Reserve order in an electronic guaranteed entitlement environment

Info

Publication number: 20080228622
Type: Application
Filed: Jul 25, 2007
Publication Date: Sep 18, 2008
Inventors: Paul Adcock (Burr Ridge, IL), Michael Cormack (Vancouver), Amy Farnstrom (Oakland, CA), Thomas Haller (Longwood, FL), Robert Hill (LaGrange, IL)
Application Number: 11/881,064

Abstract

An enhanced system and method for handling, matching and executing reserve orders in an electronic options environment is disclosed. Market maker entitlements are integrated with the reserve order processing, so that the market maker is guaranteed an allocation of the trade if the market maker is at the NBBO when a marketable reserve order is received. Once posted to the order book, only the displayed size of a reserve order is eligible for preferential execution in a market maker entitlement process.

Description

Description

CROSS-REFERENCE TO RELATED APPLICATIONS

This application claims priority from and claims the benefit of U.S. Provisional Application No. 60/834,327, filed Jul. 28, 2006, entitled “Electronic Equity Options Order Execution and Routing System;” which is hereby incorporated by reference.

BACKGROUND

Historically in the options marketplace, most market centers supported a trading model whereby specialists or market makers were notified of large incoming orders, especially if those orders were not on behalf of customer accounts. As a result, the market participants who see the incoming order know its full size and are able to price their responses accordingly when deciding whether to execute with it. A user who sends a large order has divulged his trading intentions and has possibly received less price improvement now that the marketplace knows his willingness to trade a large quantity.

Reserve orders have been in use on electronic equities marketplaces for years, i.e. in marketplaces that apply price/time priority rules. They have not been in use, however, in marketplaces that provide guaranteed entitlements to specified market participants, such as a lead market maker in an options series.

Accordingly, there is a need for a reserve order that simultaneously respects both traditional specialist/market maker guaranteed entitlements, when they are applicable, and price/time priority matching principles. To encourage market makers to quote at their best prices to participate with an incoming reserve order, there is a need for a market maker guaranteed entitlement model that requires the market makers to be quoting at the national best bid and offer (“NBBO”) at the time the incoming reserve order is received. Such an entitlement model rewards an eligible market maker for quoting size at the best price by calculating its guaranteed allocation percentage based on the total size of an incoming reserve order, and not based on its smaller displayed size. To encourage customers who post reserve orders to display more size of the order to the marketplace, there is a need for a market maker guaranteed entitlement model that only gives preference to the displayed size of a posted reserve order, and executes the nondisplayed reserve size according to price/time priority matching principles.

SUMMARY

According to one aspect of the present invention, a method for trading reserve orders in an electronic options trading environment with market maker participation includes providing a market center which lists a plurality of options series in a market with an NBBO, wherein the market center has an order book for each option series and a quote book for each option series, wherein the order book has a displayed interest component and a nondisplayed interest component; wherein a plurality of the option series have an appointed lead market maker. The method further includes receiving an incoming reserve order having a total size with a portion of the order for display and a reserve portion of the order that is not displayed; determining if the reserve order is marketable; determining if the reserve order is for an option series that has a lead market maker and determining if the lead market maker has a quote at the NBBO. Wherein if the reserve order is marketable and the lead market maker has a quote at the NBBO, the method includes computing an allocation percentage for the lead market maker and matching the incoming reserve order up to the lesser of the total size of the reserve order or the computed allocation percentage amount for the lead market maker.

According to another aspect of the present invention, the computation of the allocation percentage for the lead market maker is based on the total size of the reserve order. Also, the incoming reserve order may be a sweep limit order with reserve, an inside limit order with reserve, an exchange-restricted order with reserve or a discretionary order with reserve.

The method may further include, prior to computing the lead market maker allocation percentage, determining if the order book has a customer order at the NBBO, wherein if the order book does have a customer order at the NBBO, determining if the customer order is displayed and was posted to the order book prior to the lead market maker quote at the NBBO. If the customer order at the NBBO is displayed and was posted to the order book prior to the lead market maker quote at the NBBO, the method may include matching the incoming order with the customer order. Also, where the customer order that was posted to the book prior to the lead market maker quote at the NBBO is a resting reserve order having a total size with a portion of the order for display and a reserve portion of the order that is not displayed, the method may include matching the incoming order with the displayed portion of the reserve order and not the reserve portion of the reserve order and then proceeding to compute the lead market maker allocation percentage. Where the customer order at the NBBO was posted to the order book after the lead market maker quote at the NBBO, the method may include proceeding to compute the lead market maker allocation percentage; or where the customer order at the NBBO is not displayed, the method may include proceeding to compute the lead market maker allocation percentage. The lead market maker may have a quote at the NBO or the NBB.

According to another aspect of the present invention, the method may include determining if the incoming reserve order is too executable and may also include providing an appointed market maker in the option series in addition to the lead market maker, wherein the incoming reserve order is from a specified order sending firm and is directed to and designates the appointed market maker. The method may include determining if the order sending firm is permissioned to direct orders to the designated market maker. Wherein if the order sending firm does have permission to direct orders to the designated market maker, the method may include determining if the designated market maker has a quote at the NBBO and if the designated market maker has a quote at the NBBO, computing an allocation percentage for the designated market maker. The method may then further include matching the incoming reserve order up to the lesser of the total size of the reserve order or the computed allocation percentage amount for the designated market maker. The market center of the method may include a display order process, a working order process and a routing process.

According to yet another embodiment of the present invention, a market center which lists a plurality of options series and handles reserve order trading is also included.

DESCRIPTION OF THE DRAWINGS

These and other features, aspects and advantages of the present invention will become better understood with regard to the following description, appended claims and accompanying drawings where:

FIG. 1 is a block diagram illustrating the trading environment in which an embodiment of the present invention operates;

FIG. 2 is a block diagram illustrating an overview of the architecture involved in the equity options electronic order book of the present invention;

FIG. 3 illustrates an order execution hierarchy of the equity options electronic order book of the present invention;

FIG. 4 is a flow diagram illustrating a process for receiving an incoming reserve buy order in an embodiment of the present invention;

FIG. 5 is a flow diagram illustrating a process for checking if a buy order is too-executable;

FIGS. 6A-6B are flow diagrams illustrating a process for handling lead market maker guaranteed offer entitlements in an embodiment of the present invention;

FIG. 7A is a flow diagram illustrating a process for handling directed orders in an embodiment of the present invention;

FIG. 7B is an exemplary designated market maker/order sending firm permissions table;

FIGS. 8A-8B are flow diagrams illustrating a process for handling designated market maker guaranteed offer entitlements in an embodiment of the present invention;

FIGS. 9A-9B are flow diagrams illustrating a process for replenishing a reserve sell order in an embodiment of the invention;

FIGS. 10A-10B are flow diagrams illustrating a process for receiving an incoming regular (non-reserve) buy order in an embodiment of the present invention;

FIG. 11 is a flow diagram illustrating a process for determining the best resident offer on a market center in an embodiment of the present invention;

FIG. 12 is a flow diagram illustrating a process for receiving an incoming reserve sell order in an embodiment of the present invention;

FIG. 13 is a flow diagram illustrating a process for checking if a sell order is too-executable;

FIGS. 14A-14B are flow diagrams illustrating a process for handling lead market maker guaranteed bid entitlements in an embodiment of the present invention;

FIGS. 15A-15B are flow diagrams illustrating a process for handling designated market maker guaranteed bid entitlements in an embodiment of the present invention;

FIGS. 16A-16B are flow diagrams illustrating a process for replenishing a reserve buy order in an embodiment of the invention;

FIGS. 17A-17B are flow diagrams illustrating a process for receiving an incoming regular (non-reserve) sell order in an embodiment of the present invention; and

FIG. 18 is a flow diagram illustrating a process for determining the best resident bid on a market center in an embodiment of the present invention.

DETAILED DESCRIPTION

Referring to FIG. 1, a trading environment in which an embodiment of the system and method of the present invention operates is depicted. The examples discussed herein describe the use and application of the present invention in an equity options market center environment, but it should be understood that the present invention could be used in any type of financial instrument market center environment (e.g., equities, futures, bonds, etc.). This embodiment of the invention describes the use of multiply listed single-leg equity options, wherein contracts for a specified underlying security can be bought (if the option type is a call) or sold (if the option type is a put) at a specific strike price prior to a specific exercise date. The functionality described herein is generally applicable to all standard options products (including near-term options and LEAPS) in all underlying securities, including but not limited to exchange-listed stocks, Exchange-Traded Funds (ETFs), Holding Company Depositary Receipts (HOLDRs), American Depositary Receipts (ADRs), and commonly traded indices.

The trading environment of this embodiment includes a market center 20 which interacts with a number of other market centers 24 (i.e. away markets) and traders at order sending firms 26 and market makers 31. It should also be understood that the market center 20 referred to herein refers to a computing system having sufficient processing and memory capabilities and does not refer to a specific physical location. In fact, in certain embodiments, the computing system may be distributed over several physical locations. It should also be understood that any number of traders 26 or market makers 31 or away market centers 24 can interact with the market center 20. The market center 20 is the market center on which a specific trader 26 posts a specific order, and on which a specific market maker 31 posts a specific quote. The market center 20 includes an order matching engine 21, which validates, maintains, ranks, executes and/or routes all orders on the market center 20, and which executes marketable quotes on the market center 20. In this embodiment, the code for the order matching engine 21 is stored in the market center's memory.

The market center 20 may also include a quote and last sale interface 23 that interacts with the away market centers 24 to capture quote and last sale information. This information is stored to a best bids and offers and last sales data structure 25. This data structure 25 is where the market best bid and offer information is stored. This data structure 25 is also where the market trade reports (prints) are stored. The market center 20 may also include an order and trade parameters data structure 27. The order and trade parameters data structure 27 stores pre-defined trading parameters and rules that are used by the order matching engine 21 in matching orders and executing trades. The market center 20 may also include an order and execution interface 28 which interacts with the traders 26, the market makers 31, the away market centers 24 and the order matching engine 21 in the order execution process.

The market center 20 may also include an order information data structure 29 where order information is stored and a trade information data structure 30 where completed trade information is stored. The market center 20 may also include a market maker interface 32 that interacts with market makers 31 to capture market maker bids and offers in assigned issues. These bids and offers are depicted in a market maker quote structure 33 in this illustration.

Throughout the discussion herein, it should be understood that the details regarding the operating environment, data structures, and other technological elements surrounding the market center 20 are by way of example and that the present invention may be implemented in various differing forms. For example, the data structures referred to herein may be implemented using any appropriate structure, data storage, or retrieval methodology (e.g., local or remote data storage in data bases, tables, internal arrays, etc.). Furthermore, a market center of the type described herein may support any type of suitable interface on any suitable computer system.

Referring now to FIG. 2, a trading environment in which orders and quotes are ranked and executed is depicted. Because the market center 20 disclosed in this embodiment is order-driven, which encourages orders and quotes to compete equally, the market center 20 is designed to allow users to send a very diverse and sophisticated body of order types. For example, with the disclosed market center 20, a user may, as described in detail below, use the sophisticated order types available to mask their trading intentions from the marketplace by using order types that do not display all or part of an order's size or price.

The market center 20 disclosed in this embodiment also ranks all resting orders in such a manner as to give preference to displayed trading interest over nondisplayed trading interest at the same price so that users are encouraged to send displayed limit orders at the best possible prices. The market center 20 disclosed in this embodiment can be used in a non-competing market maker environment, a competing market maker environment and in an environment that does not use market makers in some or all of the issues. In a preferred embodiment, described herein, the market center 20 has a non-competing market maker environment. The market center order books are largely flat and open based on price/time principles. As described below, lead market makers are guaranteed participation entitlements, but only when they are already on the NBBO in their assignments, which encourages tighter spreads and faster executions.

In the non-competing market maker embodiment, described herein, market maker quotes cannot be automatically or manually improved for the purpose of participating with a specific incoming order, nor can a market maker send a price-improving order for the purpose of intercepting a specific incoming order. In this embodiment, market makers do not see an incoming order at all. As a result, a user of this system that sends an order is able to trade anonymously without divulging his or her trading intentions. Another characteristic of this non-competing market maker embodiment, as described below, is that only the lead market maker (or alternatively, a specific, designated non-lead market maker who is temporarily granted lead market maker privileges in a directed order process) is entitled to guaranteed participation with an incoming order, and therefore complex market maker pro rata allocations, as used in prior systems, are not necessary in this embodiment.

Referring specifically to FIG. 2, in this embodiment, market makers 31 can send orders and quotes to the market center 20, and order sending firms 26 can send orders to the market center 20. Away market centers 24 also route orders to the market center 20 and receive routed orders from the market center 20. Such “linkage” processing, however, is known and is not described herein. The order and execution interface 28 includes a customer gateway routine 28a, which, when executed, initiates a process that determines whether and by what means a specific order sending firm 26 is eligible to send orders to the market center 20, and also includes an order validation routine 28b which, when executed, initiates a process that determines whether the specific order meets all the business requirements of the market center 20. If an order is determined to be valid, then the order and execution interface 28 releases the order to the order matching engine 21 for further processing. Marketable orders are executed immediately, whereas nonmarketable orders that can execute later are posted to an order book 29a on the order data structure 29. The order book 29a includes all active nonmarketable orders resident on the market center 20, including fully-displayed orders, partially-displayed order and nondisplayed orders.

As illustrated in FIG. 2, market makers 31 may send orders as well. If a market maker's order is determined to be valid, as with an order sending firm's order, then the order and execution interface 28 releases the order to the order matching engine 21 for further processing. As with order sending firm orders, marketable orders are executed immediately, whereas nonmarketable orders are posted to the same order book 29a as are orders from order sending firms 26.

The market maker interface 32 includes a market maker direct connect routine 32a, and also includes a market maker quote engine 32b, which, when executed, initiates a process that receives and analyzes market maker quotes. The quote and last sale interface 23 includes a quote engine 23a, which, when executed, initiates a process that receives and analyzes away market BBO quotes and receives and analyzes the consolidated NBBO quote.

In this embodiment, the order matching engine 21 includes a display order routine 21a, a working order routine 21b and an away market routine 21c. When executed, the display order routine 21a implements a process that maintains and ranks displayed orders. As indicated in FIG. 2, market maker quotes are integrated with the display order routine 21a. The working order routine 21b, when executed, implements a process that maintains and ranks working orders. Working orders are orders having a conditional or undisplayed price and/or size that is not disclosed to the marketplace, but is electronically accessible for matching. For example, a reserve order is a working order because it has a displayed size and a nondisplayed size. The working order process is significant to the “order-driven” market center of this invention because it allows highly sophisticated order types to be submitted to the market center 20. By way of example, such sophisticated order types allow market participants to be active in the market without disclosing trading intentions, which increases the liquidity of the market center 20.

The display order routine 21a receives and processes fully-displayed orders and partially-displayed orders. When presented with a marketable incoming order, the display order routine 21a ranks disseminated market maker quotes and resting displayed orders or portions thereof according to strict price/time priority. The display order routine 21a, in this embodiment, includes the following sub-routines: a directed order routine 21d and a lead market maker guarantee routine 21e. The directed order routine 21d is a routine that, when initiated, guarantees a specified percentage of an incoming directed order to a designated market maker after customer orders ranked ahead of the designated market maker's quote execute first. The lead market maker routine 21e is a routine that, when initiated, guarantees a specified percentage of an incoming non-directed order to a lead market maker after customer orders ranked ahead of the lead market maker's quote execute first.

The working order routine 21b receives and processes partially-displayed orders and nondisplayed orders. The working order routine 21b, in this embodiment, includes the following sub-routines: a reserve routine 21g, a liquidity routine 21h, a discretionary routine 21i and a tracking routine 21j. The reserve routine 21g is a routine that, when initiated, ranks and maintains reserve orders, which display a portion of the size to the marketplace but keep another undisplayed portion in reserve. The process initiated when the reserve routine 21g is activated is the Reserve Process, which is described in detail herein. The liquidity routine 21h is a routine that, when initiated, ranks and maintains passive liquidity orders, which are completely nondisclosed limit orders that grant price improvement to incoming orders. The discretionary routine 21i is a routine that, when initiated, ranks discretionary orders, which display a price to the marketplace but include a superior undisplayed price. The tracking routine 21j is a routine that, when initiated, ranks and maintains tracking liquidity orders, which are completely nondisclosed orders whose prices automatically track the NBBO and execute only if they can prevent an incoming order from routing.

As illustrated in FIG. 2, although market maker quotes are maintained in a separate market maker quote book 33a, they are retrieved and integrated with displayed orders and partially-displayed orders in the processes initiated when the display order routine 21a is activated (“Display Order Process”), which includes the directed order routine 21d and the lead market maker guarantee routine 21e, when the order matching engine 21 evaluates matching opportunities. As also illustrated in FIG. 2, although away market quotes are maintained in a separate away market best bids and offers (“BBO”) book 25a, they are retrieved and integrated with displayed orders, partially-displayed orders, nondisclosed orders and market maker quotes when the order matching engine 21 evaluates matching opportunities and routing opportunities.

FIG. 2 shows the relative rankings of various order execution routines initiated by the order matching engine 21. As described above, the order matching engine 21 has a display order routine 21a, a working order routine 21b, and an away market routine 21c. The sequence of the subroutines 21d, 21e and 21g through 21k generally correspond to the sequence in which the order matching engine 21, in this embodiment, attempts to process an incoming marketable order. The order matching engine 21 attempts to execute an incoming marketable order as fully as possible in a given routine before continuing to the next-highest ranking routine.

In this embodiment, upon receiving an incoming marketable order, the display order routine 21a is typically initiated first, which activates the Display Order Process. The Display Order Process initiates the directed order routine 21d if the incoming order is a directed order and initiates the lead market maker guarantee routine 21e if the incoming order is unable to execute in the directed order routine 21d. After the Display Order Process has completed, if the incoming order still has quantity available to trade, then the working order routine 21b is initiated next. It attempts to execute the remainder of the incoming order in the reserve routine 21g first; in the liquidity routine 21h second; in the discretionary routine 21i third; and in the tracking routine 21j fourth. If the incoming order still has quantity remaining and is eligible to route off the market center 20, then the away market routine 21c is initiated next.

Referring to FIG. 3, the sequence in which resting orders and quotes are ranked for execution in a preferred embodiment is shown in greater detail. In the example depicted in FIG. 3, there are three orders or quotes that have been ranked by each of the order execution routine processes, at two price levels: the NBBO, and one tick inferior to the NBBO. When the order matching engine 21 evaluates matching and pricing opportunities for a given issue (option series), it retrieves the order book 29a, the market maker quote book 33a, and the away market BBO book 25a and momentarily combines them into a single ranked list of bids and a single ranked list of offers in local memory. All the bids (buy orders and bid quotations) are ranked on one side of the list, and all the offers (sell orders and offer quotations) are ranked on the opposite side of the list. The ranked list of bids combined with the ranked list of offers is referred to as the “virtual consolidated order and quote list.” FIG. 3 illustrates one side of an exemplary virtual consolidated order and quote list for a given issue.

The order matching engine 21 ranks each side of the virtual consolidated order and quote list according to price/time priority principles, but with a preference for displayed orders and quotes over working orders at the same price. This method of ranking is referred to as “price/display/time priority” in this document to indicate that an order's display characteristics (i.e., displayed versus not displayed) trumps the time that an order is received. Simply put, at a given price level, a nondisplayed order has a lower priority than a displayed order that was received later. As also shown in FIG. 3, resident orders and quotes always have priority over away market quotes at the same price, regardless of the time received.

Each order execution routine is responsible for ranking a subset of the resting orders and/or quotes in the virtual consolidated order and quote list. Resting orders and quotes are generally ranked in the sequence shown in the example of FIG. 3. Beginning with the first column of FIG. 3, all market maker quotes (e.g., lead market maker quotes and non-lead market maker quotes) and all displayed orders (e.g., exchange-restricted orders, inside limit orders, sweep limit orders, intermarket orders and pegged orders) are consolidated together and ranked in strict price/time priority in the Display Order Process, regardless of the order type or quote type. The displayed portions of partially-displayed orders (for example, the displayed portion of a reserve order, and the displayed portion of a discretionary order) are also combined with the other fully-displayed order types and market maker quotes and ranked in strict price/time priority in the Display Order Process.

The process initiated by the directed order routine 21d (“Directed Order Process”) and the process initiated by the lead market maker guarantee routine 21e (“LMM Guarantee Process”) match a marketable incoming order against a subset of the resting displayed orders and market maker quotes that are combined and ranked in the Display Order Process. In this embodiment, all displayed customer orders that are ranked ahead of a lead market maker's quote are eligible to execute in the LMM Guarantee Process. Similarly, all displayed customer orders that are ranked ahead of a designated market maker's quote are eligible to execute in the Directed Order Process. Accordingly, the displayed portion of a customer reserve order is eligible to execute in the Directed Order Process or in the LMM Guarantee Process, but its nondisclosed reserve portion is not eligible. Similarly, the displayed price of a customer discretionary order is eligible to execute in the Directed Order Process or the LMM Guarantee Process, but its nondisclosed discretionary price is not eligible. If a marketable incoming order still has quantity available to trade after it has completed executing in the Directed Order Process or in the LMM Guarantee Process (or alternatively, if it is unable to execute in either process), then the order matching engine 21 attempts to execute the order in the Display Order Process next, i.e., in strict price/time priority, with no preference granted to customers or market makers.

Continuing to the second column, the Reserve Process executes the reserve portions of resting orders only after all eligible orders and quotes at the same price have been executed in the Display Order Process. Reserve portions of orders are ranked in the Reserve Process according to the price/time priority assigned to their displayed portions in the Display Order Process.

Continuing to the third column, the process initiated by the liquidity routine 21h (“Liquidity Process”) executes passive liquidity orders only after any eligible reserve portions at the same price have been executed in the Reserve Process. Passive liquidity orders are ranked in price/time priority in the Liquidity Process.

Continuing to the fourth column, the process initiated by the discretionary routine 21i (“Discretionary Process”) executes discretionary orders only after any eligible passive liquidity orders at the same price have been executed in the Liquidity Process. Discretionary prices are ranked according to the price/time priority assigned to their displayed prices in the Display Order Process. It should be noted that an order executes using discretion in the Discretionary Process only if it cannot execute at its displayed price in the Display Order Process.

Continuing to the fifth column, the process initiated by the tracking routine 21j (“Tracking Process”) executes tracking orders only after any eligible discretionary orders that can “step up” to the same price have been executed in the Discretionary Process, and the incoming order is about to route off the market center 20. Tracking liquidity orders are ranked in price/time priority in the Tracking Process.

Continuing to the last column, the process initiated by the routing routine 21k (“Routing Process”) routes orders to eligible away markets if the order cannot execute at the best price on the market center 20. If the order type cannot be routed, then the order is generally canceled or repriced less aggressively.

After executing against all eligible orders and quotes at the NBBO in the sequence of their ranking (from 1 through 18 in this example), if an incoming order is allowed to execute at a price inferior to the NBBO, then it would continue to execute against all eligible orders (and quotes, if allowed) at the next-best price level, i.e., at one minimum price increment (tick) inferior to the NBBO, in the sequence of their ranking (from 19 through 30 in this example). As tracking orders can only execute at the NBBO by definition, they are not shown in FIG. 3 at one tick inferior to the NBBO. If an order type (e.g., an intermarket sweep order) is also allowed to contemporaneously route to away markets inferior to the NBBO, then the incoming order would continue to execute against the eligible away market quotes at one tick inferior to the NBBO, in the sequence of their ranking (from 31 through 33 in this example).

It should also be noted that certain working order types (e.g., discretionary orders and passive liquidity orders) can execute at prices between the spread (i.e., higher than the national best bid and lower than the national best offer) under certain conditions. The execution of working orders between the spread is described elsewhere and is not discussed in detail this document. It should be understood that this list of working orders is exemplary and that other embodiments of the invention may not utilize the working orders described above or may use differing combinations of them.

In a preferred embodiment of the invention, there is no minimum displayed size for a reserve order, so the “Show Size,” i.e., the maximum quantity to display publicly, can be specified at any quantity. In a different embodiment of the invention, the market center 20 may specify a minimum Show Size (e.g., 10 contracts), in which case the displayed size of a reserve order is replenished whenever it is exhausted to a quantity that is lower than the Show Size (e.g., 9 contracts or less). Defining a minimum Show Size parameter may be advantageous if market center quotes are only protected if they are a minimum size, or if the marketwide disseminated NBBO quotation has minimum volume change requirements.

For ease of explanation, the disclosure herein describes reserve orders as a separate order type, but in actuality any displayed limit-priced order can be submitted to the market center 20 with a reserve quantity specified. For example, the market center 20 may allow the following combinations:

Sweep Limit+Reserve

Inside Limit+Reserve

Exchange-Restricted+Reserve

Discretionary+Reserve

Primary Peg+Reserve

Market Peg+Reserve

An order with reserve is processed according to the rules of the order type (e.g., inside limit orders can route at the NBBO, whereas exchange-restricted orders cannot route at all), but with the additional feature that whenever its displayed size is depleted, it is replenished from the remaining quantity in reserve. Order types that are canceled if not executed immediately (e.g., IOC Orders and NOW Orders) do not specify a reserve size, as this functionality is irrelevant since the order is never posted.

A pegged order with reserve behaves just like the reserve order described herein, except that its price is not fixed on the incoming order. Instead, the order's price is automatically set by the order matching engine 21 based on the current NBBO. A primary peg order with reserve is priced according to the same side of the NBBO, i.e., a primary peg reserve buy order is priced in relation to the national best bid (“NBB”) and a primary peg reserve sell order is priced in relation to the national best offer (“NBO”). In contrast, a market peg order with reserve is priced according to the opposite side of the NBBO, i.e., a market peg reserve buy order is priced in relation to the NBO and a market peg reserve sell order is priced in relation to the NBB.

As the pricing of pegged orders generally ensures that they are not marketable when they are first received, an incoming pegged reserve order is ranked in the internal order book 29a in the same manner as a non-pegged reserve order. The displayed size of the pegged order is ranked in the Display Order Process according to price/time priority, whereas the reserve portion of the pegged order is ranked in the Working Order Process according to the price/time priority of the displayed portion. While resting in the internal order book 29a, pegged reserve orders are automatically repriced as necessary when the NBBO changes, and are accordingly re-ranked according to their new price/time priority.

A resting pegged reserve order is eligible for participation in the Directed Order Process or the LMM Guarantee Process according to the same rules for non-pegged reserve orders. If the pegged reserve order is a customer order at the NBBO and has time priority over the applicable market maker's quote (either the lead market maker or the designated market maker), then the displayed portion of the pegged reserve order is eligible to step ahead of other orders and quotes at the NBBO that were received earlier, but the reserve portion of the pegged reserve order is not eligible.

Most limit order types on the market center 20 “stand their ground” when locked or crossed by an away market center. This means the order does not respond—it is not repriced, hidden, nor canceled to avoid the lock or cross, nor does the order route to the away market center whose disseminated quotation locked or crossed it. By default, all reserve orders stand their ground unless prohibited by the rules of the underlying order type. For example, sweep limit orders and exchange-restricted orders always stand their ground when locked or crossed by an away market center, so accordingly reserve sweep limit orders and reserve exchange-restricted orders also stand their ground in the same manner.

However, whenever the displayed size of a reserve order is depleted by trading and is replenished from its reserve, then the timestamp of the reserve order is updated, as increasing the displayed size of an order causes it to lose standing on the order book 29a and to be treated like a new order. For example, assume the situation where a reserve order is locked or crossed by an away market center and stands its ground. While still locked or crossed, the displayed size of the reserve order is depleted by trading with incoming marketable orders. When the displayed size is replenished from its reserve quantity, then the process updates its timestamp.

Accordingly, the replenished reserve order now has a later timestamp than the away market center that originally locked or crossed it, and therefore it is the replenished reserve order that now locks or crosses the NBBO. Accordingly, the replenished reserve order must route to the locked or crossed away market center, up to the lesser of the disseminated quote size and the total remaining quantity of the reserve order, including its reserve. If the underlying order type cannot be routed (e.g., an exchange-restricted reserve order), then the order may instead be canceled, hidden, or repriced less aggressively to prevent it from locking or crossing the market.

Incoming Reserve Buy Order Received

Referring to FIG. 4, in this embodiment, the order matching engine 21 receives an incoming reserve buy order as indicated at step 400, and determines whether the order is marketable. If the incoming reserve order is not marketable, then it ranks the order in the internal order book 29a. The displayed portion of the reserve buy order resides in the Display Order Process, whereas the reserve portion of the order resides in the Reserve Process.

If, however, the incoming reserve buy order is marketable, then the process determines if the incoming reserve buy order is eligible to execute first in a guaranteed entitlement process, i.e., the Directed Offer Process or the LMM Guarantee Process and, if it is, processing the incoming reserve buy order in one of the guaranteed entitlement processes. The process then releases any unexecuted portion of the order to the Display Order Process for additional matching opportunities.

In step 402, the process retrieves the NBO, and in step 404, it checks if the incoming reserve buy order is marketable. If the incoming reserve buy order is not marketable, then the process continues to step 406, where it ranks the quantity equal to the user-specified Show Size in the Display Order Process in price/time priority, and ranks the quantity equal to the user-specified Reserve Size in the Working Order Process according to the price/time priority of the displayed portion. The process continues to step 408, where it disseminates the displayed portion of the reserve buy order to the public order book. The process then terminates in step 410 as indicated.

Returning to step 404, if, however, the incoming reserve buy order is marketable, then the process continues to step 412, where the “Too-Executable Buy Order Check Process” is initiated at step 500 (FIG. 5). If the incoming reserve buy order is not canceled by the “Too-Executable Buy Order Check Process” as described in detail below, then the process continues to step 413 where it combines the away market BBO book 25a, the market maker quote book 33a, and the order book 29a together in a virtual consolidated order and quote list, which it ranks in price/display/time priority but with a preference for resident interest over away market interest at the same price level. The process then proceeds to step 414 where it checks if the option series has any assigned market makers. If it does, then the process continues to step 416, where it checks if the incoming reserve buy order is a directed order. If the incoming reserve buy order is a directed order, then the process continues to step 418 where the “Directed Order Process” is initiated in step 700 (FIG. 7A). If, however, the incoming reserve buy order is not a directed order, then the process proceeds to step 420 where the “LMM Guaranteed Offer Process” is initiated instead in step 600 (FIG. 6A).

Regardless of whether the incoming reserve buy order executes in the Directed Order Process, in the LMM Guaranteed Offer Process or in neither process (if the applicable market maker is not quoting at the NBO and is therefore ineligible for a guaranteed entitlement), if the incoming reserve buy order still has quantity available to trade, then the process continues to step 422, where the process retrieves the best offer in the virtual consolidated order and quote list, i.e., the lowest-priced sell order, market maker offer, or disseminated away market offer quotation. In step 424, the process checks if the incoming reserve buy order is still marketable.

If the incoming reserve buy order is no longer marketable, then the process continues to step 426, where it ranks the quantity up to the user-specified Show Size in the Display Order Process in price/time priority, and ranks any remaining quantity in the Working Order Process according to the price/time priority of the displayed portion. The process then continues to step 428, where it disseminates the displayed portion of the reserve buy order to the public order book. The process then terminates in step 430 as indicated.

Returning to step 424, if the process determines that the incoming reserve buy order is still marketable, then it continues to step 432, where it checks if the retrieved best offer is on or off the market center 20. If the retrieved best offer is on the market center 20, then the process continues to step 444, where it matches the incoming reserve buy order, up to its full order size including its reserve, against the retrieved sell order or market maker offer, at the offer price. If the retrieved best offer is a market maker quote, it does this by automatically generating an IOC sell pseudo-order on behalf of the underlying market maker quote and matching the incoming reserve buy order with the sell pseudo-order. The process notifies the market maker quote engine 32b of the quantity that was executed so that the market maker quote engine 32b can decrement the quote.

In step 446, the process checks if the incoming reserve buy order still has any quantity remaining. If it does not, the process continues to step 448, where it terminates as indicated. If it does still have quantity available to trade, then the process returns to step 422, where it retrieves the next-best offer in the virtual consolidated order and quote list.

Returning to step 432, if, however, the retrieved best offer is not on the market center 20, then it is an away market quote and not a sell order or market maker offer. In this case, the process continues to step 434, where it checks if the incoming reserve buy order should route off the market center 20 or not. If the incoming reserve buy order should not be routed, then the process continues to step 442. In step 442, the process either posts, hides, cancels, or reprices the incoming reserve buy order according to the rules of the underlying order type. The process then terminates in step 448 as indicated.

Returning to step 434, if the process determines that the incoming reserve buy order should be routed, i.e., its order type allows routing and the away market centers at the NBO have not been completely satisfied yet, then the process continues to step 436, where the incoming reserve buy order is released to the Routing Process. In general, the Routing Process routes the lesser of the remaining quantity of the incoming reserve buy order (including its reserve quantity) and the away market center's disseminated offer size, at the disseminated offer price.

After routing all or part of the order, the process continues to step 438, where it checks if the incoming reserve buy order still has any quantity remaining. If it does not, then the process continues to step 448, where it terminates as indicated. If, however, the incoming reserve buy order does still have quantity available to trade, the process continues to step 440, where it checks if the incoming reserve buy order is allowed to execute additional contracts beyond the NBO. For example, certain order types (e.g., an inside limit order with reserve) can only execute at the NBO, whereas other order types (e.g., a sweep limit order with reserve or an intermarket sweep limit order with reserve) can take advantage of the book-and-ship exception, the trade-and-ship exception, or intermarket sweeping (if allowed by marketplace rules) and execute beyond the NBO after first satisfying the obligation to all the away markets quoting at the NBO. If the incoming reserve buy order is not allowed to execute beyond the NBO, then the process proceeds to step 426, where it ranks the quantity up to the user-specified Show Size in the Display Order Process in price/time priority, and ranks any remaining quantity in the Working Order Process according to the price/time priority of the displayed portion. The process continues to step 428, where it disseminates the displayed portion of the reserve buy order to the public order book. The process then terminates in step 430 as indicated.

Returning to step 440, if, however, the incoming reserve buy order is allowed to execute additional contracts beyond the NBO, then the process returns to step 422, where it retrieves the next-best offer in the virtual consolidated order and quote list. The process continues to step 424, where it checks if the incoming reserve buy order is still marketable against the next-best offer. The process continues as described above until the incoming reserve buy order is completely matched, or else is no longer marketable and is posted.

Too-Executable Buy Order Check Process

Referring now to FIG. 5, the Too-Executable Buy Order Check Process is illustrated. The Too-Executable Buy Order Check Process determines if an incoming buy order is “too executable,” i.e., is priced so aggressively that it exceeds a predefined allowable percentage through the published NBO quotation. In the preferred embodiment, the predefined percentage is stored as a configurable parameter “MaxPercentOffNBBO,” which caps the highest limit price allowed for an incoming buy order based on the current NBO.

In step 500, the Too-Executable Buy Order Check Process is initiated when the order matching engine 21 receives an incoming buy order that is marketable. In step 502, the process compares the incoming buy order's price to the NBO. If the incoming buy order's price is not greater than the NBO, then the process continues to step 506, where it returns to the step where the procedure was originally initiated, and the process terminates because the incoming buy order is not “too executable.” If, however, in step 502, the process determines that the incoming buy order's price is greater than the NBO, then the process continues to step 504 instead.

In step 504, the process checks if the check for excessive marketability is enabled for the incoming buy order type. If the incoming buy order type is not subject to the check for excessive marketability, then the process also continues to step 506, where it returns to the step where the procedure was originally initiated, and the process terminates because the incoming buy order is not evaluated as to whether it is “too executable.”

Returning to step 504, if the process determines that the incoming buy order is subject to the check for excessive marketability, then it continues to step 508, where it retrieves the parameter “MaxPercentOffNBBO.” Then, in step 510, the process computes the price interval allowed beyond the NBO for an incoming buy order (the “MaxPriceThruNBO” parameter) by multiplying the current NBO price by the MaxPercentOffNBBO. Accordingly, the MaxPriceThruNBO parameter is computed as the stored percentage parameter times the NBO price, rounded down to the nearest tick if necessary. For example, if the NBO is 2.10 and the MaxPercentOffNBBO is 15%, then the MaxPriceThruNBO parameter is 0.315, which would be rounded down to 0.30 if the tick is a nickel at this price level. If the issue trades in pennies, then it would be rounded down to 0.31 instead. In step 512, the process adds the computed MaxPriceThruNBO parameter to the current NBO to derive the highest valid price for the incoming buy order, i.e., the “MaxBuyPrice.”

In step 514, the process compares the price of the incoming buy order to the derived MaxBuyPrice parameter. If the incoming buy order's price is not higher than the MaxBuyPrice parameter, then the incoming buy order is not “too executable,” and is eligible for further processing. In this case, the process continues to step 516, where it returns to the step where the procedure was originally initiated, as the process has determined that the incoming buy order is not “too executable.”

Returning to step 514, if, however, the incoming buy order's price is higher than the derived MaxBuyPrice parameter, then the incoming buy order is presently “too executable,” i.e., is priced too far through the NBO. Accordingly, the incoming buy order is not allowed to execute at this price, and must either be canceled or repriced depending on the business rules of the market center 20. In step 518, if the rules determine that the order must be canceled, then the process continues to step 520, where it cancels the incoming buy order and terminates in step 522, as indicated. If, however, in step 518 the business rules of the market center 20 determine that the incoming buy order should be repriced less aggressively instead of being canceled, then the process continues to step 524, where it caps the price of the incoming buy order at the derived MaxBuyPrice parameter. The process continues to step 526, where it returns to the step where it was originally initiated, and the process terminates because the repriced buy order is no longer “too executable.” It should be noted that in this embodiment once the buy order has been repriced less aggressively, it is not subsequently repriced more aggressively even if the NBO moves away.

The LMM Guaranteed Offer Process

Referring now to FIGS. 6A-6B, the LMM Guaranteed Offer Process is illustrated. At step 600, the process is initiated. At step 602, the process retrieves the lead market maker's offer. In step 604, the process checks if the lead market maker's offer is at the NBO price. If the lead market maker's offer is inferior to the NBO, then the lead market maker is not entitled to guaranteed participation with the incoming buy order, and the process continues to step 606, where it returns to the step where it was originally initiated.

Returning to step 604, if, however, the lead market maker offer is at the NBO, then the lead market maker is entitled to guaranteed participation with the incoming buy order. The process proceeds to step 608, where it checks if the incoming buy order's size is greater than two contracts. If it is less than or equal to two contracts, then the process continues to step 609, where it matches the incoming buy order with one contract of the lead market offer, at the NBO price. It does this by generating an IOC sell pseudo-order on behalf of the underlying lead market maker offer, and executing the incoming buy order against the sell pseudo-order. After executing the sell pseudo-order, the order matching engine 21 notifies the market maker quote engine 32b of the quantity of contracts that executed (one contract) so that it can decrement the lead market maker offer.

Then at step 610, the process checks if the incoming buy order still has one contract available to trade. If it does not, then the process terminates in step 612 as indicated. If it does, then the process continues to step 611, where it matches the single remaining contract of the incoming buy order with one contract of the best displayed offer. The best displayed offer is the sell order or quote with the highest ranking in the Display Order Process according to price/time priority. The process terminates in step 612 as indicated.

Returning to step 608, if, however, the incoming buy order has more than two contracts available to execute, then the process, in this embodiment, determines if there are any customer orders that are eligible to execute ahead of the lead market maker offer. Accordingly, the process proceeds to step 614, where it checks if there are any displayed customer sell orders at the NBO. It should be understood that the displayed portion of a reserve order qualifies as a displayed order. If no customer orders exist, then the lead market maker is entitled to participate immediately with the incoming buy order. The process proceeds to step 632, where it retrieves a stored, configurable guaranteed allocation parameter determined by the market center's business rules (“LMMGuaranteedPercent”).

At step 634, the process computes the maximum quantity of contracts that the lead market maker is guaranteed for execution (“LMMGuaranteedAllocation”) by multiplying the remaining (“Leaves”) quantity of the incoming buy order by the LMMGuaranteedPercent parameter, and rounding the result down to the nearest integer value if necessary. In step 638, the process matches the incoming buy order with the lead market maker offer, at the NBO price, up to the lesser of the computed LMMGuaranteedAllocation size and the lead marker maker offer size. It does this by generating an IOC sell pseudo-order on behalf of the underlying lead market maker offer, and executing the incoming buy order against the sell pseudo-order. After executing the sell pseudo-order, the order matching engine 21 notifies the market maker quote engine 32b of the quantity of contracts that executed so that it can decrement the lead market maker offer.

In step 642, the process checks if the incoming buy order still has any contracts available to trade. If the incoming buy order has been completely executed, then the process continues to step 644, where it checks if any reserve sell orders have been flagged for replenishment. If any reserve sell orders have been flagged for replenishment, then the process continues to step 648, where it initiates the procedure titled “Replenish Reserve Sell Order Process,” and proceeds to step 900 (FIG. 9A). After execution of that procedure, then the process continues to step 650, where it terminates because the incoming buy order is completed. The process also terminates in step 650 if there are no reserve sell orders that have been flagged for replenishment, as determined at step 644.

Returning to step 614, if, however, there are displayed customer sell orders at the NBO, then the process continues to step 616, where it retrieves the timestamp assigned to the lead market maker's offer (the time assigned by the market maker quote engine 32b) and stores it in the parameter “LMMOfferTimestamp.” In step 618, the process retrieves the earliest displayed customer sell order at the NBO. In step 620, the process compares the timestamp of the retrieved customer sell order with the LMMOfferTimestamp parameter, and if the customer sell order preceded the lead market maker offer, then the process continues to step 622, where it matches the incoming buy order with the retrieved customer sell order at the NBO price. If the retrieved customer sell order is a reserve order, then only the displayed portion of the order is matched. The reserve portion is not eligible to match in the LMM Guaranteed Offer Process.

If the customer sell order is a reserve order and its displayed size was fully depleted in step 622, then in step 623, the process flags the order for subsequent replenishment. In step 624, the process checks if the incoming buy order still has contracts available to trade. If it does not, then the process continues to step 644, where it checks if any reserve sell orders have been flagged for replenishment. If any reserve sell orders have been flagged for replenishment, then the process continues to step 648, where it initiates the procedure titled “Replenish Reserve Sell Order Process,” and proceeds to step 900 (FIG. 9A). After replenishing the reserve sell orders, the process then continues to step 650, where it terminates because the incoming buy order is completed. The process also terminates in step 650 if there are no reserve sell orders that have been flagged for replenishment, as determined at step 644.

Returning to step 624, if, however, the incoming buy order does still have quantity remaining to trade, then the process continues to step 628, where it checks if there are any additional displayed customer sell orders priced at the NBO. If there are additional customer orders, then in step 630, the process retrieves the next earliest displayed customer sell order at the NBO and returns to step 620, where it checks if the newly-retrieved customer sell order was received prior to the lead market maker offer. It repeats this process until all customer sell orders with price/time priority over the lead market maker offer have been matched, unless the incoming buy order is exhausted first.

Returning to step 620, if, however, the timestamp of the retrieved customer sell order is not lower than the LMMOfferTimestamp, then the customer order was not received prior to the lead market maker offer, and is therefore not eligible to execute in the LMM Guarantee Process. In this case, the process proceeds to step 632, and executes the lead market maker guaranteed allocation according to steps 632 through 646 (or 650) as described above.

Returning to step 628, if, however, there are no additional displayed customer sell orders at the NBO, then the process proceeds to step 632, and executes the lead market maker guaranteed allocation according to steps 632 through 646 (or 650) as described above.

The Directed Order Process

Referring now to FIGS. 7A-7B, the Directed Order Process is illustrated. When the market center 20 receives a directed order, it must first determine if the order sending firm 26 is permissioned to direct orders to the designated market maker firm 31. At step 700, the process is initiated. At step 702, the process sets the parameter designated as “OSF” to the order sending firm identification (“ID”) included on the incoming directed order. Then, at step 704, the process retrieves a designated market maker/order sending firm (“DMM/OSF”) permissions table, similar to the exemplary one depicted in FIG. 7B.

At step 706, the process checks if the incoming directed order includes the ID of a designated market maker, i.e., a specific market maker firm that is the intended recipient of this directed order. If a designated market maker is not specified, then the process continues to step 712, where it consults the DMM/OSF permissions table to see if a default designated market maker has been established for this order sending firm. If no default market maker has been established in the DMM/OSF permissions table, then the incoming order cannot execute in the Directed Order Process, but it may be able to execute in one of the LMM Guarantee Processes instead. Accordingly, the process continues to step 713, where it checks if the incoming order is a buy or sell. If the incoming order is a buy order, then the process continues to step 714, where it initiates the LMM Guaranteed Offer Process. When the LMM Guaranteed Offer Process is complete, the process then continues to step 730 as indicated, where it returns to the step where the routine was originally initiated. If, however, the incoming order is a sell order, then the process continues to step 715, where it initiates the LMM Guaranteed Bid Process. When the LMM Guaranteed Bid Process is complete, the process then continues to step 732 as indicated, where it returns to the step where the routine was originally initiated.

Referring again to step 706, if the directed order includes the ID of a designated market maker, then the process, at step 708, assigns the designated market maker ID to the parameter “DMM.” At step 710, the process consults the DMM/OSF permissions table to determine if a rule exists for this DMM/OSF pair. If a rule does not exist, then this order sending firm 26 is not permissioned to send directed orders to this designated market maker. In this case, the incoming order cannot execute in the Directed Order Process, but it may be able to execute in a LMM Guarantee Process instead. Accordingly, the process continues to step 713 where it checks if the incoming order is a buy order or a sell order and then proceeds as described in the steps above.

Referring again to step 710, however, if a rule does exist for the DMM/OSF pair, then this order sending firm 26 is permissioned to send directed orders to the designated market maker 31. That being the case, the process continues to step 718, where it checks if the incoming directed order is a buy order or a sell order.

Referring again to step 712, if the process determines that a default designated market maker exists for the order sending firm sending the order, then the process, at step 716 sets the parameter designated as “DMM” to the default market maker ID and continues to step 718. At step 718, the process determines whether the incoming directed order is a buy order or a sell order. If the directed order is a buy order, then the process proceeds to step 720, where the DMM Guaranteed Offer Process is initiated, and the process proceeds to step 800 (FIG. 8A). After the DMM Guaranteed Offer Process is complete, the process proceeds to step 722 where it returns to the step where the routine was originally initiated. If, on the other hand, the directed order is a sell order, then the process proceeds to step 724, where the DMM Guaranteed Bid Process is initiated, and the process proceeds to step 1800 (FIG. 15A). After the DMM Guaranteed Bid Process is complete, the process proceeds to step 726 where it returns to the step where the routine was originally initiated.

The DMM Guaranteed Offer Process

Where the process has determined that an incoming buy order was sent by an order sending firm 26 that is permissioned to send directed orders to a market maker firm 31, the DMM Guaranteed Offer Process is activated as indicated at step 800 (FIG. 8A). FIG. 8 illustrates a routine wherein the order matching engine 21 executes the incoming directed buy order in the Directed Order Process, but only if the designated market maker's offer is at the NBO. The DMM Guaranteed Offer Process is very similar to the previously described LMM Guaranteed Offer Process, as the designated market maker in this situation receives the same privileges as the lead market maker for the purpose of executing with the incoming directed order.

At step 802, the process retrieves the designated market maker's offer. In step 804, the process checks if the designated market maker's offer is at the NBO price. If the designated market maker's offer is inferior to the NBO, then the designated market maker is not entitled to guaranteed participation with the incoming directed buy order. However, the lead market maker may still be entitled to participate with the incoming order instead. Accordingly, the process continues to step 806, where the “LMM Guaranteed Offer Process” is activated, and the process proceeds to step 600 (FIG. 6A). After the LMM Guaranteed Offer Process is complete, the process then continues to step 807, where it returns to the step where it was originally initiated.

Returning to step 804, if, however, the designated market maker offer is at the NBO, then the designated market maker is entitled to guaranteed participation with the incoming order. The process proceeds to step 808, where, in this embodiment, it checks if the incoming directed buy order's size is greater than two contracts. If it is less than or equal to two contracts, then the process continues to step 809, where it matches the incoming buy order with one contract of the designated market maker offer, at the NBO price. It does this by generating an IOC sell pseudo-order on behalf of the underlying designated market maker offer, and executing the incoming buy order against the sell pseudo-order. After executing the sell pseudo-order, the order matching engine 21 notifies the market maker quote engine 32b of the quantity of contracts that executed (one contract) so that it can decrement the designated market maker offer.

In step 810, the process checks if the incoming buy order still has one contract available to trade. If it does not, then the process terminates in step 812 as indicated. If it does, then the process continues to step 811, where it matches the single remaining contract of the incoming buy order with one contract of the best displayed offer. The best displayed offer is the sell order or quote with the highest ranking in the display order process according to price/time priority. The process terminates in step 812 as indicated.

Returning to step 808, if, however, the incoming directed buy order has more than two contracts available to execute, then the process must determine if there are any customer orders that are eligible to execute ahead of the designated market maker offer. Accordingly, it proceeds to step 814, where it checks if there are any displayed customer sell orders at the NBO.

If none exist, then the designated market maker is entitled to participate immediately with the incoming directed buy order. The process proceeds to step 832, where it retrieves a stored, configurable guaranteed allocation parameter determined by the market center's business rules (“DMMGuaranteedPercent”). In step 834, the process computes the maximum quantity of contracts that the designated market maker is guaranteed for execution (“DMMGuaranteedAllocation”) by multiplying the remaining (“Leaves”) quantity of the incoming directed buy order by the DMMGuaranteedPercent parameter, and rounding the result down to the nearest integer value if necessary. In step 838, the process matches the incoming buy order with the designated market maker offer, at the NBO price, up to the lesser of the computed DMMGuaranteedAllocation size and the designated market maker offer size. It does this by generating an IOC sell pseudo-order on behalf of the underlying designated market maker offer, and executing the incoming buy order against the sell pseudo-order. After executing the sell pseudo-order, the order matching engine 21 notifies the market maker quote engine 32b of the quantity of contracts that executed so that it can decrement the designated market maker offer.

In step 842, the process checks if the incoming directed buy order still has any contracts available to trade. If the incoming directed buy order has been completely executed, then the process continues to step 844, where it checks if any reserve sell orders have been flagged for replenishment. If any reserve sell orders have been flagged for replenishment, then the process continues to step 848, where the Replenish Reserve Sell Order Process is initiated and proceeds to step 900 (FIG. 9A). After replenishing the depleted reserve sell orders, the process then continues to step 850, where it terminates because the incoming directed buy order is completed. The process also terminates in step 850 if there are no reserve sell orders that have been flagged for replenishment, as determined at step 844.

Returning to step 814, if, however, there are displayed customer sell orders at the NBO, then the process continues to step 816, where it retrieves the timestamp assigned to the designated market maker's offer (the time assigned by the market maker quote engine 32b) and stores it in the parameter “DMMOfferTimestamp.” In step 818, the process retrieves the earliest displayed customer sell order at the NBO. In step 820, the process compares the timestamp of the retrieved customer sell order with the DMMOfferTimestamp parameter, and if the customer sell order preceded the designated market maker offer, then the process continues to step 822, where it matches the incoming directed buy order with the retrieved customer sell order at the NBO price. If the retrieved customer sell order is a reserve order, then only the displayed portion of the order is matched. The reserve portion is not eligible to match in the DMM Guaranteed Offer Process.

If the customer sell order is a reserve order and its displayed size was fully depleted in step 822, then in step 823, the process flags the order for subsequent replenishment. In step 824, the process checks if the incoming directed buy order still has contracts available to trade. If it does not, then the process continues to step 844, where it checks if any reserve sell orders have been flagged for replenishment. If any reserve sell orders have been flagged for replenishment, then the process continues to step 848, where the Replenish Reserve Sell Order Process is initiated and proceeds to step 900 (FIG. 9A). After replenishing the depleted reserve sell orders, the process then continues to step 850, where it terminates because the incoming directed buy order is completed. The process also terminates in step 850 if there are no reserve sell orders that have been flagged for replenishment, as determined at step 844.

Returning to step 824, if the incoming directed buy order still has contracts available to trade, then the process continues to step 828, where it checks if there are any additional displayed customer sell orders priced at the NBO. If there are additional customer orders, then in step 830, the process retrieves the next earliest displayed customer sell order at the NBO and returns to step 820, where it checks if the newly-retrieved customer sell order was received prior to the designated market maker offer. It repeats this process until all customer sell orders with price/time priority over the designated market maker offer have been matched, unless the incoming directed buy order is exhausted first.

Returning to step 820, if, however, the timestamp of the retrieved customer sell order is not lower than the DMMOfferTimestamp, then the customer order was not received prior to the designated market maker offer, and is therefore not eligible to execute in the Directed Order Process. In this case, the process proceeds to step 832, and executes the designated market maker guaranteed allocation according to steps 832 through 846 (or 850) as described above.

Returning to step 828, if, however, there are no additional displayed customer sell orders at the NBO, then the process proceeds to step 832, and executes the designated market maker guaranteed allocation according to steps 832 through 846 (or 850) as described above.

Replenish Reserve Sell Order Process

Referring now to FIGS. 9A-9B, the Replenish Reserve Sell Order Process is illustrated, a process wherein the order matching engine 21 replenishes a depleted reserve sell order from the contracts remaining in its reserve.

In step 900, the process is initiated. In step 902, the process retrieves the first reserve sell order that has been flagged for replenishment. In step 904, it checks if the retrieved reserve sell order still has any quantity remaining in reserve. If it does not, then in step 905, the process deletes the depleted reserve sell order from the books and then continues to step 906, where it checks if there are additional reserve sell orders flagged for replenishment. If there are none, the process terminates in step 922 as indicated. However, if there are additional reserve sell orders flagged for replenishment, then the process continues to step 908, where it retrieves the next reserve sell order flagged for replenishment and returns to step 904, where it checks if the newly-retrieved reserve sell order has any quantity remaining in reserve.

Returning to step 904, if the retrieved reserve sell order does still have quantity remaining in reserve, then in step 910, the process updates the timestamp of the retrieved order, as the timestamp of an order is always updated if its displayed size increases (whether the order is a reserve order or not), in accordance with general marketplace rules. In step 912, the process checks if the reserve sell order's price locks or crosses the NBB, i.e., is equal to or less than the NBB. If it does not lock or cross the NBB, then the order can be replenished without further evaluation and its displayed quantity can be posted. The process continues to step 942 where it replenishes the displayed size up to the lesser of the user-specified Show Size and the remaining quantity still in reserve. In step 944, the process re-ranks the displayed portion of the replenished reserve sell order in price/time priority in the Display Order Process, according to its new timestamp (which causes it to be ranked as if it were a new incoming order, behind all other resting sell orders at the same price). In step 946, the process re-ranks the reserve portion (if any) of the replenished reserve sell order in the Working Order Process, according to the price/time priority of its displayed portion. This means the order only has one position in the internal order book 29a, and the two components are not treated as separate orders. In step 948, the process disseminates the displayed portion of the reserve sell order to the public order book.

In step 950, the process checks if there are any additional reserve sell orders that have been flagged for replenishment. If there are none, then the process terminates in step 952 as indicated. If, however, there are additional flagged orders, then the process continues to step 954, where it retrieves the next reserve sell order flagged for replenishment, and returns to step 904, where it repeats the process described above for determining whether and how to replenish the order.

Returning to step 912, if however, the reserve sell order's price locks or crosses the NBB, then the order must generally be routed, hidden, canceled, or repriced according to the rules of the underlying order type. The process continues to step 913 where it generates a virtual consolidated order and quote list, and then at step 914 the process checks if the reserve sell order can execute in the LMM Guaranteed Bid Process. The process then proceeds to step 915, where it checks if the underlying order type is allowed to route off the market center 20 or not. If the underlying order type cannot be routed, e.g., in the case of an exchange-restricted order, then the process continues to step 918, where it cancels the remaining quantity of the reserve sell order instead of replenishing the order. The process then continues to step 920, where it checks if there are any additional reserve sell orders flagged for replenishment. If there are none, then the process terminates in step 922 as indicated. If, however, there are additional reserve sell orders flagged for replenishment, then the process continues to step 908, where it retrieves the next reserve sell order flagged for replenishment and returns to step 904, where it repeats the process described above for determining whether and how to replenish the order.

Returning to step 915, if, however, the depleted reserve sell order is allowed to route off the market center 20, then the process continues to step 924, where it checks if the depleted reserve sell order should route to one or more away market centers before the depleted order is replenished. By way of explanation, even if the underlying order type is routable, if the obligation to the away market center quotes has already been satisfied up to their disseminated bid sizes by prior sell orders routed over the linkage, then it may not be necessary to route additional contracts to the away markets. If at step 924, the process determines that the depleted reserve sell order is not required to route before it is replenished, then the process continues to step 942.

Returning to step 924, if, however, the process determines that the depleted reserve sell order should be routed before it is replenished, then the process continues to step 926 instead. In step 926, the process releases the reserve sell order to the Routing Process, which routes to one or more away market centers as appropriate. Generally speaking, the Routing Process routes a quantity up to the lesser of the remaining reserve quantity of the depleted reserve sell order and the target away market's bid size, at the away market's bid price. After routing to one or more away market centers, the process continues to step 928, where it checks if the depleted reserve sell order still has quantity remaining in reserve. If it does not, then the process proceeds to step 920, where it checks if there are any additional reserve sell orders flagged for replenishment, as described above.

Returning to step 928, if, however, the reserve sell order still has quantity remaining after it has routed to the away market centers, then the process continues to step 942 instead and continues the replenishment process described above. The replenished reserve sell order will generally lock (or cross) the NBB when it is posted, as allowed by marketplace rules.

The procedures described above are repeated until every reserve sell order that has been flagged for replenishment is evaluated and processed according to the rules that govern its underlying order type.

Incoming Buy Order Received

Referring now to FIGS. 10A-10B, the process is illustrated where the order matching engine 21 receives an incoming buy order. As in the previous FIG. 4 which illustrates a routine for receiving an incoming reserve buy order, the routine illustrates the execution and/or routing of a marketable incoming buy order. The incoming buy order executes as much as possible, and when it is no longer executable, then the process activates the Replenish Reserve Sell Order Process. For ease of illustration, FIGS. 4A-4B illustrate an incoming reserve buy order executing against resting non-reserve sell orders, whereas FIGS. 10A-10B illustrate an incoming non-reserve buy order executing against resting reserve sell orders. It should be understood, however, that an incoming reserve buy order can also execute against a resting reserve sell order.

At step 1000, the process is initiated. In step 1002, the process retrieves the NBO, and in step 1004, it checks if the incoming buy order is marketable. If the incoming buy order is not marketable, i.e., its price is lower than the NBO, then the process continues to step 1006, where it ranks the incoming buy order in the internal order book 29a in price/time priority and disseminates it to the public order book. The process then terminates in step 1008 as indicated.

Returning to step 1004, if, however, the incoming buy order is marketable, i.e., its price is greater than or equal to the NBO, then the process continues to step 1010, where it activates the Too-Executable Buy Order Check Process described above. If the incoming buy order is not canceled in the Too-Executable Buy Order Check Process, then the process continues to step 1011, where it generates a virtual consolidated order and quote list. The process continues to step 1012, where it checks if the option series has any assigned market makers. If it does, then the process continues to step 1014, where it checks if the incoming buy order is a directed order or not. If the incoming buy order is a directed order, then the Directed Order Process is initiated in step 1016. If, however, the incoming buy order is not a directed order, then the LMM Guaranteed Offer Process is initiated instead in step 1018.

Regardless of whether the incoming buy order executes in the Directed Order Process or the LMM Guaranteed Offer Process or in neither process (if the applicable market maker is not quoting at the NBO and is therefore ineligible for a guaranteed entitlement, or else if the issue does not have any assigned market makers), if the incoming buy order still has quantity available to trade, then the process continues to step 1020, where it checks if the incoming buy order is still marketable.

If the incoming buy order is no longer marketable, then the process continues to step 1022, where it ranks the incoming buy order in the internal order book 29a in price/time priority and disseminates it to the public order book. The process then terminates in step 1024 as indicated.

Returning to step 1020, if, however, the incoming buy order is still marketable, then the process continues to step 1028, where it checks if any away market offers are superior to the market center's offers. If none are, then the process continues to step 1034, where it initiates a “Determine Best Resident Offer Process,” and proceeds to step 1100 (FIG. 11). This process, which is described in detail below, determines whether the best offer on the market center 20 is a displayed sell order, a market maker offer, or the nondisplayed reserve portion of a reserve sell order, in accordance with the sequence in which the orders and quotes are ranked in price/display/time priority in the virtual consolidated order and quote list.

After executing against the retrieved best resident offer, the process continues to step 1038, where it checks if the incoming buy order still has any quantity remaining. If it does not, the process continues to step 1042, where it checks if any reserve sell orders have been flagged for replenishment. If the incoming buy order depleted any reserve sell orders, then these orders have already been flagged for replenishment. If no reserve sell orders were flagged, then the process terminates in step 1046 as indicated. If, however, any reserve sell orders have indeed been flagged for replenishment, then the Replenish Reserve Sell Order Process is activated in step 1044, and after the Replenish Reserve Sell Order Process is complete, the process then terminates in step 1046 as indicated.

Returning to step 1038, if, however the incoming buy order does still have quantity available to trade, then the process returns to step 1020, where it checks if the incoming buy order is still marketable. The process continues to retrieve and execute against additional sell orders and market maker offers, in the sequence of their ranking in the virtual consolidated order and quote list, until the incoming buy order is completed, is no longer marketable, or else must route off the market center 20, as described next.

Returning to step 1028, if, however, the process determines that one or more away market offers are superior to the market center's offers, then the process continues to step 1030, where it checks if the incoming buy order should route off the market center 20 or not. If the incoming buy order should not be routed (either because its underlying order type prevents routing, or because the away market center/s at the NBO have already been completely satisfied by prior routed buy orders), then the process continues to step 1036. In step 1036, the process either posts, queues, hides, cancels, or reprices the incoming buy order according to the rules of the underlying order type. The process continues to step 1042, where it checks if any reserve sell orders have been flagged for replenishment, as described above.

Returning to step 1030, if the process determines that the incoming buy order should be routed, i.e., its order type allows routing and the away market center/s at the NBO have not been completely satisfied yet, then the process continues to step 1032, where the incoming buy order is released to the Routing Process. Generally speaking, the Routing Process routes the lesser of the remaining quantity of the incoming buy order and the away market center's disseminated offer size, at the disseminated offer price. After routing all or part of the order, the process continues to step 1040, where it checks if the incoming buy order still has any quantity remaining. If it does not, then the process continues to step 1042, where it checks if any reserve sell orders have been flagged for replenishment, as described above.

Returning to step 1040, if, however, the incoming buy order does still have quantity available to trade, the process continues to step 1048, where it checks if the incoming buy order is allowed to execute additional contracts at a price inferior to the NBO. By way of explanation, some underlying order types can only execute at the NBBO by definition. If the incoming buy order is not allowed to execute beyond the NBO, then the process proceeds to step 1036, where it posts, queues, hides, cancels or reprices the incoming buy order according to the rules for the order type. The process then continues to step 1042, where it checks if any reserve buy orders have been flagged for replenishment, as described above.

Returning to step 1048, if, however, the incoming buy order is allowed to execute additional contracts beyond the NBO, then the process returns to step 1020, where it checks if the incoming buy order is still marketable. If it is, the process continues to step 1028, where it checks if any away market offers are superior to the market center's offers. If one or more away market centers are superior, then the incoming buy order will route to the market centers as previously described, if appropriate (e.g., if the incoming buy order is an intermarket sweep limit order and intermarket sweeping is allowed on the options marketplace).

Returning to step 1028, if, however, no away market centers are superior, the process continues to step 1034, where the process retrieves the best resident offer, which may be a displayed sell order, a market maker offer, or the reserve portion of a reserve sell order, depending on the sequence of their ranking at the next-best price inferior to the NBO. The number of price levels inferior to the NBO at which the incoming buy order is allowed to execute is defined by the rules of the marketplace and the rules of the order type. The process continues as described above until the incoming buy order is completely executed or else is posted.

Determine Best Resident Offer Process

Referring now to FIG. 11, the process is illustrated where the order matching engine 21 determines which offer on the market center 20 has the highest priority for execution, based on the sequence in which the offers are ranked at the price level presently being executed. In accordance with price/display/time priority rules, at any given price level, all displayed sell orders and market maker offers must execute first before any sell order's reserve portion can execute. The incoming buy order then executes against each sell order's reserve portion, in the sequence of their ranking in the virtual consolidated order and quote list. This is illustrated in FIG. 3 by showing that the trading interest shown in cells 1, 2, and 3 must execute before the trading interest shown in cells 4, 5, and 6 can execute.

If the incoming buy order still has quantity available to trade and its price is higher than the NBO and the rules of the order type allow it to execute at prices beyond the NBO after first satisfying all away markets quoting at the NBO, then this routine continues to execute in a similar manner for resident offers priced at one tick inferior to the NBO. It executes the displayed offers priced at one tick inferior to the NBO first, and then executes the reserve portions of the sell orders priced at one tick inferior to the NBO next. This is illustrated in FIG. 3 by showing that the trading interest shown in cells 19, 20, and 21 must execute before the trading interest shown in cells 22, 23, and 24 can execute.

If marketplace rules allow intermarket sweeping at multiple price levels and the incoming buy order still has quantity available to trade, then after routing to the away markets quoting at one tick inferior to the NBO (as shown in cells 31, 32, and 33), the process will then proceed to retrieve and execute against resident offers priced at two ticks inferior to the NBO. It executes the displayed offers priced at two ticks inferior to the NBO first, then executes the reserve portions of the sell orders priced at two ticks inferior to the NBO next. The process clears each price level in turn, for as many price levels as the rules allow and that overlap with the incoming buy order's price.

At step 1100, the process is initiated. In step 1102, the process checks if there are any displayed sell orders or market maker quotes at the NBO. If there are, then the process continues to step 1104, where it retrieves the order or quote with the highest ranking at the NBO. If the retrieved offer is a market maker quote, then in step 1106, the process automatically generates an IOC sell pseudo-order on behalf of the underlying market maker quote. In step 1107, the process matches the incoming buy order with the sell order, at the price of the sell order. If the sell order is a pseudo-order, then the process also notifies the market maker quote engine 32b to decrement the market maker quote by the quantity executed. The process continues to step 1108, where if the sell order was a reserve sell order whose displayed size has now been depleted, it flags the order for subsequent replenishment. The process continues to step 1110, where it returns to the step where the procedure was originally initiated, back to step 1034 (FIG. 10B).

Returning to step 1102, if there are no displayed sell orders or market maker quotes at the NBO, i.e., the incoming buy order has already exhausted them, then the process continues to step 1112, where it checks if there are any sell order reserve portions at the NBO. If there are no sell order reserve portions at the NBO, then the process continues to step 1120, where it returns to the step where the procedure was originally initiated, back to step 1034 (FIG. 10B). If, however, there are sell order reserve portions at the NBO, then the process continues to step 1114, where it retrieves the sell order reserve portion with the highest ranking at the NBO, and in step 1116, the process matches the incoming buy order with the retrieved sell order reserve portion, at the sell order price. The process continues to step 1118, where it returns to the step where the procedure was originally initiated, back to step 1034 (FIG. 10B).

Incoming Reserve Sell Order Received

Referring to FIG. 12, in this embodiment, the order matching engine 21 receives an incoming reserve sell order as indicated at step 1400, and determines whether to execute it or rank it in the internal order book 29a. The process is very similar to the process described above in FIG. 4 for receiving an incoming reserve buy order. In step 1402, the process retrieves the NBB, and in step 1404, it checks if the incoming reserve sell order is marketable. If the incoming reserve sell order is not marketable, i.e., its price is higher than the NBB, then the process continues to step 1406, where it ranks the quantity equal to the user-specified Show Size in the Display Order Process in price/time priority, and ranks the quantity equal to the user-specified Reserve Size in the Working Order Process according to the price/time priority of the displayed portion. The process continues to step 1408, where it disseminates the displayed portion of the reserve sell order to the public order book. The process then terminates in step 1410 as indicated.

Returning to step 1404, if, however, the incoming reserve sell order is marketable, i.e., its price is less than or equal to the NBB, then the process continues to step 1412, where the “Too-Executable Sell Order Check Process” is initiated at step 1500 (FIG. 13). If the incoming reserve sell order is not canceled by the Too-Executable Sell Order Check Process as described in detail below, then the process continues to step 1413 where it generates a virtual consolidated order and quote list. The process then proceeds to step 1414 where it checks if the option series has any assigned market makers. If it does, then the process continues to step 1416, where it checks if the incoming reserve sell order is a directed order. If the incoming reserve sell order is a directed order, then the process continues to step 1418 where the Directed Order Process is initiated in step 700 (FIG. 7A). If, however, the incoming reserve sell order is not a directed order, then the process proceeds to step 1420 where the “LMM Guaranteed Bid Process” is initiated instead in step 1600 (FIG. 14A).

Regardless of whether the incoming reserve sell order executes in the Directed Order Process, in the LMM Guaranteed Bid Process or in neither process (if the applicable market maker is not quoting at the NBB and is therefore ineligible for a guaranteed entitlement), if the incoming reserve sell order still has quantity available to trade, then the process continues to step 1422, where the process retrieves the best bid in the virtual consolidated order and quote list, i.e., the highest-priced buy order, market maker bid, or disseminated away market bid quotation. In step 1424, the process checks if the incoming reserve sell order is still marketable.

If the incoming reserve sell order is no longer marketable, then the process continues to step 1426, where it ranks the quantity up to the user-specified Show Size in the Display Order Process in price/time priority, and ranks any remaining quantity in the Working Order Process according to the price/time priority of the displayed portion. The process then continues to step 1428, where it disseminates the displayed portion of the reserve sell order to the public order book. The process then terminates in step 1430 as indicated.

Returning to step 1424, if the process determines that the incoming reserve sell order is still marketable, then it continues to step 1432, where it checks if the retrieved best bid is on or off the market center 20. If the retrieved best bid is on the market center 20, then the process continues to step 1444, where it matches the incoming reserve sell order, up to its full order size including its reserve, against the retrieved buy order or market maker bid, at the bid price. If the retrieved best bid is a market maker quote, it does this by automatically generating an IOC buy pseudo-order on behalf of the underlying market maker quote and matching the incoming reserve sell order with the buy pseudo-order. The process notifies the market maker quote engine 32b of the quantity that was executed so that the market maker quote engine 32b can decrement the quote.

In step 1446, the process checks if the incoming reserve sell order still has any quantity remaining. If it does not, the process continues to step 1448, where it terminates as indicated. If it does still have quantity available to trade, then the process returns to step 1422, where it retrieves the next-best bid in the virtual consolidated order and quote list.

Returning to step 1432, if, however, the retrieved best bid is not on the market center 20, then it is an away market quote and not a buy order or market maker bid. In this case, the process continues to step 1434, where it checks if the incoming reserve sell order should route off the market center 20 or not. If the incoming reserve sell order should not be routed, then the process continues to step 1442. In step 1442, the process either posts, hides, cancels, or reprices the incoming reserve sell order according to the rules of the underlying order type. The process then terminates in step 1448 as indicated.

Returning to step 1434, if the process determines that the incoming reserve sell order should be routed, i.e., its order type allows routing and the away market centers at the NBB have not been completely satisfied yet, then the process continues to step 1436, where the incoming reserve sell order is released to the Routing Process. In general, the Routing Process routes the lesser of the remaining quantity of the incoming reserve sell order (including its reserve quantity) and the away market center's disseminated bid size, at the disseminated bid price.

After routing all or part of the order, the process continues to step 1438, where it checks if the incoming reserve sell order still has any quantity remaining. If it does not, then the process continues to step 1448, where it terminates as indicated. If, however, the incoming reserve sell order does still have quantity available to trade, the process continues to step 1440, where it checks if the incoming reserve sell order is allowed to execute additional contracts beyond the NBB. For example, certain order types (e.g., an inside limit order with reserve) can only execute at the NBB, whereas other order types (e.g., a sweep limit order with reserve or an intermarket sweep limit order with reserve) can take advantage of the book-and-ship exception, the trade-and-ship exception, or intermarket sweeping (if allowed by marketplace rules) and execute beyond the NBB after first satisfying the obligation to all the away markets quoting at the NBB. If the incoming reserve sell order is not allowed to execute beyond the NBB, then the process proceeds to step 1426, where it ranks the quantity up to the user-specified Show Size in the Display Order Process in price/time priority, and ranks any remaining quantity in the Working Order Process according to the price/time priority of the displayed portion. The process continues to step 1428, where it disseminates the displayed portion of the reserve sell order to the public order book. The process then terminates in step 1430 as indicated.

Returning to step 1440, if, however, the incoming reserve sell order is allowed to execute additional contracts beyond the NBB, then the process returns to step 1422, where it retrieves the next-best bid in the virtual consolidated order and quote list. The process continues to step 1424, where it checks if the incoming reserve sell order is still marketable against the next-best bid. The process continues as described above until the incoming reserve sell order is completely matched, or else is no longer marketable and is posted.

Too-Executable Sell Order Check Process

Referring now to FIG. 13, the Too-Executable Sell Order Check Process is illustrated. The Too-Executable Sell Order Check Process determines if an incoming sell order is “too executable,” i.e., is priced so aggressively that it exceeds a predefined allowable percentage through the published NBB quotation. In the preferred embodiment, the predefined percentage is stored as a configurable parameter “MaxPercentOffNBBO,” which caps the lowest limit price allowed for an incoming sell order based on the current NBB.

In step 1500, the Too-Executable Sell Order Check Process is initiated when the order matching engine 21 receives an incoming sell order that is marketable. In step 1502, the process compares the incoming sell order's price to the NBB. If the incoming sell order's price is not lower than the NBB, then the process continues to step 1506, where it returns to the step where the procedure was originally initiated, and the process terminates because the incoming sell order is not “too executable.” If, however, in step 1502, the process determines that the incoming sell order's price is lower than the NBB, then the process continues to step 1504 instead.

In step 1504, the process checks if the check for excessive marketability is enabled for the incoming sell order type. If the incoming sell order type is not subject to the check for excessive marketability, then the process also continues to step 1506, where it returns to the step where the procedure was originally initiated, and the process terminates because the incoming sell order is not evaluated as to whether it is “too executable.”

Returning to step 1504, if the process determines that the incoming sell order is subject to the check for excessive marketability, then it continues to step 1508, where it retrieves the parameter “MaxPercentOffNBBO.” Then, in step 1510, the process computes the price interval allowed beyond the NBB for an incoming sell order (the “MaxPriceThruNBB” parameter) by multiplying the current NBB price by the MaxPercentOffNBBO. Accordingly, the MaxPriceThruNBB parameter is computed as the stored percentage parameter times the NBB price, rounded down to the nearest tick if necessary. For example, if the NBB is 1.90 and the MaxPercentOffNBBO is 15%, then the MaxPriceThruNBB parameter is 0.285, which would be rounded down to 0.25 if the tick is a nickel at this price level. If the issue trades in pennies, then it would be rounded down to 0.28 instead. In step 1512, the process subtracts the computed MaxPriceThruNBB parameter from the current NBB to derive the lowest valid price for the incoming sell order, i.e., the “MinSellPrice.”

In step 1514, the process compares the price of the incoming sell order to the derived MinSellPrice parameter. If the incoming sell order's price is not lower than the MinSellPrice parameter, then the incoming sell order is not “too executable,” and is eligible for further processing. In this case, the process continues to step 1516, where it returns to the step where the procedure was originally initiated, as the process has determined that the incoming sell order is not “too executable.”

Returning to step 1514, if, however, the incoming sell order's price is lower than the derived MinSellPrice parameter, then the incoming sell order is presently “too executable,” i.e., is priced too far through the NBB. Accordingly, the incoming sell order is not allowed to execute at this price, and must either be canceled or repriced depending on the business rules of the market center 20. In step 1518, if the rules determine that the order must be canceled, then the process continues to step 1520, where it cancels the incoming sell order and terminates in step 1522, as indicated. If, however, in step 1518 the business rules of the market center 20 determine that the incoming sell order should be repriced less aggressively instead of being canceled, then the process continues to step 1524, where it caps the price of the incoming sell order at the derived MinSellPrice parameter. The process continues to step 1526, where it returns to the step where it was originally initiated, and the process terminates because the repriced sell order is no longer “too executable.” It should be noted that in this embodiment once the sell order has been repriced less aggressively, it is not subsequently repriced more aggressively even if the NBB moves away.

The LMM Guaranteed Bid Process

Referring now to FIGS. 14A-14B, the LMM Guaranteed Bid Process is illustrated. At step 1600, the process is initiated. At step 1602, the process retrieves the lead market maker's bid. In step 1604, the process checks if the lead market maker's bid is at the NBB price. If the lead market maker's bid is inferior to the NBB, then the lead market maker is not entitled to guaranteed participation with the incoming sell order, and the process continues to step 1606, where it returns to the step where it was originally initiated.

Returning to step 1604, if, however, the lead market maker bid is at the NBB, then the lead market maker is entitled to guaranteed participation with the incoming sell order. The process proceeds to step 1608, where it checks if the incoming sell order's size is greater than two contracts. If it is less than or equal to two contracts, then the process continues to step 1609, where it matches the incoming sell order with one contract of the lead market bid, at the NBB price. It does this by generating an IOC buy pseudo-order on behalf of the underlying lead market maker bid, and executing the incoming sell order against the buy pseudo-order. After executing the buy pseudo-order, the order matching engine 21 notifies the market maker quote engine 32b of the quantity of contracts that executed (one contract) so that it can decrement the lead market maker bid.

Then at step 1610, the process checks if the incoming sell order still has one contract available to trade. If it does not, then the process terminates in step 1612 as indicated. If it does, then the process continues to step 1611, where it matches the single remaining contract of the incoming sell order with one contract of the best displayed bid. The best displayed bid is the buy order or quote with the highest ranking in the Display Order Process according to price/time priority. The process terminates in step 1612 as indicated.

Returning to step 1608, if, however, the incoming sell order has more than two contracts available to execute, then the process, in this embodiment, determines if there are any customer orders that are eligible to execute ahead of the lead market maker bid. Accordingly, the process proceeds to step 1614, where it checks if there are any displayed customer buy orders at the NBB. It should be understood that the displayed portion of a reserve order qualifies as a displayed order. If no customer orders exist, then the lead market maker is entitled to participate immediately with the incoming sell order. The process proceeds to step 1632, where it retrieves a stored, configurable guaranteed allocation parameter determined by the market center's business rules (“LMMGuaranteedPercent”). At step 1634, the process computes the maximum quantity of contracts that the lead market maker is guaranteed for execution (“LMMGuaranteedAllocation”) by multiplying the remaining (“Leaves”) quantity of the incoming sell order by the LMMGuaranteedPercent parameter, and rounding the result down to the nearest integer value if necessary. In step 1638, the process matches the incoming sell order with the lead market maker bid, at the NBB price, up to the lesser of the computed LMMGuaranteedAllocation size and the lead marker maker bid size. It does this by generating an IOC buy pseudo-order on behalf of the underlying lead market maker bid, and executing the incoming sell order against the buy pseudo-order. After executing the buy pseudo-order, the order matching engine 21 notifies the market maker quote engine 32b of the quantity of contracts that executed so that it can decrement the lead market maker bid.

In step 1642, the process checks if the incoming sell order still has any contracts available to trade. If the incoming sell order has been completely executed, then the process continues to step 1644, where it checks if any reserve buy orders have been flagged for replenishment. If any reserve buy orders have been flagged for replenishment, then the process continues to step 1648, where it initiates the procedure titled “Replenish Reserve Buy Order Process,” and proceeds to step 1900 (FIG. 16A). After execution of that procedure, then the process continues to step 1650, where it terminates because the incoming sell order is completed. The process also terminates in step 1650 if there are no reserve buy orders that have been flagged for replenishment, as determined at step 1644.

Returning to step 1614, if, however, there are displayed customer buy orders at the NBB, then the process continues to step 1616, where it retrieves the timestamp assigned to the lead market maker's bid (the time assigned by the market maker quote engine 32b) and stores it in the parameter “LMMBidTimestamp.” In step 1618, the process retrieves the earliest displayed customer buy order at the NBB. In step 1620, the process compares the timestamp of the retrieved customer buy order with the LMMBidTimestamp parameter, and if the customer buy order preceded the lead market maker bid, then the process continues to step 1622, where it matches the incoming sell order with the retrieved customer buy order at the NBB price. If the retrieved customer buy order is a reserve order, then only the displayed portion of the order is matched. The reserve portion is not eligible to match in the LMM Guaranteed Bid Process.

If the customer buy order is a reserve order and its displayed size was fully depleted in step 1622, then in step 1623, the process flags the order for subsequent replenishment. In step 1624, the process checks if the incoming sell order still has contracts available to trade. If it does not, then the process continues to step 1644, where it checks if any reserve buy orders have been flagged for replenishment. If any reserve buy orders have been flagged for replenishment, then the process continues to step 1648, where it initiates the Replenish Reserve Buy Order Process, and proceeds to step 1900 (FIG. 16A). After replenishing the reserve buy orders, the process then continues to step 1650, where it terminates because the incoming sell order is completed. The process also terminates in step 1650 if there are no reserve buy orders that have been flagged for replenishment, as determined at step 1644.

Returning to step 1624, if, however, the incoming sell order does still have quantity remaining to trade, then the process continues to step 1628, where it checks if there are any additional displayed customer buy orders priced at the NBB. If there are additional customer orders, then in step 1630, the process retrieves the next earliest displayed customer buy order at the NBB and returns to step 1620, where it checks if the newly-retrieved customer buy order was received prior to the lead market maker bid. It repeats this process until all customer buy orders with price/time priority over the lead market maker bid have been matched, unless the incoming sell order is exhausted first.

Returning to step 1620, if, however, the timestamp of the retrieved customer buy order is not lower than the LMMBidTimestamp, then the customer order was not received prior to the lead market maker bid, and is therefore not eligible to execute in the LMM Guarantee Process. In this case, the process proceeds to step 1632, and executes the lead market maker guaranteed allocation according to steps 1632 through 1646 (or 1650) as described above.

Returning to step 1628, if, however, there are no additional displayed customer buy orders at the NBB, then the process proceeds to step 1632, and executes the lead market maker guaranteed allocation according to steps 1632 through 1646 (or 1650) as described above.

The DMM Guaranteed Bid Process

Where the process has determined that an incoming sell order was sent by an order sending firm 26 that is permissioned to send directed orders to a market maker firm 31, the DMM Guaranteed Bid Process is activated as indicated at step 1800 (FIG. 15A). FIGS. 15A-15B illustrate a routine wherein the order matching engine 21 executes the incoming directed sell order in the Directed Order Process, but only if the designated market maker's bid is at the NBB. The DMM Guaranteed Bid Process is very similar to the previously described LMM Guaranteed Bid Process, as the designated market maker in this situation receives the same privileges as the lead market maker for the purpose of executing with the incoming directed order.

At step 1802, the process retrieves the designated market maker's bid. In step 1804, the process checks if the designated market maker's bid is at the NBB price. If the designated market maker's bid is inferior to the NBB, then the designated market maker is not entitled to guaranteed participation with the incoming directed sell order. However, the lead market maker may still be entitled to participate with the incoming order instead. Accordingly, the process continues to step 1806, where the “LMM Guaranteed Bid Process” is activated, and the process proceeds to step 1600 (FIG. 14A). After the LMM Guaranteed Bid Process is complete, the process then continues to step 1807, where it returns to the step where it was originally initiated.

Returning to step 1804, if, however, the designated market maker bid is at the NBB, then the designated market maker is entitled to guaranteed participation with the incoming order. The process proceeds to step 1808, where, in this embodiment, it checks if the incoming directed sell order's size is greater than two contracts. If it is less than or equal to two contracts, then the process continues to step 1809, where it matches the incoming sell order with one contract of the designated market maker bid, at the NBB price. It does this by generating an IOC buy pseudo-order on behalf of the underlying designated market maker bid, and executing the incoming sell order against the buy pseudo-order. After executing the buy pseudo-order, the order matching engine 21 notifies the market maker quote engine 32b of the quantity of contracts that executed (one contract) so that it can decrement the designated market maker bid.

In step 1810, the process checks if the incoming sell order still has one contract available to trade. If it does not, then the process terminates in step 1812 as indicated. If it does, then the process continues to step 1811, where it matches the single remaining contract of the incoming sell order with one contract of the best displayed bid. The best displayed bid is the buy order or quote with the highest ranking in the display order process according to price/time priority. The process terminates in step 1812 as indicated.

Returning to step 1808, if, however, the incoming directed sell order has more than two contracts available to execute, then the process must determine if there are any customer orders that are eligible to execute ahead of the designated market maker bid. Accordingly, it proceeds to step 1814, where it checks if there are any displayed customer buy orders at the NBB.

If none exist, then the designated market maker is entitled to participate immediately with the incoming directed sell order. The process proceeds to step 1832, where it retrieves a stored, configurable guaranteed allocation parameter determined by the market center's business rules (“DMMGuaranteedPercent”). In step 1834, the process computes the maximum quantity of contracts that the designated market maker is guaranteed for execution (“DMMGuaranteedAllocation”) by multiplying the remaining (“Leaves”) quantity of the incoming directed sell order by the DMMGuaranteedPercent parameter, and rounding the result down to the nearest integer value if necessary. In step 1838, the process matches the incoming sell order with the designated market maker bid, at the NBB price, up to the lesser of the computed DMMGuaranteedAllocation size and the designated market maker bid size. It does this by generating an IOC buy pseudo-order on behalf of the underlying designated market maker bid, and executing the incoming sell order against the buy pseudo-order. After executing the buy pseudo-order, the order matching engine 21 notifies the market maker quote engine 32b of the quantity of contracts that executed so that it can decrement the designated market maker bid.

In step 1842, the process checks if the incoming directed sell order still has any contracts available to trade. If the incoming directed sell order has been completely executed, then the process continues to step 1844, where it checks if any reserve buy orders have been flagged for replenishment. If any reserve buy orders have been flagged for replenishment, then the process continues to step 1848, where a “Replenish Reserve Buy Order Process” is initiated and proceeds to step 1900 (FIG. 16A). After replenishing the depleted reserve buy orders, the process then continues to step 1850, where it terminates because the incoming directed sell order is completed. The process also terminates in step 1850 if there are no reserve buy orders that have been flagged for replenishment, as determined at step 1844.

Returning to step 1814, if, however, there are displayed customer buy orders at the NBB, then the process continues to step 1816, where it retrieves the timestamp assigned to the designated market maker's bid (the time assigned by the market maker quote engine 32b) and stores it in the parameter “DMMBidTimestamp.” In step 1818, the process retrieves the earliest displayed customer buy order at the NBB. In step 1820, the process compares the timestamp of the retrieved customer buy order with the DMMBidTimestamp parameter, and if the customer buy order preceded the designated market maker bid, then the process continues to step 1822, where it matches the incoming directed sell order with the retrieved customer buy order at the NBB price. If the retrieved customer buy order is a reserve order, then only the displayed portion of the order is matched. The reserve portion is not eligible to match in the DMM Guaranteed Bid Process.

If the customer buy order is a reserve order and its displayed size was fully depleted in step 1822, then in step 1823, the process flags the order for subsequent replenishment. In step 1824, the process checks if the incoming directed sell order still has contracts available to trade. If it does not, then the process continues to step 1844, where it checks if any reserve buy orders have been flagged for replenishment. If any reserve buy orders have been flagged for replenishment, then the process continues to step 1848, where the Replenish Reserve Buy Order Process is initiated and proceeds to step 1900 (FIG. 16A). After replenishing the depleted reserve buy orders, the process then continues to step 1850, where it terminates because the incoming directed sell order is completed. The process also terminates in step 1850 if there are no reserve buy orders that have been flagged for replenishment, as determined at step 1844.

Returning to step 1824, if the incoming directed sell order still has contracts available to trade, then the process continues to step 1828, where it checks if there are any additional displayed customer buy orders priced at the NBB. If there are additional customer orders, then in step 1830, the process retrieves the next earliest displayed customer buy order at the NBB and returns to step 1820, where it checks if the newly-retrieved customer buy order was received prior to the designated market maker bid. It repeats this process until all customer buy orders with price/time priority over the designated market maker bid have been matched, unless the incoming directed sell order is exhausted first.

Returning to step 1820, if, however, the timestamp of the retrieved customer buy order is not lower than the DMMBidTimestamp, then the customer order was not received prior to the designated market maker bid, and is therefore not eligible to execute in the Directed Order Process. In this case, the process proceeds to step 1832, and executes the designated market maker guaranteed allocation according to steps 1832 through 1846 (or 1850) as described above.

Returning to step 1828, if, however, there are no additional displayed customer buy orders at the NBB, then the process proceeds to step 1832, and executes the designated market maker guaranteed allocation according to steps 1832 through 1846 (or 1850) as described above.

Replenish Reserve Buy Order Process

Referring now to FIGS. 16A-16B, the Replenish Reserve Buy Order Process is illustrated, a process wherein the order matching engine 21 replenishes a depleted reserve buy order from the contracts remaining in its reserve. The process is very similar to the process described above in FIGS. 9A-9B for replenishing a depleted reserve sell order.

In step 1900, the process is initiated. In step 1902, the process retrieves the first reserve buy order that has been flagged for replenishment. In step 1904, it checks if the retrieved reserve buy order still has any quantity remaining in reserve. If it does not, then in step 1905, the process deletes the depleted reserve buy order from the books and then continues to step 1906, where it checks if there are additional reserve buy orders flagged for replenishment. If there are none, the process terminates in step 1922 as indicated. However, if there are additional reserve buy orders flagged for replenishment, then the process continues to step 1908, where it retrieves the next reserve buy order flagged for replenishment and returns to step 1904, where it checks if the newly-retrieved reserve buy order has any quantity remaining in reserve.

Returning to step 1904, if the retrieved reserve buy order does still have quantity remaining in reserve, then in step 1910, the process updates the timestamp of the retrieved order, as the timestamp of an order is always updated if its displayed size increases (whether the order is a reserve order or not), in accordance with general marketplace rules. In step 1912, the process checks if the reserve buy order's price locks or crosses the NBO, i.e., is equal to or greater than the NBO. If it does not lock or cross the NBO, then the order can be replenished without further evaluation and its displayed quantity can be posted. The process continues to step 1942 where it replenishes the displayed size up to the lesser of the user-specified Show Size and the remaining quantity still in reserve. In step 1944, the process re-ranks the displayed portion of the replenished reserve buy order in price/time priority in the Display Order Process, according to its new timestamp (which causes it to be ranked as if it were a new incoming order, behind all other resting buy orders at the same price). In step 1946, the process re-ranks the reserve portion (if any) of the replenished reserve buy order in the Working Order Process, according to the price/time priority of its displayed portion. This means the order only has one position in the internal order book 29a, and the two components are not treated as separate orders. In step 1948, the process disseminates the displayed portion of the reserve buy order to the public order book.

In step 1950, the process checks if there are any additional reserve buy orders that have been flagged for replenishment. If there are none, then the process terminates in step 1952 as indicated. If, however, there are additional flagged orders, then the process continues to step 1954, where it retrieves the next reserve buy order flagged for replenishment, and returns to step 1904, where it repeats the process described above for determining whether and how to replenish the order.

Returning to step 1912, if however, the reserve buy order's price locks or crosses the NBO, then the order must generally be routed, hidden, canceled, or repriced according to the rules of the underlying order type. The process continues to step 1913 where it generates a virtual consolidated order and quote list, and then at step 1914 the process checks if the reserve buy order can execute in the LMM Guaranteed Offer Process. The process then proceeds to step 1915, where it checks if the underlying order type is allowed to route off the market center 20 or not. If the underlying order type cannot be routed, e.g., in the case of an exchange-restricted order, then the process continues to step 1918, where it cancels the remaining quantity of the reserve buy order instead of replenishing the order. The process then continues to step 1920, where it checks if there are any additional reserve buy orders flagged for replenishment. If there are none, then the process terminates in step 1922 as indicated. If, however, there are additional reserve buy orders flagged for replenishment, then the process continues to step 1908, where it retrieves the next reserve buy order flagged for replenishment and returns to step 1904, where it repeats the process described above for determining whether and how to replenish the order.

Returning to step 1915, if, however, the depleted reserve buy order is allowed to route off the market center 20, then the process continues to step 1924, where it checks if the depleted reserve buy order should route to one or more away market centers before the depleted order is replenished. By way of explanation, even if the underlying order type is routable, if the obligation to the away market center quotes has already been satisfied up to their disseminated offer sizes by prior buy orders routed over the linkage, then it may not be necessary to route additional contracts to the away markets. If at step 1924, the process determines that the depleted reserve buy order is not required to route before it is replenished, then the process continues to step 1942.

Returning to step 1924, if, however, the process determines that the depleted reserve buy order should be routed before it is replenished, then the process continues to step 1926 instead. In step 1926, the process releases the reserve buy order to the Routing Process, which routes to one or more away market centers as appropriate. Generally speaking, the Routing Process routes a quantity up to the lesser of the remaining reserve quantity of the depleted reserve buy order and the target away market's offer size, at the away market's offer price. After routing to one or more away market centers, the process continues to step 1928, where it checks if the depleted reserve buy order still has quantity remaining in reserve. If it does not, then the process proceeds to step 1920, where it checks if there are any additional reserve buy orders flagged for replenishment, as described above.

Returning to step 1928, if, however, the reserve buy order still has quantity remaining after it has routed to the away market centers, then the process continues to step 1942 instead and continues the replenishment process described above. The replenished reserve buy order will generally lock (or cross) the NBO when it is posted, as allowed by marketplace rules.

The procedures described above are repeated until every reserve buy order that has been flagged for replenishment is evaluated and processed according to the rules that govern its underlying order type.

Incoming Sell Order Received

Referring now to FIGS. 17A-17B, the process is illustrated where the order matching engine 21 receives an incoming sell order. As in the previous FIG. 12 which illustrates a routine for receiving an incoming reserve sell order, the routine illustrates the execution and/or routing of a marketable incoming sell order. The incoming sell order executes as much as possible, and when it is no longer executable, then the process activates the Replenish Reserve Buy Order Process. For ease of illustration, FIG. 12 illustrates an incoming reserve sell order executing against resting non-reserve buy orders, whereas FIGS. 17A-17B illustrate an incoming non-reserve sell order executing against resting reserve buy orders. It should be understood, however, that an incoming reserve sell order can also execute against a resting reserve buy order.

At step 2000, the process is initiated. In step 2002, the process retrieves the NBB, and in step 2004, it checks if the incoming sell order is marketable. If the incoming sell order is not marketable, i.e., its price is higher than the NBB, then the process continues to step 2006, where it ranks the incoming sell order in the internal order book 29a in price/time priority and disseminates it to the public order book. The process then terminates in step 2008 as indicated.

Returning to step 2004, if, however, the incoming sell order is marketable, i.e., its price is less than or equal to the NBB, then the process continues to step 2010, where it activates the Too-Executable Sell Order Check Process, described above. If the incoming sell order is not canceled in the Too-Executable Sell Order Check Process, then the process continues to step 2011, where it generates a virtual consolidated order and quote list. The process continues to step 2012, where it checks if the option series has any assigned market makers. If it does, then the process continues to step 2014, where it checks if the incoming sell order is a directed order or not. If the incoming sell order is a directed order, then the Directed Order Process is initiated in step 2016. If, however, the incoming sell order is not a directed order, then the LMM Guaranteed Bid Process is initiated instead in step 2018.

Regardless of whether the incoming sell order executes in the Directed Order Process or the LMM Guaranteed Bid Process or in neither process (if the applicable market maker is not quoting at the NBB and is therefore ineligible for a guaranteed entitlement, or else if the issue does not have any assigned market makers), if the incoming sell order still has quantity available to trade, then the process continues to step 2020, where it checks if the incoming sell order is still marketable.

If the incoming sell order is no longer marketable, then the process continues to step 2022, where it ranks the incoming sell order in the internal order book 29a in price/time priority and disseminates it to the public order book. The process then terminates in step 2024 as indicated.

Returning to step 2020, if, however, the incoming sell order is still marketable, then the process continues to step 2028, where it checks if any away market bids are superior to the market center's bids. If none are, then the process continues to step 2034, where it initiates a “Determine Best Resident Bid Process,” and proceeds to step 2100 (FIG. 18). This process, which is described in detail below, determines whether the best bid on the market center 20 is a displayed buy order, a market maker bid, or the nondisplayed reserve portion of a reserve buy order, in accordance with the sequence in which the orders and quotes are ranked in price/display/time priority in the virtual consolidated order and quote list.

After executing against the retrieved best resident bid, the process continues to step 2038, where it checks if the incoming sell order still has any quantity remaining. If it does not, the process continues to step 2042, where it checks if any reserve buy orders have been flagged for replenishment. If the incoming sell order depleted any reserve buy orders, then these orders have already been flagged for replenishment. If no reserve buy orders were flagged, then the process terminates in step 2046 as indicated. If, however, any reserve buy orders have indeed been flagged for replenishment, then the Replenish Reserve Buy Order Process is activated in step 2044, and after the Replenish Reserve Buy Order Process is complete, the process then terminates in step 2046 as indicated.

Returning to step 2038, if, however the incoming sell order does still have quantity available to trade, then the process returns to step 2020, where it checks if the incoming sell order is still marketable. The process continues to retrieve and execute against additional buy orders and market maker bids, in the sequence of their ranking in the virtual consolidated order and quote list, until the incoming sell order is completed, is no longer marketable, or else must route off the market center 20, as described next.

Returning to step 2028, if, however, the process determines that one or more away market bids are superior to the market center's bids, then the process continues to step 2030, where it checks if the incoming sell order should route off the market center 20 or not. If the incoming sell order should not be routed (either because its underlying order type prevents routing, or because the away market center/s at the NBB have already been completely satisfied by prior routed sell orders), then the process continues to step 2036. In step 2036, the process either posts, queues, hides, cancels, or reprices the incoming sell order according to the rules of the underlying order type. The process continues to step 2042, where it checks if any reserve buy orders have been flagged for replenishment, as described above.

Returning to step 2030, if the process determines that the incoming sell order should be routed, i.e., its order type allows routing and the away market centers at the NBB have not been completely satisfied yet, then the process continues to step 2032, where the incoming sell order is released to the Routing Process. Generally speaking, the Routing Process routes the lesser of the remaining quantity of the incoming sell order and the away market center's disseminated bid size, at the disseminated bid price. After routing all or part of the order, the process continues to step 2040, where it checks if the incoming sell order still has any quantity remaining. If it does not, then the process continues to step 2042, where it checks if any reserve buy orders have been flagged for replenishment, as described above.

Returning to step 2040, if, however, the incoming sell order does still have quantity available to trade, the process continues to step 2048, where it checks if the incoming sell order is allowed to execute additional contracts at a price inferior to the NBB. If the incoming sell order is not allowed to execute beyond the NBB, then the process proceeds to step 2036, where it posts, queues, hides, cancels or reprices the incoming sell order according to the rules for the order type. The process then continues to step 2042, where it checks if any reserve buy orders have been flagged for replenishment, as described above.

Returning to step 2048, if, however, the incoming sell order is allowed to execute additional contracts beyond the NBB, then the process returns to step 2020, where it checks if the incoming sell order is still marketable. If it is, the process continues to step 2028, where it checks if any unsatisfied away market bids are superior to the market center's bids. If one or more away market centers are superior, then the incoming sell order will route to the market centers as previously described, if appropriate (e.g., if the incoming sell order is an intermarket sweep limit order and intermarket sweeping is allowed on the options marketplace).

Returning to step 2028, if, however, no away market centers are superior, the process continues to step 2034, where the process retrieves the best resident bid, which may be a displayed buy order, a market maker bid, or the reserve portion of a reserve buy order, depending on the sequence of their ranking at the next-best price inferior to the NBB. The number of price levels inferior to the NBB at which the incoming sell order is allowed to execute is defined by the rules of the marketplace and the rules of the order type. The process continues as described above until the incoming sell order is completely executed or else is posted.

Determine Best Resident Bid Process

Referring now to FIG. 18, the process is illustrated where the order matching engine 21 determines which bid on the market center 20 has the highest priority for execution, based on the sequence in which the bids are ranked at the price level presently being executed. In accordance with price/display/time priority rules, at any given price level, all displayed buy orders and market maker bids must execute first before any buy order's reserve portion can execute. The incoming sell order then executes against each buy order's reserve portion, in the sequence of their ranking in the virtual consolidated order and quote list. Again, this is illustrated in FIG. 3 by showing that the trading interest shown in cells 1, 2, and 3 must execute before the trading interest shown in cells 4, 5, and 6 can execute.

If the incoming sell order still has quantity available to trade and its price is lower than the NBB and the rules of the order type allow it to execute at prices beyond the NBB after first satisfying all away markets quoting at the NBB, then this routine continues to execute in a similar manner for resident bids priced at one tick inferior to the NBB. It executes the displayed buy orders (and market maker quotes, if allowed by marketplace rules) priced at one tick inferior to the NBB first, and then executes the reserve portions of the buy orders priced at one tick inferior to the NBB next. This is illustrated in FIG. 3 by showing that the trading interest shown in cells 19, 20, and 21 must execute before the trading interest shown in cells 22, 23, and 24 can execute.

If marketplace rules allow intermarket sweeping at multiple price levels and the incoming sell order still has quantity available to trade, then after routing to the away markets quoting at one tick inferior to the NBB (as shown in cells 31, 32, and 33), the process will then proceed to retrieve and execute against resident bids priced at two ticks inferior to the NBB. It executes the displayed bids priced at two ticks inferior to the NBB first, then executes the reserve portions of the buy orders priced at two ticks inferior to the NBB next. The process clears each price level in turn, for as many price levels as the rules allow and that overlap with the incoming sell order's price.

At step 2100, the process is initiated. In step 2102, the process checks if there are any displayed buy orders or market maker quotes at the NBB. If there are, then the process continues to step 2104, where it retrieves the order or quote with the highest ranking at the NBB. If the retrieved bid is a market maker quote, then in step 2106, the process automatically generates an IOC buy pseudo-order on behalf of the underlying market maker quote. In step 2107, the process matches the incoming sell order with the buy order, at the price of the buy order. If the buy order is a pseudo-order, then the process also notifies the market maker quote engine 32b to decrement the market maker quote by the quantity executed. The process continues to step 2108, where if the buy order was a reserve buy order whose displayed size has now been depleted, it flags the order for subsequent replenishment. The process continues to step 2110, where it returns to the step where the procedure was originally initiated, back to step 2034 (FIG. 17B).

Returning to step 2102, if there are no displayed buy orders or market maker quotes at the NBB, i.e., the incoming sell order has already exhausted them, then the process continues to step 2112, where it checks if there are any buy order reserve portions at the NBB. If there are no buy order reserve portions at the NBB, then the process continues to step 2120, where it returns to the step where the procedure was originally initiated, back to step 2034 (FIG. 17B). If, however, there are buy order reserve portions at the NBB, then the process continues to step 2114, where it retrieves the buy order reserve portion with the highest ranking at the NBB, and in step 2116, the process matches the incoming sell order with the retrieved buy order reserve portion, at the buy order price. The process continues to step 2118, where it returns to the step where the procedure was originally initiated, back to step 2034 (FIG. 17B).

Example of Reserve Order Processing

In this example, a reserve sell order is replenished after executing, which causes it to lose its priority to other sell orders at the same price. This is because a reserve order receives a new timestamp when its displayed size is replenished.

The order matching engine 21 receives the following orders, in this sequence:

Order A: Sell 100 @ 2.45, Show Size=20, Reserve Size=80

Order B: Sell 30 @ 2.45

Order C: Sell 50 @ 2.45, Show Size=10, Reserve Size=40

The orders look like this in the offer side of the internal order book 29a:

Price Display Process Working Process 2.45 Order A: Sell 20 Order A: Sell 80 Order B: Sell 30 Order C: Sell 10 Order C: Sell 40

The offer side of the public order book looks like this:

Published Offers 60 @ 2.45

The order matching engine 21 receives the following order:

Buy 20 @ 2.45

The process

- Matches 20 contracts with Order A in the Display Order Process, completely depleting its displayed size
- Updates the timestamp of Order A to the current time
- Replenishes Order A's displayed size to 20 contracts, leaving 60 contracts in reserve
- Re-ranks Order A in the internal order book 29a according to its new price/time priority

Because Order A was replenished, it loses time priority in the Display Order Process and is ranked last according to price/time priority rules. As illustrated below, the reserve portion of Order A is not treated as an independent component, and also loses time priority in the Working Order Process. The reserve portion of an order is always ranked according to the displayed portion of the order in this embodiment. Accordingly, a reserve order only has one position in the internal order book 29a.

The orders now look like this in the offer side of the internal order book 29a:

Price Display Order Process Working Order Process 2.45 Order B: Sell 30 Order C: Sell 10 Order C: Sell 40 Order A: Sell 20 ← Order A: Sell 60 ←

As Order A was replenished, the offer side of the public order book still looks like this:

Published Offers 60 @ 2.45

The order matching engine 21 receives the following order:

Buy 110 @ 2.45

The order matching engine 21 trades all of the contracts that reside in the Display Order Process first:

- Matches 30 with Order B in the Display Order Process, completely filling the order
- Matches 10 with Order C in the Display Order Process
- Matches 20 with Order A in the Display Order Process

After depleting all the displayed contracts, the order matching engine 21 executes the contracts that reside in the Working Order Process next:

- Matches 40 with Order C in the Working Order Process, completely filling the order
- Matches 10 with Order A in the Working Order Process
- Determines that Order A's displayed size has been fully depleted
- Updates the timestamp of Order A to the current time
- Replenishes Order A's displayed size back to its full Show Size of 20 contracts, leaving 30 contracts in reserve
- Re-ranks Order A in the internal order book 29a according to its new price/time priority

The order now looks like this in the offer side of the internal order book 29a:

Price Display Order Process Working Order Process 2.45 Order A: Sell 20 ← Order A: Sell 30 ←

The offer side of the public order book now looks like this:

Published Offers 20 @ 2.45 ←

Detailed Examples of Reserve Order Trading

Examples of how quotes and orders are processed in a preferred embodiment of the invention are provided below. It should be understood that the order and quote prices and sizes discussed in these examples are by way of example only to illustrate how the process of an embodiment of the invention operates. Quote and order processing is not limited to these examples. It should also be noted that the term “linkage” when referring to the routing of orders between market centers is not limited to an intermarket linkage such as the Options Linkage Authority, but may also include any other direct or third-party network connection or any broker/dealer affiliate acting as an agent for routing orders.

EXAMPLE 1 Incoming Order Participates in the Directed Order Process, the Display Order Process, and the Working Order Process

The following example illustrates the ranking of orders and quotes within the Directed Order Process, the Display Order Process, and the Working Order Process. The issue has a lead market maker (Firm B) and a regular market maker (Firm A). In this example, a posted reserve order on behalf of a customer steps ahead of a non-customer order received earlier, as permitted in the Directed Order Process. Only the displayed portion of the reserve order is eligible to step ahead. After the Directed Order Process completes, then the order matching engine 21 executes the remaining portion of the incoming order in price/display/time priority. Accordingly, the nondisclosed reserve portion of the customer order trades behind the displayed non-customer order, because all displayed interest has priority over any reserve interest at the same price.

For ease of illustration, only the offer side of the books is shown in this example.

→The NBBO is 2.00 to 2.05

The offer side of the away market BBO book 25a looks like this:

Offer Details Source Time received AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15

The offer side of the market maker quote book 33a looks like this:

Offer Details Source Time received Quote A Offer 60 @ 2.05 Firm A 10:04:22 Quote B Offer 30 @ 2.05 Firm B 10:05:30

The offer side of the internal order book 29a looks like this:

Order Details On behalf of Time received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Order E Sell 10 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the public order book looks like this. Note that only the displayed portion of Order E (10 contracts) is included in the aggregated offer:

Published Offers 130 @ 2.05 40 @ 2.10

Step 1a: Determine if a Designated Market Maker is Entitled to a Guaranteed Allocation of an Incoming Directed Order

Referring to FIG. 10A, in step 1000, the order matching engine 21 receives the following incoming directed order in issue XYZ from order sending firm “FirmB” designated for market maker firm “FirmA”:

Order 1: Buy 150 @ Market, Directed Order for FirmA

In step 1002, the process retrieves the NBO (2.05). In step 1004, it checks if incoming Directed Buy Order 1 is executable. As market orders are marketable by definition, the process continues to step 1010, where it initiates the Too-Executable Buy Order Check Process and proceeds to step 500 (FIG. 5).

Referring to FIG. 5, in step 502, the process checks if incoming Buy Order 1 is greater than the NBO price. As it is not (by definition, a market order is priced at the NBO), the process continues to step 506, where it returns to the step where it was originally initiated, back to step 1010 (FIG. 10A).

In step 1011, the process generates a virtual consolidated order and quote list. The offer side of the virtual consolidated order and quote list looks like this:

Order or Time Quote Details Source received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Order E Sell 10 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 Quote A Offer 60 @ 2.05 FirmA 10:04:22 Quote B Offer 30 @ 2.05 FirmB 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

In step 1012, the process checks if this issue has any assigned market makers. As it does, the process continues to step 1014, where it checks if incoming Buy Order 1 is a directed order or not. As it is a directed order, the process continues to step 1016, where it initiates the Directed Order Process and proceeds to step 700 (FIG. 7A).

In step 702, the process sets the order sending firm (“OSF”) parameter to “FirmB,” the ID assigned to the firm that sent incoming Directed Buy Order 1. In step 704, it retrieves the DMM/OSF Permissions Table, which looks like this:

Designated Market Default Market Order Sending Firm Issue Maker Firm (DMM) Maker? (OSF) XYZ FirmA FirmB XYZ FirmA Yes FirmC XYZ FirmB Yes FirmB XYZ FirmB FirmA

In step 706, the process checks if incoming Directed Buy Order 1 specifies a designated market maker. As it has specified FirmA as the DMM, the process continues to step 708, where it sets the DMM parameter to “FirmA,” the ID assigned to the designated firm. In step 710, the process checks the rules in the DMM/OSF Permissions Table, and determines that FirmB is indeed permissioned to direct orders to FirmA (first rule in the Table).

The process proceeds to step 718, where it checks if incoming Directed Order 1 is a buy order or a sell order. As it is a buy order, the process continues to step 720, where it initiates the DMM Guaranteed Offer Process and proceeds to step 800 (FIG. 8A).

Step 1b: Execute the Incoming Directed Order Against a Customer Order and the DMM Quote

In step 802, the process retrieves the offer for the DMM, FirmA. As shown below, the DMM Offer is Quote A:

Order or Time Quote Details Source received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Order E Sell 10 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 Quote A Offer 60 @ 2.05 ← FirmA 10:04:22 Quote B Offer 30 @ 2.05 FirmB 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

In step 804, the process determines that Quote A (2.05) is equal to the NBO (2.05), and accordingly incoming Directed Buy Order 1 is eligible to participate in the Directed Order Process. The process continues to step 808, where it checks if incoming Directed Buy Order 1's size (150 contracts) is greater than two contracts. As it is, in step 814, the process checks if there are any displayed customer sell orders at the NBO (2.05). As shown below, reserve order E is a customer sell order at the NBO:

Order or Time Quote Details Source received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Order E Sell 10 @ 2.05 ← Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 Quote A Offer 60 @ 2.05 FirmA 10:04:22 Quote B Offer 30 @ 2.05 FirmB 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The process continues to step 816, where it stores the timestamp assigned to Quote A (10:04:22) in the parameter DMMOfferTimestamp. In step 818, it retrieves the earliest displayed customer sell order at the NBO, Reserve Order E. In step 820, the process compares the timestamp of Reserve Order E (10:03:50) to the value of the DMMOfferTimestamp parameter (10:04:22) and determines that the order timestamp is lower, i.e., the order was received prior to the quote. Reserve Order E's displayed portion (10 contracts) is eligible for participation in the DMM Guarantee Process, even though its reserve portion (50 contracts) is not. Accordingly, the process continues to step 822, where it matches 10 contracts of incoming Directed Buy Order 1 with customer Reserve Sell Order E at the price of 2.05, completely depleting the displayed portion of Reserve Sell Order E. In step 823, Reserve Sell Order E is flagged for subsequent replenishment.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Order E Sell 0 @ 2.05 ← Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 Replenish Flag = Yes ← Quote A Offer 60 @ 2.05 FirmA 10:04:22 Quote B Offer 30 @ 2.05 FirmB 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the internal order book 29a now looks like this:

Order Details On behalf of Time received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Order E Sell 0 @ 2.05 ← Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 Replenish Flag = Yes ← Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the public order book now looks like this:

Published Offers 120 @ 2.05 ← 40 @ 2.10

As Reserve Order E's displayed quantity has been fully depleted, it can no longer execute in the Display Order Process. As it can only execute in the Working Order Process now, this means all displayed resident interest has priority over Reserve Order E. Accordingly, Reserve Order E is shown below as ranked behind Quote B.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Quote A Offer 60 @ 2.05 FirmA 10:04:22 Quote B Offer 30 @ 2.05 FirmB 10:05:30 Order E Sell 0 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The process continues to step 824, where it checks if incoming Directed Buy Order 1 still has any quantity available to trade. As it has 140 contracts remaining, the process continues to step 828, where it checks if there are any more displayed customer sell orders at the NBO. As there are none, the process proceeds to step 832, where it retrieves the guaranteed percentage allocated for designated market makers, which is stored in the parameter “DMMGuaranteedPercent.”

In this example, the DMMGuaranteedPercent is configured to 40%. In step 834, the process multiplies the remaining quantity of incoming Directed Buy Order 1 (140 contracts) by the DMMGuaranteedPercent (40%) to derive the DMMGuaranteedAllocation of 56 contracts (40% of 140 contracts=56 contracts). In step 838, the process matches 56 contracts of incoming Directed Buy Order 1, the lesser of the DMMGuaranteedAllocation (56 contracts) and the DMM Offer size (60 contracts), with Quote A, at the price of 2.05. It does this by generating an IOC pseudo-order to Sell 60 @ 2.05 on behalf of DMM Offer Quote A, and executing the incoming Directed Buy Order 1 against the sell pseudo-order at the price of 2.05. The order matching engine 21 notifies the market maker quote engine 32b to decrement Quote A by the 56 contracts that were executed. Quote A still has 4 contracts available to trade. The Directed Order Process is completed.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Quote A Offer 4 @ 2.05 ← FirmA 10:04:22 Quote B Offer 30 @ 2.05 FirmB 10:05:30 Order E Sell 0 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the market maker quote book 33a now looks like this:

Offer Details Source Time received Quote A Offer 4 @ 2.05 ← FirmA 10:04:22 Quote B Offer 30 @ 2.05 FirmB 10:05:30

The offer side of the public order book now looks like this:

Published Offers 64 @ 2.05 ← 40 @ 2.10

The process continues to step 842, where it checks if incoming Directed Buy Order 1 still has any quantity available to trade. As it still has 84 contracts remaining, the process continues to step 846, where it returns to the step where it was originally initiated, back to step 720 (FIG. 7A).

From step 720, the process continues to step 722, where it returns to the step where it was originally initiated, back to step 1016 (FIG. 10A).

Step 1c: Execute the Incoming Order in the Display Order Process

After the Directed Order Process completes, incoming Buy Order 1 is no longer a directed order, and is processed like any other non-directed order. In step 1020, the process checks if incoming Buy Order 1 is still executable against the virtual consolidated order and quote list. As it is, the process continues to step 1028, where it checks if any away market center offers are superior to the market center's offers. As none are (the market center is at the NBO, 2.05), the process continues to step 1034, where it initiates the Determine Best Resident Offer Process, and proceeds to step 1100 (FIG. 11).

In step 1102, the process checks if there are any displayed sell orders or market maker quotes at the NBO (2.05). As there are, the process continues to step 1104, where it retrieves the offer with the highest ranking in the Display Order Process. As illustrated in the table above, Sell Order D is now the highest-ranked offer in the Display Order Process. As Sell Order D is not a market maker quote, the process continues to step 1107, where it matches 30 contracts of incoming Buy Order 1 against Sell Order D, at the price of 2.05, completely depleting Sell Order D. As Sell Order D is not a reserve order, it is not flagged for replenishment in step 1108. The process continues to step 1110, where it returns to the step where the procedure was originally initiated, back to step 1034 (FIG. 10B).

The process continues to step 1038, where it checks if incoming Buy Order 1 still has any contracts available to trade. As it still has 54 contracts remaining, the process returns to step 1020, where it checks if incoming Buy Order 1 is still marketable.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Quote A Offer 4 @ 2.05 FirmA 10:04:22 Quote B Offer 30 @ 2.05 FirmB 10:05:30 Order E Sell 0 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the internal order book 29a now looks like this:

Order or Quote Details Source Time received Order E Sell 0 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the public order book now looks like this:

Published Offers 34 @ 2.05 ← 40 @ 2.10

As incoming Buy Order 1 is still marketable, the process continues to step 1028, where it checks if any away market center offers are superior to the market center's offers. As none are (the market center is still at the NBO, 2.05), the process continues to step 1034, where it initiates the Determine Best Resident Offer Process again, and proceeds to step 1100 (FIG. 11).

In step 1102, the process checks if there are any displayed sell orders or market maker quotes at the NBO (2.05). As there are, the process continues to step 1104, where it retrieves the offer with the highest ranking in the Display Order Process. As illustrated in the table above, Quote A is now the highest-ranked offer in the Display Order Process. As the process has already generated a sell pseudo-order on behalf of Quote A in the Directed Order Process, the process continues to step 1107, where it matches 4 contracts of incoming Buy Order 1 against the 4 remaining contracts of the sell pseudo-order, at the price of 2.05. Quote A is completely depleted and is removed from the virtual consolidated order and quote list. The order matching engine 21 notifies the market maker quote engine 32b to decrement Quote A by the 4 contracts just executed. As Quote A is not a reserve order, it is not flagged for replenishment in step 1108. The process continues to step 1110, where it returns to the step where the procedure was originally initiated, back to step 1034 (FIG. 10B).

The process continues to step 1038, where it checks if incoming Buy Order 1 still has any contracts available to trade. As it still has 50 contracts remaining, the process returns to step 1020, where it checks if incoming Buy Order 1 is still marketable.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Quote B Offer 30 @ 2.05 FirmB 10:05:30 Order E Sell 0 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the market maker quote book 33a now looks like this (Firm A has not updated its offer yet):

Order or Quote Details Source Time received Quote B Offer 30 @ 2.05 FirmB 10:05:30

The offer side of the public order book now looks like this:

Published Offers 30 @ 2.05 ← 40 @ 2.10

As incoming Buy Order 1 is still marketable, the process continues to step 1028, where it checks if any away market center offers are superior to the market center's offers. As none are (the market center is still at the NBO, 2.05), the process continues to step 1034, where it initiates the Determine Best Resident Offer Process again, and proceeds to step 1100.

In step 1102, the process checks if there are any displayed sell orders or market maker quotes at the NBO (2.05). As there are, the process continues to step 1104, where it retrieves the offer with the highest-ranking in the Display Order Process. As illustrated in the table above, Quote B is now the highest-ranked offer in the Display Order Process. The process continues to step 1106, where it automatically generates an IOC pseudo-order to sell 30 @ 2.05 on behalf of Quote B. The process continues to step 1107, where it matches 30 contracts of incoming Buy Order 1 against the sell pseudo-order, at the price of 2.05. Quote B is completely depleted, and is removed from the virtual consolidated order and quote list. The order matching engine 21 also notifies the market maker quote engine 32b to decrement Quote B by the 30 contracts executed. As Quote B is not a reserve order, it is not flagged for replenishment in step 1108. The process continues to step 1110, where it returns to the step where the procedure was originally initiated, back to step 1034 (FIG. 10B).

Step 1d: Execute the Incoming Order in the Working Order Process

The process continues to step 1038, where it checks if incoming Buy Order 1 still has any contracts available to trade. As it still has 20 contracts remaining, the process returns to step 1020, where it checks if incoming Buy Order 1 is still marketable.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Order E Sell 0 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the internal order book 29a now looks like this:

Order or Quote Details Source Time received Order E Sell 0 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the public order book now looks like this:

Published Offers 40 @ 2.10 ←

As incoming Buy Order 1 is still marketable, the process continues to step 1028, where it checks if any away market center offers are superior to the market center's offers. As none are (Reserve Sell Order E is the same price as the away market quotes), the process continues to step 1034, where it initiates the Determine Best Resident Offer Process again, and proceeds to step 1100.

In step 1102, the process checks if there are any displayed sell orders or market maker quotes at the NBO (2.05). As there are none, the process proceeds to step 1112, where it checks if there are any reserve portions of sell orders at the NBO. As Reserve Sell Order E has 50 reserve contracts priced @ 2.05, the process continues to step 1114, where it retrieves the highest-ranked reserve portion.

As illustrated in the table above, Reserve Sell Order E is the only reserve portion. The process continues to step 1116, where it matches the remaining 20 contracts of incoming Buy Order 1 against Reserve Sell Order E, at the price of 2.05, completely depleting incoming Buy Order 1. Reserve Sell Order E still has 30 contracts remaining in reserve. The process continues to step 1118, where it returns to the step where the procedure was originally initiated, back to step 1034 (FIG. 10B).

The process continues to step 1038, where it checks if incoming Buy Order 1 still has any contracts available to trade. As it does not, the process proceeds to step 1042, where it checks if any resting reserve sell orders have been flagged for replenishment. As Reserve Sell Order E has indeed been flagged for replenishment, the process continues to step 1044, where it initiates the Replenish Reserve Sell Order Process and proceeds to step 900 (FIG. 9A).

Step 1e: Replenish the Depleted Reserve Order

In step 902, the process retrieves the first reserve sell order that has been flagged for replenishment, Reserve Order E. In step 904, the process checks if Reserve Order E still has any quantity remaining in reserve. As it still has 30 contracts in reserve, the process continues to step 910, where it updates the timestamp of Reserve Sell Order E. In step 912, the process checks if Reserve Sell Order E's price (2.05) locks or crosses the NBB (2.00). As it does not, the process continues to step 942.

In step 942, the process replenishes the displayed size of Reserve Sell Order E back to 10 contracts, the lesser of its user-specified Show Size (10 contracts) and the quantity it currently has in reserve (30 contracts). In step 944, it re-ranks the displayed portion of Reserve Sell Order E according to its new price/time priority. In step 946, the process re-ranks the reserve portion of Reserve Order E (20 contracts) according to the new price/time priority of its displayed portion. In step 948, the process disseminates the displayed portion of Reserve Sell Order E (10 contracts) to the public order book. In step 950, the process checks if there are any additional reserve sell orders that have been flagged for replenishment. As there are none, the process then terminates in step 952 as indicated.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Order E Sell 10 @ 2.05 ← Customer 10:05:58 Show Size = 10, Quantity in Reserve = 20 ← AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the internal order book 29a now looks like this:

Order or Quote Details Source Time received Order E Sell 10 @ 2.05 ← Customer 10:03:50 Show Size = 10, Quantity in Reserve = 20 ← Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the public order book now looks like this:

Published Offers 10 @ 2.05 ← 40 @ 2.10

As the incoming order has completed processing, the virtual consolidated order and quote list is deleted from local memory.

As illustrated in this example, only the displayed portion of Reserve Order E was eligible to execute in the Directed Order Process. The remaining reserve portion was eligible to execute in the Working Order Process only after all displayed orders and market maker quotes at the same price were fully executed in the Display Order Process, i.e., according to price/display/time priority rules. After the incoming buy order completed processing, Reserve Order E was replenished and re-ranked in the internal order book 29a according to its new timestamp.

As also illustrated in this example, Quote A was able to execute twice against the same incoming order—first in the Directed Order Process according to the guaranteed participation allocation, and then secondly in the Display Order Process according to normal price/time priority.

EXAMPLE 2 Incoming Order Executes in the LMM Guarantee Process the Display Order Process, and the Working Order Process

The following example illustrates the ranking of orders and quotes within the LMM Guarantee Process, the Display Order Process, and the Working Order Process. The issue has a lead market maker (LMM) and a regular market maker (MM2). In this example, which is similar to the preceding illustration of the Directed Order Process, a posted reserve order on behalf of a customer steps ahead of a non-customer order received earlier, as permitted in the LMM Guarantee Process. Only the displayed portion of the reserve order is eligible to step ahead. After the LMM Guarantee Process completes, then the order matching engine 21 executes the remaining portion of the incoming order in price/display/time priority. Accordingly, the nondisclosed reserve portion of the customer order trades behind the displayed non-customer order, because all displayed interest has priority over any reserve interest at the same price.

→The NBBO is 2.00 to 2.05

The offer side of the away market BBO book 25a looks like this:

Offer Details Source Time received AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15

The offer side of the market maker quote book 33a looks like this:

Order Details On behalf of Time received Quote A Offer 60 @ 2.05 MM2 10:04:22 Quote B Offer 30 @ 2.05 LMM 10:05:30

The offer side of the internal order book 29a looks like this:

Order Details On behalf of Time received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Order E Sell 10 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the public order book looks like this. Note that only the displayed portion of Order E (10 contracts) is included in the aggregated offer:

Published Offers 130 @ 2.05 40 @ 2.10

Step 2a: Determine if an LMM is Entitled to a Guaranteed Allocation of an Incoming Non-Directed Order

In step 1000, the order matching engine 21 receives the following incoming order in issue XYZ:

Order 2: Buy 150 @ Market

In step 1002, the process retrieves the NBO (2.05). In step 1004, it checks if incoming Buy Order 2 is executable. As market orders are marketable by definition, the process continues to step 1010, where it initiates the Too-Executable Buy Order Check Process and proceeds to step 500 (FIG. 5).

In step 502, the process checks if incoming Buy Order 2 is greater than the NBO price. As it is not (by definition, a market order is priced at the NBO), the process continues to step 506, where it returns to the step where it was originally initiated, back to step 1010 (FIG. 10A).

The process continues to step 1011, where it generates a virtual consolidated order and quote list. The offer side of the virtual consolidated order and quote list looks like this:

Order or Time Quote Details Source received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Order E Sell 10 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 Quote A Offer 60 @ 2.05 MM2 10:04:22 Quote B Offer 30 @ 2.05 LMM 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

In step 1012, the process checks if this issue has any assigned market makers. As it does, the process continues to step 1014, where it checks if incoming Buy Order 2 is a Directed Order or not. As it is not a Directed Order, the process continues to step 1018, where it initiates the LMM Guaranteed Offer Process and proceeds to step 600 (FIG. 6A).

Step 2b: Execute the Incoming Order Against a Customer Order and the LMM Quote

In step 602, the process retrieves the offer for the lead market maker. As shown below, the lead market maker offer is Quote B:

Order or Time Quote Details Source received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Order E Sell 10 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 Quote A Offer 60 @ 2.05 MM2 10:04:22 Quote B Offer 30 @ 2.05 ← LMM 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

In step 604, the process determines that Quote B (2.05) is equal to the NBO (2.05), and accordingly incoming Buy Order 2 is eligible to participate in the LMM Guaranteed Offer Process. The process continues to step 608, where it checks if incoming Buy Order 2's size (150 contracts) is greater than two contracts. As it is, in step 614, the process checks if there are any displayed customer sell orders at the NBO (2.05). As there are, the process continues to step 616, where it stores the timestamp assigned to Quote B (10:05:30) in the parameter LMMOfferTimestamp.

As indicated below, customer Reserve Order E has a displayed portion at the NBO (2.05). Accordingly, its displayed portion (10 contracts) qualifies for participation in the LMM Guarantee Process, even though its reserve portion (50 contracts) does not:

Order or Time Quote Details Source received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Order E Sell 10 @ 2.05 ← Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 Quote A Offer 60 @ 2.05 MM2 10:04:22 Quote B Offer 30 @ 2.05 LMM 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The process continues to step 618, where it retrieves the earliest displayed customer sell order at the NBO, Reserve Sell Order E. In step 620, the process compares the timestamp of Reserve Sell Order E (10:03:50) to the value of the LMMOfferTimestamp parameter (10:05:30) and determines that the order timestamp is lower, i.e., the order was received prior to the quote. Accordingly, the process continues to step 622, where it matches 10 contracts of incoming Buy Order 2 with customer Reserve Sell Order E, at the price of 2.05, completely depleting the displayed portion of Reserve Sell Order E. In step 623, Reserve Sell Order E is flagged for subsequent replenishment.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Order E Sell 0 @ 2.05 ← Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes Quote A Offer 60 @ 2.05 MM2 10:04:22 Quote B Offer 30 @ 2.05 LMM 10:05:30 AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the internal order book 29a now looks like this:

Order or Quote Details Source Time received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Order E Sell 0 @ 2.05 ← Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the public order book now looks like this:

Published Offers 120 @ 2.05 ← 40 @ 2.10

As Reserve Order E's displayed quantity has been fully depleted, it can no longer execute in the Display Order Process. As it can only execute in the Working Order Process now, this means all displayed resident interest has price/display/time priority over Reserve Order E. Accordingly, Reserve Order E is shown below as ranked behind Quote B.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Quote A Offer 60 @ 2.05 MM2 10:04:22 Quote B Offer 30 @ 2.05 LMM 10:05:30 Order E Sell 0 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The process continues to step 624, where it checks if incoming Buy Order 2 still has any quantity available to trade. As it has 140 contracts remaining, the process continues to step 628, where it checks if there are any more displayed customer sell orders at the NBO. As there are none, the process proceeds to step 632, where it retrieves the guaranteed percentage allocated for lead market makers, which is stored in the parameter “LMMGuaranteedPercent.”

In this example, the LMMGuaranteedPercent is configured to 40%. In step 634, the process multiplies the remaining quantity of incoming Buy Order 2 (140 contracts) by the LMMGuaranteedPercent (40%) to derive the LMMGuaranteedAllocation of 56 contracts (40% of 140 contracts=56 contracts). In step 638, the process matches 30 contracts of incoming Buy Order 2, the lesser of the LMMGuaranteedAllocation (56 contracts) and the lead market maker offer size (30 contracts), with Quote B, at the price of 2.05. It does this by generating an IOC pseudo-order to Sell 30 @ 2.05 on behalf of lead market maker offer Quote B, and executing incoming Buy Order 2 against the sell pseudo-order. Quote B is completely depleted, and is removed from the virtual consolidated order and quote list. The process notifies the market maker quote engine 32b to decrement Quote B by the 30 contracts just executed. The LMM Guaranteed Offer Process is completed.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Order D Sell 30 @ 2.05 Non-customer 10:01:03 Quote A Offer 60 @ 2.05 MM2 10:04:22 Order E Sell 0 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the market maker quote book 33a now looks like this (the lead market maker has not updated its offer yet):

Order or Quote Details Source Time received Quote A Offer 60 @ 2.05 MM2 10:04:22

The offer side of the public order book now looks like this:

Published Offers 90 @ 2.05 ← 40 @ 2.10

The process continues to step 642, where it checks if incoming Buy Order 2 still has any quantity available to trade. As it still has 110 contracts remaining, the process continues to step 646, where it returns to the step where it was originally initiated, back to step 1018 (FIG. 10A).

Step 2c: Execute the Incoming Order in the Display Order Process

The process continues to step 1020, where it checks if incoming Buy Order 2 is still marketable. As it is, the process continues to step 1028, where it checks if any away market center offers are superior to the market center's offers. As none are (the market center is at the NBO, 2.05), the process continues to step 1034, where it initiates the Determine Best Resident Offer Process, and proceeds to step 1100 (FIG. 11).

In step 1102, the process checks if there are any displayed sell orders or market maker quotes at the NBO (2.05). As there are, the process continues to step 1104, where it retrieves the offer with the highest ranking in the Display Order Process. As illustrated in the table above, Sell Order D is the highest-ranked offer in the Display Order Process. As Sell Order D is not a market maker quote, the process continues to step 1107, where it matches 30 contracts of incoming Buy Order 2 against Sell Order D, at the price of 2.05, completely depleting Sell Order D. As Sell Order D is not a reserve order, it is not flagged for replenishment in step 1108. The process continues to step 1110, where it returns to the step where the procedure was originally initiated, back to step 1034 (FIG. 10B).

The process continues to step 1038, where it checks if incoming Buy Order 2 still has any contracts available to trade. As it still has 80 contracts remaining, the process returns to step 1020, where it checks if incoming Buy Order 2 is still marketable.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Quote A Offer 60 @ 2.05 MM2 10:04:22 Order E Sell 0 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the internal order book 29a now looks like this:

Order or Quote Details Source Time received Order E Sell 0 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the public order book now looks like this:

Published Offers 60 @ 2.05 ← 40 @ 2.10

As incoming Buy Order 2 is still marketable, the process continues to step 1028, where it checks if any away market center offers are superior to the market center's offers. As none are (the market center is still at the NBO, 2.05), the process continues to step 1034, where it initiates the Determine Best Resident Offer Process again, and proceeds to step 1100.

In step 1102, the process checks if there are any displayed sell orders or market maker quotes at the NBO (2.05). As there are, the process continues to step 1104, where it retrieves the offer with the highest ranking in the Display Order Process. As illustrated in the table above, Quote A is now the highest-ranked offer in the Display Order Process. The process continues to step 1106, where it automatically generates an IOC pseudo-order to sell 60 @ 2.05 on behalf of Quote A. The process continues to step 1107, where it matches 60 contracts of incoming Buy Order 2 against the sell pseudo-order at the price of 2.05, completely depleting Quote A and removing it from the virtual consolidated order and quote list. The process also notifies the market maker quote engine 32b to decrement Quote A by the 60 contracts executed. As Quote A is not a reserve order, it is not flagged for replenishment in step 1108. The process continues to step 1110, where it returns to the step where the procedure was originally initiated, back to step 1034 (FIG. 10B).

The process continues to step 1038, where it checks if incoming Buy Order 2 still has any contracts available to trade. As it still has 20 contracts remaining, the process returns to step 1020, where it checks if incoming Buy Order 1 is still marketable.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Order E Sell 0 @ 2.05 Customer 10:03:50 Show Size = 10, Quantity in Reserve = 50 ReplenishFlag = Yes AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the market maker quote book 33a has now been completely depleted (the LMM and MM2 have not replenished their offers yet).

The offer side of the public order book now looks like this:

Published Offers 40 @ 2.10 ←

As incoming Buy Order 2 is still marketable, the process continues to step 1028, where it checks if any away market center offers are superior to the market center's offers. As none are (Reserve Sell Order E is the same price as the away market quotes), the process continues to step 1034, where it initiates the Determine Best Resident Offer Process again, and proceeds to step 1100.

Step 2d: Execute the Incoming Order in the Working Order Process

In step 1102, the process checks if there are any displayed sell orders or market maker quotes at the NBO (2.05). As there are none, the process proceeds to step 1112, where it checks if there are any reserve portions of sell orders at the NBO. As Reserve Sell Order E has 50 reserve contracts priced @ 2.05, the process continues to step 1114, where it retrieves the highest-ranked reserve portion.

As illustrated in the table above, Reserve Order E is the only reserve portion. The process continues to step 1116, where it matches the remaining 20 contracts of incoming Buy Order 1 against Reserve Sell Order E, at the price of 2.05, completely depleting incoming Buy Order 1. Reserve Sell Order E still has 30 contracts remaining in reserve. The process continues to step 1118, where it returns to the step where the procedure was originally initiated, back to step 1034 (FIG. 10B).

The process continues to step 1038, where it checks if incoming Buy Order 2 still has any contracts available to trade. As it does not, the process proceeds to step 1042, where it checks if any resting reserve sell orders have been flagged for replenishment. As Reserve Sell Order E has indeed been flagged for replenishment, the process continues to step 1044, where it initiates the Replenish Reserve Sell Order Process and proceeds to step 900 (FIG. 9A).

Step 2e: Replenish The Depleted Reserve Order

In step 902, the process retrieves the first reserve sell order that has been flagged for replenishment, Reserve Sell Order E. In step 904, the process checks if Reserve Sell Order E still has any quantity remaining in reserve. As it still has 30 contracts in reserve, the process continues to step 910, where it updates the timestamp of Reserve Sell Order E. In step 912, the process checks if Reserve Sell Order E's price (2.05) locks or crosses the NBB (2.00). As it does not, the process continues to step 942.

In step 942, the process replenishes the displayed size of Reserve Sell Order E back to 10 contracts, the lesser of its user-specified Show Size (10 contracts) and the quantity it currently has in reserve (30 contracts). In step 944, it re-ranks the displayed portion of Reserve Sell Order E according to its new price/time priority. In step 946, the process re-ranks the reserve portion of Reserve Order E (20 contracts) according to the new price/time priority of its displayed portion. In step 948, the process disseminates the displayed portion of Reserve Order E (10 contracts) to the public order book. In step 950, the process checks if there are any additional reserve sell orders that have been flagged for replenishment. As there are none, the process then terminates in step 952 as indicated.

The offer side of the virtual consolidated order and quote list now looks like this:

Order or Time Quote Details Source received Order E Sell 10 @ 2.05 ← Customer 10:05:58 Show Size = 10, Quantity in Reserve = 20 AwayMktA Offer 60 @ 2.05 Away Market A 10:02:32 AwayMktB Offer 30 @ 2.05 Away Market B 10:03:15 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the internal order book 29a now looks like this:

Order or Quote Details Source Time received Order E Sell 10 @ 2.05 ← Customer 10:05:58 Show Size = 10, Quantity in Reserve = 20 Order G Sell 40 @ 2.10 Customer 09:58:57

The offer side of the public order book now looks like this:

Published Offers 10 @ 2.05 ← 40 @ 2.10

As the incoming order has completed processing, the virtual consolidated order and quote list is deleted from local memory.

As illustrated in this example, only the displayed portion of Reserve Order E was eligible to execute in the LMM Guaranteed Offer Process. The remaining reserve portion was eligible to execute in the Working Order Process only after all displayed orders and market maker quotes at the same price were fully executed in the Display Order Process, i.e., according to price/display/tine priority. After the incoming buy order completed processing, Reserve Order E was replenished and re-ranked in the internal order book 29a according to its new timestamp.

EXAMPLE 3 Marketable Incoming Reserve Order Routes Off the Market Center, Stands its Ground when Locked But Ships when its Displayed Portion is Depleted and is Replenished

This example illustrates the processing of a marketable incoming reserve order. If an incoming reserve order is marketable, then the entire order size is eligible for trading, regardless of the Show Size and Reserve Size specified on the order. As nearly any displayed limit order type is allowed to include a reserve quantity in this embodiment, an incoming reserve order is processed as if it were a fully-displayed order until the point where it is no longer marketable. Once a reserve order is no longer marketable, then the order matching engine 21 inserts a quantity of contracts in the Display Order Process up to the lesser of the order's specified Show Size and its remaining (“Leaves”) quantity. Any remaining contracts are inserted in the Working Order Process as reserve quantity.

As the Directed Order Process and the LMM Guarantee Process have already been illustrated in the prior examples, and as an incoming reserve order participates in these entitlement processes in the same manner as a non-reserve order does, neither entitlement process is illustrated again in this example. It should be simply noted that the entire order quantity of an incoming reserve order is eligible to participate in the Directed Order Process or the LMM Guarantee Process. After all customer orders with time priority over the market maker execute first, then the 40% market maker guaranteed allocation is based on the remaining quantity of the incoming reserve order's size, including its reserve size.

In this example, an incoming marketable reserve order routes to an away market center and contemporaneously locks the market. As the incoming reserve order in this example is a Sweep Limit Order, the order is subject to the edit for excessive marketability. When the resting reserve order is subsequently locked by an away market center's quote, the reserve order stands its ground and does not route. However, when its displayed portion is depleted by trading, the reserve order routes to the away market center contemporaneously as it replenishes its displayed portion and locks the away market center's quote.

→The NBBO is 1.90 to 1.95 (40×110)

The away market BBO book 25a looks like this:

Bids Offers Source Bid details Source Offer details Away Market A Bid 40 @ 1.90 Away Market A Offer 40 @ 2.00 Away Market B Bid 30 @ 1.80 Away Market B Offer 20 @ 2.05

The market maker quote book 33a looks like this:

Bids Offers Source Bid details Source Offer details LMM Bid 30 @ 1.85 LMM Offer 60 @ 1.95

The internal order book 29a looks like this:

Bids Offers Source Bid details Source Offer details Order A Buy 20 @ 1.85 Order C Sell 50 @ 1.95 Order B Buy 10 @ 1.80 Order D Sell 10 @ 2.10

→The market center BBO is 1.85 to 1.95 (50×110)

The public order book looks like this:

Published Bids Published Offers 50 @ 1.85 110 @ 1.95 10 @ 1.80 10 @ 2.10

Step 3a: Incoming Reserve Order is Checked for Excessive Marketability

Referring to FIG. 12, in step 1400, the order matching engine 21 receives the following incoming reserve sell order:

Order E: Sell 100 @ 1.90, Show Size=20, Reserve Size=80

In step 1402, the process retrieves the NBB (1.90), and in step 1404, it checks if incoming Reserve Sell Order E is marketable. As it is, the process continues to step 1412, where it initiates the Too-Executable Sell Order Check Process and proceeds to step 1500 (FIG. 13).

In step 1502, the process checks if incoming Reserve Sell Order E's price (1.90) is lower than the NBB (1.90). As the prices are equal, the process continues to step 1506, where it returns to the step where it was originally initiated, back to step 1412 (FIG. 12).

Step 3b: LMM Quote is not Eligible to Execute Against Incoming Reserve Order in the LMM Guarantee Process

The process continues to step 1413, where it generates a virtual consolidated order and quote list. The virtual consolidated order and quote list looks like this:

Bids Offers Source Bid details Source Offer details Away Market A Bid 40 @ 1.90 Order C Sell 50 @ 1.95 Order A Buy 20 @ 1.85 LMM Offer 60 @ 1.95 LMM Bid 30 @ 1.85 Away Market A Offer 40 @ 2.00 Order B Buy 10 @ 1.80 Away Market B Offer 20 @ 2.05 Away Market B Bid 30 @ 1.80 Order D Sell 10 @ 2.10

The process continues to step 1414, where it checks if this issue has any assigned market makers. As it does, the process continues to step 1416, where it checks if incoming Reserve Sell Order E is a directed order or not. As it is not a directed order, the process continues to step 1420, where it initiates the LMM Guaranteed Bid Process and proceeds to step 1600 (FIG. 14A).

In step 1602, the process retrieves the LMM Bid (30 @ 1.85). In step 1604, it checks if the LMM Bid is at the NBB (1.90). As the LMM Bid is inferior to the NBB, it is not eligible to participate in the LMM Guaranteed Bid Process, and the process continues to step 1606, where it returns to where it was originally initiated, back to step 1420 (FIG. 12).

Step 3c: Incoming Reserve Order Routes Off the Market Center

The process continues to step 1422, where it retrieves the best bid in the virtual consolidated order and quote list, which is Away Market A's bid. In step 1424, it checks if incoming Reserve Sell Order E is marketable. As it is, the process continues to step 1432, where it checks if the best bid is on or off the market center 20. As Away Market A's Bid (1.90) is superior to the market center's best bid (1.85), the process continues to step 1434, where it checks if incoming Reserve Sell Order E should be routed.

As incoming Reserve Sell Order E is eligible to route, and whereas the process has not previously satisfied Away Market A's disseminated bid by routing sell orders to it, the process determines that Reserve Sell Order E should indeed route. The process continues to step 1436, where it releases incoming Reserve Sell Order E to the Routing Process, which routes 40 contracts, the lesser of Away Market A's Bid Size (40 contracts) and the total order size of incoming Reserve Sell Order E (100 contracts), at the price of 1.90. Note that the quantity routed (40 contracts) exceeds the user-specified Show Size (20 contracts). By definition, a marketable incoming reserve order will execute up to its full order size, including its reserve quantity. The Show Size only caps the quantity that is displayed.

Step 3d: Nonmarketable Remainder of the Incoming Reserve Order is Ranked in the Internal Order Book 29a; Displayed Portion Locks the Market

The process continues to step 1438, where it checks if incoming Reserve Sell Order E has any quantity remaining to trade. As it still has 60 contracts remaining, the process continues to step 1440, where it checks if incoming Reserve Sell Order E (1.90) can execute beyond the NBB (1.90). As it is priced at the NBB and therefore cannot execute beyond it in this example, the process continues to step 1426, where it ranks 20 contracts (the Show Size) of incoming Reserve Sell Order E in price/time priority in the Display Order Process, and ranks the remaining 40 contracts of incoming Reserve Sell Order E in the Working Order Process. In step 1428, the process disseminates the displayed portion (20 contracts) of Reserve Sell Order E to the public order book, and the process terminates in step 1430 as indicated. As allowed by marketplace rules, Reserve Sell Order E has now locked Away Market A's Bid.

→The NBBO is 1.90 to 1.90 (40×20). The NBBO is locked.

The virtual consolidated order and quote list now looks like this:

Bids Offers Source Bid details Source Offer details Away Bid 40 @ 1.90 Order E Sell 20 @ 1.90 ← Market A Show Size = 20, Quantity in reserve = 40 Timestamp = 11:14:17 Order A Buy 20 @ 1.85 Order C Sell 50 @ 1.95 LMM Bid 30 @ 1.85 LMM Offer 60 @ 1.95 Order B Buy 10 @ 1.80 Away Market A Offer 40 @ 2.00 Away Bid 30 @ 1.80 Away Market B Offer 20 @ 2.05 Market B Order D Sell 10 @ 2.10

The internal order book 29a now looks like this:

Bids Offers Source Bid details Source Offer details Order A Buy 20 @ 1.85 Order E Sell 20 @ 1.90 ← Show Size = 20, Quantity in reserve = 40 Timestamp = 11:14:17 Order B Buy 10 @ 1.80 Order C Sell 50 @ 1.95 Order D Sell 10 @ 2.10

→The market center BBO is now 1.85 to 1.90 (50×20)

The public order book looks like this:

Published Bids Published Offers 50 @ 1.85 20 @ 1.90 ← 10 @ 1.80 110 @ 1.95 10 @ 2.10

Away Market A fills the 40 contracts routed to it, and fades it bid to 1.80. The virtual consolidated order and quote list is deleted from local memory.

Step 3e: Away Market Center Locks the Posted Reserve Order, which Stands its Ground
→Away Market B changes its bid to 30 @ 1.90, locking the market center's published best offer.

→The NBBO is 1.90 to 1.90 (30×20)

The away market BBO book 25a looks like this:

Bids Offers Source Bid details Source Offer details Away Bid 30 @ 1.90 ← Away Market A Offer 40 @ 2.00 Market B Timestamp = 11:15:06 Away Bid 30 @ 1.80 Away Market B Offer 20 @ 2.05 Market A

When the quote engine 23a detects that an away market quote touches an order, it notifies the order matching engine 21. As before, the process combines the away market BBO book 25a, the market maker quote book 33a, and the order book 29a into a virtual consolidated order and quote list, which it ranks in price/display/time priority, but with a preference for resident interest over away market interest at the same price.

The virtual consolidated order and quote list now looks like this:

Bids Offers Source Bid details Source Offer details Away Market B Bid 30 @ 1.90 ← Order E Sell 20 @ 1.90 ← Timestamp = 11:15:06 Show Size = 20, Quantity in reserve = 40 Timestamp = 11:14:17 Order A Buy 20 @ 1.85 Order C Sell 50 @ 1.95 LMM Bid 30 @ 1.85 LMM Offer 60 @ 1.95 Order B Buy 10 @ 1.80 Away Market A Offer 40 @ 2.00 Away Market A Bid 30 @ 1.80 Away Market B Offer 20 @ 2.05 Order D Sell 10 @ 2.10

As previously described, when an away market center locks or crosses the market center, nearly every limit order type stands its ground, i.e., is neither canceled, hidden, repriced, nor routed. As Reserve Sell Order E is a sweep limit order, it stands its ground.

Step 3f: Away Market Center Routes an Order Over the Linkage, Depleting the Reserve Order's Displayed Size

→Away Market B routes an order to the market center over the linkage:

Buy 20 @ 1.90

Generally speaking, an incoming linkage order sent by an away market center 24 is executed on the market center 20 in much the same manner as an order sent directly by a user, except that in this embodiment, incoming linkage orders are not eligible for participation in any market maker entitlement process. In a different embodiment, however, incoming linkage orders may be eligible for participation in the LMM Guarantee Process. Additionally, nonmarketable linkage orders are canceled rather than posted. Accordingly, the incoming linkage order is received in step 1000 and is processed in this example using the same logic as is used for orders sent by order sending firms 26 and market makers 31 except for the limitations just described.

In step 1002, the process retrieves the NBO (1.90), and in step 1004, checks if the incoming linkage buy order is greater than or equal to the NBO. As linkage orders currently only execute at the NBBO, the Too-Executable Buy Order Check Process of step 1010 is bypassed.

The process continues to step 1011, where it generates a virtual consolidated order and quote list. As no orders or quotes have changed since the virtual consolidated order and quote list was created in the prior step, it looks the same as before:

Bids Offers Source Bid details Source Offer details Away Market B Bid 30 @ 1.90 Order E Sell 20 @ 1.90 Timestamp = 11:15:06 Show Size = 20, Quantity in reserve = 40 Timestamp = 11:14:17 Order A Buy 20 @ 1.85 Order C Sell 50 @ 1.95 LMM Bid 30 @ 1.85 LMM Offer 60 @ 1.95 Order B Buy 10 @ 1.80 Away Market A Offer 40 @ 2.00 Away Market A Bid 30 @ 1.80 Away Market B Offer 20 @ 2.05 Order D Sell 10 @ 2.10

As incoming linkage orders are not eligible to participate in any market maker guarantees in this embodiment, the process bypasses step 1012 and continues to step 1020, where it checks if the incoming linkage buy order is marketable. As it is, the process continues to step 1028, where it checks if any away market offers are superior to the market center's offers. As none are (Reserve Sell Order E is alone at the NBO), the process continues to step 1034, where it initiates the Determine Best Resident Offer Process and proceeds to step 1100 (FIG. 11).

In step 1102, the process checks if there are any displayed sell orders or market maker quotes at the NBO. As Reserve Sell Order E is alone at the NBO, the process continues to step 1104, where it retrieves the order. As Reserve Sell Order E is not a market maker quote, the process continues to step 1107, where it matches the incoming linkage buy order with the 20 displayed contracts of Reserve Sell Order E, completely depleting its displayed size. In step 1108, the process flags Reserve Sell Order E for replenishment, and continues to step 1110, where it returns to the step where it was originally initiated, back to step 1034 (FIG. 10B).

The virtual consolidated order and quote list momentarily looks like this:

Bids Offers Source Bid details Source Offer details Away Market B Bid 30 @ 1.90 Order E Sell 0 @ 1.90 ← Timestamp = 11:15:06 Show Size = 20, Quantity in reserve = 40 Timestamp = 11:14:17 ReplenishFlag = Y Order A Buy 20 @ 1.85 Order C Sell 50 @ 1.95 LMM Bid 30 @ 1.85 LMM Offer 60 @ 1.95 Order B Buy 10 @ 1.80 Away Market A Offer 40 @ 2.00 Away Market A Bid 30 @ 1.80 Away Market B Offer 20 @ 2.05 Order D Sell 10 @ 2.10

The process continues to step 1038, where it checks if the incoming linkage buy order has any quantity remaining. As it does not, the process continues to step 1042, where it checks if any resting reserve sell orders have been flagged for replenishment. As Reserve Sell Order E has been flagged, the process continues to step 1044, where it initiates the Replenish Reserve Sell Order Process and proceeds to step 900 (FIG. 9A).

Step 3g: Reserve Order Routes to the Away Market Center while Contemporaneously Posting its Replenished Displayed Size

In step 902, the process retrieves the first reserve sell order flagged for replenishment, Reserve Sell Order E. In step 904, it checks if the order still has any quantity remaining in reserve. As Reserve Sell Order E still has 40 contracts in reserve, the process continues to step 910, where it updates the timestamp of Reserve Sell Order E. In step 912, the process checks if Reserve Sell Order E's price (1.90) locks or crosses the NBB (1.90). As Reserve Sell Order E's price locks the NBB, the process continues to step 913, where it generates a virtual consolidated order and quote list. As the order book and quote books have not changed since the prior step, it looks the same as before.

The process continues to step 914, where it initiates the LMM Guaranteed Bid Process and proceeds to step 1600 (FIG. 14A). In step 1602, the process retrieves the LMM's Bid (1.85). In step 1604, it checks if the LMM's Bid is at the NBB (1.90). As the LMM's Bid is inferior to the NBB, the process continues to step 1606, where it returns to the step where it was originally initiated, back to step 914 (FIG. 9A).

The process then continues to step 915, where it checks if Reserve Sell Order E's underlying order type is allowed to route. As sweep limit orders are allowed to route, the process continues to step 924, where it checks if Reserve Sell Order E should route before it is replenished. As Away Market B's bid has not been satisfied by any prior sell orders routed to it, it must be satisfied now contemporaneously with Reserve Sell Order E locking the NBB. Accordingly, the process continues to step 926, where it releases Reserve Sell Order E to the Routing Process, which routes 30 contracts, the lesser of Away Market B's bid size (30 contracts) and the total quantity remaining in reserve in Reserve Sell Order E (40 contracts), at Away Market B's bid price of 1.90.

The process continues to step 928, where it checks if Reserve Sell Order E still has any quantity remaining after routing. As it still has 10 contracts, the process continues to step 942, where the process replenishes the displayed size of Reserve Sell Order E to 10 contracts, the lesser of its user-specified Show Size (20 contracts) and the quantity remaining in reserve (10 contracts).

In step 944, the process re-ranks the displayed portion of Reserve Sell Order E in the Display Order Process according to its new price/time priority. As Reserve Sell Order E has no quantity in reserve, the process bypasses step 946. In step 948, the process disseminates the 10 displayed contracts to the public order book.

→The NBBO is 1.90 to 1.90 (30×10). The market is still locked.

The virtual consolidated order and quote list now looks like this:

Bids Offers Source Bid details Source Offer details Away Market B Bid 30 @ 1.90 Order E Sell 10 @ 1.90 ← Timestamp = 11:15:06 Show Size = 20, Quantity in reserve = 0 Timestamp = 11:15:22 Order A Buy 20 @ 1.85 Order C Sell 50 @ 1.95 LMM Bid 30 @ 1.85 LMM Offer 60 @ 1.95 Order B Buy 10 @ 1.80 Away Market A Offer 40 @ 2.00 Away Market A Bid 30 @ 1.80 Away Market B Offer 20 @ 2.05 Order D Sell 10 @ 2.10

The internal order book 29a now looks like this:

Bids Offers Source Bid details Source Offer details Order A Buy 20 @ 1.85 Order E Sell 10 @ 1.90 ← Show Size = 20, Quantity in reserve = 0 Timestamp = 11:15:22 Order B Buy 10 @ 1.80 Order C Sell 50 @ 1.95 Order D Sell 10 @ 2.10

→The market center BBO is 1.85 to 1.90 (50×10)

The public order book looks like this:

Published Bids Published Offers 50 @ 1.85 10 @ 1.90 ← 10 @ 1.80 110 @ 1.95 10 @ 2.10

Away Market B fills the 30 contracts routed to it. The virtual consolidated order and quote list is deleted from local memory.

While the invention has been discussed in terms of certain embodiments, it should be appreciated that the invention is not so limited. The embodiments are explained herein by way of example, and there are numerous modifications, variations and other embodiments that may be employed that would still be within the scope of the present invention.

Claims

1. A method for trading reserve orders in an electronic options trading environment with market maker participation, comprising:

providing a market center which lists a plurality of options series in a market with an NBBO, wherein the market center has an order book for each option series and a quote book for each option series, wherein the order book has a displayed interest component and a nondisplayed interest component; wherein a plurality of the option series have an appointed lead market maker;

receiving an incoming reserve order having a total size with a portion of the order for display and a reserve portion of the order that is not displayed;

determining if the reserve order is marketable;

determining if the reserve order is for an option series that has a lead market maker;

determining if the lead market maker has a quote at the NBBO;

wherein if the reserve order is marketable and the lead market maker has a quote at the NBBO, computing an allocation percentage for the lead market maker; and

matching the incoming reserve order up to the lesser of the total size of the reserve order or the computed allocation percentage amount for the lead market maker.

2. The reserve order trading method of claim 1, wherein the computation of the allocation percentage for the lead market maker is based on the total size of the reserve order.

3. The reserve order trading method of claim 1, wherein the incoming reserve order is a sweep limit order with reserve.

4. The reserve order trading method of claim 1, wherein the incoming reserve order is a inside limit order with reserve.

5. The reserve order trading method of claim 1, wherein the incoming reserve order is an exchange-restricted order with reserve.

6. The reserve order trading method of claim 1, wherein the incoming reserve order is a discretionary order with reserve.

7. The reserve order trading method of claim 1, further comprising, prior to computing the lead market maker allocation percentage:

determining if the order book has at least one customer order at the NBBO;

wherein if the order book does have at least one customer order at the NBBO, determining if the at least one customer order is displayed and was posted to the order book prior to the lead market maker quote at the NBBO;

wherein if the at least one customer order at the NBBO is displayed and was posted to the order book prior to the lead market maker quote at the NBBO, matching the incoming order with the at least one customer order.

8. The reserve order trading method of claim 7, wherein the at least one customer order that was posted to the book prior to the lead market maker quote at the NBBO is a resting reserve order having a total size with a portion of the order for display and a reserve portion of the order that is not displayed, further comprising:

matching the incoming order with the displayed portion of the reserve order and not the reserve portion of the reserve order; and

then proceeding to compute the lead market maker allocation percentage.

9. The reserve order trading method of claim 7, wherein if the at least one customer order at the NBBO was posted to the order book after the lead market maker quote at the NBBO, proceeding to compute the lead market maker allocation percentage.

10. The reserve order trading method of claim 7, wherein if the at least one customer order at the NBBO is not displayed, proceeding to compute the lead market maker allocation percentage.

11. The reserve order trading method of claim 1, wherein the lead market maker has a quote at the NBO.

12. The reserve order trading method of claim 1, wherein the lead market maker has a quote at the NBB.

13. The reserve order trading method of claim 1, further comprising determining if the incoming reserve order is too executable.

14. The reserve order trading method of claim 1, further comprising:

providing at least one appointed market maker in the option series in addition to the lead market maker;

wherein the incoming reserve order is from a specified order sending firm and is directed to and designates the at least one appointed market maker;

determining if the order sending firm is permissioned to direct orders to the designated market maker;

wherein if the order sending firm does have permission to direct orders to the designated market maker, determining if the designated market maker has a quote at the NBBO;

wherein if the designated market maker has a quote at the NBBO, computing an allocation percentage for the designated market maker;

matching the incoming reserve order up to the lesser of the total size of the reserve order or the computed allocation percentage amount for the designated market maker.

15. The reserve order trading method of claim 14, further comprising, prior to computing the designated market maker allocation percentage:

determining if the order book has at least one customer order at the NBBO;

wherein if the order book does have at least one customer order at the NBBO, determining if the at least one customer order is displayed and was posted to the order book prior to the designated market maker quote at the NBBO;

wherein if the at least one customer order is displayed and was posted to the order book prior to the designated market maker quote at the NBBO, matching the incoming reserve order with the at least one customer order.

16. The reserve order trading method of claim 15, wherein if the at least one customer order was posted to the order book after the designated market maker quote at the NBBO, proceeding to compute the designated market maker allocation percentage.

17. The reserve order trading method of claim 15, wherein if the at least one customer order at the NBBO is not displayed, proceeding to compute the designated market maker allocation percentage.

18. The reserve order trading method of claim 14, wherein the designated market maker has a quote at the NBO.

19. The reserve order trading method of claim 14, wherein the designated market maker has a quote at the NBB.

20. The reserve order trading method of claim 1, wherein the market center includes a display order process and wherein after the incoming reserve order is matched with the lead market maker quote, processing the incoming reserve order in the display order process.

21. The reserve order trading method of claim 20, wherein the market center includes a working order process and wherein after the incoming reserve order is matched in the display order process, processing the incoming reserve order in the working order process.

22. The reserve order trading method of claim 1, wherein the market center includes a routing process and wherein the incoming reserve order is processed by the routing process.

23. A market center which lists a plurality of options series and handles reserve order trading, comprising:

an order book for each option series and a quote book for each option series, wherein the order book has a displayed interest component and a nondisplayed interest component; wherein a plurality of the option series have an appointed lead market maker;

an interface for receiving orders and an interface for receiving quotes;

a market center memory for storing code for analyzing and processing orders and quotes;

a processor for interacting with the interfaces and executing the code for analyzing and processing quotes and orders, wherein the code, when executed:

receives an incoming reserve order having a total size with a portion of the order for display and a reserve portion of the order that is not displayed;

determines if the reserve order is marketable;

determines if the reserve order is for an option series that has a lead market maker;

determines if the lead market maker has a quote at the NBBO;

wherein if the reserve order is marketable and the lead market maker has a quote at the NBBO, computes an allocation percentage for the lead market maker; and

matches the incoming reserve order up to the lesser of the total size of the reserve order or the computed allocation percentage amount for the lead market maker.

24. A method for trading reserve orders in an electronic options trading environment with market maker participation, comprising:

providing a market center which lists a plurality of options series in a market with an NBBO, wherein the market center has an order book for each option series and a quote book for each option series, wherein the order book has a displayed interest component which is processed in a display order process and a nondisplayed interest component which is processed in a working order process; wherein a plurality of the option series have an appointed lead market maker;

posting a reserve order having a total size with a portion of the order for display and a reserve portion of the order that is not displayed on the market center;

receiving an incoming order on the side of the order book opposite to the posted reserve order;

determining if the incoming contra side order is for an option series that has a lead market maker;

determining if the lead market maker has a quote at the NBBO;

wherein if the lead market maker has a quote at the NBBO, computing an allocation percentage for the lead market maker;

matching the incoming contra side order up to the lesser of the total size of the incoming contra side order or the computed allocation percentage amount for the lead market maker; and

after matching the incoming contra side order with the lead market maker quote, matching at least a portion of the remainder of the incoming contra side order with the displayed portion of the posted reserve order.

25. The reserve order trading method of claim 24, wherein the posted reserve order is a sweep limit order with reserve.

26. The reserve order trading method of claim 24, wherein the posted reserve order is an inside limit order with reserve.

27. The reserve order trading method of claim 24, wherein the posted reserve order is an exchange-restricted order with reserve.

28. The reserve order trading method of claim 24, wherein the posted reserve order is a discretionary order with reserve.

29. The reserve order trading method of claim 24, wherein the posted reserve order is a primary peg order with reserve.

30. The reserve order trading method of claim 24, wherein the posted reserve order is a market peg order with reserve.

31. The reserve order trading method of claim 24, further comprising, prior to computing the lead market maker allocation percentage:

determining if the posted reserve order is at the NBBO;

wherein if the posted reserve order is at the NBBO, determining if the posted reserve order was posted to the order book prior to the lead market maker quote at the NBBO;

wherein if the posted reserve order was posted to the book prior to the lead market maker quote at the NBBO, matching the incoming contra side order with the displayed portion of the reserve order and not the reserve portion of the posted reserve order; and

then proceeding to compute the lead market maker allocation percentage.

32. The reserve order trading method of claim 24, wherein the displayed portion of the posted reserve order is depleted during matching with the incoming contra side order and further comprising:

flagging the depleted display portion of the reserve order for replenishment;

executing the remainder of the incoming contra side order in the display order process,

executing the remainder of the incoming contra side order with the reserve portion of the depleted reserve order in the working order process; and

contemporaneously replenishing the depleted display portion of the reserve order.

33. The reserve order trading method of claim 32, wherein the market center has a lead market maker guaranteed entitlement routine and a routing routine and wherein if the NBBO is locked or crossed when the reserve order is replenished, further comprising:

prior to replenishing the reserve order, activating the lead market maker guaranteed entitlement routine and the routing routine;

attempting to process the reserve order in the lead market maker guaranteed entitlement routine,

processing the replenished reserve order in the routing routine; and

then replenishing the depleted display portion of the replenished reserve order.

34. The reserve order trading method of claim 24, wherein the lead market maker has a quote at the NBO.

35. The reserve order trading method of claim 24, wherein the lead market maker has a quote at the NBB.

36. The reserve order trading method of claim 24, further comprising:

providing at least one appointed market maker in the option series in addition to the lead market maker;

wherein the incoming order is from a specified order sending firm and is directed to and designates the at least one appointed market maker;

determining if the order sending firm is permissioned to direct orders to the designated market maker;

wherein if the order sending firm does have permission to direct orders to the designated market maker, determining if the designated market maker has a quote at the NBBO;

wherein if the designated market maker has a quote at the NBBO, computing an allocation percentage for the designated market maker;

matching the incoming order up to the lesser of the total size of the incoming order or the computed allocation percentage amount for the designated market maker.

37. The reserve order trading method of claim 36, further comprising, prior to computing the designated market maker allocation percentage:

determining if the order book has at least one customer order at the NBBO;

wherein if the order book does have at least one customer order at the NBBO, determining if the at least one customer order is displayed and was posted to the order book prior to the designated market maker quote at the NBBO;

wherein if the at least one customer order is displayed and was posted to the order book prior to the designated market maker quote at the NBBO, matching the incoming order with the at least one customer order.

38. The reserve order trading method of claim 37, wherein if the at least one customer order was posted to the order book after the designated market maker quote at the NBBO, proceeding to compute the designated market maker allocation percentage.

39. The reserve order trading method of claim 37, wherein if the at least one customer order at the NBBO is not displayed, proceeding to compute the designated market maker allocation percentage.

40. The reserve order trading method of claim 36, wherein the designated market maker has a quote at the NBO.

41. The reserve order trading method of claim 36, wherein the designated market maker has a quote at the NBB.

42. The reserve order trading method of claim 24, wherein the market center includes a routing process and wherein the incoming reserve order is processed by the routing process.

43. A market center which lists a plurality of options series and handles reserve order trading, comprising:

an order book for each option series and a quote book for each option series, wherein the order book has a displayed interest component and a nondisplayed interest component; wherein a plurality of the option series have an appointed lead market maker;

an interface for receiving orders and an interface for receiving quotes;

a market center memory for storing code for analyzing and processing orders and quotes;

a processor for interacting with the interfaces and executing the code for analyzing and processing quotes and orders, wherein the code, when executed:

posts a reserve order having a total size with a portion of the order for display and a reserve portion of the order that is not displayed on the market center;

receives an incoming order on the side of the order book opposite to the posted reserve order;

determines if the incoming contra side order is for an option series that has a lead market maker;

determines if the lead market maker has a quote at the NBBO;

wherein if the lead market maker has a quote at the NBBO, computes an allocation percentage for the lead market maker;

matches the incoming contra side order up to the lesser of the total size of the incoming contra side order or the computed allocation percentage amount for the lead market maker; and

after matching the incoming contra side order with the lead market maker quote, matches at least a portion of the remainder of the incoming contra side order with the displayed portion of the posted reserve order.