call market offers both anonymity and non-disclosure of trading interests. It also concentrates liquidity at certain points of time. By concentrating liquidity, this system is trying to address the liquidity challenges of the fixed income market. However, call markets increase the 'chicken and egg' liquidity hurdle. In order to get matches and thereby satisfy users, the system must generate a large amount of simultaneous demand. Another fixed income security electronic system is a quote driven system, where institutions can electronically request prices from multiple dealers simultaneously. The institutions are required to identify themselves. Dealers, in this system, continue to earn their bid-offer spread, albeit in a more competitive quoting paradigm than the previous phone-based system. Another competitive system provides a continuous stream of executable bid and offer quotes from dealers and trading is anonymous.

All of the above mentioned systems either continue to have dealers as the providers of liquidity or as brokers in the transaction, or they have a transaction paradigm whose 'best execution' success relies on generating continuous liquidity or concentrating liquidity in discrete call cycles. Moreover, none of these systems publish estimates of fair value for a security, nor do they have sufficient transaction data to accurately estimate a security's fair value.

What is needed in less liquid markets is a system that provides for 'best execution' by effectively and efficiently finding and matching the most likely trading counter parties, i.e. a system of Intelligent Counter party Discovery. The system must also aggregate a critical mass of trade prices to provide accurate, real time estimates of a security's fair value and make these estimates widely available by publishing them simultaneously with the communication of the relevant trade orders. SUMMARY OF THE INVENTION

The present invention provides an on-line trading system and method for finding and matching the most likely counter parties to a transaction and for aggregating sufficient trade data from securities custodians or other data suppliers, to more accurately estimate a security's fair value and simultaneously communicate the estimate of the security's fair value with a trade order. The system can be linked to one or more external trading systems/partner trading systems and potentially to multiple dealer systems in order to complete the execution of the transaction once counter parties are found and matched. The on-line system includes secure links to trading client systems, a message server, custodial systems, trade management systems and external trading systems.

Traders, associated with participants in the external trading systems use external trading client systems to send trades to partner trading servers. The partner trading servers then route the trade orders to the inventive system's message server. The message server processes orders and filters them against the personal preferences of users of the inventive system. Importantly, these personal filters can incorporate and utilize, in the filtering process, an individual participant's bond holdings and historic transaction data. In the case of fixed income, this data is aggregated from multiple custodians, dealers, and/or any other market participant. As there is only likely to be a few buyers or sellers for a given fixed income security at a particular time, the inventive system solves the liquidity issue by effectively informing the most likely counter parties of a trade offer through its personal filtering and messaging process. This filtering process uniquely utilizes the participant's historic transaction behavior, represented by the participant's individual holdings and historic transaction data, to identify the participant's likely interest in a trade order. The messaging system delivers notice of the order using the communication method(s) preferred by each participant. By aggregating multiple transaction and holding data from multiple sources, the system also offers pricing transparency through the real time calculation and distribution of fair value estimates and through a more accurate end of day pricing service.

Specifically in a preferred embodiment of the invention, participants, i.e. buyers, sellers, lenders, borrowers and issuers of securities, in the on-line trading system must register to buy or sell a security on the inventive system. Upon registering, each participant is assigned a unique identifier for identifying the participant. A portfolio for each participant also may be established during registration. Each portfolio includes a credit limit and other qualifying information for the participant and other information that is necessary for the participant to quickly and efficiently execute the trade. The portfolio also may include the participant's filtering preferences for indicating the type of orders the participant is interested in purchasing. Filtering preferences may include reference to historical transaction and holdings data associated with the participant and other independent criteria set by the participant. If the on-line trading system is. linked to multiple external trading systems, pre-set credit limits from the external trading systems may be downloaded to the on-line trading system in order for the on-line trading system to match a transaction, before communicating the matched trade to the relevant external trading systems.

After registration, a participant may transmit an order through a trade management system to an associated trader. The trader enters the order into the inventive system's trading client or into the external trading system. The order is filtered through a database containing the participants filtering preferences, which includes transaction and holdings data. The database may reside on the message server or on custodial systems. The order is then transmitted to the most likely buyers or sellers based on the filtering results.

Orders are also communicated in the means most convenient to the individual participant. For example, orders may be communicated through e-mails, on-line instant messaging, wireless smart phones and PDAs. Messages containing orders have imbedded Uniform Resource Locators (URLs), which link the participant directly to the on-line trading system or the external trading system and the security in question. This personalized filtering and messaging reduces the need for all participants to commit resources to actively monitor markets for a particular security. A counter party may execute against the displayed order immediately, enter a controlled negotiation with the initiator of the order, or make a counter offer. The counter offer is immediately displayed on the screens of all trading clients and simultaneously routed to other likely counter parties via the filtering and messaging process. Executed trades in the system are processed against the participant's portfolio or through clearing brokers. Completed trades are immediately communicated to the counter parties via the trading clients and immediately communicated to the clearing agent.

The on-line trading system is also a pricing source for less liquid securities, including for example, non-government bonds. The inventive system has historical trade data from multiple custodians, dealers and/or other market participants. This cumulative data and resultant historic price relationships between securities, allows the on-line trading system to provide pricing services with a significant improvement in accuracy.

It is therefore an object of the present invention to provide a method for trading less liquid securities on-line. The method includes the step of filtering an order entered into the system through the current holding or historic data of an individual participant or through other descriptive filters set by an individual participant in order to find the most likely buyers.

It is another object of the invention to provide a method for including the participant preferences in a filtering means and for using the filtering means to determine the most likely counter parties in a trading transaction.

It is another object of the invention to provide a method for communicating filtered orders to selected individual participants through pre-selected communications means that are chosen by the individual participants. Filtering and messaging in the inventive system reduces the participants' need to commit resources to actively monitoring markets or trading systems for a desired security. By including reference to historical trading data and current holdings data in filtering preferences, the invention creates dynamic filtering preferences in that they are updated every time an individual completes a trade.

It is another object of the invention to provide a method for participants to search for relevant orders using personal search criteria, which may reference their current holdings or their historic trading data.

It is another object of the invention to provide a method for providing a pricing source for less liquid securities, such as non-government bonds, by aggregating and using historic trading data supplied by multiple custodians, dealers and/or other market participants. This provides pricing services with significant improvement in accuracy.

It is another object of the invention to use the pricing services to embed in messages of search results communicating a trade order, a real-time estimate of the fair value of the security, which is the subject of the order. Additional features and advantages of the invention will be set forth in the description that follows, and in part will be apparent from the description, or may be learned by practice of the invention. The objectives and advantages of the invention will be realized and attained by the on-line trading system that is particularly pointed out in the written description and claims hereof as well as the appended drawings. To achieve these and other advantages and in accordance with the purpose of the invention, as embodied and broadly described, the present invention provides an on-line trading system for trading less liquid securities and for discovering and matching the most likely counter parties to a transaction, the on-line system comprises: a plurality of trading client systems used by registered participants to initiate and complete transactions to trade less liquid securities; a first processing means for processing at least one order in each of the plurality of transactions against participants' filtering preferences in order to find the most likely counter parties for each of the plurality of transactions, selecting the most likely counter parties based on filtering results, and transmitting messages regarding the at least one order, the message includes an estimate of a fair market value for the less liquid security, which is the subject of the at least one order, to the selected counter parties; and means for enabling the selected counter parties to execute trades against the at least one order

An alternate embodiment of th present invention provides a method for trading less liquid securities in a client/server environment by discovering and matching the most likely counter parties for a transaction and providing trading and price transparency, the method comprising the steps of: transmitting an order by a registered participant to an online trading system; processing the order through filtering preferences to determine the most likely counter parties and selecting at least one of a plurality of most likely counter parties; sending a message regarding the order and an estimate of the fair value of a security, which is the subject of the order, to a selected counter parties through various communications means; and executing instructions from selected counter parties in order to complete the transaction. An alternate embodiment of the present invention provides an online system for trading less liquid securities, commodities, and/or goods while providing trading and pricing transparency and overcoming a liquidity hurdle, the system comprises: a plurality of trade management systems and external trading systems for transmitting orders from a participant through one of a plurality of trading clients; means in the plurality of trading clients for transmitting orders to a message server; means in the message server for filtering at least one order through a database with filtering preferences and for transmitting the at least one order for filtering to a plurality of custodial systems with filtering preferences; selecting records of counter parties from the database and from the custodial system based on results from the filtering and communicating messages regarding the at least one order and an estimate of a fair market value for the less liquid security, which is the subject of the at least one order, to the selected counter parties; and means for enabling the selected counter parties to execute a trade against the at least one order.

It is to be understood that both the foregoing general description and the following detailed description are exemplary and explanatory and are understood to provide further explanation of the invention as claimed

BRIEF DESCRIPTION OF THE DRAWINGS

The accompanying drawings, which are included to provide a further understanding of the invention and are incorporated in and constitute a part of this specification, illustrate embodiments of the invention that together with the description serve to explain the principles of the invention.

In the drawings:

Fig. 1 illustrates a computer network in which the inventive system may be incorporated;

Fig. 2 illustrates the TCP/IP Layering Model Protocol used during communications between components on the computer network;

Fig. 3 illustrates an electronic system for trading fixed income securities according to the present invention; and

Figs. 4 illustrates the steps implemented in a preferred embodiment of the inventive system of Fig. 3.

DESCRIPTION OF THE PREFERRED EMBODIMENTS

Reference will now be made in detail to the preferred embodiments of the present invention, examples of which are illustrated in the accompanying drawings. The present invention described below extends the functionality of the inventive on-line trading system and method for processing less liquid securities, commodities and/or goods by effectively matching counter parties though a filtering process.

Fig. 1 is an example of a local area network (LAN) 100 that is connected to the Internet and in which the inventive system and method may be utilized. LAN 100 comprises a server 102, four computer systems 104, 106, 108,110, and peripherals, such as printers and other devices 112, that may be shared by components on LAN 100. Computer systems 104, 106, 108, 110 may serve as clients for server 102 and/or as clients and/or servers for each other and/or for other components connected to LAN 100. Components on LAN 100 are preferably connected together by cable media, for example copper or fiber-optic cable, and the network topology may be a token ring topology 114. It should be apparent to those of ordinary skill in the art that other media, for example, wireless media, such as optical and radio frequency, may also connect LAN 100 components. It should also be apparent that other network topologies, such as Ethernet, may be used. Data may be transferred between components on LAN 100 in packets, i.e., blocks of data that are individually transmitted over LAN 100. Routers 120, 122 create an expanded network by connecting LAN 100 to other computer networks, such as the Internet, other LANs or Wide Area Networks (WAN). Routers are hardware devices that may include a conventional processor, memory, and separate I/O interface for each network to which it connects. Hence, components on the expanded network may share information and services with each other. In order for communications to occur between components of physically connected networks, all components on the expanded network and the routers that connect them must adhere to a standard protocol. Computer networks connected to the Internet and to other networks typically use TCP/IP Layering Model Protocol. It should be noted that other internetworking protocols may be used.

As illustrated in Fig. 2, TCP/IP Layering Model comprises an application layer (Layer 5) 202, a transport layer (Layer 4) 204, an Internet layer (Layer 3) 206, a network interface layer (Layer 2) 208, and a physical layer (Layer 1) 210. Application layer protocols 202 specify how each software application connected to the network uses the network. Transport layer protocols 204 specify how to ensure reliable transfer among complex protocols. Internet layer protocols 206 specify the format of packets sent across the network as well as mechanisms used to forward packets from a computer through one or more routers to a final destination. Network interface layer protocols 208 specify how to organize data into frames and how a computer transmits frames over the network. Physical layer protocols 210 correspond to the basic network hardware. By using TCP/IP Layering model protocols, any component connected to the network can communicate with any other component connected directly or indirectly to one of the attached networks. Fig. 3 illustrates an inventive on-line system for trading securities, as it is incorporated in LAN 100. System 300 is linked to the bond holding and transaction data of individual participants. The transactions and holdings data is supplied by multiple custodians/dealers and other market participants, and orders to trade securities in system 300 are displayed real time, for immediate execution. System 300 includes trading client systems 302, 304, 306, 308, a message server 310, custodial systems 312, 314, 316 and trade management systems 318, 320. System 300 is also connected to one or more external trading systems. Trading client systems 302-308, message server 310 and custodial systems 318, 320 are linked via TCP/IP connection. They are also connected to the Internet and incorporate Web interfaces and Application Programming Interfaces (API) for accessing, submitting, and processing trading orders, filtering and messaging preferences, credit limits and/or historic trading data and current holdings data and generating and communicating messages. Trading client systems 302-308, custodial systems 312-316 and trade management systems 318, 320 may be incorporated in computer systems 104-110, and message server 310 may be incorporated in server 102 of LAN 100. As would be apparent to one of ordinary skill in the art, these systems may also be incorporated in any client/server environment or other computer network environments. As would also be apparent, messages between components of system 300 may be encrypted or otherwise secured to ensure confidentiality.

Market participants include buyers, sellers, lenders, borrowers and issuers of securities of new securities. Trading in system 300 includes buying, selling, lending, borrowing, issuing or otherwise exchanging securities between multiple participants. Market participants may use trade management systems 318, 320 to initiate orders to trade a security. These orders are transmitted through trading client systems 302-308 and are immediately published on trading client systems 302-308. The orders are also simultaneously filtered through individual participant's holdings and historic transaction data on custodial systems 312-316. Alternatively, the orders may be filtered through individual participant's historic transaction and holding data stored on a database in message server 310. Alternatively, potential counter parties, dealers or other market participants may supply the holding and transaction data. Upon filtering, transmissions of messages with the order and an estimate of the security's fair value, which is the subject of the order, are submitted to the most likely buyer or seller.

Specifically, in a preferred embodiment of the invention, participants utilizing the on-line trading system 300 must register to buy or sell a security. Upon registering, each participant is assigned a unique identifier for identifying the participant to system 300. In one embodiment of the invention, a portfolio for each participant is also established during registration. Each portfolio includes a credit limit for the participant and other information that is necessary for the participant to quickly and efficiently execute a trade. The portfolio also may include the participant's filtering preferences for indicating the types of orders the participant is interested in. Filtering preferences may include reference to historical trading data and current securities holding data associated with the participant. In one embodiment, multiple custodians could supply this data. In another embodiment, the data could be supplied directly by the participants, dealers or by other entities in the market. Examples of filtering preferences include any securities the participant currently owns; securities issued by the same issuer or in the same sector as any securities the participant currently owns; and securities that have been previously traded by the participant in a specified time. Filtering preferences also may include other broad independent criteria set by the participant. For example, it may include any A-rated security with a 5 to 7 year duration.

After registration, a participant, such as a mutual fund manager, may use on-line trading system 300 to buy or sell a fixed income security. In one embodiment of the invention, a mutual fund manager, for example, may transmit an order through trade management system 318 to a trader associated with the mutual fund manager. Alternatively, the order may be communicated to the trader through other communication means. The trader enters the order into trading client system 302 or into an external trading system. In one embodiment of the invention, the order is immediately published on all trading clients and simultaneously filtered through the database, on message server 310, containing historical transaction and holdings data of individual participants. In another embodiment of the invention, the order is filtered through historical transaction and holdings data on custodial systems 12-316. Based on the filtering results, the order is then communicated, over secure electronic networks, to the most likely buyers or sellers. Orders are also communicated in the means most convenient to participants in the system. For example, orders may be communicated through e-mails, on-line instant messaging, pagers, wireless smart phones and/or personal digital assistants (PDAs). Messages containing orders have imbedded Uniform Resource Locators (URLs), which link the participant direcdy to the trading client of on-line trading system 300 or the external trading system, diat originated the order and to die security in question. Filtering and messaging in the inventive on-line trading system reduce the need lor all participants to commit resources to actively watching screens or otherwise monitor trading systems for a particular security. As there is only likely to be a few buyers or sellers for a given fixed income security at a particular time, system 300 solves the liquidity issue in the prior art by effectively informing the most likely counter parties about an offer. The inventive system d us achieves best execution by reaching the most likely buyers or sellers of any given order through iLs filtering process, which incorporates the previous trading behavior of potential counter parties as derived from die counter parties individual liistoric trading data and current holdings data. Participants in system 300 may search for relevant orders using personal search criteria, which may reference their current holdings or their historic trading data. For example, an individual participant may not want to receive messages resulting from filtering in system 300, but may instead search for a desired security on an as needed basis. Alternatively, the individual participant may receive messages resulting from filtering in system 300 and search for desired securities on an as needed basis. After a counter party receives a message indicating an order of interest, the counter party may either execute against the displayed order immediately, enter a controlled negotiation with the initiator of the order, or make a counter offer via trading client 302- 308 or via trading clients of external trading system. The counter offer is displayed on trading client systems 302-308 and simultaneously routed through the personalized filters. Messages generated from the filters are transmitted to other likely counter parties. Counter offers may also be transmitted to external trading systems for display on external client systems. In one embodiment of the invention, executed trades in system 300 are processed against the participant's portfolio to adequately determine if the participant has sufficient credit to satisfy the order. Alternatively, if an external trading system is involved in the transaction, pre-set credit limits from the external trading system may be downloaded in advance to on-line trading system 300 in order to match counter parties in on-line trading system 300 before communicating matched trades back to the external trading system. In another alternative, system 300 may engage dealers as clearing brokers and use them to determine if a participant is qualified to enter into a transaction. System 300 also may encourage dealer participation by allowing buy side firms and issuers to direct commissions to them for clearing services. Thus, trades in system 300 may be settled by a predetermined or nominated clearing broker or by a correspondent clearing broker associated with the electronic system. Completed trades are immediately communicated to counter parties via trading client systems 302-308 or external trading clients. The completed trades are also immediately communicated to clearing agents. Price and volume data for completed trades are published on trading client systems 302-308 and filtered through filtering preferences for participants who select to receive generated messages on completed trades. On-line trading system 300 is also a pricing source for less liquid securities, for example, non-government bonds. Since non-government bonds, like many less liquid securities, trade infrequently, estimating a bond's value is largely determined by modeling the price relationship between various bonds and benchmarked U.S. Treasury bonds. Regardless of the actual fair value model, the accuracy of the fair value estimate relies principally on the reliability of the U.S. Treasury benchmarked curve, and the accuracy and number of sample points of prices for the actual non-government bond trades. Data for existing fair value models often come from the price indications of a single dealer's trading desk. The inventive system 300 has, on the other hand, accumulated multiple custodian, dealers and/or participants historical trading data. This cumulative data and resultant historic price relationships between securities, allows on-line trading system 300 to provide an end-of-day pricing service or a real-time service for estimating the fair value of securities with significant improvement in accuracy over the prior art. System 300 would also include, in personalized messages regarding an order, a real-time estimate of fair value the security, which is the subject of the order. System 300 also produces extensive risk management data for less liquid securities, such as investment grade corporate bonds. Thus, system 300 provides most value to investors trading (i.e. buying, selling, borrowing or lending) or issuers issuing less liquid securities, such as investment grade, non-government fixed income securities where the lack of transparency or information leads to wider spreads and to difficulty in locating the most price competitive counter party. Moreover, the system's focus on counter party discovery ensures its effectiveness in trading or issuing any less liquid security, including for example non-investment grade securities. In addition, the system focus on counter party discovery using individual participants' current holdings data for filtering allows the system to also facilitate the electronic lending and borrowing of securities. In effect, the securities lending market can be viewed as just another less liquid securities market, which would benefit from the discovery and matching of counter parties.

Fig. 4 illustrates the steps implemented in transacting a trade in one embodiment of the invention, using fixed income securities as an example. In Step 410, participants in the on-line trading system 300 register to buy or sell a fixed income security on system 300. Upon registering, each participant is assigned a unique identifier for identifying the participant to system 300. In Step 420, a participant may transmit an order through trade management system 318 to a trader. In Step 430, the trader enters the order into trading client system 302. In Step 440, the order is published on client trading systems 302-308 and simultaneously filtered through the personal preferences of each participant, referencing the relevant historical transaction and holdings data. In Step 450, the order is then transmitted, over secure electronic networks, to the most likely buyers or sellers as determined by the filtering process in the means most convenient to the participant. In Step 460, the counter party may either execute against the displayed order immediately, enter a controlled negotiation with the initiator of the order, or make a counter offer. In Step 470, the counter party's qualification for participating in the transaction is checked by a dealer, or a clearing broker, or against an appropriate portfolio. In Step 480, completed trades are immediately communicated to the counter parties and the price, volume and security details are published on client trading systems 302-308 and if desired, filtered through the filtering preferences, generating personalized messages of completed trades. The foregoing description has been directed to specific embodiments of diis invention. It will be apparent, however, that odier variations and modifications may be made to the described embodiments, with the attainment of some or all of their advantages. Therefore, it is die object of the appended claims to cover all such variations and modifications as come within the true spirit and scope of die invention.

Claims

WHAT IS CLAIMED:

1. An on-line trading system for trading less liquid securities and for discovering and matching the most likely counter parties to a transaction, the on-line system comprises: a plurality of trading client systems used by registered participants to initiate and complete transactions to trade less liquid securities; a first processing means for processing at least one order in each of the plurality of transactions against participants' filtering preferences in order to find the most likely counter parties for each of the plurality of transactions, selecting the most likely counter parties based on filtering results, and transmitting messages regarding the at least one order, the message includes an estimate of a fair market value for the less liquid security, which is the subject of the at least one order, to the selected counter parties; and means for enabling the selected counter parties to execute trades against the at least one order.

2. The system of claim 1, wherein registered participants include buyers, sellers, lenders, borrowers and issuers of new securities.

3. The system of claim 1, wherein filtering preferences comprise reference to each participant's historic holding, trading and transaction data, and current holding data associated with the participant.

4. The system of claim 3, wherein filtering preferences are stored on a database in a message server in the on-line trading system.

5. The system of claim 3, wherein filtering preferences are stored on at least one of a plurality of custodial systems that are connect to the on-line trading system.

6. The system of claim 3, wherein filtering preferences are stored on at least one of a plurality of market participants' systems that are connect to the on-line trading system.

7. The system of claim 4, wherein filtering preferences comprise independent criterion set by the registered participant.

8. The system of claim 1, wherein trading includes means for buying, selling, lending, borrowing issuing or otherwise exchanging less liquid securities between multiple participants.

9. The system of claim 1, wherein less liquid securities include securities, goods and commodities.

10. The system of claim 1, wherein each registered participant is assigned a unique identifier during registration with the on-line trading system.

11. The system of claim 1, where a portfolio is established for each participant during registration, whereby the portfolio comprises a credit limit and other information that is necessary for the registered participant to quickly and efficiently execute a trade.

12. The system of claim 11, wherein executed trades are processed against the registered participant's portfolio to adequately determine if the registered participant has sufficient credit to satisfy the order.

13. The system of claim 1, wherein executed trades are processed against pre-set credit limits that are downloaded from a plurality of external trading systems in order to select the most likely counter parties in the on-line trading system before communicating matched trades back to the plurality of external trading systems.

14. The system of claim 1, wherein executed trades are processed against pre-set credit limits that are downloaded from a plurality of dealers engaged as clearing brokers, whereby the dealers determine if the participant is qualified to enter into the transaction.

15. The system of claim 1, wherein the participant transmits an order to one of the plurality of trading client systems through a trade management system that is linked to the on-line trading system or through other communications means.

16. The system of claim 15, wherein a trader receives the order from the trade management system and enters the order into one of the plurality of trading client systems

17. The system of claim 1, wherein a trader receives the order from an external trade management system and enters the order into an external trading system for further transmission to a message server in the on-line trading system.

18. The system of claim 1, wherein messages regarding orders are communicated to the most likely counter parties in means most convenient to the most likely counter parties.

19. The system of claim 18, wherein messages regarding orders are communicated through e-mails, on-line instant messaging, pagers, wireless smart phones, or personal digital assistants.

20. The system of claim 18, wherein messages regarding orders have imbedded URLs for linking the most likely counter parties directly to the order, which is the subject of the message, within the on-line trading system or with an external trading system that originated the order.

21. The system of claim 18, wherein the selected counter parties execute against the communicated order immediately, enter a controlled negotiation with an initiator of the order or make a counter offer.

22. The system of claim 21, wherein counter offers are displayed on the plurality of trading client systems, routed though personalized filters and, based on results from the personalized filters, messages with the counter offer are transmitted to other most likely counter parties on the system.

23. The system of claim 1, wherein registered participants search for relevant orders using personal search criteria, wherein search criteria comprise reference to each registered participant's historic holding, trading and transaction data, and current holding data associated with the registered participant.

24. The system of claim 1, wherein a database in the message server comprises cumulative transaction data from multiple dealers, custodians, participants or the on-line trading system, and resultant historic price relationships between securities to allow the online trading system to provide an end-of-day pricing service or a real-time service for estimating fair value of a less liquid security.

25. A method for trading less liquid securities in a client/server environment by discovering and matching the most likely counter parties for a transaction and providing trading and price transparency, the method comprising the steps of: transmitting an order by a registered participant to an online trading system; processing the order through filtering preferences to determine the most likely counter parties and selecting at least one of a plurality of most likely counter parties; sending a message regarding the order and an estimate of the fair value of a security, which is the subject of the order, to a selected counter parties through various communications means; and executing instructions from selected counter parties in order to complete the transaction.

26. The method of claim 25, further comprising the step of registering buyers, borrowers, lenders, sellers and issuers of securities as participants in the on-line trading system.

27. The method of claim 25, further comprising the step of storing in the filtering preferences, reference to each registered participant's historic holding, trading and transaction data, and current securities holding data associated with the registered participant.

28. The method of claim 25, further comprising the step of trading goods, commodities and securities as securities in the on-line trading system.

29. The method of claim 25, further comprising the step of storing filtering preferences on a database in a message server in the on-line trading system.

30. The method of claim 25, further comprising the step of storing filtering preferences on at least one of a plurality of custodial systems that are connect to the on-line trading system

31. The method of claim 25, further comprising the step of storing filtering preferences on market participants' systems that are connect to the on-line trading system.

32. The method of claim 25, further comprising the step of storing independent criterion set by the registered participant in the filtering means.

33. The method of claim 26, further comprising the step of assigning each registered participant a unique identifier during registration with the on-line trading system.

34. The method of claim 26, further comprising the step of establishing a portfolio for each participant during registration, whereby the portfolio comprises a credit limit and other information that is necessary for a participant to quickly and efficiently execute a trade.

35. The method of claim 34, further comprising the step of processing executed trades against the registered participant's portfolio to adequately determine if the regsitered participant has sufficient credit to satisfy the order.

36. The method of claim 25, further comprising the step of processing executed trades against pre-set credit limits that are downloaded from a plurality of external trading systems in order to select the most likely counter parties in the on-line trading system before communicating matched trades back to the plurality of external trading systems.

37. The method of claim 25, further comprising the step of processing executed trades against pre-set credit limits that are downloaded from a plurality of dealers engaged as clearing brokers, whereby the dealers determine if the registered participant is qualified to enter into the transaction.

38. The method of claim 25, wherein the step of transmitting further comprises the step of transmitting an order, by the registered participant, to one of a plurality of trading client systems through a trade management system that is linked to the on-line trading system or through other communications means.

39. The method of claim 38, wherein the step of transmitting further comprises the steps of receiving the order by a trader from the trade management system and entering the order into one of the plurality of trading client systems.

40. The method of claim 25, wherein the step of transmitting further comprises the steps of receiving the order by a trader from one of a plurality of external trade management systems and entering the order into one of a plurality of external trading systems for further transmission to a message server in the on-line trading system.

41. The method of claim 25, wherein the step of sending further comprises the step of communicating messages regarding orders to the most likely counter parties in the means most convenient to those counter parties.

42. The method of claim 25, wherein the step of sending further comprises the steps of communicating messages regarding orders through e-mails, on-line instant messaging, pagers wireless smart phones or personal digital assistants.

43. The method of claim 25, wherein the step of sending further comprises the steps of imbedding URLs in messages with the order for linking the most likely counter parties directly with the order, which is the subject of the message, within the on-line trading system or with one of a plurality of external trading system that originated the order.

44. The method of claim 25, wherein the step of executing further comprises the steps of: immediately executing against the order by the one of the selected counter parties; entering a controlled negotiation with an initiator of the order by one of the selected counter parties; or making a counter offer by one of the selected counter party.

45. The method of claim 44, further comprising the steps of: displaying the counter offer on the plurality of trading client systems; and routing the counter offer though personalized filters and, based on results from the personalized filters, transmitting messages with the counter offer to other likely counter parties.

46. The method of claim 45, further comprising the steps of transmitting the counter offer to external trading systems.

47. The method of claim 25, wherein the step of executing further comprises the steps of communicating completed trades to clearing agents and most likely counter parties through the plurality of on-line trading clients or through a plurality of external trading system.

48. The method of claim 47, wherein the step of executing further comprises the step of publishing completed trades on a plurality of on-line trading clients.

49. The method of claim 48, wherein the step of publishing further comprises the steps of filtering completed trades through filtering preferences of individual participants to generate messages on completed trades and communicating the generated messages to the individual participants.

50. The method of claim 25, further comprising the steps of storing, on a database in a message server, cumulative data from multiple dealers, custodians or participants, and resultant historic price relationships between securities to allow the on-line trading system to provide end-of-day pricing service or real-time service for estimating fair value of a less liquid security.

51. The method of claim 25, further comprising the step of enabling participants to search for relevant orders using personal search criteria, wherein search criteria comprise reference to each registered participant's historic holding, trading and transaction data, and current holding data associated with the registered participant.

52. An online system for trading less liquid securities, commodities, and/or goods while providing trading and pricing transparency and overcoming a liquidity hurdle, the system comprises: a plurality of trade management systems and external trading systems for transmitting orders from a participant through one of a plurality of trading clients; means in the plurality of trading clients for transmitting orders to a message server; means in the message server for filtering at least one order through a database with filtering preferences and for transmitting the at least one order for filtering to a plurality of custodial systems with filtering preferences; selecting records of counter parties from the database and from the custodial system based on results from the filtering and communicating messages regarding the at least one order and an estimate of a fair market value for the less liquid security, which is the subject of the at least one order, to the selected counter parties; and means for enabling the selected counter parties to execute a trade against the at least one order.