International Securities Exchange, LLCv.Chicago Board Options Exchange, Inc.

Patent Trial and Appeal Board

May 22, 2014

13178289 (P.T.A.B. May. 22, 2014)

Trials@uspto.gov Paper 12
571-272-7822 Date: May 22, 2014

UNITED STATES PATENT AND TRADEMARK OFFICE
____________

BEFORE THE PATENT TRIAL AND APPEAL BOARD
____________

INTERNATIONAL SECURITIES EXCHANGE, LLC
Petitioner
v.
CHICAGO BOARD OPTIONS EXCHANGE, INC.
Patent Owner
____________

Case IPR2014-00099
Patent 8,266,044 B2

Before JUSTIN T. ARBES, RAMA G. ELLURU, and
JAMES B. ARPIN, Administrative Patent Judges.
ELLURU, Administrative Patent Judge.

DECISION
Denying Institution of Inter Partes Review
37 C.F.R. § 42.108

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Patent 8,266,044 B2

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Petitioner International Securities Exchange, LLC, requests inter
partes review of claims 1-3 of U.S. Patent No. 8,266,044 B2 (Ex. 1001; “the
’044 patent”) (Paper 1, “Pet.”). Patent Owner Chicago Board Options
Exchange, Inc., filed a preliminary response opposing institution of review
(Paper 9, “Prelim. Resp.”).
We have jurisdiction under 35 U.S.C. § 314. For the reasons that
follow, we determine not to institute an inter partes review.
I. BACKGROUND
The standard for instituting an inter partes review is set forth in
35 U.S.C. § 314(a):
THRESHOLD—The Director may not authorize an inter partes
review to be instituted unless the Director determines that the
information presented in the petition filed under section 311 and any
response filed under section 313 shows that there is a reasonable
likelihood that the petitioner would prevail with respect to at least 1 of
the claims challenged in the petition.
We determine that the information presented in the petition does not
show that there is a reasonable likelihood that Petitioner would prevail with
respect to at least one challenged claim. Accordingly, we deny an inter
partes review of claims 1-3 of the ’044 patent.
A. The’044 Patent (Ex. 1001)
The ’044 patent, titled “Automated Trading Exchange System Having
Integrated Quote Risk Monitoring and Integrated Quote Modification
Services,” issued on September 11, 2012, based on U.S. Patent Application
No. 13/178,289 (“the ’289 application”), filed on July 7, 2011. The ’289
application is a continuation of U.S. Patent Application No. 12/035,996
(“the ’996 application”) filed on February 22, 2008, which issued as U.S.
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Patent No. 7,980,457. The ’996 application is a continuation of U.S. Patent
Application No. 09/475,534, filed on December 30, 1999, which issued as
U.S. Patent No. 7,356,498.
The ’044 patent relates to automated trading systems for option
contracts (“options”). Ex. 1001, 1:18-22; Abstract. Specifically, the
claimed invention is directed to methods for managing the risk of a maker of
an options market in an automated trading system. Id. at 1:18-22.
Options are traded publicly on exchanges. Id. at 1:27-28. Each
option covers certain rights to buy or sell an underlying security at a fixed
price for a specified period of time. Id. at 1:28-31. The potential loss to the
buyer of an option is no greater than the initial premium paid for the option,
regardless of the performance of the underlying security. Id. at 1:37-39. On
the contrary, in exchange for the premium, the seller of the option (“the
market-maker”) assumes the risk of being assigned the obligation to buy or
sell the underlying security, according to the option terms, if the contract is
exercised. Id. at 1:40-45. Thus, writing options may entail large risks to the
market maker. Id. at 1:44-45.
Many option trading systems utilize an “open outcry” method. Id. at
1:53-54. In such systems, market-makers are required to make a two-sided
market by providing an order and offer quote. Id. at 1:54-56. In a non-
automated, open outcry system, a market-maker communicates verbally with
traders indicating their willingness to buy and sell various quantities of
securities. Id. at 1:56-59. Because a market-maker in such systems has
personal control over the types and number of options traded, the market-
maker can manage risk associated with his or her options portfolio. Id. at
1:59-61. A market-maker manages risk by modifying quotes for options to
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favor trades that tend to hedge against unwanted risk. Id. at 1:61-65.
The ’044 patent Specification states that the automated trading
environment already was known in the art. Id. at 1:66, 2:1-8. An
automated, computer-based trading system typically records quotes and
automatically matches them with orders that enter the system. Id. at 1:66-
2:4. One disadvantage of known automated trading systems was that the
systems executed trades so rapidly that a market-maker was unable to
withdraw or modify his quotes in a timely manner. Id. at 2:4-15.
Software tools that assessed trading option portfolio risk and
recommended quote modifications also were known. Id. at 2:16-21. An
automated trading system, however, processes transactions in the order
received. Id. at 2:26-28. Thus, even if a market-maker utilized such
software tools to modify quotes, those tools may have been unable to act in
time, given the speed at which the automated trading exchange system
executes orders. Id. at 2:21-26. For example, an automated trading
exchange may have a message queue containing additional orders that must
be processed before the automated exchange receives and processes the
market-maker’s quote modification request. Id. at 2:28-33. These known
automated trading exchange systems, therefore, limit a market-maker’s
ability to manage risk. Id. at 2:34-42. The ’044 patent Specification
recognizes the need for a method that automatically modifies quotes under
certain trading conditions in an automated trading exchange system. Id. at
2:43-45.
The invention of the ’044 patent is directed to apparatus for an
automated trading exchange having integrated quote risk monitoring and
quote modification services. Id. at 2:49-51. Thus, one aspect of the
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invention is an apparatus that is implemented using a computer, having
memory, a processor, and a communication port. Id. at 2:51-54.
The computer receives orders and quotes, wherein a quote has
associated trading parameters, such as a risk threshold. Id. at 2:54-57. The
computer then may generate a trade by matching the received orders and
quotes to previously received orders and quotes. Id. at 2:64-66. If a trade is
not generated, the computer stores each of the received orders and quotes.
Id. at 2:66-67. The computer determines whether a market-maker’s quote
has been filled as a result of the generated trade, and, if so, determines a risk
level and aggregate risk level associated with the trade. Id. at 2:67-3:4. The
computer then compares the aggregate risk level with the market-maker’s
risk threshold for a quote; and, if the threshold is exceeded, the computer
automatically modifies at least one of the market-maker’s remaining quotes.
Id. at 3:4-7.
B. Related Matters
Petitioner has been sued for infringement of the ’044 patent in a
district court case titled Chicago Bd. Options Exch., LLC v. Int’l Sec. Exch.
LLC, No. 1:13-cv-01339-JMF (S.D.N.Y.). Pet. 5. The ’044 patent also is
the subject of a Covered Business Method (CBM) patent review in
International Securities Exchange, LLC, v. Chicago Board Options
Exchange Inc., CBM2013-00051.
Patents related to the ’044 patent, U.S. Patent Nos. 7,356,498 B2 and
7,980,457 B2, are the subject of co-pending, covered business method patent
review in International Securities Exchange, LLC, v. Chicago Board
Options Exchange Inc., CBM2013-00049 and CBM2013-00050,
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respectively. Petitioner also filed petitions requesting inter partes review of
those two patents in IPR2014-00097 and IPR2014-00098, respectively.
C. Illustrative Claim
Of the challenged claims, claim 1 is the only independent claim.
Claim 1 of the ’044 patent, reproduced below, is representative of the
challenged claims:
1. A system for processing trades of securitized
instruments based on security orders and quotes received from
client computers, comprising:
at least one server computer comprising a memory, and a
processor, said server computer configured to perform the steps
of:
receiving orders and quotes, wherein specified
ones of said quotes belong to a quote group, and wherein said
specified ones of said quotes have associated trading parameters
comprising a predefined number of bought or sold contracts
relating to said quote group;
generating a trade by matching said received
orders and quotes to previously received orders and quotes;
storing each of said orders and quotes when a trade
is not generated;
determining whether a quote having associated
trading parameters has been filled as a result of the generated
trade, and if so, determining a number of contracts that have
been bought or sold within said quote group, including the
generated trade;
comparing said number of contracts that have been
bought or sold within said quote group with said predefined
number of bought or sold contracts relating to said quote group;
and,
automatically modifying at least one of the
remaining specified ones of said quotes in the quote group if
said predefined number of bought or sold contracts is exceeded.

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D. The Applied References
Petitioner relies on the following references. Pet. 7. Petitioner also
relies upon the Declaration of Dr. Maureen O’Hara. Ex. 1004.
Patent/Publication No. Date of Issuance or
Publication
Exhibit No.
“State of the Art as described in
the ’044 patent” (“Admitted
Prior Art”)
Ex. 1001
U.S. Patent No. 6,405,180 B2
(“Tilfors”)
June 11, 2002 Ex. 1002
Allen Jan Baird, Option Market
Making, Trading and Risk
Analysis for the Financial and
Commodity Options Markets,
(1993) (“Baird”)
1993 Ex. 1003
U.S. Patent No. 6,016,483
(“Rickard”)
January 18, 2000 Ex. 1005

E. The Asserted Grounds
Petitioner challenges claims 1-3 based on the following grounds. Pet.
8.
Prior Art Basis Claims Challenged
Tilfors § 102(e) 1
Tilfors and Baird § 103(a) 2-3
Admitted Prior Art, and
Rickard and/or Baird
§ 103(a) 1-3

II. ANALYSIS
A. Claim Construction
In an inter partes review, claim terms in an unexpired patent are given
their broadest reasonable construction in light of the Specification of the
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patent in which they appear. 37 C.F.R. § 42.100(b). Under the broadest
reasonable interpretation standard, claim terms are given their ordinary and
customary meaning in view of the Specification, as would be understood by
one of ordinary skill in the art at the time of the invention. In re Translogic
Tech., Inc., 504 F.3d 1249, 1257 (Fed. Cir. 2007). Any special definition for
a claim term must be set forth in the Specification “with reasonable clarity,
deliberateness, and precision.” In re Paulson, 30 F.3d 1475, 1480 (Fed. Cir.
1994).
For purposes of this decision and based on the record before us, we
need not provide express constructions at this stage of the proceeding.
B. Anticipation by Tilfors
Petitioner challenges claim 1 as anticipated by Tilfors. Pet. 17-34.
Based on the record before us, we are not persuaded that Petitioner has
demonstrated a reasonable likelihood that it would prevail with respect to
claim 1.
Petitioner has not persuaded us that Tilfors discloses the following
elements of claim 1: “[a] server computer configured to . . . determin[e] a
number of contracts that have been bought or sold within said quote group,
including the generated trade” and “compar[e] said number of contracts that
have been bought or sold within said quote group with said predefined
number of bought or sold contracts relating to said quote group.” For these
elements, Petitioner cites the following Tilfors disclosure (Pet. 22-23, 28-
30):
Thus, first when a quote has been traded the one-tick
worse rule checks the next one tick worse parameter to see the
volume the market maker has specified, step 401. The volume
and price specified by the first one tick worse parameter is used
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in the matching. If further trade is still indicated in a step 403,
i.e. there are matching offers at the worse price, when the
volume and price specified by the first one tick worse parameter
has been traded, the system returns to the step 401, wherein the
second one tick worse parameter is used for generating a new
offer specifying another volume, which of course also can be
the same volume, at a worse price than the first parameter. The
procedure is repeated until in the step 403 there is no match.
When there no longer is a match the procedure proceeds to a
step 405 wherein the procedure returns from where it came.
Ex. 1002, 6:20-34.
We are not persuaded, however, that Tilfors discloses a server
configured to determine the “number of contracts that have been bought or
sold” (claim 1) (emphasis added). Petitioner does not explain adequately
what aspect of the disclosure specifically corresponds to the claimed
“determining a number of contracts that have been bought or sold within
said quote group.” See Pet. 22-23. According to Dr. O’Hara, “[s]ince
Tilfors/Katz checks [if] contract volume of a trade against a tick worse
threshold is exceeded,” Tilfors “necessarily” discloses the “determining”
element. Ex. 1004 ¶ 49. We are not persuaded that Dr. O’Hara’s assertion
is supported by the Tilfors disclosure.
Our determination that Tilfors does not disclose the “determining”
element is exemplified by examining the “comparing” element. Claim 1
recites “comparing said number of contracts that have been bought or sold
within said quote group with said predefined number of bought or sold
contracts relating to said quote group.” We determine that the “said”
number of contracts that have been bought or sold recited in the
“comparing” element refers to the number of contracts “determin[ed]” in the
previous element. Petitioner, however, has not pointed to disclosure
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showing that the number of instruments that “have been bought or sold” is
determined by Tilfors and then compared to the tick worse parameter.
Petitioner contends that Tilfors’s “multiple tick worse threshold
parameters” correspond to the claimed “predefined number of bought or sold
contracts.” Pet. 22. Petitioner further argues that Tilfors discloses
comparing the “actual number of contracts bought or sold” to the “tick
worse volume parameter set by the market maker,” and “subsequent quotes
are modified (ticked worse) if the predefined number is exceeded.” Pet. 22.
Dr. O’Hara likewise states that Tilfors discloses that the “actual number of
bought and sold contracts are compared to one or more tick worse
thresholds,” and if the threshold is exceeded, the quote is modified (i.e.,
“ticked worse” to a price less favorable for traders). Ex. 1004 ¶ 50. We are
not persuaded that Tilfors discloses the “comparing” element for at least two
reasons.
First, Tilfors explains that, when a quote has been traded, the Tilfors
system checks the next one tick worse parameter and uses the volume and
price specified by that parameter in further matching. Ex. 1002, 6:20-24.
The only comparison explained by the cited Tilfors disclosure is that, “[i]f
further trade is still indicated . . . , i.e. there are matching offers at the worse
price, when the volume and price specified by the first one tick worse
parameter has been traded” (emphasis added), the system uses the second
one tick worse parameter to generate an offer, specifying another volume,
which could be the same volume, at a worse price than the first parameter.
Id. at 6:24-31. That disclosure only indicates that Tilfors compares the price
of an outstanding offer to the predefined price set by the one tick worse
parameter. Moreover, even assuming both the volume and price indicated
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by the one tick worse parameter are used, the comparison is prospective in
nature. In other words, the volume and price indicated by the one tick worse
parameter is compared to outstanding customer offers, not to the claimed
“number of contracts that have been bought or sold within said quote group”
(emphasis added). See Ex. 1002, 2:45-49 (“If the market maker full volume
at the best price is traded, and the customer order indicates that it wants to
trade more (volume and price indicates further matching) the tick worse
parameter generates new quotes . . . .”); Prelim. Resp. 24 (“The only values
that are evaluated in connection with the tick worse parameters are the
volume and price of a customer order. . . . Tilfors is silent regarding
comparing tick worse thresholds to a number of contracts that has been
traded” (internal citation omitted)).
Second, Petitioner also has not persuaded us that Tilfors discloses
“determining a number of contracts that have been bought or sold within
said quote group” and “comparing” that to a “predefined number of bought
or sold contracts relating to said quote group” (claim 1) (emphasis added).
Petitioner provides no explanation as to how Tilfors satisfies the claim
elements “within” and “relating to” “said quote group.” See Prelim. Resp.
22-23. As Patent Owner notes, Petitioner does not explain how Tilfors
discloses determining a number of contracts that have been bought or sold
“within a collection of related quotes” or how any tick worse parameter
equates with the recited predefined number of bought or sold contracts
“relating to a collection of related quotes.” Id. at 24-25.
Accordingly, we are not persuaded that Petitioner has demonstrated a
reasonable likelihood that it will prevail in this challenge with respect to
claim 1.
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C. Obviousness of Claims 2 and 3 over Tilfors and Baird
Petitioner challenges claims 2 and 3 as obvious by Tilfors and Baird.
Pet. 34-41. Based on the record before us, we are not persuaded that
Petitioner has demonstrated a reasonable likelihood that it would prevail in
its challenge with respect to claims 2 and 3.
Petitioner refers to Baird as allegedly teaching the additional
limitations of dependent claims 2 and 3. See Pet. 34-35. However,
Petitioner does not argue that Baird cures the deficiencies of Tilfors,
discussed above with respect to independent claim 1. See Prelim. Resp. 32.
Therefore, for those reasons discussed above, we are not persuaded that
Petitioner has demonstrated a reasonable likelihood that it will prevail with
respect to claims 2 and 3.
D. Obviousness of Claims 1-3 in view of Applicant’s Admitted Prior
Art in view of Rickard, and/or Baird
Petitioner challenges claims 1-3 as obvious over Applicant’s admitted
prior art and Rickard, and/or Baird. Pet. 41-47. Petitioner has not persuaded
us, however, that there is a reasonable likelihood that it would prevail with
respect to claims 1-3 on this ground.
Instead, we are persuaded by Patent Owner (see Prelim. Resp. 32)
that, although Petitioner alleges that claims 1-3 would have been obvious
over the asserted prior art (see Pet. 41-47), Petitioner has not provided an
element-by-element analysis for each of claims 1-3 with respect to the
asserted prior art, for example, with a properly explained claim chart.
Petitioner does not “explain clearly and succinctly what the petitioner
believes a claim means in comparison to something else, such as another
claim, a reference, or a specification.” See Office Patent Trial Practice
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Guide, 77 Fed. Reg. 48,756, 48,764 (Aug. 14, 2012). Furthermore,
Petitioner does not map the construed claim language to the teachings of the
asserted prior art references, does not explain how the proposed
combinations teach or suggest all of the limitations of the claims, and does
not explain how the claims would have been obvious over that combination.
See 37 C.F.R. § 42.104(b)(4) (a petition must explain “[h]ow the construed
claim is unpatentable under the statutory grounds identified,” which includes
“specify[ing] where each element of the claim is found in the prior art
patents or printed publications relied upon”). For the foregoing reasons, we
determine that Petitioner has not established a reasonable likelihood that it
would prevail with respect to claims 1-3 over the combination of Applicant’s
admitted prior art and Rickard, and/or Baird.
III. CONCLUSION
We conclude that Petitioner has not demonstrated a reasonable
likelihood that at least one challenged claim is unpatentable based on the
asserted grounds. We, therefore, do not institute an inter partes review on
any of the asserted grounds as to any of the challenged claims.

IV. ORDER
It is ORDERED that the petition is denied as to all challenged claims
of the ’044 patent.

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PETITIONER:
Michael M. Murray
Bryan N. DeMatteo
Michael Scheer
WINSTON & STRAWN LLP
mmurray@winston.com
bdematteo@winston.com
mscheer@winston.com
PATENT OWNER:
Joseph A. Hynds
ROTHWELL, FIGG, ERNST & MANBECK, P.C.
jhynds@rfem.com