Apparatus and Method for Commodity Trading with Automatic Odd Lot Hedging

Abstract

Apparatus and method for trading commodities with automatic hedging for odd lot offers. The apparatus automatically accepts odd lot offers on behalf of buyers and aggregates them with other odd lot offers of the same commodity symbol until there are enough bushels to reach a predetermined threshold, or “tipping point,” which causes the system to automatically calculate the optimum number of full lot futures contracts to sell at the market price in order to offset risk associated with accepting the odd lot offers, and to automatically secure the optimum number of full lot futures contracts. The system reduces or eliminates situations where no transactions are executed due to the market's failure to reach a certain price, and reduces the buyers' exposure to slippage on accumulated odd lots.

What is claimed is: 
     
         1 . A method for trading a commodity on a commodity trading system, the commodity trading system having a first electronic interface to a cash market for the commodity and a second electronic interface to a futures market for the commodity, the method comprising:
 a) storing on the commodity trading system a counter W indicating a number of units of the commodity waiting to be hedged on behalf of a buyer, and a tipping point T for the buyer indicating a minimum number of units of the commodity that must currently be waiting to be hedged before a full lot futures contract is sold on behalf of said buyer, the tipping point T being greater than zero and less than a full lot size F for the commodity on the futures market;   b) receiving on the commodity trading system, via the first electronic interface, an offer from a seller in the cash market to sell a quantity Q of the commodity to the buyer, wherein the quantity Q comprises an odd lot size;   c) if the sum of the quantity Q and the counter W is equal to or greater than the tipping point T for the buyer, transmitting an order via the second electronic interface to cause one or more full lot futures contracts to be sold at market price on the futures market on behalf of the buyer;   d) determining on the commodity trading system a difference between the current number of units of the commodity bought in the cash market on behalf of the buyer and the current number of units of the commodity sold in the futures market on behalf of the buyer; and   e) if the quantity Q is less than or equal to the difference, executing an instruction on the commodity trading system that causes the commodity trading system to buy the quantity Q of the commodity from the seller on behalf of the buyer.   
     
     
         2 . The method of  claim 1 , further comprising:
 f) repetitively calculating on the commodity trading system the difference between the current number of units of the commodity bought in the cash market on behalf of the buyer and the current number of units of the commodity sold in the futures market on behalf of the buyer; and   g) executing an instruction on the commodity trading system that prevents the commodity trading system from buying the quantity Q of the commodity from the seller on behalf of the buyer so long as the quantity Q is greater than the difference.   
     
     
         3 . The method of  claim 2 , further comprising:
 h) periodically transmitting, via the second electronic interface, a new order to sell one or more full lot futures contracts at market price on the futures market on behalf of the buyer; and   i) periodically executing an instruction on the commodity trading system that causes the commodity trading system to buy the commodity on the cash market on behalf of the buyer;   j) wherein the relative timing of the periodic transmission of the new orders to sell the commodity on behalf of the buyer and the periodic execution of the instruction to buy the commodity on behalf of the buyer is automatically controlled by the commodity trading system such that the difference between the current number of units of the commodity bought in the cash market on behalf of the buyer and the current number of units of the commodity sold in the futures market on behalf of the buyer is not permitted to exceed the tipping point T.   
     
     
         4 . The method of  claim 1 , further comprising calculating on the commodity trading system a number N of full lot futures contracts to sell when the sum of the quantity Q and the counter W equals or exceeds the tipping point T. 
     
     
         5 . The method of  claim 4 , further comprising calculating the number N of full lot futures contracts to sell according to the formula:
     N =floor(( F−T+W )/ F ).   
     
     
         6 . The method of  claim 1 , further comprising:
 k) receiving on the commodity trading system a buyer's basis for the commodity for each buyer enrolled on the commodity trading system;   l) periodically receiving on the commodity trading system an updated commodity exchange price for the commodity; and   m) calculating on the commodity trading system a cash market flat price on behalf of said each buyer by subtracting said buyer's basis for said each buyer from the updated commodity exchange price for the commodity.   
     
     
         7 . The method of  claim 6 , further comprising determining on the commodity trading system whether the offer is eligible for a trade with a particular buyer. 
     
     
         8 . The method of  claim 7 , further comprising determining that the offer is eligible for a trade with the particular buyer when the offer price for the commodity in the offer does not exceed the cash market flat price calculated on behalf of the particular buyer by the commodity trading system. 
     
     
         9 . A commodity trading system, comprising:
 a) a microprocessor;   b) a first electronic interface to a cash market for the commodity;   c) a second electronic interface to a futures market for the commodity;   d) a database for storing a counter W indicating a number of units of a commodity waiting to be hedged on behalf of a buyer, and a tipping point T for the buyer indicating a minimum number of units of the commodity that must currently be waiting to be hedged before a full lot futures contract is sold on behalf of said buyer, the tipping point T being greater than zero and less than a full lot size F for the commodity on the futures market; and   e) an odd lot processing module comprising programming instructions that, when executed by the microprocessor, will cause the microprocessor to:
 (i) receive an offer from a seller in the cash market to sell a quantity Q of the commodity to the buyer, wherein the quantity Q comprises an odd lot size, 
 (ii) if the sum of the quantity Q and the counter W is equal to or greater than the tipping point T for the buyer, transmit an order via the second electronic interface to cause one or more full lot futures contracts to be sold at market price on the futures market on behalf of the buyer, 
 (iii) determine on the commodity trading system a difference between the current number of units of the commodity bought in the cash market on behalf of the buyer and the current number of units of the commodity sold in the futures market on behalf of the buyer, and 
 (iv) if the quantity Q is less than or equal to the difference, execute an instruction that causes the commodity trading system to buy the quantity Q of the commodity from the seller on behalf of the buyer. 
   
     
     
         10 . The commodity trading system of  claim 9 , wherein the odd lot processing module further includes programming instructions that, when executed by the microprocessor, will cause the microprocessor to:
 f) repetitively calculate the difference between the current number of units of the commodity bought in the cash market on behalf of the buyer and the current number of units of the commodity sold in the futures market on behalf of the buyer; and   g) avoid executing an instruction to buy the quantity Q of the commodity from the seller on behalf of the buyer while the quantity Q is greater than the difference.   
     
     
         11 . The commodity trading system of  claim 10 , wherein the odd lot processing module further includes program instructions that, when executed by the microprocessor, will cause the microprocessor to:
 h) periodically transmit, via the second electronic interface, a new order to sell one or more full lot futures contracts at market price on the futures market on behalf of the buyer; and   i) periodically execute an instruction to buy the commodity on the cash market on behalf of the buyer;   j) wherein the odd lot processing module automatically controls the relative timing of the periodic transmission of the new orders to sell the commodity on behalf of the buyer and the periodic execution of the instruction to buy the commodity on behalf of the buyer such that the difference between the current number of units of the commodity bought in the cash market on behalf of the buyer and the current number of units of the commodity sold in the futures market on behalf of the buyer is not permitted to exceed the tipping point T.   
     
     
         12 . The commodity trading system of  claim 9 , wherein the odd lot processing module further includes program instructions that, when executed by the microprocessor, will cause the microprocessor to calculate a number N of full lot futures contracts to sell when the sum of the quantity Q and the counter W equals or exceeds the tipping point T. 
     
     
         13 . The commodity trading system of  claim 12 , the odd lot processing module further includes program instructions that, when executed by the microprocessor, will cause the microprocessor to calculate the number N of full lot futures contracts to sell according to the formula:
     N =floor(( F−T+W )/ F ).   
     
     
         14 . The commodity trading system of  claim 9 , further comprising a matching module, the matching module including program instructions that, when executed by the microprocessor, will cause the microprocessor to:
 k) receive a buyer's basis for the commodity for each buyer enrolled on the commodity trading system;   l) periodically receive an updated commodity exchange price for the commodity; and   m) calculate a cash market flat price on behalf of said each buyer by subtracting said buyer's basis for said each buyer from the updated commodity exchange price for the commodity.   
     
     
         15 . The commodity trading system of  claim 14 , wherein the matching module further includes program instructions that, when executed by the microprocessor, will cause the microprocessor to determine whether the offer is eligible for a trade with a particular buyer. 
     
     
         16 . The commodity trading system of  claim 15 , wherein the matching module further includes program instructions that, when executed by the microprocessor, will cause the microprocessor to determine that the offer is eligible for a trade with the particular buyer when the offer price for the commodity in the offer does not exceed the cash market flat price calculated on behalf of the particular buyer by the commodity trading system. 
     
     
         17 . A method for trading a commodity on a commodity trading system, the commodity trading system having a first electronic interface to a cash market for the commodity, a second electronic interface to a futures market for the commodity, a first mode of operation and a second mode of operation, the method comprising:
 a) storing on the commodity trading system a counter W indicating a number of units of the commodity waiting to be hedged on behalf of a buyer, and a tipping point T for the buyer indicating a minimum number of units of the commodity that must currently be waiting to be hedged before a full lot futures contract is sold on behalf of said buyer, the tipping point T being greater than zero and less than a full lot size F for the commodity on the futures market;   b) receiving on the commodity trading system, via the first electronic interface, an offer from a seller in the cash market to sell a quantity Q of the commodity to the buyer, wherein the quantity Q comprises an odd lot size;   c) if the sum of the quantity Q and the counter W is equal to or greater than the tipping point T for the buyer, invoking the second electronic interface on the commodity trading system to cause one or more full lot futures contracts to be sold at market price on the futures market on behalf of the buyer;   d) determining on the commodity trading system a difference between the current number of units of the commodity bought in the cash market on behalf of the buyer and the current number of units of the commodity sold in the futures market on behalf of the buyer; and   e) in the first mode of operation, automatically buying the quantity Q of the commodity from the seller on behalf of the buyer responsive to receiving the offer irrespective of whether the quantity Q is less than or greater than the difference; and   f) in the second mode of operation, automatically buying the quantity Q of the commodity from the seller on behalf of the buyer responsive to receiving the offer only if the quantity Q in the offer is less than or equal to the difference.   
     
     
         18 . The method of  claim 17 , further comprising:
 g) repetitively calculating the on the commodity trading system the difference between the current number of units of the commodity bought in the cash market on behalf of the buyer and the current number of units of the commodity sold in the futures market on behalf of the buyer; and   h) executing an instruction on the commodity trading system that prevents the commodity trading system from buying the quantity Q of the commodity from the seller on behalf of the buyer so long as the quantity Q is greater than the difference.   
     
     
         19 . The method of  claim 18 , further comprising:
 i) periodically transmitting, via the second electronic interface, a new order to sell one or more full lot futures contracts at market price on the futures market on behalf of the buyer; and   j) periodically executing an instruction on the commodity trading system that causes the commodity trading system to buy the commodity on the cash market on behalf of the buyer;   k) wherein the relative timing of the periodic transmission of the new orders to sell the commodity on behalf of the buyer and the periodic execution of the instruction to buy the commodity on behalf of the buyer is automatically controlled by the commodity trading system such that the difference between the current number of units of the commodity bought in the cash market on behalf of the buyer and the current number of units of the commodity sold in the futures market on behalf of the buyer is not permitted to exceed the tipping point T.   
     
     
         20 . The method of  claim 17 , further comprising calculating on the commodity trading system a number N of full lot futures contracts to sell when the sum of the quantity Q and the counter W equals or exceeds the tipping point T. 
     
     
         21 . The method of  claim 18 , further comprising calculating on the commodity trading system the number N of full lot futures contracts to sell according to the formula:
     N =floor(( F−T+W )/ F ).   
     
     
         22 . The method of  claim 17 , further comprising:
 l) receiving on the commodity trading system a buyer's basis for the commodity for each buyer enrolled on the commodity trading system;   m) periodically receiving on the commodity trading system an updated commodity exchange price for the commodity; and   n) calculating on the commodity trading system a cash market flat price on behalf of said each buyer by subtracting said buyer's basis for said each buyer from the updated commodity exchange price for the commodity.   
     
     
         23 . The method of  claim 22 , further comprising determining on the commodity trading system whether the offer is eligible for a trade with a particular buyer. 
     
     
         24 . The method of  claim 23 , further comprising determining that the offer is eligible for a trade with the particular buyer when the offer price for the commodity in the offer does not exceed the cash market flat price calculated on behalf of the particular buyer by the commodity trading system. 
     
     
         25 . An online commodity trading system with a first mode of operation and a second mode of operation, the commodity trading system comprising:
 a) a microprocessor;   b) a data storage device;   c) a database in the data storage device having a field that stores a counter W indicating a total number of units of a commodity currently waiting to be hedged on behalf of a buyer;   d) a server that receives an offer from a seller in a cash market to sell a quantity Q of the commodity to the buyer, wherein the quantity Q comprises an odd lot size, the server having a first mode of operation and a second mode of operation; and   e) an odd lot hedging module having program instructions that, when executed by the microprocessor, will cause the microprocessor to:
 (i) determine that the offer is eligible for a trade with the buyer, 
 (ii) increment the amount W waiting to be hedged by the quantity Q in the odd lot offer, 
 (iii) automatically generate an order to sell one or more futures contracts on behalf of the buyer at market price when the counter W equals or exceeds a specified tipping point T for the buyer, the specified tipping point T indicating a minimum number of units of the commodity that must currently be waiting to be hedged before a full lot futures contract is sold on behalf of said buyer, the specified tipping point being greater than zero and less than a full lot size F for the commodity, 
 (iv) in the first mode of operation, automatically accept the offer on behalf of the buyer if the offer is eligible, and 
 (v) in the second mode of operation, automatically accept the offer on behalf of the buyer only if both the offer is eligible and the quantity Q in the offer is less than or equal to the difference between the current number of units of the commodity bought in the cash market on behalf of the buyer and the current number of units of the commodity sold in the futures market on behalf of the buyer. 
   
     
     
         26 . The online commodity trading system of  claim 25 , wherein the odd lot hedging module further comprises program instructions that, when executed by the microprocessor, will cause the microprocessor to calculate a number N of full lot futures contracts to sell when the counter W equals or exceeds the tipping point T. 
     
     
         27 . The online trading system of  claim 26 , wherein the number N of full lot futures contracts to sell is calculated according to the formula:
     N =floor(( F−T+W )/ F ).   
     
     
         28 . An apparatus for trading commodities, comprising:
 a) a microprocessor;   b) a data storage device;   c) a database in the data storage device having fields that store a bid received from a buyer, an offer received from a seller, an updated futures market prices for a commodity, wherein the bid includes a buyer basis and the offer includes an offer price and an odd lot size, a counter W indicating a number of units of the commodity currently waiting to be hedged on behalf of the buyer, and a specified tipping point T for the buyer, the specified tipping point T being greater than zero and less than a full lot size;   d) a price feed interface that receives the updated futures market price and stores the updated price in the database; and   e) a set of program modules in the data storage device, comprising
 1) a matching module having program instructions that, when executed by the processor, causes the processor to i) calculate a cash market price for the buyer based on the updated futures market price and the buyer basis and ii) register the seller's offer as an eligible offer for trade with the buyer when the offer price does not exceed the buyer's cash market price, and 
 2) an odd lot hedging module having program instructions that, when executed by the microprocessor, causes the microprocessor to generate, on behalf of the buyer, an order to sell a number N of full lot futures contracts at market price on a futures market when the counter W is equal to or greater than the specified tipping point T. 
   
     
     
         29 . The apparatus of  claim 28 , wherein the odd lot hedging module further comprises program instructions that, when executed by the microprocessor, cause the microprocessor to calculate the number N of full lot futures contracts to sell when the specified tipping point T is reached or exceeded according to the formula:
     N =floor(( F−T+W )/ F ),   
       wherein F represents a size of a full lot futures contract for the commodity. 
     
     
         30 . The apparatus of  claim 28 , wherein the odd lot hedging module further includes program instructions that, when executed by the microprocessor, will prevent the microprocessor from accepting the offer on behalf of the buyer prior to causing a sufficient number of units of the commodity to be sold on the futures market to hedge the quantity of the commodity contained in the offer. 
     
     
         31 . The apparatus of  claim 28 , wherein the odd lot hedging module further includes program instructions that, when executed by the microprocessor, will permit the microprocessor to accept the offer on behalf of the buyer prior to causing a sufficient number of units of the commodity to be sold on the futures market to hedge the quantity of the commodity contained in the offer. 
     
     
         32 . A method for trading a commodity on a commodity trading system, the commodity trading system having a first electronic interface to a cash market for the commodity and a second electronic interface to a futures market for the commodity, the method comprising:
 a) storing on the commodity trading system a counter W indicating a number of units of the commodity waiting to be hedged on behalf of a buyer, and a tipping point T for the buyer indicating a minimum number of units of the commodity that must currently be waiting to be hedged before a full lot futures contract is sold on behalf of said buyer, the tipping point T being greater than zero and less than a full lot size F for the commodity on the futures market;   b) periodically receiving on the commodity trading system, via the first electronic interface, an offer from a seller in the cash market to sell a quantity Q of the commodity to the buyer, wherein the quantity Q comprises an odd lot size;   c) periodically transmitting, via the second electronic interface, a new order to sell one or more full lot futures contracts at market price on the futures market on behalf of the buyer;   d) periodically executing an instruction on the commodity trading system that causes the commodity trading system to buy the commodity on the cash market on behalf of the buyer; and   e) periodically determining a difference between the current number of units of the commodity bought in the cash market on behalf of the buyer and the current number of units of the commodity sold in the futures market on behalf of the buyer   f) wherein the relative timing of the periodic transmission of the new orders to sell the commodity on behalf of the buyer and the periodic execution of the instruction to buy the commodity on behalf of the buyer is automatically controlled by the commodity trading system so that the difference is not permitted to exceed the tipping point T.   
     
     
         33 . A computer system for trading a commodity, comprising:
 a) a microprocessor;   b) a first electronic interface to a cash market for the commodity;   c) a second electronic interface to a futures market for the commodity, the method comprising:   d) a database for storing a counter W indicating a number of units of the commodity waiting to be hedged on behalf of a buyer, and a tipping point T indicating a minimum number of units of the commodity that must currently be waiting to be hedged before a full lot futures contract is sold on behalf of said buyer, the tipping point T being greater than zero and less than a full lot size F for the commodity on the futures market; and   e) an odd lot processing module having computer-executable instructions that, when executed by the microprocessor, will cause the microprocessor to
 (i) periodically receive, via the first electronic interface, an offer from a seller in the cash market to sell a quantity Q of the commodity to the buyer, wherein the quantity Q comprises an odd lot size, 
 (ii) periodically transmit, via the second electronic interface, a new order to sell one or more full lot futures contracts at market price on the futures market on behalf of the buyer, 
 (iii) periodically execute an instruction that causes the commodity to be purchased on the cash market on behalf of the buyer, and 
 (iv) periodically determine a difference between the current number of units of the commodity bought in the cash market on behalf of the buyer and the current number of units of the commodity sold in the futures market on behalf of the buyer; 
   f) wherein the odd lot processing module is configured to control the relative timing of the periodic transmission of the new orders to sell the commodity on behalf of the buyer and the periodic execution of the instruction to buy the commodity on behalf of the buyer is automatically so that the difference is not permitted to exceed the tipping point T.