Thomas F. HallerDownload PDFPatent Trials and Appeals BoardNov 29, 201914191152 - (D) (P.T.A.B. Nov. 29, 2019) Copy Citation UNITED STATES PATENT AND TRADEMARK OFFICE UNITED STATES DEPARTMENT OF COMMERCE United States Patent and Trademark Office Address: COMMISSIONER FOR PATENTS P.O. Box 1450 Alexandria, Virginia 22313-1450 www.uspto.gov APPLICATION NO. FILING DATE FIRST NAMED INVENTOR ATTORNEY DOCKET NO. CONFIRMATION NO. 14/191,152 02/26/2014 Thomas F. Haller NGI-14-1073R 8564 35811 7590 11/29/2019 IP GROUP OF DLA PIPER LLP (US) ONE LIBERTY PLACE 1650 MARKET ST, SUITE 5000 PHILADELPHIA, PA 19103 EXAMINER GREGG, MARY M ART UNIT PAPER NUMBER 3697 NOTIFICATION DATE DELIVERY MODE 11/29/2019 ELECTRONIC Please find below and/or attached an Office communication concerning this application or proceeding. The time period for reply, if any, is set in the attached communication. Notice of the Office communication was sent electronically on above-indicated "Notification Date" to the following e-mail address(es): pto.phil@us.dlapiper.com PTOL-90A (Rev. 04/07) UNITED STATES PATENT AND TRADEMARK OFFICE ____________ BEFORE THE PATENT TRIAL AND APPEAL BOARD ____________ Ex parte THOMAS F. HALLER ____________ Appeal 2019-000007 Application 14/191,152 Technology Center 3600 ____________ Before ELENI MANTIS MERCADER, NORMAN H. BEAMER, and ADAM J. PYONIN, Administrative Patent Judges. BEAMER, Administrative Patent Judge. DECISION ON APPEAL Appellant1 appeals under 35 U.S.C. § 134(a) from the Examiner’s Non-Final Rejection of claims 1–24. We have jurisdiction over the pending rejected claims under 35 U.S.C. § 6(b). We AFFIRM. 1 We use the word “Appellant” to refer to “applicant” as defined in 37 C.F.R. § 1.42. Appellant identifies NYSE Group, Inc. as the real party in interest. (Appeal Br. 1.) Appeal 2019-000007 Application 14/191,152 2 THE INVENTION Appellant’s disclosed and claimed invention is directed to a trading platform adapted for pairs trading of unrelated securities from one or more asset classes using a single order approach. (Abstract.) Independent claim 1, reproduced below, is illustrative of the subject matter on appeal: 1. A computer-implemented method, said method comprising: in a programmed computer comprising at least one database structure, said database structure defining an order book and storing data defining tradable pairs of unrelated securities as single orders in said order book: receiving, at the programmed computer, from among one or more trader computing devices adapted to conduct trades, at least one request to pair a first leg and a second leg of unrelated securities for a quantity; testing, by the programmed computer, information associated with each of the unrelated securities to determine whether a pairing compatibility exists between the unrelated securities in the at least one request; creating, by the programmed computer, at least one tradable pair of the unrelated securities when it is determined that the pairing compatibility exists; causing, by the programmed computer, the at least one tradable pair of unrelated securities to be presented to at least one trading entity via at least one of the one or more trader computing devices; receiving, by the programmed computer, from among the one or more trader computing devices, a selection; entering, by the programmed computer, said selected tradable pair as a single pairs trade order into the order book, the single pairs trade order having order parameters, a portion Appeal 2019-000007 Application 14/191,152 3 of the order parameters associated with the first leg, another portion of the order parameters associated with the second leg; matching, by the programmed computer, information in one or more other trade orders to the order parameters of the single pairs trade order entered into the order book; determining, by the programmed computer, whether the order parameters associated with said first leg and said second leg of the single pairs trade order are met; and executing, by the programmed computer, said single pairs trade order as one single order when the order parameters associated with said first leg and said second leg are both met. Appeal Br. 38. (Claims App.) REJECTIONS2 The Examiner rejected claims 1–4, 7, and 9–24 under 35 U.S.C. § 112, first paragraph, as failing to comply with the written description requirement. (Non-Final Act. 27.) 2 New Rejections: the obviousness rejections of claims 9, 11, and 19 were modified to correct typographical errors. See Ans. 3–6. Withdrawn Rejections: The rejections of claim 1 under 35 U.S.C. § 112, first paragraph, regarding the “testing” and “entering” limitations were withdrawn in the Answer. (Non-Final Act. 28–30, Ans. 6–7.) The rejection of claim 1 under 35 U.S.C. § 112, second paragraph, regarding the “testing” limitation was withdrawn in the Answer. (Non-Final Act. 35, Ans. 7.) While the Examiner did not explicitly withdraw the rejections to the commensurate limitations of independent claim 7, the Answer only analyzes written description and enablement issues regarding the “database structure” appearing in independent claims 1 and 7. See Ans. 12–15. We consider the Examiner’s failure to withdraw the “testing” limitation rejections to independent claim 7 as harmless error, and we will only consider the Section 112 rejections regarding the “database structure.” We treat the rejections of claim 7 regarding the “testing” limitation to be withdrawn. Appeal 2019-000007 Application 14/191,152 4 The Examiner rejected claims 1–4, 7, and 9–24 under 35 U.S.C. § 112, second paragraph, as being indefinite. (Non-Final Act. 35.) The Examiner rejected claims 1–24 under 35 U.S.C. § 101 because the claims are directed toward at least one judicial exception without reciting additional elements that amount to significantly more than the judicial exception. (Non-Final Act. 37.) The Examiner rejected claims 1–3, 5, 6, 8, 13, and 14 under 35 U.S.C. § 103(a) as being unpatentable over Maynard (US 2009/0271308 A1, pub. Oct. 29, 2009), Keith (US 2001/0044770 A1, pub. Nov. 22, 2001), and Securities and Exchange Commission, “Self-Regulatory Organizations et al.,” Release No. 34-54135, July 12, 2006 (hereinafter “CBOE”). (Non- Final Act. 64.) The Examiner rejected claim 4 under 35 U.S.C. § 103(a) as being unpatentable over Maynard, Keith, CBOE, and Durkin et al (US 2006/0089899 A1, pub. Apr. 27, 2006) (hereinafter “Durkin”). (Non-Final Act. 75.) The Examiner rejected claim 8 under 35 U.S.C. § 103(a) as being unpatentable over Maynard, Keith, CBOE, and Peterffy et al. (US 2004/0254804 A1, pub. Dec. 16, 2004) (hereinafter “Peterffy”). (Non-Final Act. 76.) The Examiner rejected claims 9–11 and 23 under 35 U.S.C. § 103(a) as being unpatentable over Maynard, Keith, CBOE, Rooney (US 2011/0145126 A1, pub. June 16, 2011), and Gao et al., “Institutional Ownership and Return Predictability Across Economically Unrelated Stocks,” July 13, 2012 (hereinafter “Gao”). (Non-Final Act. 78.) Appeal 2019-000007 Application 14/191,152 5 The Examiner rejected claims 7, 12, 15, 17, 18, 21, and 22 under 35 U.S.C. § 103(a) as being unpatentable over Maynard, Keith, and CBOE. (Non-Final Act. 87.) The Examiner rejected claim 16 under 35 U.S.C. § 103(a) as being unpatentable over Maynard, Keith, CBOE, and Durkin. (Non-Final Act. 97.) The Examiner rejected claims 19, 20, and 24 under 35 U.S.C. § 103(a) as being unpatentable over Maynard, Keith, CBOE, Rooney, and Gao. (Non-Final Act. 98.) ISSUES ON APPEAL Appellant’s arguments in the Appeal and Reply Briefs present the following issues:3 Issue One: Whether the Examiner erred in finding claims 1–4, 7, and 9–24 fail to comply with the written description requirement. (Appeal Br. 9–11; Reply Br. 3.) Issue Two: Whether the Examiner erred in finding claims 1–4, 7, and 9–24 are indefinite. (Appeal Br. 11–12; Reply Br. 3.) Issue Three: Whether the Examiner erred in finding claims 1–24 are directed to a judicial exception without significantly more. (Appeal Br. 12– 24; Reply Br. 3–8.) Issue Four: Whether the Examiner erred in finding the combination of Maynard, Keith, and CBOE teaches or suggests 3 Rather than reiterate the arguments of Appellant and the positions of the Examiner, we refer to the Appeal Brief (filed May 7, 2018); the Reply Brief (filed Sept. 27, 2018); the Non-Final Office Action (mailed Dec. 8, 2017); and the Examiner’s Answer (mailed Aug. 16, 2018) for the respective details. Appeal 2019-000007 Application 14/191,152 6 receiving, at the programmed computer, from among one or more trader computing devices adapted to conduct trades, at least one request to pair a first leg and a second leg of unrelated securities for a quantity, as recited in independent claim 1, and the commensurate limitation recited in independent claim 7. (Appeal Br. 34–37; Reply Br. 8.) ANALYSIS We have reviewed the Examiner’s rejections in light of Appellant’s arguments. Arguments Appellant could have made but chose not to make are deemed to be waived. See 37 C.F.R. § 41.37(c)(1)(iv). First Issue — Written Description Appellant argues that written description support for the claimed “database structure defining an order book and storing data defining tradeable pairs of unrelated securities as single orders in said order book” can be found in the disclosure and that “any artisan skilled in the art would certainly understand that the subject specification indeed provides support.” (Appeal Br. 9–10, citing Spec. ¶¶ 5, 19, 25–26, 14, 16–17, 33–34, Fig. 3.) We are unpersuaded of error. The Examiner finds, and we agree, that upon review of the cited paragraphs, the cited paragraphs have “no support for a database structure defining an order book” and “no support for a database structure process or a particular data structure whose structure defines an order book.” (Ans. 12–13.) The Examiner further finds, and we agree, that while some “paragraphs pointed to have support for storage medium to store instruction [paragraphs 14, 16–17, 33–34], these paragraphs have no support for a database structure defining an order book.” (Ans. 14.) Appeal 2019-000007 Application 14/191,152 7 Additionally, while Figure 3 refers to a “pair book,” the illustrated flowchart offers no information regarding a database structure. Thus, we do not find any indication that Appellant possessed the “database structure,” or, otherwise, how to achieve the claimed steps using the “database structure.” See Vasudevan Software, Inc. v. MicroStrategy, Inc., 782 F.3d 671, 683 (Fed. Cir. 2015) (“The more telling question [for written description analysis] is whether the specification shows possession by the inventor of how accessing disparate databases is achieved.”); see also In re Wilder, 736 F.2d 1516, 1521 (Fed. Cir. 1984) (affirming a rejection for lack of written description because the specification does “little more than outlining goals appellants hope the claimed invention achieves and the problems the invention will hopefully ameliorate.”); Ex parte Smith, Appeal 2012-007631, slip op. at 21 (PTAB Mar. 14, 2013) (informative) (“Beyond general statements of the function to be performed, which, at most, may render the claimed function obvious, the inventor has not shown how the recited opinion timeline is generated,” which “is not sufficient because a description that merely renders the invention obvious does not satisfy the written description requirement.”); see also Examining Computer- Implemented Functional Claim Limitations for Compliance with 35 U.S.C. 112, 84 Fed. Reg. 57 (Jan. 7, 2019). Accordingly, we sustain the Examiner’s written description rejection of claims 1–4, 7, and 9–23. Second Issue — Definiteness Appellant argues that the Examiner’s indefiniteness rejection of the claimed “database defining an order book” is in error because “support for [the] database feature” appears in the disclosure. (Appeal Br. 11, citing Appeal 2019-000007 Application 14/191,152 8 Spec. ¶¶ 5, 14, 17, 19, 25–26, 33–34, Figs. 1–4.) We are unpersuaded of error. The Examiner finds, and we agree, that the Appellant provides [no] explanation as to how a database structure defines an order book. The appellant does not point to any specific functions or structures or what exactly the metes and bounds of the term “defining” actually encompasses. (Ans. 14.) The Examiner further finds, and we agree, that “it is not clear how the database as claimed defines an order book. It is also not clear as to what the scope of the term ‘defining’ actually entails.” (Ans. 15.) One skilled in the art, having reviewed the disclosure and finding no written description support for the claimed “database,” would similarly be unable to understand the meaning of the “database defining an order book.” Accordingly, we sustain the Examiner’s indefiniteness rejection of claims 1–4, 7, and 9–23. Third Issue — Patent Eligibility The Examiner determines the claims are patent ineligible under 35 U.S.C. § 101, because “method claim 1 is rooted in a business solution in a financial pairs trading system for unrelated (i.e. inter-commodity) securities” and “[t]he claim at issue is directed or drawn to the abstract idea of unrelated/inter-commodity pairs trading.” (Non-Final Act. 38.) The Examiner further concludes that there is nothing in the claims that is significantly more than this abstract idea because the individual steps of independent claim 1 are abstract (see Non-Final Act. 39–43), and that [v]iewing the ordered combination of abstract elements and concrete tangible components as a combination does not add anything further than the individual elements. This is because the ordered combination of abstract elements do not go beyond generally linking use of the judicial exception to a particular technological environment. The technology implemented in the Appeal 2019-000007 Application 14/191,152 9 instant application is useful to solve a business problem (trading unrelated (inter-commodity) securities as a single order), but the additional elements are not a technological solution to a technological problem, or a solution to the problem introduced by the technology itself. (Non-Final Act. 45.) Appellant argues the claims are directed to a technological improvement, because the claims provide a way for pairing, storing and even executing trades involving unrelated securities as single orders; whereas prior art systems which do not have this capability are required to store the unrelated securities separately and execute multiple trades on multiple orders (i.e., one trade for each unrelated security) to achieve the same result. (Appeal Br. 13.) Particularly, Appellant contends that according to Enfish [Enfish, LLC v. Microsoft Corp., 822 F.3d 1327 (Fed. Cir. 2016)], even a basic and known computer component (such as a database) that is reconfigured to operate differently from conventional databases in the art, and, as a result of the reconfiguration, results in data processing improvements (e.g., faster search times, flexibility, etc.), constitutes patent-eligible subject matter under §101, and that similar to Enfish, the instant claims include a reconfigured database structure that is specially reconfigured to define an order book that accepts and stores pairs trade orders of unrelated securities as single orders. (Appeal Br. 14, emphasis in original.) An invention is patent-eligible if it claims a “new and useful process, machine, manufacture, or composition of matter.” 35 U.S.C. § 101. Here, independent claim 1 and dependent claims 2–6, 8, 9–11, 13, 14, and 23 relate to a method, and independent claim 7 and dependent claims 12, 15– Appeal 2019-000007 Application 14/191,152 10 22, and 24 t relate to a system. Thus each claim is a machine, process, or manufacture. However, the Supreme Court has long held that “[l]aws of nature, natural phenomena, and abstract ideas are not patentable.” Alice Corp. v. CLS Bank Int’l, 573 U.S. 208, 216 (2014) (quoting Ass’n for Molecular Pathology v. Myriad Genetics, Inc., 569 U.S. 576, 598–99 (2013)). The “abstract ideas” category embodies the longstanding rule that an idea, by itself, is not patentable. Alice, 573 U.S. at 216–17. In Alice, the Supreme Court sets forth an analytical “framework for distinguishing patents that claim laws of nature, natural phenomena, and abstract ideas from those that claim patent-eligible applications of those concepts.” Id. at 217. The first step in the analysis is to “determine whether the claims at issue are directed to one of those patent-ineligible concepts,” such as an abstract idea. Id. Concepts determined to be abstract ideas, and thus patent ineligible, include certain methods of organizing human activity such as fundamental economic practices (Alice, 573 U.S. at 219–20; Bilski v. Kappos, 561 U.S. 593, 611 (2010)); mathematical concepts (Parker v. Flook, 437 U.S. 584, 594–95 (1978)); and mental processes (Gottschalk v. Benson, 409 U.S. 63, 69 (1972)). Concepts determined to be patent eligible include physical and chemical processes, such as “molding rubber products” (Diamond v. Diehr, 450 U.S. 175, 191 (1981)); “tanning, dyeing, making water-proof cloth, vulcanizing India rubber, smelting ores” (id. at 182 n.7 (quoting Corning v. Burden, 56 U.S. 252, 267–68 (1853))); and manufacturing flour (Benson, 409 U.S. at 69 (citing Cochrane v. Deener, 94 U.S. 780, 785 (1876))). If the claims are directed to a patent-ineligible concept, the second step in the Alice/Mayo analysis is to consider the elements of the claims Appeal 2019-000007 Application 14/191,152 11 “individually and ‘as an ordered combination’” to determine whether there are additional elements that “‘transform the nature of the claim’ into a patent-eligible application.” Alice, 573 U.S. at 217 (quoting Mayo Collaborative Servs. v. Prometheus Labs., Inc., 566 U.S. 66, 79, 78 (2012)). In other words, the second step is to “search for an ‘inventive concept’ — i.e., an element or combination of elements that is ‘sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.’” Alice, 573 U.S. at 217–18 (quoting Mayo, 566 U.S. at 72–73.) A claim that recites an abstract idea must include additional features to ensure that the claim is more than a drafting effort designed to monopolize the abstract idea. Alice, 573 U.S. at 221. A transformation into a patent-eligible application requires more than simply stating the abstract idea while adding the words “apply it.” Id. Further to the Alice/Mayo analytical framework, after the mailing of the Answer and the filing of the Briefs in this case, the USPTO published revised guidance on the application of Section 101. See 2019 Revised Patent Subject Matter Eligibility Guidance, 84 Fed. Reg. 50 (Jan. 7, 2019) (hereinafter “Revised Guidance”). Under the Revised Guidance, we first look to whether the claim recites: (1) any judicial exceptions, including certain groupings of abstract ideas (i.e., mathematical concepts, certain methods of organizing human activity such as a fundamental economic practice, or mental processes); and (2) additional elements that integrate the judicial exception into a practical application (see MPEP § 2106.05(a)–(c), (e)–(h)). Appeal 2019-000007 Application 14/191,152 12 Only if a claim (1) recites a judicial exception and (2) does not integrate that exception into a practical application, does the Office then look to whether the claim: (3) adds a specific limitation beyond the judicial exception that are not “well-understood, routine, conventional” in the field (see MPEP § 2106.05(d)); or (4) simply appends well-understood, routine, conventional activities previously known to the industry, specified at a high level of generality, to the judicial exception. See Revised Guidance. In evaluating the claims at issue, we consider claim 1 as representative, consistent with how Appellant and the Examiner analyze the claims. See 37 C.F.R. § 41.37(c)(1)(iv) (2016). The claimed method as a whole recites a method of “pairs trading of unrelated securities from one or more asset classes using a single price movement provided by a single order approach” (Spec. ¶ 5), and accordingly recites a method of organizing human activity. Omitting the portions of the claim invoking use of generic technology (which are discussed separately below), the remaining limitations of claim 1 (both “receiving” steps, as well as the “testing,” “creating,” “causing,” “entering,” “matching,” “determining,” and “executing” steps) elaborate on the actions performed in order to consummate a single pairs trade order. Specifically, claim 1 recites operations that would ordinarily take place in performing trading. For example, pairs trading is well known: [t]he concept of pairs trading is disarmingly simple. Find two stocks whose prices have moved together historically. When the spread between them widens, short the winner and buy the Appeal 2019-000007 Application 14/191,152 13 loser. If history repeats itself, prices will converge and the arbitrageur will profit.4 The trading of single or multiple securities involves the economic acts of purchasing and/or selling securities, typically in one or more financial markets. Such trading forms the basis of a fundamental economic practice.5 As stated in the Revised Guidance, fundamental economic principles or practices (including hedging, insurant, mitigating risk), and commercial or legal interactions (including agreements in the form of contracts; legal obligations; advertising; marketing or sales activities or behaviors; business relations) are an example of organizing human activity. (Revised Guidance, 84 Fed. Reg. at 52.) 4 Gatev et al., “Pairs Trading: Performance of a Relative-Value Arbitrage Rule,” The Review of Financial Studies, Vol. 19, No. 3 (2006), pp. 797–827, available at: http://www-stat.wharton.upenn.edu/~steele/Courses/434/ 434Context/PairsTrading/PairsTradingGGR.pdf. 5 See also Bilski v. Kappos, 561 U.S. 593, 611 (2010) (“The concept of hedging, described in claim 1 and reduced to a mathematical formula in claim 4, is an unpatentable abstract idea . . . .”); Alice, 573 U.S. at 218 (“These claims are drawn to the abstract idea of intermediated settlement.”); buySafe, Inc. v. Google, Inc., 765 F.3d 1350, 1355 (Fed. Cir. 2014) (claims that “are squarely about creating a contractual relationship—a ‘transaction performance guaranty’” held as “directed to an abstract idea”); Accenture Glob. Servs., GmbH v. Guidewire Software, Inc., 728 F.3d 1336, 1345 (Fed. Cir. 2013) (claims reciting “generalized software components arranged to implement an abstract concept [of generating insurance-policy-related tasks based on rules to be completed upon the occurrence of an event] on a computer” not patent eligible); Bancorp Servs., L.L.C. v. Sun Life Assur. Co. of Can. (U.S.), 687 F.3d 1266, 1277 (Fed. Cir. 2012) (determining a “‘method for managing a life insurance policy comprising’ seven steps” is abstract). Appeal 2019-000007 Application 14/191,152 14 In sum, the subject matter of claim 1 is a fundamental economic practice, which is one of the certain methods of organizing human activity identified in the Revised Guidance. Therefore, we agree with the Examiner that the subject matter of claim 1 recites an abstract idea, as do the remaining claims. Further, pursuant to the Revised Guidance, we consider whether there are additional elements set forth in claim 1 that integrate the judicial exception into a practical application. Revised Guidance, 84 Fed. Reg. at 54–55. The abstract idea of claim 1 is carried out using various generic technological components to facilitate the pairs trade: a “programmed computer” and “database structure.” We are unpersuaded by Appellant’s principal argument that the claims “include a reconfigured database structure” (Appeal Br. 14, emphasis in original) that “provides more efficient storage.” (Appeal Br. 15, emphasis in original), and “achieves processing improvements and benefits to the end users.” (Appeal Br. 16.) Appellant offers no technical reasoning or factual support for the assertion that Appellant’s claimed invention includes a reconfigured database structure and data handling mechanism that provide an advancement in technology. Nor do we see, in the record before us, any indication that the claimed technique will store orders more efficiently. (See Ans. 21.) The claim limitations are recited at a high level of generality and the Specification provides no indication of an improvement in the underlying computer system. We additionally note that as discussed above regarding the written description rejection, although the claim recites a “database structure” that defines “an order book and storing data defining tradable pairs of unrelated Appeal 2019-000007 Application 14/191,152 15 securities as single orders in said order book,” the disclosure fails to describe this structure in terms that one of ordinary skill in the art would use in a description. Thus, the subject matter here is distinguished from that considered in such authorities as BASCOM Global Internet Servs., Inc. v. AT&T Mobility LLC, 827 F.3d 1341 (Fed. Cir. 2016). There, the court held eligible claims directed to a technology-based solution to filter Internet content that overcame existing problems with other Internet filtering systems by making a known filtering solution—namely a “one-size-fits-all” filter at an Internet Service Provider (ISP)—more dynamic and efficient via individualized filtering at the ISP. BASCOM, 827 F.3d at 1351. Notably, this customizable filtering solution improved the computer system’s performance and, therefore, was patent-eligible. See id. But unlike the filtering system improvements in BASCOM that added significantly more to the abstract idea in that case, the claimed invention here uses generic computing components to implement an abstract idea as noted previously. Nor is this invention analogous to that which the court held eligible in McRO, Inc. v. Bandai Namco Games America, Inc., 837 F.3d 1299 (Fed. Cir. 2016). There, the claimed process used a combined order of specific rules that rendered information in a specific format that was applied to create a sequence of synchronized, animated characters. Id. at 1315. Notably, the recited process automatically animated characters using particular information and techniques—an improvement over manual three- dimensional animation techniques that was not directed to an abstract idea. Id. at 1316. Appeal 2019-000007 Application 14/191,152 16 But unlike the claimed invention in McRO that improved how the physical display operated to produce better quality images, the claimed invention here merely uses generic computing components to perform a financial trade. This generic computer implementation does not improve a display mechanism as was the case in McRO. See SAP America, 898 F.3d at 1167 (distinguishing McRO). Although Appellant contends that “conventional systems do not include any mechanism for processing or storing pairs trade orders of unrelated securities ( e.g., from different asset classes) as a single order” (Appeal Br. 16, emphasis in original), “merely adding computer functionality to increase the speed or efficiency of the process does not confer patent eligibility on an otherwise abstract idea.” Intellectual Ventures I LLC v. Capital One Bank (USA), 792 F.3d 1363, 1370 (Fed. Cir. 2015); see also Credit Acceptance Corp. v. Westlake Servs., 859 F.3d 1044, 1057 (Fed. Cir. 2017). The savings efficiency afforded combining orders is part of the abstract idea, and is only a conclusory, unpersuasive assertion that the subject matter provides any improvements to technology. (Appeal Br. 14– 16.) Nor does the subject matter of claim 1 contain additional elements that implement the judicial exception with a “particular machine,” because the claims do not specify any particular technology. See MPEP § 2106.05(b). Further, the method does not transform matter; at best it transforms information. See MPEP § 2106.05(c). Nor does claim 1 have any other meaningful limitations (MPEP § 2106.05(e)), or any of the other considerations set forth in the Revised Guidance regarding a determination of whether additional elements integrate the judicial exception into a Appeal 2019-000007 Application 14/191,152 17 practical application. See Revised Guidance, 84 Fed. Reg. at 55. Rather, the claim “merely includes instructions to implement an abstract idea on a computer, or merely uses a computer as a tool to perform an abstract idea.” Id. Accordingly, we conclude that the subject matter of claim 1 (and the remaining pending claims) is directed to an abstract idea, and the additional elements recited therein do not integrate the abstract idea into a practical application. Turning to the second step of the Alice inquiry, we do not agree with Appellant that additional elements of claim 1 add “significantly more” to the basic abstract idea encompassed by the claim sufficient to transform the claimed abstract idea into a patent-eligible application. Alice, 573 U.S. at 223 (“[T]he mere recitation of a generic computer cannot transform a patent- ineligible abstract idea into a patent-eligible invention.”). “It is clear from Mayo that the ‘inventive concept’ cannot be the abstract idea itself.” Aatrix Software, Inc. v. Green Shades Software, Inc., 890 F.3d 1354, 1359 (Fed. Cir. 2018). Moreover, “[p]atent law does not protect claims to an ‘asserted advance in the realm of abstract ideas . . . no matter how groundbreaking the advance.’” Id. at 1359 (citation omitted.) Unlike Core Wireless, in which “the claims are directed to an improvement in the functioning of computers,” (Core Wireless Licensing S.A.R.L. v. LG Elecs., Inc., 880 F.3d 1356, 1363 (Fed. Cir. 2018), Appellant’s improvement is part of the abstract idea, despite the claim limitations reciting a programmed computer and a database structure. The record supports the Examiner’s finding that the additional element of a programmed computer (recited in claim 1) is well-understood, routine, and conventional, specified at a high level of generality. (Non-Final Appeal 2019-000007 Application 14/191,152 18 Act. 44; see also Fig. 4, Spec. ¶¶ 29–34.) See Revised Guidance, 84 Fed. Reg. at 56. Accordingly, we sustain the Examiner’s 35 U.S.C. § 101 rejection of claim 1. Appellant provides no arguments that would differentiate the remaining claims. Thus, the foregoing analysis of claim 1 is exemplary of that for claims 2–24. See 37 C.F.R. § 41.37(c)(1)(iv)(2016). Therefore, we also sustain the Examiner’s 35 U.S.C. § 101 rejection of those claims. Fourth Issue — Obviousness Appellant argues that the Examiner, at page 52 of the Second Examiner’s Answer, now acknowledges that Maynard does not recite the term “un- related securities.” However, the Examiner goes on to re-define this term (again), and alleges that this term can be “broadly interpreted as “pair trading from different asset classes,” and that “the Examiner’s interpretation of the claim term is improper.” (Reply Br. 8.) We are persuaded of error. The Examiner first finds that “Maynard does not explicitly teach: unrelated securities” (Non-Final Act. 67) and later finds that “[a]lthough Maynard does not recite the term “un-related securities” in light of the definition provided by the specification that “un- related securities” can be broadly interpreted as “pair trading from different asset classes.[”] (Ans. 52, citing Maynard ¶¶ 25–26.) Although the disclosure does not contain an explicit definition of “unrelated securities,” the disclosure states that “related securities . . . tend to move together.” (Spec. ¶ 3, emphasis added.) The disclosure additionally refers to “pairing unrelated securities from one or more asset classes” (Spec. ¶ 21) and that “two legs of unrelated securities from the same asset Appeal 2019-000007 Application 14/191,152 19 class may also be paired” (Spec. ¶ 21.) One of ordinary skill in the art, upon reading the disclosure, would consider that the type of asset class or classes does not determine whether two securities are “unrelated,” because the disclosure indicates that securities from the same or different asset classes may be unrelated. Accordingly, we do not agree with the Examiner’s finding that Maynard teaches or suggests Appellant’s trading of “unrelated securities” because Maynard teaches that asset classes may be mixed in “any combination.” (Ans. 52.) As none of the remaining references are cited as curing the deficiency of Maynard, we are persuaded the combination of references does not teach or suggest “unrelated securities.” Accordingly, we reverse the obviousness rejections of independent claims 1 and 7, and all claims that depend therefrom. CONCLUSION For the reasons stated above, we (1) affirm the written description and indefiniteness rejections of claims 1–4, 7, and 9–24; (2) affirm the non-statutory subject matter rejection of claims 1–24; and (3) reverse the obviousness rejections of claims 1–24. Appeal 2019-000007 Application 14/191,152 20 DECISION SUMMARY In summary: Claims Rejected 35 U.S.C. § Reference(s)/Basis Affirmed Reversed 1–4, 7, 9–24 112(1) written description 1–4, 7, 9– 24 1–4, 7, 9–24 112(2) indefiniteness 1–4, 7, 9– 24 1–24 101 non-statutory subject matter 1–24 1–3, 5, 6, 8, 13, 14 103(a) Maynard, Keith, CBOE 1–3, 5, 6, 8, 13, 14 4 103(a) Maynard, Keith, CBOE, Durkin 4 8 103(a) Maynard, Keith, CBOE, and Peterffy 8 9–11, 23 103(a) Maynard, Keith, CBOE, Rooney, Gao 9–11, 23 7, 12, 15, 17, 18, 21, 22 103(a) Maynard, Keith, CBOE 7, 12, 15, 17, 18, 21, 22 16 103(a) Maynard, Keith, CBOE, Durkin 16 19, 20, 24 103(a) Maynard, Keith, CBOE, Rooney, Gao 19, 20, 24 Overall Outcome 1–24 The Examiner’s decision is affirmed because we have affirmed at least one ground of rejection with respect to each claim on appeal. See 37 C.F.R. § 41.50(a)(1). TIME PERIOD FOR RESPONSE No time period for taking any subsequent action in connection with this appeal may be extended under 37 C.F.R. § 1.136(a)(1)(iv). AFFIRMED Notice of References Cited Application/Control No. 14/191,152 Applicant(s)/Patent Under Patent Appeal No. 2019-000007 Examiner Art Unit 3697 Page 1 of 1 U.S. PATENT DOCUMENTS * Document Number Country Code-Number-Kind Code Date MM-YYYY Name Classification A US- B US- C US- D US- E US- F US- G US- H US- I US- J US- K US- L US- M US- FOREIGN PATENT DOCUMENTS * Document Number Country Code-Number-Kind Code Date MM-YYYY Country Name Classification N O P Q R S T NON-PATENT DOCUMENTS * Include as applicable: Author, Title Date, Publisher, Edition or Volume, Pertinent Pages) U Gatev et al., “Pairs Trading: Performance of a Relative-Value Arbitrage Rule,” The Review of Financial Studies, Vol. 19, No. 3 (2006), pp. 797–827. V W X *A copy of this reference is not being furnished with this Office action. (See MPEP § 707.05(a).) Dates in MM-YYYY format are publication dates. Classifications may be US or foreign. U.S. Patent and Trademark Office PTO-892 (Rev. 01-2001) Notice of References Cited Part of Paper No. Pairs Trading: Performance of a Relative-Value Arbitrage Rule Evan Gatev Boston College William N. Goetzmann Yale University K. Geert Rouwenhorst Yale University We test a Wall Street investment strategy, ‘‘pairs trading,’’ with daily data over 1962–2002. Stocks are matched into pairs with minimum distance between normal- ized historical prices. A simple trading rule yields average annualized excess returns of up to 11% for self-financing portfolios of pairs. The profits typically exceed conser- vative transaction-cost estimates. Bootstrap results suggest that the ‘‘pairs’’ effect differs from previously documented reversal profits. Robustness of the excess returns indicates that pairs trading profits from temporary mispricing of close substitutes. We link the profitability to the presence of a common factor in the returns, different from conventional risk measures. Wall Street has long been interested in quantitative methods of specula- tion. One popular short-term speculation strategy is known as ‘‘pairs trading.’’ The strategy has at least a 20-year history on Wall Street and is among the proprietary ‘‘statistical arbitrage’’ tools currently used by hedge funds as well as investment banks. The concept of pairs trading is disarmingly simple. Find two stocks whose prices have moved together historically. When the spread between them widens, short the winner and buy the loser. If history repeats itself, prices will converge and the arbi- trageur will profit. It is hard to believe that such a simple strategy, based solely on past price dynamics and simple contrarian principles, could possibly make money. If the U.S. equity market were efficient at all times, risk-adjusted returns from pairs trading should not be positive. In this article, we examine the risk and return characteristics of pairs trading with daily data over the period 1962 through December 2002. We are grateful to Peter Bossaerts, Michael Cooper, Jon Ingersoll, Ravi Jagannathan, Maureen O’Hara, Carl Schecter, and two anonymous referees for many helpful discussions and suggestions on this topic. We thank the International Center for Finance at the Yale School of Management for research support, and the participants in the EFA’99 Meetings, the AFA’2000 Meetings, the Berkeley Program in Finance, and the Finance and Economics workshops at Vanderbilt and Wesleyan for their comments. Address correspondence to Evan Gatev, Boston College, Carroll School of Management, Fulton Hall, 140 Commonwealth Ave, Chestnut Hill, MA 02467, or email: gatev@bc.edu. The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org. doi:10.1093/rfs/hhj020 Advance Access publication February 13, 2006 Using a simple algorithm for choosing pairs, we test the profitability of several straightforward, self-financing trading rules. We find average annualized excess returns of about 11% for top pairs portfolios. Although pairs strategies exploit temporary components of stock prices, we show that our profits are not caused by simple mean reversion as documented in the previous literature. We examine the robustness of our results to a wide variety of risk factors—including not only the widely used factors in the empirical literature but also potential low-frequency institutional factors such as bankruptcy risk. In addition, we explore the robustness of our results to microstructure factors such as the bid-ask bounce, short- selling costs, and transaction costs. Although some factors such as short- selling and transaction costs affect the magnitude of the excess returns, pairs trading remains profitable for reasonable assumptions over the sample period of study, as well as over a true out-of-sample test of four years. We interpret the results of our analysis as evidence in favor of profitable arbitrage in expectations that may accrue to market partici- pants who possess relatively low transaction costs and the ability to short securities. We also find evidence that points to a systematic factor that influences the profitability of pairs trading over time. This unidentified latent risk factor has been relatively dormant recently. The importance of this risk factor is correlated with the returns to pairs trading, which is consistent with the view that the profits are a compensation to arbitra- geurs for enforcing the ‘‘Law of One Price.’’ We argue that our results reveal something about the mechanism and performance of relative-price arbitrage activities in practice. This is potentially useful to researchers because, despite considerable theory about market efficiency, economists have little empirical information about how efficiency is maintained in practice. In addition, despite the fact that hedge funds have attracted an increasing amount of investment capital over the past decade, the study of hedge fund strategies is in its infancy in the financial economics literature. This article examines the risk and return characteristics of one widely practiced active trading strategy. One natural question to ask is whether our results imply a violation of equilibrium asset pricing. Although the documented profitability of the pairs trading rule is a robust result, it is not inconsistent with all pricing models. Indeed the reversion in relative values we find is consistent with a pricing model in prices developed and tested by Bossaerts (1988). Thus, our article at the very least suggests that this class of models merits further empirical investigation. The remainder of the article is organized as follows. Section 1 provides some background on pairs trading strategy. The next section describes our methodology of constructing pairs and calculating returns. The empirical results are described in Section 3, and Section 4 provides con- clusions and directions for future research. The Review of Financial Studies / v 19 n 3 2006 798 1. Background of Pairs Trading 1.1 History In the mid-1980s, the Wall Street quant Nunzio Tartaglia assembled a team of physicists, mathematicians, and computer scientists to uncover arbitrage opportunities in the equities markets. Tartaglia’s group of for- mer academics used sophisticated statistical methods to develop high-tech trading programs, executable through automated trading systems, which took the intuition and trader’s ‘‘skill’’ out of arbitrage and replaced it with disciplined, consistent filter rules. Among other things, Tartaglia’s pro- grams identified pairs of securities whose prices tended to move together. They traded these pairs with great success in 1987—a year when the group reportedly made a $50 million profit for the firm. Although the Morgan Stanley group disbanded in 1989 after a couple of bad years of perfor- mance, pairs trading has since become an increasingly popular ‘‘market- neutral’’ investment strategy used by individual and institutional traders as well as hedge funds. The increased popularity of quantitative-based statistical arbitrage strategies has also apparently affected profits. In a New York Times interview, David Shaw, head of one of the most success- ful modern quant shops and himself an early Tartaglia’s protégé, sug- gests that recent pickings for quant-shops have become slim—he attributes the success of his firm, D. E. Shaw, to early entry into the business. Tartaglia’s own explanation for pairs trading is psychological. He claims, ‘‘... Human beings don’t like to trade against human nature, which wants to buy stocks after they go up not down’’ [Hansell (1989)]. Could pairs traders be the disciplined investors taking advantage of the undisciplined over-reaction displayed by individual investors? This is at least one possible—albeit psychological—explanation for our results, which is consistent with Jegadeesh and Titman’s (1995) finding that contra- rian profits are in part due to over-reaction to company-specific informa- tion shocks rather than price reactions to common factors. 1.2 Data snooping and market response In our study we have not searched over the full strategy space to identify successful trading rules, but rather we have interpreted practitioner description of pairs trading as straightforwardly as possible. Our rules follow the general outline of first ‘‘find stocks that move together,’’ and second ‘‘take a long–short position when they diverge and unwind on convergence.’’ A test requires that both of these steps must be parameter- ized in some way. How do you identify ‘‘stocks that move together?’’ Need they be in the same industry? Should they only be liquid stocks? How far do they have to diverge before a position is put on? When is a position unwound? We have made some straightforward choices about each of these questions. We put positions on at a two-standard deviation Pairs Trading 799 spread, which might not always cover transaction costs even when stock prices converge. Although it is tempting to try potentially more profitable schemes, the danger in data-snooping refinements outweigh the potential insights gained about the higher profits that could result from learning through testing.1 As with all filter rules using historical asset pricing data, data snooping is a potential concern. One approach to the data snooping issue is to test the results out of sample. We completed and circulated the first draft of the working paper in 1999, using data through the end of 1998. The time lag between the first analysis and the present study gives us an ideal holdout sample. Using the original model, but the post-1988 data, we found that over the 1999–2002 period, the excess return of the fully invested portfolio of the top 20 pairs averaged 10.4% per annum, with an annual standard deviation of 3.8% and a large and significant Newey- West-adjusted t-statistic of 4.82—consistent with the long-term, in-sample results of our original analysis. We were careful not to adjust our strategy from the first draft to the current draft of the article, to avoid data- snooping criticisms. Not only does this additional four-year sample suggest that the results were not simply an artifact of the earlier sample period, over which pairs trading was known to be popular, but it also suggests that the public dissemination of the results has apparently not affected the general risk and return characteristics of the strategy, despite curiosity from the professional sector. 1.3 Relative pricing Asset pricing can be viewed in absolute and relative terms. Absolute pricing values securities from fundamentals such as discounted future cash flow. This is a notoriously difficult process with a wide margin for error. Articles by Bakshi and Chen (1997) and Lee et al. (1997), for example, are heroic attempts to build quantitative value-investing models. Relative pricing is only slightly easier. Relative pricing means that two securities that are close substitutes for each other should sell for the same price—it does not say what that price will be. Thus, relative pricing allows for bubbles in the economy, but not necessarily arbitrage or profitable speculation. The Law of One Price [LOP] and a ‘‘near-LOP’’ are applic- able to relative pricing—even if that price is wrong. Ingersoll (1987) defines the LOP as the ‘‘proposition ... that two invest- ments with the same payoff in every state of nature must have the same current value.’’ In other words, two securities with the same prices in all states of the world should sell for the same amount. Chen and Knez (1995) extend this to argue that ‘‘closely integrated markets should assign 1 Froot and Dabora (1999) consider ‘‘twin’’ stocks that trade in different international markets to examine the issues of market integration. The Review of Financial Studies / v 19 n 3 2006 800 to similar payoffs prices that are close.’’ They argue that two securities with similar, but not necessarily, matching payoffs across states should have similar prices. This is of course a weaker condition and subject to bounds on prices for unusual states; however, it allows the examination of ‘‘near-efficient’’ economies, or in Chen and Knez’ case, near integrated markets. Notice that this theory corresponds to the desire to find two stocks whose prices move together as long as we can define states of nature as the time series of observed historical trading days. We use an algorithm to choose pairs based on the criterion that they have had the same or nearly the same state prices historically. We then trade pairs whose prices closely match in historical state-space, because the LOP suggests that in an efficient market their prices should be nearly identical. In this framework, the current study can be viewed as a test of the LOP and near-LOP in the U.S. equity markets, under certain stationarity conditions. We are effectively testing the integration of very local markets—the markets for specific individual securities. This is similar in spirit to Bossaerts’ (1988) test of co-integration of security prices at the portfolio level. We further conjecture that the marginal profits to be had from risk arbitrage of these temporary deviations is crucial to the maintenance of first-order efficiency. We could not have the first effect without the second. 1.4 Co-integrated prices The pairs trading strategy may be justified within an equilibrium asset-pricing framework with nonstationary common factors like Bossaerts and Green (1989) and Jagannathan and Viswanathan (1988). If the long and short components fluctuate with common nonstationary factors, then the prices of the component portfolios would be co-integrated and the pairs trading strategy would be expected to work. Evidence of exposures to common nonstationary factors would support a nonstationary factor pricing frame- work. The space of normalized, cum-dividend prices, that is, cumulative total returns with dividends reinvested, is the basic space for the pairs trading strategies in this article. The main observation about our motivating models of the CAPM-APT variety is that they are known to imply perfect collinearity of prices, which is readily rejected by the data. On the other hand, Bossaerts (1988) finds evidence of price co-integration for the U.S. stock market. We would like to keep the notion of the empirically observed co-movement of prices, without unnecessarily restrictive assumptions, hence we proceed in the spirit of the co-integrated prices literature. More specifically, our matching in price space can be inter- preted as follows. Suppose that prices obey a statistical model of the form, pit¼ X ilplt þ eit; kCopy with citationCopy as parenthetical citation