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DISCUSSION DRAFT: 12/21/2007
Intellectual Property and Financial Markets Competition:
A Discussion of Selected Public Policy Issues *
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Richard Heckinger, † Victor Lubasi ‡ and
Robert S. Steigerwald §
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Introduction

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Like other sectors of the increasingly interconnected and “globalized” economy,
the financial services sector has been undergoing a fundamental transformation
and modernization in recent years. 1 Indeed, the pace of change in the financial
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services industry continues to accelerate as the industry adopts more and more
advanced computing and communications technologies and as it faces
increasing consolidation and competition, cross-border integration and shifts in

*

This discussion draft is distributed as of December 21, 2007, for purposes of review and
comment only. Please do not quote this draft without the authors’ permission.

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†

Richard Heckinger is a Senior Policy Advisor in the Financial Markets Group of the
Federal Reserve Bank of Chicago. Richard.Heckinger@chi.frb.org
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‡

Victor Lubasi is a Financial Markets Senior Analyst in the Financial Markets Group of the
Federal Reserve Bank of Chicago. Victor.Lubasi@chi.frb.org
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§

Robert S. Steigerwald is a Senior Financial Markets Advisor in the Financial Markets
Group of the Federal Reserve Bank of Chicago. Robert.Steigerwald@chi.frb.org
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1

See, e.g., Stewart, Jamie B., “The Implications of Advancing Technology for Bankers and
Central Bankers,” Remarks at SWIFT SIBOS Conference, San Francisco, California (Sept. 11,
2000):

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“I cannot recall a time of more fundamental and pervasive change in the financial
services industry. Much of this change – and the pace at which it is taking place
– is driven by extraordinary advances in computing and telecommunications
technology. These advances in technology are not just evolutionary, they are
revolutionary, and they are transforming virtually every aspect of commerce and
banking.”
The Society for Worldwide Interbank Financial Telecommunications, SCRL (“SWIFT”) is an
industry cooperative which provides secure financial messaging services to its members. SWIFT
sponsors the annual SIBOS financial services conference and exhibition.

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DISCUSSION DRAFT: 12/21/2007
legal and regulatory policy. 2 Accompanying these changes, the legal protection
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of intellectual property in information (e.g., account relationships, business
strategies, price data, etc.), business methods or processes (e.g., accounting
methods, call center operations, automated trade execution processes, etc.) and
financial technologies (e.g., risk management methodologies) has become
increasingly important to the industry.

This paper provides an introductory

discussion of the rights arising under U.S. law in these forms of intellectual
property. In particular, we focus upon the role intellectual property has recently
played in the competitive (but also sometimes cooperative) interaction among
financial market institutions.

These institutions, which include exchanges, alternative trading systems (such as
“electronic communications networks” or “ECNs”), clearinghouses and the
financial intermediaries and end users which interact with them, are of particular
interest because they have “network” characteristics that may be relevant to
understanding how intellectual property rights affect competition in the financial
services industry. To provide a basis for analyzing this question, we describe
some recent intellectual property litigation involving financial markets. We then
identify selected public policy issues relating to this trend, based upon a recent

2

See, e.g., H. Ruding, “The transformation of the financial services industry,” Financial
Stability Institute, Occasional Paper No. 2 (Basel: March 2002); A. E. Wilmarth, Jr., “The
Transformation of the U.S. Financial Services Industry, 1975-2000: Competition, Consolidation,
and Increased Risks,” U. of Illinois Law Rev., Vol. 2002, No. 2 (2002). The Wilmarth paper
focuses upon banking and, in particular, the erosion of the separation of banking, insurance and
securities underwriting under U.S. law that began sometime in the late 1970’s. See, id. at 219.
The Ruding paper, which also focuses upon banking, emphasizes the “growing cost of
technology, information and communication” costs to the financial services industry beginning in
the 1980’s and 1990’s. See, id. at 2.
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DISCUSSION DRAFT: 12/21/2007
roundtable discussion sponsored by the Federal Reserve Bank of Chicago and
Kellogg School of Management, Northwestern University.

Discussion

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Financial market institutions, such as Chicago’s derivatives exchanges and
clearinghouses, have long relied upon many varieties of intellectual property,
such as trademarks, copyrights and trade secrets. Until recently, however, it was
uncommon for financial services competitors to seek patent protection for their
innovative business methods and practices. 3
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In fact, intellectual property

disputes among financial markets competitors were relatively infrequent until
recently. 4 Today, however, exchanges and other financial services institutions
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actively seek to protect their intellectual property and litigation between financial
services competitors is becoming more common.

The social costs of these

disputes are evident; the social benefits are less obvious.
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A key factor in the emerging significance of financial services-related intellectual
property is the so-called “business process patent,” which was formally
recognized under U.S. law in 1998 with the decision of the Court of Appeals for

3

A notable early exception involved the patent issued to Reuben Jennings of Chicago in
1877 for an octagonal, recessed “trading pit.” (See Appendix). The Chicago Board of Trade
challenged the Jennings patent, which was later overturned by the courts. See, W. Lukken,
“Patent Pending: The Role of the CFTC in Intellectual Property Disputes (Chicago: Oct. 26,
2004), available online at: http://www.cftc.gov/opa/speeches04/opalukken-10.htm .

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The litigation in the early 1980’s between the Chicago Board of Trade and Dow Jones &
Co., Inc. concerning the listing of futures contracts based upon the Dow Jones Industrial Average,
may have been an early indication that intellectual property-related disputes would become more
common in later years. See, e.g., Board of Trade of the City of Chicago vs. Dow Jones &
Company, Inc., 98 Ill. 2d 109, 456 N.E.2d 84 (Ill. S.Ct.1983).

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DISCUSSION DRAFT: 12/21/2007
the Federal Circuit in the State Street case. * * Under State Street, patents may
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be obtained for a wide variety of financial systems and business methods,
including methods for managing accounts, insurance claims, consolidating bills,
asset management, electronic trading and business decision making. Patents for
these and other processes, such as Amazon.com's method of conducting online
commercial transactions using “one click,” have routinely been granted by the
U.S. Patent and Trademark Office in the years since State Street.

Patent disputes involving financial services – in particular, trading, clearing and
settlement technologies – have become more common in the years following the
State Street decision. For example, a patent issued in 1990 (U.S. 4,903,201) to
Susan Wagner, a former official of the Commodity Futures Trading Commission,
claimed the invention of an “automated futures trading exchange.” The patent
was later sold for an amount reported to be approximately $2 million and became
the basis of litigation in federal courts in Texas and New York. The Chicago
Board of Trade, Chicago Mercantile Exchange and New York Mercantile
Exchange settled infringement claims with the patent owner in 2002 and 2003 for
an aggregate amount reported to be in excess of $50 million.

More recently, litigation among financial markets institutions has involved a mix
of intellectual property claims. For example, the New York Mercantile Exchange
(“NYMEX”) sued the IntercontinentalExchange (“ICE”) in 2003, claiming that
publicly disseminated settlement prices for contracts traded on NYMEX are

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State Street Bank and Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed.
Cir. 1998).

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DISCUSSION DRAFT: 12/21/2007
“original works of authorship” produced by NYMEX and that ICE violated
NYMEX’s registered copyright by providing facilities for trading and clearing
competing contracts in the “over-the-counter” market. A federal court in New
York later granted summary judgment to ICE, ruling that market prices are mere
facts that cannot be copyrighted.

Pending litigation in federal court in New York and state court in Illinois involving
the International Securities Exchange (“ISE”), Chicago Board Options Exchange
(“CBOE”), Dow Jones & Co., McGraw-Hill and others raises numerous
intellectual property claims, including the claim that CBOE’s trading system
infringes patents held by ISE (U.S. Nos. 6,618,707 6,405,180 and 6,377,940)
covering the design of an "automated exchange for trading derivative securities,”
etc.

Why has intellectual property become an important battleground for competition
in the financial services industry?

The answer to that question turns on many

factors, such as the increasing importance of technology in financial services
operations, the accelerated pace of financial engineering, the advent of the
business process patent and, perhaps, the trend toward less prescriptive forms
of financial services regulation (which may have resulted in eliminating or
reducing legal barriers to competition).

Financial market institutions have responded to this change in the competitive
landscape in various ways.

Some patent holders have extracted rents from

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DISCUSSION DRAFT: 12/21/2007
competitors by threatening to enforce court orders that require parties accused of
infringement to cease the activities causing infringement.
have

developed

robust

patent

portfolios

aforementioned infringement claims.

as

a

Some incumbents

deterrent

against

the

Others build patent portfolios as a

mechanism for negotiating licensing agreements with incumbent firms or
establish standards for interoperability.

The growing prominence of intellectual property rights as a competitive factor in
financial markets bears important public policy implications because of the
implications for productivity, economic growth, and financial market stability. To
that end, the Federal Reserve Bank of Chicago and Kellogg School of
Management at Northwestern University hosted a roundtable discussion of
intellectual property and competition issues relating to the financial services
industry on October 29, 2007. Leading academics, legal practitioners, business
leaders, and senior central bank staff explored intellectual property issues
relating to financial information, business methods and technologies, and
considered how conflicts over intellectual property rights have affected
competition in the financial services industry.

Policymakers have explored …“Are we striking the right balance in our protection
of intellectual property rights? Are the protections sufficiently broad to encourage
innovation but not so broad as to shut down follow-on innovation? Are such
protections so vague that they produce uncertainties that raise risk premia and
the cost of capital? How appropriate is our current system--developed for a world

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DISCUSSION DRAFT: 12/21/2007
in which physical assets predominated--for an economy in which value
increasingly is embodied in ideas rather than tangible capital?” 6
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The answers to these questions are less than clear. Consider, for example, the
Black-Scholes options pricing model and the innovations that resulted from it.
Consider the impact on further innovations in finance if Fischer Black, Myron
Scholes and Robert Merton patented their discovery and restricted others from
using it. Suffice to say that innovations in finance and beyond could have been
stifled. Merton, for example, has stated that publication of the Black-Scholes
model:
“. . . provided a launching pad for refinements of the theory,
extensions to derivative-security pricing in general, and a wide
range of other applications, some completely outside the realm of
finance. The Chicago Board Options Exchange (CBOE), the first
public options exchange, began trading in April 1973, and by 1975,
traders on the CBOE were using the model to both price and hedge
their option positions. It was so widely used that, in those prepersonal-computer days, Texas Instruments sold a handheld
calculator specially programmed to produce Black-Scholes option
prices and hedge ratios.” 7
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It is unclear whether anyone at the time considered the model to be eligible for
patent protection. In light of recent developments in the law, however, it seems
that the model might have been considered a kind of “business method” that is
routinely patented today. Landes and Posner consider the model “. . . a plausible

6

A. Greenspan, “Market Economies and Rule of Law,” Remarks at Financial Markets
Conference, Federal Reserve Bank of Atlanta (April 4, 2003).

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R. Merton, “Applications of Option-Pricing Theory: Twenty-Five Years Later,” The
American Economic Review, Vol. 88, No. 3 (June 1998) at 324, available online at: www.jstor.org

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DISCUSSION DRAFT: 12/21/2007
candidate [for patent protection] had it been invented after the new type of patent
[for “business-methods”] was recognized.” 8
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Whether the world of finance would have been a better or worse place had the
model been patented is an important question for us to consider now that
“conceptual” technologies such as mathematical methods for estimating the
value of securities (so-called “Monte Carlo” simulation) 9 and even variations on
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the Black-Scholes model 10 have been patented. Many inventors in the financial
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services industry are actively seeking to protect their intellectual property and, as
discussed above, litigation between financial services competitors is becoming
more common.

The social costs of these disputes are evident; the social

benefits are less obvious.

Conclusions

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The legal protection of intellectual property in information, business methods or
processes and financial technologies has become increasingly important to the
financial services industry in the past several decades. In particular, intellectual
property has played a prominent role in recent years in the competitive (but also
sometimes cooperative) interaction among financial market institutions, such as
8

W. Landes, and R. Posner, The Economic Structure of Intellectual Property Law
(Cambridge, Mass.: Harvard U. Press, 2003) at 306.

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9

See Traub, et al., U.S. Patent 5940810 (Estimation method and system for complex
securities
using
low-discrepancy
deterministic
sequences),
available
online
at:
http://www.freepatentsonline.com/5940810.html

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10

See Swift, U.S. Patent 20020178101 (System and method for option pricing using a
modified
Black-Scholes
option
pricing
model),
available
online
at:
http://www.freepatentsonline.com/20020178101.html

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DISCUSSION DRAFT: 12/21/2007
exchanges, alternative trading systems, clearinghouses and the financial
intermediaries and end users who interact with them. In this paper, we postulate
that intellectual property has played a unique role in relation to financial market
competition at least in part as a result of the “network” characteristics of the
connections among these institutions.

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DISCUSSION DRAFT: 12/21/2007
REFERENCES
Publications
Greenspan, Alan, “Market Economies and Rule of Law,” Remarks at Financial
Markets Conference, Federal Reserve Bank of Atlanta (April 4, 2003), available
online at:
http://www.federalreserve.gov/boarddocs/speeches/2003/20030404/default.htm
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Landes, William M., and Richard A. Posner, The Economic Structure of
Intellectual Property Law (Cambridge, Mass.: Harvard U. Press 2003)
Merton, Robert C., “Applications of Option-Pricing Theory: Twenty-Five Years
Later,” The American Economic Review, Vol. 88, No. 3 (June 1998) at 324,
available online at: www.jstor.org
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Langley, Peter, and Bob Seeman, “Patent Strategies for Financial Institutions
and Internet Businesses,” Paper, International Bar Association (Sept. 28, 1999),
available online at: http://www.origin.co.uk/papers/IBA.pdf
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Ruding, H. Onno, “The transformation of the financial services industry,”
Financial Stability Institute, Occasional Paper No. 2 (Basel: March 2002),
available online at: http://www.bis.org/fsi/fsipapers02.pdf
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Stewart, Jamie B., “The Implications of Advancing Technology for Bankers and
Central Bankers,” Remarks at SWIFT SIBOS Conference, San Francisco,
California (Sept. 11, 2000), available online at:
http://www.newyorkfed.org/newsevents/speeches/2000/js000911.html
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Wilmarth, Arthur E., Jr., “The Transformation of the U.S. Financial Services
Industry, 1975-2000: Competition, Consolidation, and Increased Risks,” U. of
Illinois Law Rev., Vol. 2002, No. 2 (2002), available online at:
http://www.ssrn.com
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Patent Documents
Swift, U.S. Patent 20020178101 (System and method for option pricing using a
modified Black-Scholes option pricing model), available online at:
http://www.freepatentsonline.com/20020178101.html

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Traub, et al., U.S. Patent 5940810 (Estimation method and system for complex
securities using low-discrepancy deterministic sequences), available online at:
http://www.freepatentsonline.com/5940810.html
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DISCUSSION DRAFT: 12/21/2007
SELECTED BIBLIOGRAPHY
Banks, E., E-Finance – the Electronic Revolution ([CITE]: John Wiley, 2001)
Bar, F., “The construction of marketplace architecture,” in Tracking a
Transformation: E-commerce and the Terms of Competition in Industries
(Washington, D.C.: Brookings Institution, 2001)
Breedon, F., and A. Holland, “Electronic versus open outcry markets: the case of
the bund futures contract,” Bank of England Working Paper No. 76 (Feb. 1998),
available online at: www.bankofengland.co.uk
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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102