Patent No. 8,244,622
`Petition For Covered Business Method Patent Review
`
`UNITED STATES PATENT AND TRADEMARK OFFICE
`_______________
`
`BEFORE THE PATENT TRIAL AND APPEAL BOARD
`_____________
`
`INVESTORS EXCHANGE LLC
`Petitioner
`
`v.
`
`NASDAQ, INC.
`Patent Owner
`
`Patent No. 8,244,622
`Issue Date: August 14, 2012
`Title: ORDER MATCHING PROCESS AND METHOD
`_______________
`
`Covered Business Method Review No.: CBM2018-00041
`____________________________________________________________
`
`PETITION FOR COVERED BUSINESS METHOD REVIEW
`UNDER 35 U.S.C. § 321 AND § 18 OF THE LEAHY-SMITH
`AMERICA INVENTS ACT
`
`
`
`
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`dc-958387
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`CBM2018-00041
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`TABLE OF CONTENTS
`
`
`
`
`I.
`II.
`
`B.
`
`Page
`INTRODUCTION .......................................................................................... 1
`BACKGROUND ............................................................................................ 3
`A.
`Financial Markets ................................................................................. 3
`1.
`The advent of financial markets ................................................. 3
`2.
`Stock exchange floors ................................................................ 4
`3.
`Order types ................................................................................. 6
`4.
`Order books ................................................................................ 9
`5.
`Reporting of trading information ............................................. 12
`6. Market automation ................................................................... 13
`Computer Science and Architecture ................................................... 15
`1. Memory management .............................................................. 15
`2.
`Computer processes ................................................................. 17
`III. SUMMARY OF THE ’622 PATENT .......................................................... 21
`A.
`Specification ....................................................................................... 21
`B.
`Claims ................................................................................................. 24
`C.
`File History ......................................................................................... 26
`D.
`Priority Date ....................................................................................... 27
`E.
`Level of Ordinary Skill in the Art ...................................................... 27
`IV. CLAIM CONSTRUCTION ......................................................................... 28
`V.
`STANDING AND CBM ELIGIBILITY ...................................................... 28
`A.
`Petitioner Has Been Sued for Infringement ....................................... 28
`B.
`The ’622 Patent Is Eligible for CBM Review .................................... 29
`1.
`Claims 1-30 are directed to a financial activity ....................... 29
`2.
`Claims 1-30 do not recite a technological invention ............... 32
`VI. THE ’622 PATENT IS INVALID ............................................................... 43
`A. GROUND 1: Claims 1-30 Are Invalid Under 35 U.S.C. § 101 ........ 44
`1.
`Step One: Claims 1-30 are directed to a patent-ineligible
`abstract idea .............................................................................. 45
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`CBM2018-00041
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`TABLE OF CONTENTS
`(continued)
`
`
`
`Page
`
`2.
`
`Step Two: Claims 1-30 do not recite any inventive
`concept ..................................................................................... 59
`B. GROUND 2: Claims 1-30 Are Invalid as Lacking Written
`Description Support Under 35 U.S.C. § 112 ¶ 1 ................................ 73
`C. NOTICES AND STATEMENTS ...................................................... 80
`VII. CONCLUSION ............................................................................................. 82
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`CBM2018-00041
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`Exhibit List
`
`Exhibit Description
`
`Exhibit #
`
`U.S. Patent No. 8,244,622 (“’622 Patent”)
`
`File History of ’622 Patent (“File History”)
`
`Declaration of Prof. Bernard S. Donefer (“Donefer Decl.”)
`
`Declaration of Dr. Benjamin Goldberg (“Goldberg Decl.”)
`
`David M. Weiss, After the Trade is Made: Processing Securities
`Transactions, (New Prentice Hall Press, 1993) (“After the Trade is
`Made”) (Excerpts)
`
`“Modern Operating Systems, Second Edition” Andrew S.
`Tanenbaum, 2001 (“Modern Operating Systems” or “Tanenbaum”)
`(Excerpts)
`
`U.S. Patent No. 6,850,906 to Chadha et al. (“Chadha”)
`
`William N. Goetzmann, Money Changes Everything: How Finance
`Made Civilization Possible (Princeton Univ. Press 2016) (“Money
`Changes Everything”) (Excerpts)
`Zvi Bodie, et al., Investments (McGraw-Hill Irwin eds., 6th ed. 2005)
`(“Investments”) (Excerpts)
`
`Securities and Exchange Commission Historical Society, Film, Radio
`and Television: “The Big Board,” New York Stock Exchange Film,
`available at http://www.sechistorical.org/museum/film-radio-
`television/video-
`player.php?vid=1398364160001&title=%22The%20Big%20Board,%
`22%20New%20York%20Stock%20Exchange%20Film (“The Big
`Board”)
`
`Joel Hasbrouck, et al., New York Stock Exchange Systems and
`Trading Procedures, (New Stock Exchange, Inc., Working Paper
`No. 93-01, 1993) (“NYSE Systems and Trading Procedures”)
`
`
`
`
`dc-958387
`
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`iii
`
`1001
`
`1002
`
`1003
`
`1004
`
`1005
`
`1006
`
`1007
`
`1008
`
`1009
`
`1010
`
`1011
`
`

`

`CBM2018-00041
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`Exhibit Description
`
`Exhibit #
`
`Kalman J. Cohen, et al., The Microstructure of Securities Markets
`(Prentice Hall, 1986) (“Microstructures of Securities”) (Excerpts)
`
`Aite Group, Market Fragmentation and Its Impact: a Historical
`Analysis of Market Structure Evolution in the United States, Europe,
`Australia, and Canada (August 2013) (“Market Fragmentation”)
`(Excerpts)
`
`New York Stock Exchange, NYSE overview statistics, available at,
`http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?m
`ode=table&key=268&category=14 (“NYSE Overview Statistics”)
`
`Morris Mendelson, Toward a Modern Exchange: the
`Peake-Mendelson-Williams Proposal for an Electronically Assisted
`Auction Market: Impending Changes for Securities Markets: What
`Role for the Exchanges? (Ernest Bloch and Robert Schwartz, eds.
`1979) (“Impending Changes”) (Excerpts)
`
`Nasdaq, Designated Order Turnaround System (DOT): Definition,
`available at https://www.nasdaq.com/investing/glossary/d/designated-
`order-turnaround (“DOT Definition”)
`
`The New York Times, Futures/Options; Automation in Trading,
`available at https://www.nytimes.com/1984/12/10/business/futures-
`options-automation-in-trading.html (“Futures/Options”)
`
`Intex, Late But Hopeful, Intex Looks for Summer Start Up, Futures
`World, June 14, 1984 (“Late But Hopeful Intex”) (Excerpts)
`
`United States General Accounting Office, Report to Congressional
`Committees: SEC Action Needed to Address National Market System
`Issues (Craig Simmons, March 12 1990) (“GAO Report”)
`
`Lewis D. Solomon and Louise Corso, The Impact of Technology on
`the Trading of Securities: The Emerging Global Market and the
`Implications for Regulation, 24 J. Marshall L. Rev. 299 (1991)
`(“Impact of Technology”)
`
`
`
`
`dc-958387
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`iv
`
`1012
`
`1013
`
`1014
`
`1015
`
`1016
`
`1017
`
`1018
`
`1019
`
`1020
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`CBM2018-00041
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`Exhibit Description
`
`Michael Gorham and Nidhi Singh, Electronic Exchanges: The Global
`Transformation from Pits to Bits (Elsevier Science 2009) (“Electronic
`Exchanges”) (Excerpts)
`
`Company-Histories.com, Companies by Letter: The Island ECN, Inc.,
`available at http://www.company-histories.com/The-Island-ECN-Inc-
`Company-History.html (“ECN History”)
`
`Gary R. Craft, Convergence Among Stock Markets, Stock Exchanges
`And Stock Liquidity Providers: The Increasing Importance of
`Electronic Communication Networks (BancBoston Robertson
`Stephens Sep. 9, 1998) (“Convergence Among Stock Markets”)
`
`Hal McIntyre, Securities Operations Forum, ECN and ATS...The
`Electronic Future, available at,
`http://www.soforum.com/library/ecn_ats.shtml (“ECN and ATS”)
`
`Mondovisione, NYSE Launches Pilot for Automatic Order Execution
`Service NYSE Direct+-Network NYSE Auto-X Routing Underway,
`available at http://www.mondovisione.com/news/nyse-launches-pilot-
`for-automatic-order-execution-service-nyse-direct-network-ny/
`(“NYSE Launches Pilot”)
`
`Joel Hasbrouck and George Sofianos, The Trades of Market Makers:
`An Empirical Analysis of NYSE Specialists, The Journal of Finance,
`5, 1565-1592 (“Trades of Market Makers”)
`
`The Internet Archive, What is the Island BookViewer?, (capture of:
`http://island.com:80/BookViewer/bookviewer.htm) ( Dec. 6, 2000)
`(“Island Bookviewer”)
`
`The Internet Archive, Speed: the Value of Faster Trades (capture of:
`http://island.com:80/about/speed.htm ) (Dec. 9, 2000) (“Value of
`Faster Trades)
`
`Exhibit #
`
`1021
`
`1022
`
`1023
`
`1024
`
`1025
`
`1026
`
`1027
`
`1028
`
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`CBM2018-00041
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`Exhibit Description
`
`William Stallings, Operating Systems: Internals and Design
`Principles, Fourth Edition, (Marcia Horton, ed. 2001) (“Operating
`Systems”) (Excerpts)
`Microsoft Corporation, Microsoft Computer Dictionary 5th Edition
`(Sandra Haynes and Alex Blanton, eds. 2002) (Excerpts) (“Microsoft
`Dictionary”)
`
`Webopedia, Definition of log file, available at
`https://www.webopedia.com/TERM/L/log_file.html (“Definition of
`Log File”)
`
`Complaint, Nasdaq, Inc. et al v. IEX Group, Inc. et al, No. 3:18-cv-
`03014-BRM-DEA (D. N.J. Mar. 1, 2018), ECF No. 1 (“Nasdaq
`Complaint”)
`
`USPTO, Class 705, Data Processing: Financial, Business Practice,
`Management, or Cost/Price Determination, available at
`https://www.uspto.gov/web/patents/classification/shadowFiles/defs70
`5sf.htm?705_37&S&W&4T&4W#4W) (“USPTO Class 705-37”)
`
`The Internet Archive, How Island Works (capture of:
`http://www.island.com:80/about/howitworks.htm) (August 15, 2000)
`(“How Island Works”)
`
`Order Audit Trail System (OATS), available at
`http://www.finra.org/industry/oats
`
`
`Exhibit #
`
`1029
`
`1030
`
`1031
`
`1032
`
`1033
`
`1034
`
`1035
`
`
`
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`CBM2018-00041
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`TABLE OF AUTHORITIES
`
` Page(s)
`
`Cases
`Alice Corp. Pty. Ltd. v. CLS Bank Int’l,
`134 S. Ct. 2347 (2014) .................................................................................passim
`
`Ariad Pharms., Inc. v. Eli Lilly & Co.,
`598 F.3d 1336 (Fed. Cir. 2010) (en banc) ........................................ 73, 78, 79, 80
`
`Bilski v. Kappos,
`561 U.S. 593 (2010) .......................................................................... 45, 51, 52, 53
`
`Content Extraction & Transmission LLC v. Wells Fargo Bank, N.A.,
`776 F.3d 1343, 1347 (Fed. Cir. 2014), cert. denied,
`136 S. Ct. 119 (2015) ...................................................................................passim
`
`CQG, Inc. v. Chart Trading Dev., LLC,
`CBM2016-00046, Paper 13 (P.T.A.B. Sept. 13, 2016) .......................... 31, 39, 40
`
`Cyberfone Sys., LLC v. CNN Interactive Grp., Inc.,
`558 F. App’x 988 (Fed. Cir. 2014) ..................................................................... 45
`
`CyberSource Corp. v. Retail Decisions, Inc.,
`654 F.3d 1366 (Fed. Cir. 2011) .................................................................... 46, 61
`
`D Three Enters., LLC v. SunModo Corp.,
`890 F.3d 1042 (Fed. Cir. 2018) .............................................................. 78, 79, 80
`
`DDR Holdings, LLC v. Hotels.com, L.P.,
`773 F.3d 1245 (Fed. Cir. 2014) .................................................................... 58, 59
`
`DealerSocket, Inc. v. AutoAlert, Inc.,
`No. CBM2014-00146, Paper 19 (P.T.A.B. Dec. 9, 2014) .................................. 34
`
`Elec. Power Grp., LLC v. Alstom S.A.,
`830 F.3d 1350 (Fed. Cir. 2016) .................................................................... 48, 51
`
`Enfish, LLC v. Microsoft Corp.,
`822 F.3d 1327 (Fed. Cir. 2016) .......................................................................... 58
`
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`FairWarning IP, LLC v. Iatric Sys., Inc.,
`839 F.3d 1089 (Fed. Cir. 2016) .................................................................... 45, 48
`
`Finjan, Inc. v. Blue Coat Sys., Inc.,
`879 F.3d 1299 (Fed. Cir. 2018) .......................................................................... 46
`
`IBG LLC v. Trading Techs. Int’l, Inc.
`CBM2015-00179, Paper 23 (P.T.A.B. Feb. 24, 2016) ....................................... 31
`
`IBG LLC v. Trading Techs. Int’l, Inc.,
`No. CBM2016-00032, Paper 51 (P.T.A.B. Aug. 14, 2017) ......................... 34, 41
`
`ICU Med., Inc. v. Alaris Med. Sys., Inc.,
`558 F.3d 1368 (Fed. Cir. 2009) .......................................................................... 73
`
`Intellectual Ventures I LLC v. Capital One Bank,
`792 F.3d 1363 (Fed. Cir. 2015) .............................................................. 51, 53, 60
`
`Intellectual Ventures I LLC v. Capital One Fin. Corp.,
`850 F.3d 1332 (Fed. Cir. 2017) .................................................................... 55, 58
`
`Intellectual Ventures I LLC v. Erie Indem. Co.,
`711 F. App’x 1012 (Fed. Cir. 2017) ................................................................... 51
`
`Intellectual Ventures I LLC v. Erie Indem. Co.,
`850 F.3d 1315 (Fed. Cir. 2017) ...................................................................passim
`
`J.P. Morgan Chase & Co. v. Intellectual Ventures II LLC,
`CBM2014-00157, Paper 40 (P.T.A.B. Jan. 12, 2016) .................................. 39, 41
`
`Knowles Elecs. LLC v. Cirrus Logic, Inc.,
`883 F.3d 1358 (Fed. Cir. 2018) .......................................................................... 73
`
`LizardTech, Inc. v. Earth Resource Mapping, Inc.,
`424 F.3d 1336 (Fed. Cir. 2005) .......................................................................... 73
`
`Mayo Collaborative Servs. v. Prometheus Labs., Inc.,
`566 U.S. 66 (2012) ........................................................................................ 66, 69
`
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`CBM2018-00041
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`SAP Am., Inc. v. Investpic, LLC,
`890 F.3d 1016 (Fed. Cir. 2018), modified on other grounds,
`No. 2017-2080, 2018 WL 3656048 (Fed. Cir. Aug. 2, 2018) .......... 49, 67, 68, 73
`
`SAP Am., Inc. v. Versata Dev. Grp., Inc.,
`No. CBM2012-00001, Paper No. 36 (P.T.A.B. Jan. 9, 2013) ...................... 29, 43
`
`Smart Sys. Innovations v. Chicago Transit Auth.,
`873 F.3d 1364 (Fed. Cir. 2018) .............................................................. 50, 56, 57
`
`In re TLI Commc’ns LLC Patent Litig.,
`823 F.3d 607 (Fed. Cir. 2016) ...................................................................... 61, 64
`
`Two-Way Media v. Comcast Cable Commc’ns,
`874 F.3d 1329 (Fed. Cir. 2017), Petition for a Writ Certiorari,
`Case No. 18-124, (U.S. July 27, 2018) ............................................................... 69
`
`Ultramercial, Inc. v. Hulu, LLC,
`772 F.3d 709 (Fed. Cir. 2014), cert. denied,
`135 S. Ct. 2907 (2015) .................................................................................passim
`
`Versata Dev. Grp. v. SAP Am., Inc.,
`793 F.3d 1306 (Fed. Cir. 2015), cert. denied,
`136 S. Ct. 2510 (2016) ............................................................................ 32, 46, 49
`
`Vivid Techs., Inc. v. Am. Sci. & Eng’g, Inc.,
`200 F.3d 795 (Fed. Cir. 1999) ............................................................................ 28
`
`Statutes
`
`35 U.S.C. § 101 ........................................................................................ 2, 44, 59, 73
`
`35 U.S.C. § 112 .............................................................................................. 2, 44, 73
`
`35 U.S.C. § 321 .......................................................................................................... 1
`
`A.I.A. § 18 .........................................................................................................passim
`
`Other Authorities
`
`37 C.F.R. § 42.8 ........................................................................................... 80, 81, 82
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`37 C.F.R. § 42.15(b) ............................................................................................... 82
`37 CPR. § 42.15(b) ............................................................................................... 82
`
`37 C.F.R. § 42.203 ................................................................................................... 82
`37 CPR. § 42.203 ................................................................................................... 82
`
`37 C.F.R.
`
`37 C.F.R.
`§ 42.301 ............................................................................................. 29, 31, 32, 43
`§ 42.301 ............................................................................................. 29, 31, 32, 43
`§ 42.302 ............................................................................................................... 28
`§ 42.302 ............................................................................................................... 28
`§ 42.304 ............................................................................................................... 43
`§ 42.304 ............................................................................................................... 43
`
`77 Fed. Reg. 48,680 ................................................................................................. 29
`77 Fed. Reg. 48,680 ................................................................................................. 29
`
`77 Fed. Reg. 48,709 ................................................................................................. 29
`77 Fed. Reg. 48,709 ................................................................................................. 29
`
`77 Fed. Reg. 48,734 ........................................................................................... 32, 33
`77 Fed. Reg. 48,734 ........................................................................................... 32, 33
`
`77 Fed. Reg. 48,756 ..................................................................................... 33, 34, 40
`77 Fed. Reg. 48,756 ..................................................................................... 33, 34, 40
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`CBM2018-00041
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`Investors Exchange LLC (“Petitioner” or “IEX”) respectfully requests
`
`Covered Business Method (“CBM”) review of claims 1-30 of U.S. Patent
`
`No. 8,244,622 (“’622 Patent”) (Ex. 1001) under 35 U.S.C. § 321 and Section 18 of
`
`the America Invents Act (“AIA”).
`
`I.
`
`INTRODUCTION
`
`The claims of the ’622 Patent are directed to the patent-ineligible abstract
`
`idea of receiving an incoming buy or sell order for a security, matching that
`
`buy/sell order with another sell/buy order, and storing information about the
`
`processing of orders in a log. But the fundamental economic practice of matching
`
`buyers and sellers of goods and services goes to the very foundation of markets
`
`that developed since humans began trading, long before the advent of financial
`
`markets. Patentees cannot now claim the use of this abstract idea in the field of
`
`securities trading on electronic trading venues — venues on which billions of
`
`dollars of trades in U.S. equities are executed every day.
`
`The claims of the ’622 Patent do not include any inventive concept that
`
`transforms them into a patent-eligible application of this abstract idea. Instead, the
`
`’622 Patent claims purport to implement this abstract idea using only conventional
`
`computer components and well-known techniques. The ’622 Patent claims are
`
`implemented on a generic “computer system” or “computer” comprising “a
`
`processor” (e.g., CPU), “main memory” (e.g., RAM), and a “persistent storage
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`device” or “persistent storage medium” (e.g., hard disk). The ’622 Patent claims
`
`require that the “order book” (listing buy/sell orders) be stored in main memory,
`
`but it was basic knowledge that main memory (or RAM) was faster than hard disk.
`
`The ’622 Patent claims also require (1) a “first portion” of a computer program (or
`
`“instructions”) that performs matching of buy/sell orders with direct access to the
`
`order book, and (2) a “remaining portion” of a computer program (or
`
`“instructions”) that accesses an order activity log and accesses the order book only
`
`through the “first portion.” But this fundamental programming architecture was
`
`well known and conventional to those skilled in the art.
`
`Finally, the claims of the ’622 Patent are also invalid under 35 U.S.C. § 112
`
`because they lack written description support. The specification does not provide
`
`any written description of a “remaining portion” of a computer program (or
`
`“instructions”) that both accesses an order activity log and accesses the order book
`
`only through the “first portion.”
`
`The ’622 Patent claims should be found invalid on two grounds: (1)
`
`claims 1-30 are invalid under 35 U.S.C. § 101 for being directed to non-statutory
`
`subject matter; and (2) claims 1-30 are invalid under 35 U.S.C. § 112 ¶ 1 for
`
`lacking written description support in the specification.
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`II. BACKGROUND
`The fundamental financial and computing concepts disclosed and claimed in
`
`the ’622 Patent had been known and implemented for years before its mid-2002
`
`filing date.
`
`A.
`
`Financial Markets
`1.
`Companies have sought to raise capital to further their business objectives
`
`The advent of financial markets
`
`for hundreds of years. (Donefer Decl., Ex. 1003, ¶¶ 17-18.) One way companies
`
`have traditionally raised capital is by selling ownership interests to investors in the
`
`form of shares of stock. (Id. ¶ 18.) An early example of a corporation seeking to
`
`raise capital is the Dutch East India Company, founded in 1602. (Id. ¶ 19.) The
`
`Dutch East India Company sought to profit by sailing ships to Asia to engage in
`
`the spice trade. (Id.) To raise money for ships and personnel, the company sold
`
`securities (e.g., shares of its stock) to investors. (Id.)
`
`Investors are willing to purchase securities, like stock, as long as they
`
`believe that they will be able to find buyers for those securities should they want to
`
`sell them at some future date, i.e., that the securities have “liquidity.” (Id. ¶ 19.)
`
`Investors would be less likely to purchase securities if they believed that the
`
`securities could not later be sold, i.e., that the securities did not have reasonable
`
`liquidity or were “illiquid.” (Id.) A market creates an environment for liquidity by
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`bringing buyers and sellers together at a time and place where they can trade. (Id.
`
`¶ 20.)
`
`A market can exist wherever buyers and sellers may be brought together and
`
`their buy and sell orders matched with one another. (Id. ¶¶ 21-22.) The market
`
`could be physical (e.g., a town square or a coffee house), electronic and physical
`
`(e.g., phone calls to brokers on a trading floor), or purely electronic (e.g., a
`
`computer program or electronic trading venue). (Id.) In each case, the goal of the
`
`market is to have enough buyers and sellers with sufficient supply to meet usual
`
`demand (offer liquidity) with expectations of fairness and transparency of trading
`
`information. (Id.)
`
`The early investors of the Dutch East India Company traded shares in a
`
`market created by the Amsterdam Stock Exchange. (Id. ¶ 20.) Over the years,
`
`other regional stock exchanges arose, including the London Stock Exchange,
`
`Frankfurt Stock Exchange, Tokyo Stock Exchange, New York Stock Exchange
`
`(“NYSE”), and Chicago Stock Exchange. (Id. ¶ 21.)
`
`Stock exchange floors
`
`2.
`Securities traditionally traded on floor-based exchange trading floors
`
`exemplified by the NYSE. (Id. ¶¶ 23-25.) The short film “Big Board” provides an
`
`introduction to the NYSE before computer automation. (Id. ¶ 23.) The film is
`
`available at Exhibit 1010 and at the following link:
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`http://www.sechistorical.org/museum/film-radio-television/video-
`
`player.php?vid=1398364160001&title=%22The%20Big%20Board,%22%20New
`
`%20York%20Stock%20Exchange%20Film.
`
`The diagram below is illustrative of the trading floor at the NYSE as it
`
`existed in 1981 (the date indicated on the figure):
`
`
`
`Figure 4-1
`(Ex. 1005 at 9-10 (annotated).)
`
`
`To trade a security on the NYSE before electronic trading, a money manager
`
`working on behalf of an investor would place an order with a broker. (Donefer
`
`Decl., Ex. 1003, ¶ 26.) The broker would validate the order to ensure it met certain
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`formal requirements, for example, that the account originating the order existed
`
`and was permitted to trade in the security. (Id. ¶ 27.) The broker would then call
`
`the order down to the broker’s booth (shown in red) on the periphery of the floor.
`
`(Id. ¶ 28.) A clerk at the booth would write the order down and give the order to a
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`floor broker on a piece of paper. (Id.) The floor broker would walk the order
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`(shown in purple) to the only post on the floor where that particular security traded
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`(shown in blue). (Id.) At the post, the broker would attempt to execute the trade
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`by trading either with a NYSE “specialist” for the particular security or with other
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`brokers buying and selling the security for other investors (known as the “crowd”).
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`(Id.) A specialist is a member of the NYSE with obligations to facilitate trading in
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`assigned securities by (1) keeping track of brokers’ open orders to buy or sell a
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`security, and (2) offering to buy or sell the security themselves at quoted bids or
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`offers to stabilize the market when there is insufficient liquidity. (Id.) The
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`specialist or a NYSE floor official would determine whether the order was
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`marketable or not. (Id.) For example, a NYSE floor official would not permit an
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`order to execute if the order was inappropriately priced or violated trading rules.
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`(Id.)
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`3. Order types
`Investors can submit orders to buy or sell a security. (Id. ¶ 31.) Generally
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`speaking, buyers submit “bids” to buy a security and are seeking to be matched
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`with the lowest-priced “offer” to sell that same security, and sellers submit “offers”
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`to sell a security and are seeking to be matched with the highest-priced “bid” to
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`buy that same security. (Id.) There are many variations of buy and sell orders, but
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`two main types of buy or sell orders are (1) market orders, and (2) limit orders.
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`(Id. ¶ 33.)
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`Market Orders. A market order is where an investor seeks to buy or sell a
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`security at the best price that is currently being offered in the market. (Id. ¶ 33.)
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`Generally, market orders must match and execute immediately. (Id.) If, for some
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`reason, there are no other open orders a market order can match against on the
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`NYSE, a specialist may match the market order him/herself to ensure liquidity.
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`(Id.) For example, if a buyer submits a market order for shares of Company XYZ,
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`and there is no offer to sell shares of Company XYZ (at any price), then the
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`specialist may sell his/her own shares of Company XYZ to the buyer. (Id.)
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`Limit Orders. A limit order is where an investor seeks to buy a security at
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`or below a specified price (a buy limit order) or to sell a security at or above a
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`specified price (a sell limit order). (Id. ¶ 34.) If the limit order cannot match
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`against an open order at the limit price or better, the limit order will be recorded in
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`a market’s “order book” for possible matching against later incoming orders. (Id.)
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`In the case of the NYSE (described above), the specialist will record the order in a
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`physical order book (and later electronically) when the order is not marketable
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`when received, and the specialist will execute the order later if possible. (Id.)
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`Below are two examples of how a trade would execute on the NYSE before
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`automation using computers. The first example is execution of a market order and
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`the second example is execution of a limit order.
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`Market Order Execution. Adam Smith places a market order to buy
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`100 shares of Company XYZ. (Id. ¶ 36.) Mr. Smith places the order with a
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`brokerage firm, which, after validating the order, calls the order down to a booth
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`on the NYSE floor. (Id.) A floor broker takes the order and walks to the post
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`assigned to Company XYZ. (Id.) At the post, there is a NYSE specialist for
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`Company XYZ and there may also be a crowd of other floor brokers attempting to
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`execute orders of Company XYZ on behalf of other investors. (Id.) The specialist
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`may tell Mr. Smith’s broker the best offer price from his/her order book for
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`Company XYZ. (Id.) The crowd also may tell Mr. Smith’s broker the price at
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`which it is willing to sell 100 shares of Company XYZ. (Id.) Mr. Smith’s floor
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`broker will immediately purchase 100 shares of XYZ Company at the best (i.e.,
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`lowest) offer price he/she can find, either from the specialist or the crowd. (Id.) If
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`neither the specialist (in his/her order book) nor the crowd have an open order to
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`sell 100 shares of Company XYZ, the specialist may sell 100 shares of Company
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`XYZ in his/her possession to Mr. Smith’s broker to ensure that the order can trade,
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`i.e., ensure liquidity. (Id.)
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`Limit Order Execution. Adam Smith places a limit order to buy 100 shares
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`of Company XYZ at no more than $8 per share. (Id. ¶ 37.) Mr. Smith’s floor
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`broker walks the order to the post for Company XYZ. (Id.) If the crowd indicates
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`that it will sell 100 shares of Company XYZ at $8 (or less) per share, then
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`Mr. Smith’s broker can immediately execute the trade. (Id.) If the crowd will only
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`agree to sell 100 shares of Company XYZ at more than $8 per share, then
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`Mr. Smith’s broker hands the limit order to the specialist at the post. (Id.) The
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`specialist will check whether there is an open order in the order book to sell 100
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`shares of Company XYZ at $8 (or less). (Id.) If so, the specialist will identify the
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`match and cause the trade to execute. (Id.) If not, the specialist will write
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`Mr. Smith’s buy limit order into the appropriate location in his/her order book.
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`(Id.) If a subsequent order comes along to sell 100 shares of Company XYZ for $8
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`(or less) per share, then the specialist will identify the match and cause the trade to
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`execute. (Id.)
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`4. Order books
`An “order book” has historically been used to track buy and sell limit orders
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`that could not immediately match against another buy or sell order. (Id. ¶¶ 38-40.)
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`An order book tracks (1) buy limit orders with a limit price below the lowest
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`offered sale price, and (2) sell limit orders with a limit price above the highest
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`offered buy price. (Id. ¶ 41.)
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`An example of an order book, such as would have been used by specialists at
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`a NYSE post, is shown below.
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`
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`Fig. 4-2
`(Ex. 1005 at 15 (annotated).)
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`This order book is dedicated to a single security, with each page in the order
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`book specifying a particular dollar value at which the security might be traded.
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`(Donefer Decl., Ex. 1003, ¶ 40.) In the above example, the page shown reflects the
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`orders to buy and sell a security at prices ranging from $22 to $22-7/8. (Id.)
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`As shown above, the order book is divided into three columns. The middle
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`column lists the different prices ranging from $22 to $22-7/8. (Id.) The left
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`column lists open buy limit orders. (Id. ¶ 41) The right column lists open sell limit
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`orders. (Id.) Buyers seek to pay less for a security, so the open buy limit orders in
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`the left column are towards the top of the page (lower prices). (Id.) Sellers want to
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`charge more for the security, so the open sell orders in the right column are
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`towards the bottom of the page (higher prices). (Id.)
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`The order book clearly shows “top of book” information for a particular
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`security. Top of book information includes the “best bid” (or “inside bid”) and
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`“best offer” (or “inside offer”) for a security. (Id. ¶ 42.) The best bid orders are
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`the buy orders with the highest price open in the order book. (Id.) In the order
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`book illustrated above, the best bid orders are shown in red ($22-1/4). (Id.) The
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`b