WO2007021801A2

WO2007021801A2 - Method and apparatus for generating liquidity for dissimilar assets using category groupings

Info

Publication number: WO2007021801A2
Application number: PCT/US2006/031142
Authority: WO
Inventors: Mark Daniel Jackson
Original assignee: Microtick, Llc
Priority date: 2005-08-11
Filing date: 2006-08-09
Publication date: 2007-02-22
Also published as: WO2007021801A3

Abstract

A system, method and means creates liquid markets capable of grouping assets by correlation and trading the grouped assets as intangible category markets in addition to the individual assets. The category markets are correlated to the individual assets by standardized covariance options. The resulting marketplace has uses for standardized trading of dissimilar assets, information markets, prediction markets and related search engine technology as well as any other asset markets.

Description

Method and Apparatus for Generating Liquidity for Dissimilar Assets Using Category Groupings

BACKGROUND OF THE INVENTION

1. Field of the Invention

The present invention relates to a system, method and means for standardizing, pricing and trading derivative instruments on the financial markets, commodity markets, foreign exchange markets or other types of commercial or retail marketplaces.

2. Background of the Art

Historically, the financial markets have been formed around and based upon tradable assets that have standardized parameters for the contract that in turn allow buyers and sellers of the asset to negotiate on price while keeping the other parameters constant. Because each contract is fungible with another of the same series or issue, centralized trading is possible which promotes the desirable properties of price dissemination, price transparency and price competition to market participants.

These desirable characteristics break down when dealing with tradable assets with dissimilar characteristics. Such assets do not readily fit the traditional mold for exchange-based trading, and as a result they are typically traded on a one-to-one, or over-the-counter basis.

The financial markets have a history of innovation aimed primarily at broadening trading opportunities and overcoming certain logistical obstacles to trading certain products. One such product example that was designed to overcome logistical difficulties in risk management and hedging and which embodies ingenuity and inventiveness is the traded option. The current invention, which provides a solution to trading intangible assets, uses a type of option referred to as a MicroTick® option, as a basis for its marketplace. Black-Scholes option pricing model

In 1973, the Black-Scholes pricing model for exchange-traded options was published by Myron Scholes and Fisher Black. Using the Black-Scholes model, the price of a call option can be expressed using the following formula:

Where:

C = the price for the call option

P = the current price of the underlying security X- the exercise price for the option r = the risk free interest rate s = standard deviation of the underlying returns t - time left until the option expires

NQ = cumulative standard normal distribution di and d₂ = the normalization factors of the option

This formula was the first theoretical model for calculating the fair value of a call option, and Black and Scholes were awarded the 1997 Nobel Prize in Economics over twenty years after the model was first published. Today the Black-Scholes formula is in use daily by thousands of traders to value option contracts traded in markets around the world.

The Black-Scholes pricing formula, along with other theoretical option pricing models, calculates the fair value of an option in part by assuming that fair value will be the price someone would pay in order to break even in the long run. The model employs several parameters that can affect the value of an option, the most important of which are the price difference between the underlying instrument and the strike price of the option, the volatility of the underlying instrument's return, and the time to expiration of the option. ThFMicroTick® Marketplace

The MicroTick® marketplace (MTM) is based on trading options that are always at-the-money with strike price determined through a feedback mechanism between market participants and the marketplace itself. The marketplace and its operation is described in co-pending patent application serial number 10/999,806 filed November 30, 2004, which application is incorporated herein in its entirety by reference. In one application of the MTM, the implied underlying price can be treated as an expected value for the underlying asset and the option premiums as the expected volatility for future price movement over the option time duration. The traditional MicroTick® marketplace allows (and in some embodiments depends on) options being exercised into the underlying units so they can be arbitraged externally. Without this arbitrage potential, it is possible to have a runaway market where calls (puts) are overvalued causing the implied price to become higher (lower), causing the calls (puts) to become even more overvalued. The exercise potential keeps prices in check, with sellers (buyers) stepping in when the strike price for the underlying asset becomes too high (low).

The MicroTick® marketplace solves the 'liquidity of trading' problem for short-term micro-options by reducing the number of choices available for trading by offering issues based on time duration instead of fixed expiration times. Additionally, in order to guarantee the relevance of the strike price at any given time, the issues have floating strike prices, specified using a fixed amount either above or below the current price of the underlying instrument. As the underlying instrument varies in price, the floating strike price of the option does not change, and will continue to specify a fixed amount in relation to the current underlying price. Additionally, the MicroTick® marketplace uses a feedback mechanism between market makers for the short-term options and the marketplace itself. An arbitrary reference price for the underlying security is created that market participants agree will be the strike price for all options traded on the marketplace. This arbitrary reference price is referred to as the "implied underlying price" for the market. If the price of floating calls is greater than the price of floating puts, the implied underlying price is raised. Conversely, if the price of floating calls is less than the price of floating puts, the implied underlying price is lowered. This action of observing the prices market makers place on the issue, and adjusting the arbitrary Fefefence pϊfce^ιirf"the "direction of the difference, is referred to in control systems as a feedback loop and has beneficial properties to the system as a whole if applied correctly. In the case of the MTM, the feedback allows the implied price to stabilize and also allows the marketplace to be self-contained and works because of the possibility of an option being exercised into the underlying asset.

Brief Description of the Drawings

Figure 1. Category / Asset Hierarchies Figure 2. Market Block Diagram Figure 3. Standalone MTM block diagram. Figure 4. Group contract valuation block diagram.

Detailed Description of the Invention

Market operation

The present invention provides for grouping of similar assets into "categories" through priced linkages or associations between markets and enables traders (when referred to herein, the terms "traders", "investors", "speculators", "hedgers" and

"market makers" can be collectively considered to be marketplace users as opposed to the operation of the marketplace itself, and as such, these terms should not be considered to be limiting with respect to the scope of the claims) to trade the categories as a proxy asset in addition to or in certain cases substituted for the composite assets. The preferred embodiment of the invention provides for derivative securities (in particular a type of option with at least two strike prices which will be referred to as "group" contracts, "group options" or "category options" herein) to be traded that allow traders to cash settle or exercise the contract into at least one selected member asset of a category, depending in some embodiments on the correlation of an asset's price movement to a category price movement over the time period of the contract.

Further functions capable of relating price movement of separate assets are comprised of but are by no means limited to products, sums or averages (arithmetic mean, geometric mean, harmonic mean or power mean for example) or differences in price movement, or price movement differentials over a standardized time period. Group contracts as provided for by the system of the invention are similar to standardized MϊcroTic^'K® contracts with the exception they relate to two or more distinct underlying instruments as opposed to a single underlying instrument, specifically they are characterized by a) standardization based on time duration, b) floating strike prices for at least two underlying assets, and c) in some embodiments there may exist feedback between market makers and the marketplace using an adjustable price, index or weighting mechanism that may in some cases cause the system to become suitably stable.

Category markets as provided for by the system of the invention are derivative markets based on an intangible asset or assets whose primary value is derived from the relation of the category price movement to the price movement of the component assets that comprise or are otherwise related to the category. In one embodiment of the system of the invention, assets are grouped into categories prior to trading by a separate authority, such as an independent third party, possibly a market maker or search engine, and these groupings do not change during the market operation. In other embodiments, groupings or linkages may be dynamically generated allowing for changing category taxonomies that are capable of evolving over time.

Figure 1 shows an example category taxonomy with hierarchical groupings between assets 103, sub-categories 102 and super-categories 101. The system of the invention has the capability to group assets into sub-categories that in turn can be grouped into super-categories. This example taxonomy is provided for example purposes but it should be understood that an infinite number of linkages between markets are theoretically possible, and in fact in some embodiments, these linkages can be created dynamically during market operation by market makers or other market participants. Each individual asset or category market is capable of operating as a standalone MicroTick® marketplace in order to obtain an at-the-money price for the market. As mentioned previously, in the standalone MTM the implied pricing and market maker quotations in individual markets use a feedback mechanism to achieve equilibrium. Similarly, the call and put prices available to trade on the MTM provide for estimates for the expected price volatility in the up and down direction respectively for the underlying asset.

The operation of an MTM is shown in Figure 3. Call quotes 301 and Put quotes 302 are created by market makers and submitted to the marketplace. The mkfϊceφrace^{^}perffiπris'a^'price comparison 303 of the call and put quotes. This results in an adjustment factor that is periodically sampled by the Additive Sampler 304 and added to an arbitrary reference price termed the Implied Price 305. This implied price is itself looped back to the input of the additive sampler through the use of feedback 306. The sample rate for the adjustment calculation is determined in some embodiments through a timing generator with a timing rate or period that is a property of the sampler 304. Note that although an additive sampler is used in the Figure, it is possible to use other means of signal combination to accomplish the purpose of signal feedback as is generally practiced in the field of control system design. The system of the invention in some embodiments provides for call and put quotes that can be themselves group contracts, that is, said call and put quotes provide for strike prices on at least two underlying assets and are listed by time duration with strike prices floating until time of purchase of the contract. MTM markets using signal feedback can be built, for an MTM based on group contract options the same feedback mechanism can be used to achieve pricing stability, and in the preferred embodiment of the system of the invention, the implied price that is generated through such feedback is used to adjust relative weights used in valuing the group contracts.

Individual asset markets are grouped or linked to individual category markets or subcategory markets through a grouping function that in some embodiments include a number, weight or value that is assigned to the link. This weight is maintained by the marketplace in some embodiments as a means to achieve feedback in the system in a similar manner to the way the implied pricing is achieved in a standalone MTM, and is adjusted by the marketplace depending on and in response to the actions of traders buying and selling the individual assets, categories, and / or group contracts. As mentioned previously, not all embodiments combine signals through additive feedback, other means of signal combination, such as but not limited to products or phase adjustment are suitable for use as well.

Because the standalone MicroTick® marketplace is uniquely designed to be a liquid marketplace for at-the-money options, it is ideal for deriving and trading group contracts that can be used to generate liquidity between markets. This is because the at-the-money quality of MicroTick® options along with the balancing mechanism between calls and puts traded on the marketplace allow for price differentials to be traded on a standardized, ready market when treating such price differentials over a constant time duration. The implied price generated by the MTM can be considered to^'Η'e^'an'applbϋαmatibn'bf the expected value of the underlying asset. As a result, statistical functions like covariance, defined as the expected value of the product of such price differentials (with the starting or strike price representing the expected or average value and the ending or expiration price after a fixed time duration yielding a price differential with respect to the starting price), can be priced and traded by generating a covariance group contract with underlying MTMs contributing the respective underlying price movements used to settle the contract.

A group contract by definition depends on the price movement of more than one asset or category (sometimes these are mathematical combinations of a plurality of asset and category prices) over a given time duration. Like MicroTick® options, group options have a time duration and a premium. However, group options additionally provide for multiple (at least two) strike prices that are the price of the respective input markets at the contract start time and a function that relates these strike prices and the price movement of at least two linked markets over the time duration to arrive at its value. In one preferred embodiment, this function is related to the covariance (product of the price differentials) of the underlying assets. In another preferred embodiment, this function is the geometric mean of the price differentials of the underlying assets. Geometric mean may be preferred in some embodiments because the contract can be easier to hedge by taking an opposing position to a previously opened position, because the value of an open position changes more linearly with correlated price movement.

The operation of a group contract is as follows. The group contract is offered for sale by a market maker or trader that provides the purchaser a cash-settled amount that can be taken as a discount applied to the purchase of any single composite asset in a given category, based on the price movement of the basis prices over the time period of the contract. At expiration, the owner of the option can cash settle the group contract for its value or in some embodiments may be able to exercise the group contract into at least one underlying asset that is linked to the group. Further embodiments provide for dynamically adjusting exercise quantities, instead of strictly cash-settling the contracts, based on the price movement of the composite asset and category price movements. Such exercise quantities become fixed only at contract expiration. A group contract that can be exercised into a variable quantity X of an asset or category Y in the group where X is related to the price movement of a different member of the group is one type of group contract that is provided for by the ^' s^'ystenfof the Invention^* Both X and Y in this case refer to price differentials over the group contract's time duration.

Figure 4 shows a block diagram of an apparatus capable of valuing a group contract derived from two or more MTM marketplaces, indicated by the dotted line in the diagram. In the figure, MTMs 401 operate in a standalone fashion and generate implied prices 402 as part of their normal operation. These implied prices are in some embodiments weighted 403 according to marketplace-assigned weights. A sampler 404 is triggered at group contract start (which in the preferred embodiment is the time of purchase of the group contract of fixed time duration) and stop time by a timing mechanism 406. This results in price differentials 405 capable of being evaluated by valuation processing means 407, resulting in a contract value 408. The contract value is the final value of the contract at or after expiration and is a function of the price differentials on the respective MTMs over the contract time duration generated by the timing block 406. The system of figure 4 can easily be extended to more than two MTMs in parallel by adding additional inputs, weights, sampler inputs and outputs, and valuation inputs accordingly. The valuation function 407 can be any of a number of valuation algorithms that will be discussed next. Note that there need be no distinction between asset or category markets with respect to MTMs 401 in the diagram. Any of the input MTMs 401 may be any combination of asset or category markets, depending on the desired system operation. Marketplace assigned weights 403 may be in some embodiments adjusted periodically using any number of algorithms, including feedback from the output of other blocks or the contract value itself, depending on the desired system operation. The MTMs 401 used as the group contract input may be replaced by mathematical combinations of one or more markets or even computed indexes that depend on but do not represent actual functioning markets (such as weighted averages of the implied prices of a plurality of MTMs) to yield a workable system. The MTMs 401 are not considered to be part of the valuation mechanism, rather, they are a preferred means of generating an at-the-money price that can be used as an input to a group contract valuation apparatus in place of the implied price 402. These inputs may in some embodiments be dynamically generated and change during operation of the system as a whole. Covaria^ήce^"cdntracf

One preferred valuation mechanism is termed a "covariance contract" for which the contract valuation function 407 is the product of the price differentials 405 over the contract time duration. A related type of valuation mechanism uses the geometric mean of price differentials over the contract time duration, as this type of valuation mechanism results in a pricing function that may make it easier for market participants to hedge open positions.

Covariance options are one type of covariance contract such that calls have value when the covariance valuation is greater than zero, and puts have value when the covariance valuation is less than zero. Such opposing call and put contracts can be used in combination with feedback similar in manner to the operation of the MTM when adjusting weights for respective inputs.

Multi-asset weighted average contract

A second type of valuation function 407 is the additive weighted sum of marketplace price differentials. This type of multi-asset contract may take the form of calls and puts as group contracts using a weighted average of implied prices on the respective marketplaces as the valuation function. Such calls and puts have strike prices for each of the underlying assets of the group contract. The weights may be periodically adjusted according to any of a various number of algorithms that can vary according to desired operation. In one preferred embodiment, these weights are adjusted according to a separate covariance function generated externally and use feedback as with the MTM to achieve price stability and premium parity between calls and puts.

Category contract

A third type of group contract is termed a "category contract" which can be viewed as an option contract on any single asset in a group of assets. The asset may be chosen during the contract's lifetime, or optionally at expiration by the owner of the contract. For this type of contract, the valuation function 407 reflects a single chosen price differential from the group of price differentials presented at its input. In a preferred embodiment of this type of contract valuation mechanism, one of the MTMs 401 may typically be a category MTM and the rest may be asset MTMs. The contract's value will be the price differential over the contract time duration of any single asset's price movement over that time duration, where said single asset is chosen by the owner or purchaser of the contract. In a preferred embodiment the price differential is weighted depending on the single asset that is selected for exercise. For example, if asset A is trading at $5 (the $5 is the MicroTick® implied price) and asset B is trading at $10, and both assets are linked to category C, a category option on C would be able to be exercised into either A or B at a strike price of $5 or $10, depending on which asset was selected, in some embodiments weighted appropriately according to the relative weights of A or B. In some embodiments, the price for category C in some embodiments can be derived separately based on the purchases and sales of category options in the same manner as the asset markets using the MicroTick® implied pricing mechanism.

In a preferred embodiment of the system of the invention, the marketplace uses dynamically adjusted weights assigned to the linkages between category markets and individual asset markets to adjust the value of the group contract. These weights may be assigned at contract purchase time or in some embodiments at contract expiration. The weights can act as a multiplier for contract value, with strongly linked assets having a higher weight. The weights can in some cases be used to adjust price (as in for cash settled contracts) or quantity.

One embodiment of the system of the invention provides for linkages between assets, sub categories and super categories to be dynamically weighted. For this type of operation, market makers can price cash-settled covariance options on any two markets. This is performed by quoting a fair price for covariance calls (which have value if the markets move in a correlated manner) and / or covariance puts (which have value if the markets move in a negatively correlated manner). The marketplace uses the best bid / ask for these quotes to arrive at a fair estimate for the covariance (and hence, the correlation) of the markets. The search function of the marketplace then ranks the markets by correlation when displaying search results or category contents to traders.

In some embodiments, the purpose of the weighting is to achieve a feedback loop between the fair price for the chosen contract and the value of the weight. That is, if the price of the group call option rises with respect to the opposing put option, the marketplace should be able to adjust the appropriate weight to counteract this pricing In ofcIeFfor equilibrium to be achieved. This feedback is the same general type of mechanism as described and used with the implied price for individual assets on a standard MTM.

Like the underlying at-the-money MicroTick® markets, a group contract does not have a fixed expiration nor fixed a strike price until the time the contract is purchased. In some embodiments of the system of the invention, the strike prices are not assigned until the contract is exercised, when the trader or owner of the contract may choose which asset or assets the contract will be applied to. In other embodiments, the assets or categories the group contract applies to are selected at purchase and cannot be changed over the lifetime of the option.

Marketplace Search and Discovery

The system of the invention provides a means for traders to trade broad categories of assets represented by category markets and to optionally narrow trading down to individual assets in a category possibly as a hedge or for other purposes. This accomplishes several purposes: it allows illiquid asset markets to be hedged by broad category markets and thereby increases the liquidity of the asset markets, and it makes it easier for marketplace participants to locate and find tradable contracts.

By relating individual asset markets of low liquidity to category markets of progressively greater liquidity, the liquidity of the category market helps channel liquidity to the individual asset markets by funneling trading activity. One way this can be done is by assigning search terms to a category market that can be used to attract liquidity from traders. Category markets used in this manner are related to search terms, such as "keywords" or other meaningful distinguishing identifiers that can be used to identify general group characteristics or group properties. The marketplace implements a 'discovery' function consisting of a search mechanism combined with prioritized search results where traders identify and trade markets that span broad categories and the marketplace links then lead the traders down to the individual asset markets either through the possibility of exercising a category security into an individual asset in some embodiments, or by the rankings of markets in relation to their relevance to the general category in other embodiments. In a preferred embodiment of a marketplace search function, links to asset markets are ordered^" accofdmglo ^"relevance based on the prices of covariance group contracts relating the respective category and asset markets.

In Figure 2, traders at terminals 201 send search queries to control block 202 which returns a list of generic category markets 204 matching query. Trader can then trade a category 204 or transition to a more specific market, in this figure an asset market 203. In the figure, the category / asset hierarchy is only two levels. Orders subsequently placed using trader terminal 201 are routed through the control block 202 to the appropriate market. Asset / category links are prioritized in some embodiments based on covariance contracts indicating how strongly related the markets are in terms of expected common price movement over contract time duration.

One preferred embodiment of a marketplace suitable for trading group contracts in the manner described is a distributed over-the-counter (OTC) marketplace operating as a bulletin board facilitating the trading of such options. The trades taking place between counter parties would remain OTC but would be facilitated by a centralized server consisting primarily of a bulletin board and implied underlying price calculation service. Optionally, a central clearing member could be used to provide credit worthiness guarantees.

In one embodiment, the centralized server contains data processing means consisting of one or more central processing units (CPU), one or more network connections and an application programming interface (API) for accessing services provided by the centralized server, data broadcasting means for disseminating contract price quotations and additionally in some embodiments a plurality of implied prices as well as optional weights to market participants, a cryptographic core capable of digitally signing trade data and for providing login authentication, time stamping and secure communications to market participants, and storage means capable of storing price quotations from a plurality of market participants.

Example Applications

Information Marketplace

The internet enables fast, convenient and easy sharing of information with anyone in the world. This convenience is highly useful for sharing information by enabling internet users to quickly find, access, download and share freely available

I₂ Information? "f'Kere'is'another type of information that is available on the internet - information for a fee available for download or view. Such information is everywhere - stock reports, images, shareware, and news feeds rank among some of the more prevalent. Buyers of information have a justifiable concern about the quality of the information they are about to access. The seller of the information may be overstating the value of the information. The buyer may not have any use for a particular piece of information. The buyer needs to make sure he gets an appropriate value for the price paid. Information sellers have a different set of equally valid concerns. Sellers have an incentive to stand behind the price with a quality guarantee or by allowing a free "peek" at content in order to overcome a buyer's hesitation in transacting. If a preview is offered, they run the risk of the buyer viewing the information, finding what is needed (or not) and deciding not to pay for it. Sellers also run the risk of buyers sharing the information with other parties who may not have paid for the information.

At-the-money options, along with a derived underlying price such as offered by the MicroTick® marketplace may help to solve the problems these counter parties have. With an MTM in between the counter parties, a buyer will be able to buy a call on a particular piece of information in order to have the ability to view the information for a set period of time before making a decision to buy. Usually, the buyer will not need a large period of time to make a decision, so the natural short- term nature of the options traded on an MTM are perfectly suited for this situation. A seller, facing the other side of the transaction, loses control of the information once it is downloaded. The seller faces the risk that the information buyer will decide not to transact once the information has been viewed. This risk can be effectively addressed by the MTM (or other market participants) offering puts on the information that the seller can purchase in order to complete the sale even if the buyer decides not to buy. In this way, both the buy side and the sell side of the transaction have an incentive to utilize the MTM to hedge risk. The propensity of buyers to buy calls versus the sellers to buy puts is in direct proportion to the perceived risk for a particular piece of information at a particular price. This risk is priced through the option premium, and the MTM uses the differences in option premium to achieve an equilibrium resulting In^" a fair market price for that piece of information. Thus, both the buyer and seller are assured they are getting a fair price for the information. The market determines a fair price as opposed to the seller alone. Buyers have the comfort knowing that the efficiencies of price competition and price transparency are working to achieve fairness in price.

By classifying information into categories, an information marketplace will be able to offer liquidity to bids and asks on search keywords. As mentioned previously, these categories might belong to a predetermined category taxonomy, or keyword categories might be dynamically created on an as-needed basis as market participants relate specific assets to new, previously non-existent keywords. In either case, the underlying operation of the marketplace is unchanged as the addition of a new category will not affect other parts of the category taxonomy.

Each category is initially classified through the keywords appearing in response to the buyer's queries and the seller's asset description in some embodiments. The marketplace can use search technology to match buyers and sellers through these categories and a correlation ranking system described earlier. An "information market" can therefore be thought of as a sophisticated internet-based search engine for paid information.

Real Estate Marketplace

Real estate is an intangible asset that has been historically traded exclusively in an over-the-counter manner. Real estate is also an illiquid asset, with buying and selling a house or apartment typically requiring price agreement, financing, title insurance, commissions, and closing. The intangible marketplace can help bring liquidity to real estate in the same way it works for other assets. Homes can be grouped as "3 bedroom", "ranch style" or "2 car garage", where these are properties of houses that can easily be categorized, as well as categories based on location (neighborhood, city, state, region) or vintage (new, 1920's, 1970's). The MicroTick® marketplace combined with group contracts allows buyers, sellers, and speculators (such as Title companies, Insurance companies, and other interested parties who have a vested interest in the well-being and liquidity of the housing market) to have a liquid marketplace on future prices for individual homes or categories δ^~f Homes' (154 Main Street would be a specific home, while "Mountain View Subdivision" is a category containing all homes in that subdivision).

A real-estate marketplace using at-the-money options would have use for all counter parties. Buyers shopping for a house would buy a call on the house to reserve the current market price. Homeowners would be able to buy puts to protect an individual home from price decline. Speculators could speculate on the prices of any home, as well as capitalize on overpriced or under priced homes in a neighborhood.

With this type of a market, the actual real estate transaction (i.e. the closing price and time) might be completely independent of the marketplace. The price agreement between buyer and seller, however, is of interest in that it can be used to periodically mark-to-market a particular asset being traded against the implied price at the time of the respective MTM.

Prediction Markets

Prediction markets are used to harness the power of groups to in order to make predictions on the likelihood of certain events. The markets are based on underlying assets that have value based on whether or not a certain event occurs. The price of the asset is then interpreted as an insight into the probability of that certain event occurring.

Using MTMs to trade options on these predictive assets makes sense in that a single implied price is generated rather than a bid-ask spread. The option prices themselves represent the uncertainty in a specific prediction price, something generally not readily available in current predictive markets. In addition, using group contracts to correlate predictive assets allows greater possible insights and more variety and flexibility in the types of markets possible than without the technology. With covariance group contracts and grouped markets for example, additional information and potentially probabilities of combinations or groups of events occurring could be generated, represented by category groups and covariance contracts as separate tradable markets in some embodiments of the system of the invention.

In the ways described here, this system of trading allows a financial marketplace to be built that generates its liquidity by grouping sets of dissimilar elements^' by^"cOmϊnoή characteristics in an expanding hierarchy of parent sets or any other desired relationship, rather than imposing the traditional requirement that all contracts on a given market be unique and that standardized units be created. In some embodiments, contracts traded might have different, unique and non-constant values for all three parameters of strike, expiration and quantity.

Although specific embodiments have been illustrated and described herein, it will be appreciated by those of ordinary skill in the art that any arrangement that is calculated to achieve the same purpose may be substituted for the specific embodiments shown. This application is intended to cover any adaptations or variations of the invention. It is intended that this invention be limited only by the claims, and the full scope of equivalents thereof.

Claims

TclaϊrnT

1. A contract valuation system for valuing a financial contract based on at least two variable price inputs, comprising: a. system timing means that determines a sampling start and stop time for a financial contract, b. sampling means that samples a representative price from at least two inputs using a start and stop time, and c. valuation processing means that establishes a contract valuation based on representative price differentials from the at least two inputs.

2. A method for providing a group contract comprising: associating at least two different assets with separate prices into a group contract; sampling a representative price for each of the separate assets based on a start time and a stop time of the group contract; and establishing a group contract valuation based on price movement over the time duration of the group contract for at least one of the at least two separate asset prices.

3. The method of claim 2 wherein a group contract valuation is established based on at least two representative price differentials for at least two of the at least two separate contract prices.

4. The method of claim 2 wherein the sampling start time is based on a time the buyer initiates purchase of the contract.

5. The method of claim 4 wherein after the buyer purchases the contract he allows the contract to expire or exercises rights under the contract by cash settling the contract or purchasing at least one of the at least two separate assets.

6. The method of claim 3 wherein the sampling start time is based on a time the buyer initiates purchase of the contract.

7. The method of claim 6 wherein after the buyer purchases the contract he allows the contract to expire or exercises rights under the contract by cash settling the contract or purchasing at least one of the at leasttwo separate assets. -

if 8::i& system for providing a financiafecpntract bused on

distinct asset markets wherein: a. at least a first market comprises an asset representing tangible tradable assets, b. at least a second market ^"comprises a category market .representing a set_^ 0 of assets with a common property, c. linking at least one asset from the first market and the second market into a single group contract; and d. allowing buyers to purchase the single group contract, - .

5 9. The system of claim 8 wherein group contracts are cash settled based on, or exercised into, the first market asset, the second market asset, or both the first maket asset and the second market asset.

10. The system of claim 8 wherein the set of assets with a common property may 0 comprise assets categorized by a keyword or generic term describing the commoβ properties.

11. The system of claim 9 wherein the common properties are selected from the group consisting of residential descriptors, future events, strategic policy objectives, 5 market sector, economic stage of development, and geographic region.

12. A transactional method for a financial marketplace comprising market makαs pricing call quotes for a group contract and put quotes for a group contract and submitting both quotes to a marketplace, the marketplace performing a price 0 comparison of call quotes and put quotes, the marketplace forming an adjustment factor from the comparison that is periodically sampled by an adjustment sampler, which adjustment factor is results in an arbitrary reference price termed an implied price, this implied price is looped back to input of the sampler through the use of feedback, and a sample rate for calculating the adjustment factor is determined through a timing generator with a timing rate or period that is a property of the adjustment sampler.

13. The method of claim 5 wherein th>;first separate asset is trading at X. as.ani implied priέe and the secdnd sφaraMlsset is toadifljg at ^ as iiέjaxφlieάrpήύei anά) both assets are linked to a contract orf category C, a category option on C is established that can be exercised into either the first separate asset or the second separate asset at a strike price of X or Y respectively, depending on which asset was selected for purchase..

14. The method of claim 12 wherein a price for the contract on category C is derived separately based on purchases and sales of category call and put options based on a time frame between when the contract on category C is established and when the contract on category C expires.

15. A method of offering and selling group contracts in a marketplace wherein the marketplace establishes at least two separate market assets, at least one market asset comprising individual components with like characteristics grouped into a set; dynamically adjusted weights are assigned to assets to affect the value of group contracts traded on the marketplace; assigning these adjusted weights to a specific contract at a contract purchase or expiration time.

16. The method of claim 15 wherein the at least one market asset has like characteristics selected from the group consisting of residential descriptors, future events, strategic policy objectives, market sector, economic stage of development, and geographic region.

17. A financial contract method comprising establishing a group contract on a combination of assets that are not tied to a single business entity, offering the group contract for sale by a market maker or trader that provides a purchaser with a cash- settled amount or an exercisable quantity of at least one underlying asset, based on the price movement of the basis prices over the time period of the contract; and upon expiration of the group contract, the purchaser of the group contract settling the group contract for its value or exercising the group contract into at least one underlying asset from among the combination of assets that is linked to the group contracts

18. The method of claim 17 wherein, exercϊselφiantities are dymm|cal|y:adjukted based on price movement of the combination of assets and/or category price movements.

19. The method of claim 18 wherein the group contract can be exercised into a variable quantity X of an asset or category Y wherein both X and Y refer to price differentials over time duration of the group contract.