FEDERALLY SPONSORED RESEARCH OR DEVELOPMENT

Not Applicable.

COMPACT DISK APPENDIX

Not Applicable.

BACKGROUND

A financial exchange is a market, physical or electronic, in which shares, options, derivatives, futures, and other units of financial instruments are bought and sold. Financial instruments include, for example, equities, stocks, bonds, commodities, indexes, exchange-traded funds, and other instruments.

Exchange-traded funds (ETF), also known as exchange-traded products (ETP), are securities that represent a legal right of ownership over an underlying portfolio of securities or other assets held by the issuing fund. The assets held in an ETF may include individual stocks, bonds, cash, commodities, derivatives, or any tradable asset, including contracts based on the value of any of the foregoing. Shares of an ETF are designed to be listed on a securities exchange and traded over the exchange just like other securities. ETFs thus allow an investor to own a set or “basket” of assets by simply purchasing shares in the individual ETF.

ETFs have sometimes been viewed as a more liquid alternative to mutual funds. ETFs enable investors to gain a broad diversification and can be traded during market hours. In addition, ETFs enable institutional investors to quickly enter and exit positions, making them a valuable tool in situations where cash is needed to be raised quickly. Institutional investors may buy or sell creation units, which are the baskets of the underlying shares which make up each ETF.

A financial exchange matches bids to buy a particular financial instrument, such as a security, equity, option, or other instrument, with offers to sell that particular financial instrument and to identify a price and volume at which a trade for the financial instrument can be executed. The introduction of electronic trading systems into such exchanges has enabled investors to place orders for financial instruments over a computer network and receive the status of orders in near real time. These trading systems also report prices at which financial instruments are quoted, bought, and sold to reporting entities that consolidate trading information and disseminate trading data, such as a best bid or offer (BBO) for the financial instrument.

One advantage of such trading systems is that marketable orders generally can be executed immediately against available contra-side interests. An order is marketable when it is priced equal to or more aggressively than the contra side interest. For example, a buy order for a financial instrument is marketable when it is priced equal to or more aggressively than the current best offer for the financial instrument, and a sell order for a financial instrument is marketable when it is priced equal to or more aggressively than the current best bid for the financial instrument. In this context, more aggressive means higher for a bid to buy or lower for an offer to sell.

Lower levels of liquidity lead to greater bid-ask spreads, (i.e. spreads in prices between bids and offers) larger discrepancies between net asset value and the value of the underlying securities, and a decreased ability to trade profitably. It is preferable to reduce the difference in prices between the best bid to buy and the best offer to sell. Such a tighter market is better for market participants.

SUMMARY

In one aspect, a market liquidity incentive system selects market data for shares on the financial exchange's book for one or more selected times. The market data includes order data for resting shares, including the total number of resting shares from one or more orders of one or more financial instruments from each of one or more participants and the corresponding prices for the resting shares from each order, and the best bids to buy and/or best offers to sell for the financial instruments for the one or more selected times. For each selected time, the market liquidity system analyzes the order data and the best bids to buy and best offers to sell and increments a counter value by a selected value for each market participant that has the greatest total number of resting shares from one or more orders for a particular financial instrument at the financial instrument's best bid to buy or best offer to sell. The incentive system analyzes the counter values assigned to each market participant for a selected period and selects the market participant that has the highest counter value in the selected period to be the market participant that has earned an incentive.

In another aspect, a market liquidity incentive system selects market data for shares on the financial exchange's book for one or more selected times. The market data includes order data for resting shares, including the total number of resting shares from one or more orders of one or more financial instruments from each of one or more participants and the corresponding prices for the resting shares from each order, and the best bids to buy and/or best offers to sell for the financial instruments for the one or more selected times. For each selected time, the market liquidity system analyzes the order data and the best bids to buy and best offers to sell and increments a counter value by a selected value for each market participant that has the greatest total number of resting shares from one or more orders for a particular financial instrument at the financial instrument's best bid to buy and best offer to sell. The incentive system analyzes the counter values assigned to each market participant for a selected period and selects the market participant that has the highest counter value in the selected period to be the market participant that has earned an incentive.

In another aspect, the selected value is a unit. In another aspect, the selected value is the total number of resting shares from the one or more orders for the particular financial instrument at the financial instrument's best bid to buy or best offer to sell. In another aspect, the selected value is the total number of resting shares from the one or more orders for the particular financial instrument at the financial instrument's best bid to buy and best offer to sell.

In another aspect, the one or more selected times may be one or more time increments or one or more other selected times. In one example, the one or more selected times are one or more time increments. In another example, the one or more selected times are one or more one-second time increments. In another example, the one or more selected times are one or more times during a trading day. In another example, the one or more selected times alternately may be one or more randomized times or one or more non-randomized times. A combination of one or more of the forgoing may be made.

The selected period may be, for example, a trading day (including regular hours only, extended trading hours, auction hours, or a combination of one or more of the foregoing), a week with one or more trading days, a month with one or more trading days, an hour, multiple hours, or another period of time or events.

In one example, the market liquidity incentive system selects and compares the market data at the one or more selected times during the selected period. In another example, the market liquidity incentive system selects and compares the market data for the selected times, not necessarily at the one or more selected times and not necessarily during the selected period. In another example, the market liquidity incentive system analyzes the counter values for each market participant for the selected period, not necessarily at or during the selected period.

In another aspect, the market liquidity incentive system uses a parameter, such as an event parameter, instead of a counter. The market liquidity incentive system increments an event parameter by a value or assigns or otherwise stores a value to the event parameter for a market participant instead of incrementing a counter value for the market participant.

In another aspect, the market liquidity incentive system measures the total liquidity across a trading day for an aggregate best bid to buy and best offer to sell, instead of for a best bid to buy or best offer to sell. The aggregate best bid to buy and best offer to sell shares is the total number of shares at the best bid to buy plus the total number of shares at the best offer to sell. The market liquidity incentive system selects market data for shares on the financial exchange's book (e.g. resting shares), such as market data for one or more selected times during a trading day. The market data includes order data for resting shares, including the total number of resting shares from one or more orders of one or more financial instruments from each of one or more participants and the corresponding prices for the resting shares from each order, and the best bids to buy and/or best offers to sell for the financial instruments. The market liquidity incentive system has a counter for each market participant. The count or value for the counter may, for example, start at zero or another value. For each selected time, the market liquidity incentive system analyzes the order data and the best bids to buy and best offers to sell at that time (such as by comparing the order data for each market participant for the selected time) and increments a counter value of a market participant's counter for each market participant that has the greatest total number of resting shares from one or more orders from the market participant for a particular financial instrument at the financial instrument's best bid to buy and best offer to sell. In one example, the counter value is incremented by the total number of resting shares from the one or more orders for the particular financial instrument that were at the financial instrument's best bid to buy and best offer to sell for the selected time. In another example, the counter value is incremented by a unit, such as by 1 (e.g. from 0 to 1, from 1 to 2, etc) or another unit. The incentive system analyzes the counter values assigned to each market participant for a selected period to determine the market participant that has the highest counter value in the selected period (such as by comparing the values of each market participant's counter), such as a trading day, and selects the market participant that has the highest counter value in the selected period to be the market participant that has earned the incentive.

In another aspect, the market liquidity incentive system selects market data for shares on the financial exchange's book (e.g. resting shares), such as market data for a selected time point. The market data includes order data for resting shares, including the number of resting shares from one or more orders of one or more financial instruments from each of one or more participants and the corresponding prices for the resting shares, and financial instruments BBO data. Financial instrument BBO data includes data identifying the best bid to buy for a financial instrument and/or the best offer to sell for the financial instrument or such data for multiple financial instruments. The market liquidity incentive system has a counter for each market participant. The count or value for the counter may, for example, start at zero or another value. The market liquidity system analyzes the order data and the best bids to buy and best offers to sell (such as by comparing the order data for each participant) and increments a counter value for each market participant that has the greatest total number of resting shares from one or more orders for a particular financial instrument at the financial instrument's best bid or best offer for that selected point in time. The market liquidity incentive system optionally selects market data for the financial exchange for one or more additional points in time during a trading day, analyzes the order data and the BBO data for each additional point in time (such as by comparing the order data for each participant), and increments a counter value for each market participant that has the greatest total number of resting shares from one or more orders for a financial instrument at the best bid or best offer. The market liquidity incentive system analyzes the values of the counter assigned to each market participant to each other for a selected period (such as by comparing the values of each market participant's counter to the values of each other market participant's counter), such as a trading day or other period, and selects the market participant that has the highest counter value in the selected period to be the market participant that has earned the incentive.

For example, the market liquidity incentive system has an event parameter for each market participant. The market liquidity incentive system analyzes the order data and the best bids to buy and best offers to sell and increments an event parameter value of a market participant's event parameter for each market participant that has the greatest total number of resting shares from one or more orders for a particular financial instrument at the financial instrument's best bid to buy and/or best offer to sell. In one example, the event parameter value is incremented by the total number of resting shares from the one or more orders for the particular financial instrument that were at the financial instrument's best bid to buy and/or best offer to sell for the selected time. In another example, the event parameter value is incremented by a unit, such as by 1 (e.g. from 0 to 1, from 1 to 2, etc) or another unit. The market liquidity incentive system analyzes the event parameter values assigned to each market participant for a selected period to determine the market participant that has the highest event parameter value in the selected period (such as by comparing the values of each market participant's event parameter to the values of each other market participant's event parameter), such as a trading day, and selects the market participant that has the highest event parameter value in the selected period to be the market participant that has earned the incentive.

In one aspect, the market liquidity incentive system compares an aggregate number of shares of a financial instrument resting on the exchange's book from each of one or more market participants to a best bid or best offer for the financial instrument. The aggregate number of shares is the total number of shares from one or more orders from a market participant. The aggregate number of resting shares is the total number of resting shares from one or more orders from a market participant.

The market liquidity incentive system increments a count or value of an event parameter assigned to the market participant that has the greatest aggregate number of resting shares at the best bid or best offer at a selected time (alternately, when the comparison is made). The value for the parameter may, for example, start at zero. The market liquidity incentive system analyzes the parameter value assigned to each market participant for a selected period (such as by comparing the parameter values for each market participant) and selects the market participant that has the greatest event parameter value (for example, the highest value in the event parameter) in the selected period to be the market participant that has earned the incentive.

In another aspect, the market liquidity incentive system analyzes the aggregate number of resting shares of a financial instrument from one or more market participants on the exchange's book to a best bid or best offer for the financial instrument, such as by comparing the aggregate number of resting shares of a financial instrument for each market participant. The market liquidity incentive system assigns a unit of value to the market participant that has the greatest aggregate number of resting shares at the best bid and assigns a unit of value to the market participant that has the greatest aggregate number of resting shares at the best offer when the analysis is made. The market liquidity incentive system analyzes the number of units assigned to each market participant for a selected period, such as by comparing the number of units assigned to each market participant for the selected period. The market liquidity incentive system selects the market participant that has the greatest number of units in the selected period to be the market participant that has earned the incentive. In one aspect, the market liquidity incentive system awards, assigns, or issues the incentive to the selected market participant.

In another aspect, the market liquidity incentive system analyzes the aggregate number of resting shares of a financial instrument from one or more market participants on the exchange's book to a best bid or best offer for the financial instrument, such as by comparing the aggregate number of resting shares of a financial instrument for each market participant. The market liquidity incentive system assigns a unit of value to the market participant that has the greatest aggregate number of resting shares at the best bid and best offer when the analysis is made. The market liquidity incentive system analyzes the number of units assigned to each market participant for a selected period, such as by comparing the number of units assigned to each market participant for the selected period. The market liquidity incentive system selects the market participant that has the greatest number of units in the selected period to be the market participant that has earned the incentive. In one aspect, the market liquidity incentive system awards, assigns, or issues the incentive to the selected market participant.

In another aspect, the best bid is the current best bid for the financial instrument, and the best offer is the current best offer for the financial instrument.

In another aspect, the market liquidity incentive system performs one or more size event tests (SETs). A SET is a determination by the market liquidity incentive system of the aggregate order size of each financial instrument for each participant and the BBO data for each financial instrument. The aggregate order size is the total number of shares submitted by a participant in one or more orders and that are resting on the exchange's book at a selected time. The BBO data includes data identifying the best bid to buy for a financial instrument and/or the best offer to sell for the financial instrument or such data for multiple financial instruments. A SET result identifies a particular participant as being eligible for a reward or other incentive based on the aggregate order size of orders submitted by that particular participant that include eligible order prices at a best bid to buy and/or a best offer to sell. A participant earns (or wins) a SET when it has the greatest aggregate number of shares in one or more orders that are resting on the exchange's book for a selected time at a best bid to buy the financial instrument and/or a best offer to sell the financial instrument for the selected time.

A SET is performed at one or more test times or test periods. An incentive is awarded to the participant that earns (or wins) the most SETs during a selected period, such as an hour, day, week, month, a trading period, or other period.

In another aspect, a method determines a reward for a market participant submitting at least one order for a financial instrument in a financial market. The method includes identifying, by at least one processor, first order detail data included in each of a first one or more orders from a first market participant, the first order detail data for each first order comprising a first order price, a first instrument identification for a first financial instrument, a first participant identification for the first particular market participant, and a first order size. The method further includes identifying, by the at least one processor, second order detail data included in a second one or more orders received at the at least one processor from a second market participant, the second order detail data for each second order comprising a second order price, a second instrument identification for a second financial instrument, a second participant identification for the second market participant, and a second order size. The at least one processor performs a size event test to each of the first one or more orders and each of the second one or more orders, identifies a first number of the size event tests won by the first market participant and a second number of the size event tests won by the second market participant, and determines a reward amount for at least one of the first market participant and the second market participant based on the first number and the second number.

In another aspect, a market liquidity incentive system for an electronic financial exchange includes a processor, a memory with a counter for each of a plurality of market participants, and an application to be executed executes by the processor. The application, when executed by the processor, selects market data for resting shares on a book for the financial exchange for one or more selected times during a selected period. The market data includes order data for resting shares, including a total number of resting shares from one or more orders of one or more financial instruments from each of one or more participants and corresponding prices for the resting shares, and best bids to buy and best offers to sell for the financial instruments. For each selected time, the application analyzes the order data and the best bids to buy and best offers to sell and increments a counter value of a counter by a selected value for each market participant that has the greatest total number of resting shares from one or more orders for a particular financial instrument at the financial instrument's best bid to buy or best offer to sell. The application analyzes the counter values assigned to each market participant for the selected period to determine the market participant that has a highest counter value in the selected period, selects the market participant that has the highest counter value in the selected period to be the market participant that has earned an incentive, and applies the incentive to the selected market participant.

In another aspect, a market liquidity incentive system includes a processor, a memory with a counter for each of a plurality of market participants, an application to be executed by the processor. The application, when executed by the processor, selects market data for resting shares on an electronic financial exchange's book for one or more selected times during a selected period, the market data comprising order data for resting shares, including a total number of resting shares from one or more orders of one or more financial instruments from each of one or more participants and corresponding prices for the resting shares, and best bids to buy and best offers to sell for the financial instruments. For each selected time, the application analyzes the order data and the best bids to buy and best offers to sell and increment a counter value of a counter for a market participant by a selected value for each market participant that has a greatest total number of resting shares from one or more orders for a particular financial instrument at a financial instrument's best bid to buy or best offer to sell. The application analyzes the counter values assigned to each market participant for the selected period to determine the market participant that has a highest counter value in the selected period, selects the market participant that has the highest counter value in the selected period to be the market participant that has earned the incentive, and applies the incentive to the selected market participant.

In another aspect, a market liquidity incentive method includes, by at least one processor of an electronic financial exchange, selecting market data for resting shares on a book for the financial exchange for one or more selected times during a selected period, the market data comprising order data for resting shares, including a total number of resting shares from one or more orders of one or more financial instruments from each of one or more participants and corresponding prices for the resting shares, and best bids to buy and best offers to sell for the financial instruments. For each selected time, a counter value of a counter is incremented by a selected value for each market participant that has the greatest total number of resting shares from one or more orders for a particular financial instrument at the financial instrument's best bid to buy or best offer to sell. The counter values assigned to each market participant for the selected period are analyzed to determine the market participant that has a highest counter value in the selected period. The market participant that has the highest counter value in the selected period is selected to be the market participant that has earned an incentive. The incentive is applied to the selected market participant.

In another aspect, a market liquidity incentive method includes by at least one processor of an electronic financial exchange, selecting market data for resting shares on a financial exchange's book for one or more selected times during a selected period, the market data comprising order data for resting shares, including a total number of resting shares from one or more orders of one or more financial instruments from each of one or more participants and corresponding prices for the resting shares, and best bids to buy and best offers to sell for the financial instruments. For each selected time, a counter value of a counter for a market participant is incremented by a selected value for each market participant that has a greatest total number of resting shares from one or more orders for a particular financial instrument at a financial instrument's best bid to buy or best offer to sell. The counter values assigned to each market participant for the selected period are analyzed to determine the market participant that has a highest counter value in the selected period. The market participant that has the highest counter value in the selected period is selected to be the market participant that has earned the incentive. The incentive is applied to the selected market participant.

