Colored coins have been talked a lot recently, I apologize in advance if a proposal like this has already been made.

I suggest a way to execute orders without a trusted third party using colored coins. Here is how it would work.

• Buyers and sellers of a security would publish the trades they are willing to make via a distributed medium (such as an overlay network, IRC, whatever).
• Once an order match has been detected by either peer, they establish communication.
• The security buyer (offering regular bitcoins) chooses a list of outputs and a change address for the coins that will be sent to the seller. The buyer also chooses a receiving address for receiving the colored coins. These parameters are communicated to the seller.
• Using the parameters provided by the buyer, the seller builds a transaction transferring the colored coins to the buyer and transferring the regular coins to himself. The seller signs the colored coin inputs and leaves the regular bitcoin inputs from the buyer unsigned.
• The seller transmit the partial transaction to the buyer.
• The buyer validates that the trade is conform to the agreed trade and signs the regular bitcoins in the transaction over to the seller. The transaction is now fully signed.
• The buyer publishes the transaction on the bitcoin network.

With a system like this, trades would be executed on a first-to-propagate basis and two parties competing for the same securities will look like a double spend.

What do you guys think ?