System and Method for Trading Options

Abstract

A system and method of trading option contracts, such as foreign currency option contracts, is described. In one embodiment, a system and method for web-based or network-based interactive trading of currency options is described. Users of the system provide volatility runs of currency options, deal on existing offers to sell or bids to buy, or may improve on existing offers to sell or bids to buy. Option contracts may be priced in units of volatility. Users of the system described include banks of all sizes and traders or dealers employed by banks or other financial institutions. The system and method provide automatic price quotations for a requested option contract by polling internal volatility surfaces of users for prices on the requested contract. Additionally, the system and method ensure a more orderly pattern of trades by categorizing the users into discrete tiers which determine a user's obligations to provide offers and bids to the system and which determine a user's opportunities and rights to trade on the system. Furthermore, a system and method is described for automatically withdrawing quotes for offers to sell or bids to buy option contracts after expiration of a prescribed period of time or prescribed movement in the market underlying the option contract.

1 - 56 . (canceled) 
     
     
         57 . A financial instrument option contract trading system, comprising:
 a computer network comprising a plurality of terminals each disposed in communication with an at least one computing unit,
 the at least one computing unit comprising a volatility request mechanism which defines formats for requests and prices; 
   a volatility data storage unit storing at least one set of volatility data associated with the option contract and respectively obtained from at least one of the plurality of terminals;   a calculation unit supported by at least one computing unit and implementing a protocol for identifying from the at least one set of volatility data a best price,
 the at least one set of volatility data obtained from at least one volatility surface, 
 the at least one volatility surface accessible by at least one associated terminal of the plurality of terminals; and 
   a communications unit supported by at least one computing unit and communicating with a first of the plurality of terminals the best price in response to a request for a quote from the first of the plurality of terminals for the options contract.   
     
     
         58 . The system of  claim 57 , wherein the best price is a highest bid to buy the option contract and a lowest bid to sell the option contract, the highest bid to buy the option contract and the lowest bid to sell the option contract defining a first range. 
     
     
         59 . The system of  claim 57 , wherein the at least one computing unit is on a user's premises. 
     
     
         60 . The system of  claim 57 , wherein the at least one computing unit is a web server. 
     
     
         61 . The system of  claim 57 , wherein the at least one computing unit is a network server. 
     
     
         62 . The system of  claim 57 , wherein prices are generated dynamically by the at least one computing unit to avoid holding the complete surface in the storage unit. 
     
     
         63 . The system of  claim 57 , wherein, on use, surface price takers can ask for an anonymous surface price. 
     
     
         64 . The system of  claim 57 , wherein the plurality of terminals provide contributions to the volatility surface, wherein a contribution comprises:
 a volatility price corresponding to an option contact for each of a series of deltas and expiring every business day in the year following the date of the contribution; and   a bid/offer spread.   
     
     
         65 . The system of  claim 64 , wherein the series of deltas are from 5% to 95% 
     
     
         66 . The system of  claim 64 , wherein the bid/offer spread is provided in terms of units of volatility. 
     
     
         67 . The system of  claim 65 , wherein the at least one computing unit specifies the volatility used for options expiring on every business day in the next year and for every delta from 5% to 95%. 
     
     
         68 . The system of  claim 58 , wherein the plurality of terminals further comprises:
 a second terminal communicating an associated set of volatility data to the at least one computing unit, the associated set of volatility data comprising an associated bid to buy and an associated offer to sell defining a second range;   
     
     
         69 . The system of  claim 68 , further comprising:
 an arbitrage identification unit accessing the highest bid to buy the option contract and the lowest bid to sell the option contract identified by the calculation unit and, in response to the communication of the associated set of volatility data, determining if the second range does not mathematically overlap the first range.   
     
     
         70 . The system of  claim 69 , further comprising the at least one computing unit identifying the existence of arbitrage to the second terminal in response to the second range not mathematically overlapping the first range. 
     
     
         71 . The system of  claim 69 , wherein the first terminal further comprises a user interface unit communicating the best price to a user of the first terminal. 
     
     
         72 . The system of  claim 57 , further comprising the at least one computing unit receiving an indication that at least one of the at least one set of volatility data associated with the option contract has changed. 
     
     
         73 . The system of  claim 72 , further comprising the volatility data storage unit receiving an updated set of volatility data corresponding to the at least one of the at least one set of volatility data that has changed. 
     
     
         74 . The system of  claim 69 , wherein the first terminal is prevented from executing a purchase of the option contract when the first range does not mathematically overlap the second range. 
     
     
         75 . The system of  claim 69 , wherein the at least one computing unit permits the second terminal to trade the option contract with a terminal associated with the lowest bid to sell in response to the first range not mathematically overlapping the second range. 
     
     
         76 . The system of  claim 69 , wherein the at least one computing unit permits the second terminal to trade the option contract with a terminal associated with the highest offer to buy in response to the first range not mathematically overlapping the second range. 
     
     
         77 . The system of  claim 69 , wherein the at least one set of volatility data comprises a time-limited set of volatility data having a predetermined period of time associated therewith, the at least one computing unit being arranged to withdraw the time-limited set of volatility data in response to the predetermined period of time expiring. 
     
     
         78 . The system of  claim 69 , wherein the at least one set of volatility data comprises a value-limited set of volatility data having a predetermined threshold value associated therewith, the at least one computing unit withdrawing the value-limited set of volatility data in response to a current market price for the option contract being equal to or crossing the threshold value.