UNITED STATES DISTRICT COURT
`NORTHERN DISTRICT OF ILLINOIS
`EASTERN DIVISION
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`
`Judge Sharon Johnson Coleman
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`Civil Action No. 05 C 4811
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`HIGHLY CONFIDENTIAL
`ATTORNEYS’ EYES ONLY
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`____________________________________
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`TRADING TECHNOLOGIES
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`INTERNATIONAL, INC.,
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`Plaintiff
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`v.
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`CQG, INC., and CQGT, LLC,
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`Defendants.
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`____________________________________)
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`CORRECTED EXPERT REPORT OF CHRISTOPHER THOMAS
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`1.
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`I, Christopher Thomas, have been retained by the law firm of McDonnell Boehnen
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`Hulbert & Berghoff LLP (“MBHB”) as an expert witness in the above-referenced case.
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`2.
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`I expect to provide expert testimony on certain topics relevant in this case including,
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`for example, (a) general background information regarding trading, (b) the nature of the trading
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`industry, (c) background of the patents-in-suit (U.S. Patent Nos. 6,766,304 and 6,722,132), (d) the
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`utility and advantages of the patented invention, and (e) CQG’s infringement of the patents-in-suit.
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`3.
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`I understand that trial preparation is continuing, and that I will have the right to
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`supplement or amend this report if additional information pertinent to my opinions becomes known
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`to me. I also understand that I may be asked at trial to rebut opinions raised by CQG.
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`4.
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`5.
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`For my work in this case, I am charging my consulting rate of $500 per hour.
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`In the last four years, I provided an expert report in the RCG v. TT litigation.
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`I.
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`QUALIFICATIONS & BACKGROUND
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`6.
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`My curriculum vitae is attached to this report as Exhibit A. Briefly, my expertise
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`TRADING TECH EXHIBIT 2201
`TD Ameritrade v. Trading Technologies
`CBM2014-00135
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`Page 1 of 12
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`the RCG v. TT case on the issue of infringement, as well as Judge Dow’s opinion on
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`infringement. I am also familiar with my expert report from the RCG case. I have also reviewed
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`the summary judgment briefing and declarations from the TT v. GL case on the issue of
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`infringement. I have reviewed Judge Holderman’s opinion from the GL Trade v. TT case.
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`III. BACKGROUND OF THE INDUSTRY
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`14.
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`The electronic trading industry is made up of various participants. These
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`participants include the exchanges, Futures Commissions Merchants (“FCMs”), technology
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`providers, such as Independent Software Vendors (“ISVs”) whose primary business is to provide
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`front end order entry software, trading firms and individual traders. I may describe the roles of
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`these various participants. All of the participants identified above provide complimentary
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`services and work together to facilitate the execution of trades. The norm in the industry is for
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`traders to pay on a per transaction basis to execute a trade. TT is an example of an ISV.
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`Examples of more well diversified vendors include CQG and Bloomberg. Examples of an FCM
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`include RCG and Goldman Sachs. Examples of an exchange include the CME and Eurex.
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`15.
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`Since at least the early 1990s, the industry participants identified above have been
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`investing in creating and providing front end order entry software. The technology providers
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`include ISVs and more well diversified vendors that provide various technology, including front
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`end order entry software. Many FCMs (such as RCG and Goldman Sachs), and exchanges (such
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`as DTB/Eurex in the 1990s, the CME in the 1990s through the early 2000s and the
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`Intercontinental Exchange ("ICE”) today) have provided their own front end order entry
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`software. Furthermore, many trading firms and individual traders have invested in their own
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`technology creating their own front end order entry software. All of the participants identified
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`above compete against each other with respect to front end order entry software.
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`16.
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`I may testify regarding the nature of the competition between the various
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`participants identified in Paragraph 14. For example, FCMs and exchanges that provide front
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`end order entry software have an advantage over ISVs because they have the ability to leverage
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`off of their core businesses. The more well diversified vendors also have an advantage over
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`ISVs because they have the ability to leverage off of their other businesses (for example, CQG
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`provides charting/analytics software and Bloomberg provides news and other services).
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`17.
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`I may also provide background testimony regarding the history of trading and
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`electronic trading. This may include an explanation regarding how trades were conducted prior
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`to electronic trading (e.g., trading in the pits) and about the transition to electronic trading. I may
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`also explain the types of tradeable objects that can be traded. For example, I may provide
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`background regarding what is a futures contract and what is an underlying cash product. I may
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`further testify regarding the purpose of futures markets (e.g., to provide price discovery and risk
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`transfer). I may also testify about the various types of traders in the market and the roles they
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`play (e.g., hedgers and speculators), as well as provide examples of hedging (e.g., fuel hedging
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`contracts used by airlines, mortgages, etc.).
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`18.
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`I may also testify about the importance of volume to the industry and about the
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`trading volumes at the top derivative exchanges. The invention provided the added benefit to
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`exchanges and FCMs of causing traders to trade more volume. For example, the former CTO of
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`the Chicago Mercantile Exchange (“CME”), Scott Johnston, testified that a major contributor to
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`the CME’s dramatic volume growth from 2000 to 2002 was MD Trader (TT’s commercial
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`embodiment of the invention). Johnston Decl., at ¶3; Johnston Dep. Tr., at 69-71. This was also
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`testified to by James Zellinger, the former Executive Vice President of Operations for Fuji
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`Futures (a division of Fuji bank) and founder of Advantage Futures, LLC. (Zellinger Decl., ¶ 10I
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`have reviewed Mr. Grisafi’s declaration, which he also claims that MD Trader increased the
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`volumes of futures such as the E-Mini by magnitudes. I may also testify regarding the types of
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`fees typically charged for trading. This includes regulatory fees, commissions charged by FCMs,
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`and fees charged by exchanges. Additionally, I may talk about trading costs, including slippage.
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`Slippage is the difference between the price at which the trader wants to execute a trade, versus
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`the price at which the trade is actually executed.
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`IV.
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`THE BACKGROUND OF THE PATENTS-IN-SUIT
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`19.
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`Prior to the invention of the patents-in-suit, there was a well-accepted
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`conventional wisdom regarding the design of a trading interface for order entry. For example, it
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`was conventional to provide the ability to enter orders using order entry tickets. With order entry
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`tickets, a trader fills out a ticket and then clicks on a send button (and/or a confirmation button)
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`provided on the ticket to send an order to an exchange. This method was widely known as being
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`very accurate for order entry, but also widely known as being very slow.
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`20. With respect to trading interfaces that permitted users to enter orders by directly
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`interfacing with displayed prices (e.g., through the use of a mouse), the vast majority of trading
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`interfaces were dynamic screens. Such dynamic screens displayed the best bid price and best ask
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`price at designated locations on the screen. Some of such dynamic screens permitted single
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`action order entry that consisted of a trader pre-setting a default quantity and then clicking (e.g.,
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`using a single-click or a double-click) on a dynamic screen to cause a trade order to be sent to the
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`exchange at the pre-set quantity.
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`21.
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`Figure 2 of the patents-in-suit (reproduced with annotations below) illustrates an
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`example of one such common dynamic screen, also referred to as a market grid.
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`Best Bid Price is
`Always Displayed
`Here
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`Best Ask Price is
`Always Displayed
`Here
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`22.
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`The dynamic screen of Figure 2 represents a screenshot for a market. In the
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`figure, bid prices are provided in the BidPrc column 203 and ask prices are displayed in the
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`AskPrc column 204 column adjacent to the BidPrc column. The best bid price that is currently
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`available in the market is always displayed at the top of column 203, and other bids that are also
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`currently available in the market are provided progressively descending the BidPrc column 203.
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`Similarly, the best ask price that is currently available in the market is always displayed at the
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`top of column 204, and other asks that are currently available in the market are displayed
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`progressively descending the AskPrc column 204. The inside market is understood (and defined
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`by the patents-in-suit) as meaning the best bid price and best ask price available in the market.
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`23.
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`The screen shown in Figure 2 is dynamic with respect to the display of prices
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`because each and every time the inside market changes, the price values within the cells of the
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`top row in columns 203 and 204 will change. More particularly, the value in the best bid price
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`cell changes every time an update reflecting a change to the best bid price available in the market
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`is received, and the value in the best ask price cell changes every time an update reflecting a
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`change to the best ask price available in the market is received. The other displayed bid and ask
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`prices similarly change based on updates in the market. Therefore, the prices are constantly
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`changing in response to changes in the market. However, the location (or cells) designated for
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`the inside market remains in the same top row of the display of prices. In other words, though
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`the values for the prices are changing in the cells, the dynamic display maintains the inside
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`market at the same location in those top two cells. Thus, the dynamic screen of Figure 2 fixes
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`the inside market for a commodity in a specified location (i.e., in the top cells).
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`24.
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`Prior to the invention of the patents-in-suit, dynamic screens of the sort shown in
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`Figure 2 represented the engrained conventional wisdom regarding how electronic trading
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`screens were designed. While most dynamic screens have a format similar to what is shown in
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`Figure 2 (where the best bid and ask prices are provided side-by-side), at the time of the
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`invention there were also similar dynamic screens that displayed the prices vertically (e.g., with
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`the best ask price being displayed above the best bid price). However, such screens similarly
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`displayed the best bid and best ask prices only at designated locations on the screen. There were
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`two main design criteria for trading screens at that time: 1) increasing speed and accuracy, and
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`2) conserving screen real estate. The dynamic screen fit both of these design criteria and
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`provided numerous advantages.
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`25. While various features may have varied from one dynamic screen to another
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`dynamic screen, there was one constant: the inside market was displayed in a fixed, designated
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`location to emphasize focus on the primary target for the traders – the inside market. This is
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`because, prior to the invention, the most common types of orders were orders made at the inside
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`market (commonly referred to as “market orders” or “market type orders”). Since the location of
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`the inside market is always known, the trader may easily spot the target, regardless of changes in
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`the market. At any given time, the trader could look at the screen and immediately know the
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`current state of the market. Thus, dynamic screens allow the trader to quickly enter market type
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`orders at the current market by clicking on (i.e., single- or double-click) the location for the best
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`bid (or best ask). For these types of orders, the dynamic screen is very accurate. There also was
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`no quicker way that such an order could be sent to the exchange. So, prior to the invention, the
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`conventional wisdom was to set the inside market as a fixed target on a dynamic screen.
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`26.
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`The second design consideration -- conserving screen “real estate” -- was
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`important because traders had numerous types of information provided on the limited space of
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`the trading screen, including multiple markets for products to be traded, various price charts,
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`numerous news feeds, etc. It was critical to minimize space so that the market for each product
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`could be displayed, as well as to reduce the amount of mouse movement between products. The
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`dynamic screens satisfied this criteria because the bid and ask prices for a product are provided
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`in proximate locations. In addition, the number of displayed bid and ask prices beyond the inside
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`market may be adjusted to further minimize the amount of screen real estate required for a
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`product. That is, the screen real estate for a product can be reduced to simply four pieces of
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`market data: (i.e., a best bid price/quantity and a best ask price/quantity). The other rows in
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`Figure 2 are not necessary to see the current market and, therefore, do not need to be displayed.
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`Thus, the dynamic screen allowed mouse movement by the user within a product, as well as
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`between products, to be minimized.
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`27.
`
`There were numerous examples of dynamic screens in the futures space prior to
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`the patents-in-suit, including but not limited to:
`
`
`Intex (1994) trading screen;
` SPATS (1987) screen;
` GLOBEX I (1992) trading screens;
` LIFFE APT (1989) trading screens;
`
`the OSD screen of the LIFFE APT system;
` MEFF (1997) dynamic screen;
` TT’s X_TRADER;
` Project A trading screens;
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` eSpeed trading screens;
` Patsystems trading screens;
` Globex II trading screens;
` DTB/Eurex trading screens;
` Ecco trading screens;
` RTS trading screens; and
` EasyScreen trading screens
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`28.
`
`In 2001, I designed an order entry interface for Stafford Trading, and later used by
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`
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`TD Bank, which used a dynamic screen similar to that of Figure 2. There also were hundreds of
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`these types of dynamic screens used in other asset classes, including bonds and equities (e.g.,
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`NASDAQ level 2 type dynamic trading screens). Still today, this style of dynamic screen is a
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`common type of order entry screen in all asset classes other than futures.
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`V.
`
`THE UTILITY AND ADVANTAGES OF THE PATENTED INVENTION
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`29.
`
`In my opinion, the invention of the patents-in-suit was revolutionary and changed
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`the industry. The invention provided significant advantages over the prior art by combining a
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`“static display of prices” or “static price axis” with single action order entry. In contrast to
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`dynamic screens, where the location of the inside market remains constant and the values
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`displayed at those locations change with each and every inside market update, the static display
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`of prices includes price levels that do not change with a change in the inside market. Instead, the
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`indicators for the inside market change location or move relative to the static display of prices.
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`30.
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`By combining a static display of prices with single action order entry, the
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`inventors of the patents-in-suit went against the prevailing and overwhelming conventional
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`wisdom at the time. For example, instead of having the market in a fixed location with the prices
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`changing in that fixed location, the inventors fixed the location of the prices and made the inside
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`market move relative to the fixed prices on the price axis. The price axis was static, so that the
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`prices do not normally flip, as with the dynamic style screen of Figure 2, causing the trader to
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`miss his or her intended price before the order is sent.
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`31.
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`The inventors were primarily concerned with addressing the problem in dynamic
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`screens whereby traders would miss their intended prices as a result of the prices changing from
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`under the trader’s cursor before an order is sent. E.g., Brumfield Trial Tr., at 682-706. As a
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`result, the combination of static screens and single action order entry increased the likelihood
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`that the user would get his desired price for non-market type orders and provided for fast order
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`entry by keeping the price level static when the inside market changes.
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`32.
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`After a period of initial skepticism, the invention broke through to become the
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`prominent trading tool in the futures trading space. E.g., Geannopulos 2011 Dep. Tr., at 113-14;
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`McElveen Decl., at ¶ 7; Burns Dep Tr., at 242-44. The invention received widespread
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`praise. For example, over 30 prominent traders and leaders in the futures industry signed
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`declarations under the penalty of perjury attesting to the importance of the patented invention to
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`electronic trading, declaring, for example:
`
` “Mr. Brumfield had a unique vision and [MD Trader] was ingenious” (Glickman, Decl., ¶
`6)
` “significantly reduces the mental calculations required by the preexisting systems” (Id. at
`¶ 5)
` “much faster than any order entry system I had used before” (Thomas Burns Decl., ¶ 7)
` “created a paradigm change in the way that active traders traded” (Feltes Decl., ¶ 5)
` “fast and accurate order entry and management” (Johnson Decl., ¶ 7)
` “more intuitive and easy to use than other systems” (Ryan Decl., ¶ 4)
` “changed the way electronic trading was done” (Anthony Decl., ¶ 6)
` “made it much easier to see how the market was moving” (Oryhon Decl., ¶ 4)
` “allowed traders to . . . react quicker” (Id. at ¶ 5)
` “radically different than the types of trading tools that were available at that time”
`(Monieson Decl., ¶ 7)
` “far superior” (Clark Decl., ¶¶ 4-5)
` “allowed a trader to recognize opportunities much quicker” (Cahnman Decl., ¶ 8)
` “a world of difference” (Thomas Burns Decl., ¶ 5)
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` “[traders] saw the great advantages of using MD Trader and now could not switch back”
`(Moore Decl., 4)
` “far superior for the active trader because it was fast” (Zellinger Decl.,¶ 5)
` “a very significant departure from the . . . [systems available]” (Grisafi Decl., ¶ 6)
` “allow for a trader to be more aggressive and more confident” (Anthony Decl., ¶ 6)
` “a revolutionary product providing great benefits to electronic traders” (Oryhon Decl., ¶
`6)
` “revolutionary . . .not just an incremental improvement.” (Kidd Decl., ¶ 8)
` The differences between MD Trader and previous systems resulted “in MD Trader being
`an invaluable tool to traders.” (Grisafi Decl., ¶ 5)
` “a stroke of genius and I had not seen anything like it before” (Martin Decl., ¶ 8)
` “different . . . from anything I had ever seen before” (Leone Decl., ¶ 3)
` “a major improvement . . . so significant that I cannot put a price on its value” (Parker
`Decl., ¶ 4)
` “displayed the ebbs and flows of a market in a way that I could easily see” (Thomas
`Burns Decl., ¶ 6)
` Prior to TT’s launch of MD Trader “no one suggested anything remotely like MD
`Trader” (Feltes Decl., ¶ 8)
` “whoever came up with . . . MD Trader was truly ‘thinking outside of the box’” (Oryhon
`Decl., ¶ 6)
` “MD Trader provided a significant change to the order entry screens that were prevalent
`at the time of its release. Prior to the release of MD Trader, traders did not even perceive
`a problem with the old tools they were using. Only after seeing the benefits of MD
`Trader did people
`like myself
`realize
`the shortcomings of
`the preexisting
`systems.” (Schuman Decl., ¶ 12)
` MD Trader was a “superior tool to the other systems available at the time.” (Zellinger
`Decl., ¶ 4)
` “MD Trader was the first application designed to be used as a true trading tool by the
`trader to enhance trading.” (Zellinger Decl., ¶ 5)
` “MD Trader proved to be a significant advance in performance.” (Marlovics Decl., ¶ 8)
` MD Trader was “great.” (Gancer Decl., ¶ 4)
` MD Trader is “invaluable.” (Jahno Decl., ¶ 5)
` “substantially increases the speed in which traders can react to opportunities and enter
`orders.” (Mendelson Decl., ¶ 6)
` “revolutionary.” (Moricz Decl., ¶ 4)
` “radically different . . . far superior.” (Monieson Decl., ¶ 7)
` “a world of difference for the trader.” (Melgarejo Decl., ¶ 4)
` “provided dramatic benefits to traders.” (Ryan Decl., ¶ 5)
`
`33.
`
`In addition, by keeping the price levels static and having the inside market move
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`relative to the static price axis, the patents-in-suit unexpectedly better represented the market and
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`changes in the market than prior art style screens. E.g., Brumfield Trial Tr., at 705-706. For
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`example, allowing the market to move up and down on the screen provided the ability of the
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`trader to enter orders more quickly and accurately at desired prices relative to the market. This
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`required less mental processing demands on the trader, and also more precisely identified the
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`current market. E.g., Anthony, Decl., ¶ 5, Cahnman Decl., ¶¶ 8-9, Glickman, Decl., ¶ 5; Grisafi,
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`Decl., ¶¶ 4-5, McElveen, Dec., ¶¶ 4-5, Feltes, Decl., ¶¶ 4-5, Northway, Decl., ¶ 4, Zellinger,
`
`Decl., ¶ 5. Thus, order entry at desired prices was improved. E.g., Brumfield Trial Tr., at 703-
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`706; Anthony, Decl., ¶ 5, Glickman, Decl., ¶¶ 4-5, Grisafi, Decl., ¶¶ 4-5, Clark Decl., ¶ 5;
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`Cahnman Decl., ¶ 8, Feltes, Dec., ¶¶ 4-5, McElveen, Dec., ¶¶ 4-5, Northway, Decl., ¶ 4. The
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`combination of this unexpected benefit with the fast/accurate order entry made this invention
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`very valuable to many traders.
`
`34.
`
`I have reviewed testimony from traders describing the benefits of the invention
`
`over the prior art. For example, one of the inventors, Harris Brumfield, changed from using the
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`prior art style interface to the invention claimed in the patents-in-suit and as a result quickly
`
`experienced an exponential increase in his gains. Brumfield Trial Tr., at 707-713; PTX 396.
`
`One early adopter, David Martin, changed from using a prior art style Globex terminal to the
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`invention claimed in the patents-in-suit and soon thereafter had approximately 90 consecutively
`
`profitable trading days using the invention. Martin Decl., ¶ 8; Martin Dep. Tr., at 118-120.
`
`According to Mr. Martin, the invention “was far superior to preexisting systems” and his success
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`was “directly attributable” to TT’s patented invention. Id. Yet another user of the invention,
`
`Charles McElveen III, founder and owner of Kingstree Trading, L.L.C., licensed and used the
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`invention soon after it launched and quickly saw the “significant advance over the trading
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`XI.
`
`RESERVATION OF RIGHT TO SUPPLEMENT THIS REPORT AND
`OPINIONS
`
`176. This report presents my opinions to date. As additional data, information,
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`testimony, or expert reports from the various· defendants become available to me or are provided
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`to me, I may consider this information and I may find it appropriate to revise or supplement my
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`analysis, opinions, and conclusions. Thus, I reserve the right to modify or supplement this report
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`and the opinions contained herein.
`
`177.
`
`I declare under penalty of perjury that the foregoing is true and correct and that
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`this declaration was executed on this November 25, 2013, in Chicago, Illinois.
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`Executed on November 25,2013
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