Patent Issued for Secure messaging systems and methods using intelligent probabilistic volatility servers (USPTO 11854079): North American Derivatives Exchange Inc.

2024 JAN 16 (NewsRx) -- By a News Reporter-Staff News Editor at Insurance Daily News -- From Alexandria, Virginia, NewsRx journalists report that a patent by the inventors Nafeh, John (Portola Valley, CA, US), Yee, Kenton K. (Stanford, CA, US), filed on April 3, 2020, was published online on December 26, 2023.

The patent’s assignee for patent number 11854079 is North American Derivatives Exchange Inc. (Chicago, Illinois, United States).

News editors obtained the following quote from the background information supplied by the inventors: “General George Patton is reputed to have once said, “Take calculated risks. That is quite different from being rash.” General Patton’s attitudes about risk had far-reaching implications indeed, in that the decisions he made and the risks he took sometimes cost the lives of men in battle. But the notion of calculated risk goes well beyond warfare; it is a process that we all engage in as we make the daily decisions that define our lives. And the fact remains that most of the risks-economic and otherwise-that individuals face in their lives are not shared by society. As inefficient and insecure as it may seem, “we allow our standards of living to be determined substantially by a game of chance.”

“Over the years a number of instruments have emerged that enable people to “hedge their bets” in the face of risk. Insurance, in its many forms, is the classic example of a hedge instrument. So too, is the futures market for hedging the price of commodities. In fact, a futures market can exist for anything, functioning as a market where bets can be placed on the course of the price or index that defines that market. Hedging in any market-whether it be commodities, real estate, or anything with any kind of economic consequences-is essentially the same as buying insurance against price changes.

“A number of financial management systems have been proposed in the past. Exemplary systems include U.S. Pat. Nos. 4,232,367, 4,633,397, 4,742,457, 4,752,877, 4,766,539, 4,839,804, 4,876,648, 5,083,270, 5,101,353, 5,136,501 and 5,206,803. Broadly speaking, the prior art has proposed several methods to transfer the types of risks, which are common to many people. These include banks, insurers, equities and commodities exchanges, the bond and swap markets, and mutual funds, each of which developed from a recognition that numerous parties with similar risk exposures needed effective methods of transfer and a means of determining the value of risk transfer at any given time.

“These structures operate on the basis of transferring risk to an entity which utilizes one of two primary forms of capital structure: a capital leveraging system (banks and insurance companies) or a capital matching system (the exchanges and markets).

“Under the capital leveraging system, an insurer may accept any type or amount of risk, subject to internal underwriting guidelines and regulatory restrictions. This format provides a significant degree of flexibility in the pricing, terms, and limits of risks accepted. These insurers operate on the premise that premiums cover claims. Their capital is available to pay claims if losses exceed premiums and investment income. The aggregate of policy liabilities though, is generally much larger than their combined premium and capital. So, like a bank, which could not pay if all depositors asked for their money, insurance companies are not generally designed to pay if all policies claimed their limits.

“Leveraging capital, i.e., a small amount of capital compared to the risk exposures assumed, translates a small underwriting profit on premium into a substantial return on capital. Conversely, a relatively small loss over premium results in a significant loss to capital. This system does not absolutely assure an insurer’s ability to pay in that an insurer’s policy limits are generally much larger than its assets. Hence, an insurer must only accept risks common to many people, limiting its exposure to each single risk to a small percentage of its capital, and relying on geographic and risk type diversification, as well as reinsurance, to protect its shareholder’s capital. This works well when losses are predictable. It is when insurers accept unique or difficult-to-place risks that premium as well as capital may not be sufficient to cover claims. Even Lloyd’s of London (which operates in a manner similar to a collection of small insurance companies with the exception that should losses exceed available funds, its underwriting members, similar to shareholders, can be forced, in theory, to pay up to the limit of their assets) has experienced such difficulties.

“Under the prior art, insurance policies have provided security to insureds based on and no greater than the general claims paying ability rating (the ability to pay claims) of an insurer to perform its obligations. Although reinsurance has sometimes been available, reinsurance policies likewise protect the insurer only to the extent of the reinsurance company’s capacity to pay loss claims as they accrue.

“In contrast, a capital matching system such as an exchange, accepts risk by matching buyers and sellers, i.e., parties transfer risk to those accepting it, in effect matching risk to capital. Under this system parties transfer or accept risks which are easily quantified in comparatively small units, such as through futures and options contracts. It limits the types and conditions under which parties may transfer to specifically defined contractual units, priced by the marketplace, being a price agreed between those parties wishing to transfer risk and those willing to accept it.

“These narrowly defined contracts offer little flexibility in the risk being accepted. Although each investor can select the type and amount of risk accepted, parties transferring risks are not concerned with the performance of a specific party having accepted a corresponding amount of risk. The exchange stands as the intermediary between all parties, perfectly matched, with its only exposure being the credit performance of any one participant. Like Lloyd’s, these parties’ assets can be attached to secure their performance.

“Each system operates on the basis of accepting risks which are common to large numbers of people. As financial transactions and our world in general grow more complex, certain types of risk exposures have become increasingly difficult to transfer in today’s markets. In the insurance markets, catastrophic events and judicial reinterpretation have caused a contraction in some types of insurance capacity. It appears that today’s insurance markets are frequently unable or unwilling to facilitate the transfer of unique risks such as those with a high possibility of loss, where the loss could come earlier rather than later or with more severity than projected. The exchanges have taken some steps toward addressing unique risks, such as catastrophe futures contracts, but again the terms are restrictive and do not easily integrate with the flexibility of a reinsurance contract. In essence, neither the exchanges nor mutual funds can accept a single unique risk.

“In spite of insurance companies and exchanges, the fact remains that there are no existing instruments that people can use to hedge most of the common, everyday risks they face. For example, workers have no direct way to hedge against the pain of prolonged work stoppage. Retailers have no way to hedge against macroeconomic surprises in the global economy which could impact the availability of inventory items. And individuals have no way to hedge against government decisions-such as war, economic embargoes, legislation and a myriad of other possibilities-that could substantially impact their livelihoods.

“One limited attempt to address the above shortcomings has been presented by the Iowa Electronic Markets (IEM), which are operated by faculty at the University of Iowa Tippie College of Business as part of a research and teaching mission. The IEM are real-money futures markets in which contract payoffs depend on economic and political events such as elections. More specifically, the IEM is a real-money, small-scale futures exchange in which the ultimate values of the contracts traded are determined by political events, financial events and economic indicators or other real-world events such as companies’ earnings per share (EPS) or stock price returns. Participants in these markets invest their own funds, buy and sell listed contracts, and bear the risk of losing money as well as earning profits.

“The exclusive purposes of the IEM are teaching and research. Through the IEM as a teaching device, participants learn first-hand about the operation of a financial market. Because they have an added incentive to do so, they often become better informed about events determining the ultimate value of the contract being traded-be that a political race, the earnings per share of a company, the stock return of a company, or the exchange rate between a foreign currency and the dollar. Through the IEM as a research venture, the markets provide insights into market and trader behavior. Participation in the IEM is open to students, faculty, and staff at colleges and universities worldwide; IEM political markets are also open to non-academic participants.

“The IEM is operated as a not-for-profit venture. No commissions or transactions fees are charged, and the method of issuing contracts and making final payoffs on these contracts ensures that the IEM does not realize financial profits or suffer losses from market transactions. Although the IEM is under the regulatory purview of the Commodity Futures Trading Commission (CFTC), it is not regulated by, nor are its operator registered with, the CFTC or any other regulatory authority.

“As noted above, the market operates on computer systems at the Henry B. Tippie College of Business of the University of Iowa; traders gain access through the World Wide Web. At the time of this writing, the home page for the IEM is http://www.biz.uiowa.edu/iem/index.html.

“While the IEM goes somewhat beyond traditional commodity futures in the types of contracts which are offered, much of the system is modeled on conventional futures trading principles. Accordingly, IEM, like other traditional risk hedging methods such as insurance, offers a limited variety of contracts and provides incomplete markets and thus restricts opportunities for risk management.”

There is additional summary information. Please visit full patent to read further.

As a supplement to the background information on this patent, NewsRx correspondents also obtained the inventors’ summary information for this patent: “In spite of existing brick and mortar futures markets, there exists a continuing need for additional futures markets to facilitate the vast variety of risk management needs. As described in the Prior Art section, liquidity is the lifeblood of existing futures markets. Traditional futures markets such as the CME require a minimum trading volume before they are able to sanction and administer the trading of a security. Without a rather high minimum trading volume, the market cannot break even.

“Accordingly, in view of the shortcomings of prior art, it is an object of the present invention to provide a risk hedging, contract trading system whereby prospective traders can transact with each other with low transaction overhead, in real-time, near instantaneous speed, twenty-four hours-per-day, 7 days-per-week, and without any intermediary or broker.

“It is also an object of the present invention to enable and provide markets, for trading to any interested parties, risk hedging contracts pertaining to a virtually unlimited range of possible events.

“It is also an object of the present invention to enable and provide a system for creating and managing markets for risk hedging contracts having de minimus transaction costs so that a minimum market size or trading volume is not necessary for efficiency, practicality or viability.

“It is a further object of the present invention to act as an umbrella aggregator, facilitator, administrator and electronic platform for supporting a nearly unlimited number of simultaneous trading markets in hedge instruments, and to act as a disseminator of information pertaining to the activities on these markets.”

The claims supplied by the inventors are:

“1. A redundant and load sharing system comprising: two separate systems at a single location operating on a same switched high speed secure local area network comprising an intelligent probabilistic volatility server incorporating load balancing and machine dynamic learning utilizing a blockchain to record transactions including a blockchain database managed autonomously using a peer-to-peer network and a distributed timestamping server, each separate system further comprising: a means for establishing a contract trading system electronically accessible by traders, the contract trading system including a plurality of trading accounts having encrypted passwords, each trader on the contract trading system being associated with at least one of the plurality of trading accounts; a means for establishing on the contract trading system at least two contracts for a future event designated contract “A” and contract “B”, where contract “A” pays off a fixed nonzero monetary sum if a state “s1” occurs on an expiration designated “T” and contract “B” pays off the fixed nonzero monetary sum if a state “s2” occurs on the expiration designated “T”, and where contract “A” pays off a zero sum if the state “s2” occurs on the expiration designated “T” and contract “B” pays off the zero sum if the state “s1” occurs on the expiration designated “T”, and where states “s1” and “s2” are each mutually exclusive of each other and together represent all possible outcomes at the expiration designated “T”, and where the fixed nonzero monetary sum is known when an at least two contracts bundle is established; a means for selling over the contract trading system at least one of the contracts; a means for settling the at least one of the contracts against the trading account of the trader of the at least one of the contracts; a means for assessing a transaction fee for at least one of steps of selling or settling of the at least one of the contracts; a hardware based random number generator randomly prioritizing two or more orders received simultaneously in real time from geographically dispersed traders and directing a prioritized order to a validator, the validator freezing an asset corresponding to the prioritized order and directing the prioritized order to a switch; and the switch communicatively coupled to the validator, the switch receiving the prioritized order from the validator, and directing the prioritized order to an order matcher, the order matcher having an order matching subsystem, the order matching subsystem processing the prioritized order according to a price-time priority algorithm, the price-time priority algorithm comprising: if a price of the prioritized order is not better than or equal to a best contra order listed in an order book, then the prioritized order will be added to the order book in a unique position reflecting its price and time priority information; if the price of the prioritized order is better than or equal to the best contra order listed in the order book, then the prioritized order will be matched against that contra order at a price of that contra order; if this does not fill a quantity of the prioritized order, then the order matching subsystem will match a remainder of the prioritized order with lower priority contra orders in the order book until the quantity of the prioritized order has been satisfied or there are no orders remaining on a contra side at a price equal to or better than the price of the prioritized order; and any remaining quantity after all possible executions have been generated will be placed into the order book in a position reflecting its price and time order placed priority.

“2. The system of claim 1, wherein the future event is rainfall.

“3. The system of claim 1, wherein the future event is snowfall.

“4. The system of claim 1 further comprising: a means for saving records for compliance with Commodity Exchange Act (CEA).

“5. The system of claim 1, wherein “s1” and “s2” represent all possible outcomes of a future event.

“6. The system of claim 1, wherein the future event is a catastrophic event.

“7. The system of claim 6, wherein the catastrophic event is an earthquake.

“8. The system of claim 1, wherein the future event is an election.

“9. The system of claim 8, wherein the election is a Presidential election.

“10. A system comprising: an intelligent probabilistic volatility server incorporating load balancing and machine dynamic learning operating on a switched high speed secure local area network utilizing a blockchain to record transactions including a blockchain database managed autonomously using a peer-to-peer network and a distributed timestamping server, the intelligent probabilistic volatility server having a hardware processor and a memory for storing executable instructions, the executable instructions comprising: establishing a contract trading system electronically accessible by traders, the contract trading system including a plurality of trading accounts having encrypted passwords, each trader on the contract trading system being associated with at least one of the plurality of trading accounts; establishing on the contract trading system at least two contracts for a future event designated contract “A” and contract “B”, where contract “A” pays off a fixed nonzero monetary sum if a state “s1” occurs on an expiration designated “T” and contract “B” pays off the fixed nonzero monetary sum if a state “s2” occurs on the expiration designated “T”, and where contract “A” pays off a zero sum if the state “s2” occurs on the expiration designated “T” and contract “B” pays off the zero sum if the state “s1” occurs on the expiration designated “T”, and where states “s1” and “s2” are each mutually exclusive of each other and together represent all possible outcomes at the expiration designated “T”, and where the fixed nonzero monetary sum is known when an at least two contracts bundle is established; selling over the contract trading system using an interactive graphical user interface, at least one of the contracts; settling, using the interactive graphical user interface, the at least one of the contracts against the trading account of the trader of the at least one of the contracts; and assessing a transaction fee for at least one of the selling and the settling of the at least one of the contracts; a hardware based random number generator randomly prioritizing two or more orders received simultaneously in real time from geographically dispersed traders and directing a prioritized order to a validator, the validator freezing an asset corresponding to the prioritized order and directing the prioritized order to a switch; and the switch communicatively coupled to the validator, the switch receiving the prioritized order from the validator, and directing the prioritized order to an order matcher, the order matcher having an order matching subsystem, the order matching subsystem processing the prioritized order according to a price-time priority algorithm, the price-time priority algorithm further comprising: if a price of the prioritized order is not better than or equal to a best contra order listed in an order book, then the prioritized order will be added to the order book in a unique position reflecting its price and time priority information; if the price of the prioritized order is better than or equal to the best contra order listed in the order book, then the prioritized order will be matched against that contra order at a price of that contra order; if this does not fill a quantity of the prioritized order, then the order matching subsystem will match a remainder of the prioritized order with lower priority contra orders in the order book until the quantity of the prioritized order has been satisfied or there are no orders remaining on a contra side at a price equal to or better than the price of the prioritized order; and any remaining quantity after all possible executions have been generated will be placed into the order book in a position reflecting its price and time order placed priority.

“11. The system of claim 10, wherein the future event is rainfall.

“12. The system of claim 10, wherein the future event is snowfall.

“13. The system of claim 10 wherein the executable instructions further comprise: saving records for compliance with Commodity Exchange Act (CEA).

“14. The system of claim 10, wherein “s1” and “s2” represent all possible outcomes of a future event.

“15. The system of claim 10, wherein the future event is a catastrophic event.

“16. The system of claim 15, wherein the catastrophic event is an earthquake.

“17. The system of claim 10, wherein the future event is an election.

“18. The system of claim 17, wherein the election is a Presidential election.

“19. The system of claim 10, wherein the future event is an exchange rate between a foreign currency and a US dollar.

“20. The system of claim 10, wherein the future event is a price of a commodity or a market index.”

For additional information on this patent, see: Nafeh, John. Secure messaging systems and methods using intelligent probabilistic volatility servers. U.S. Patent Number 11854079, filed April 3, 2020, and published online on December 26, 2023. Patent URL (for desktop use only): https://ppubs.uspto.gov/pubwebapp/external.html?q=(11854079)&db=USPAT&type=ids

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