System and method for estimating and optimizing transaction costs

• US 20030233306A1
• Filed: 06/12/2002
• Published: 12/18/2003
• Est. Priority Date: 06/12/2002
• Status: Active Grant

• Current Assignee: Virtu ITG Software Solutions LLC
• Original Assignee: ITG Incorporated
• Inventors: Asriev, Artem V., Madhavan, Ananth
• Granted Patent: US 7,974,906 B2
• Time in Patent Office: Days
• US Class Current: 705/37
• CPC Class Codes: G06Q 10/04 Forecasting or optimisation specially adapted for administrative or management purposes, e.g. linear programming or "cutting stock problem" market predictions or forecasting for commercial activities G06Q30/0202
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange

Abstract

A method and system for forecasting the transaction cost of a portfolio trade execution that may be applied to any given trade strategy or an optimal trade strategy that minimizes transaction costs. In preferred embodiments, a server comprises one or more computers that act as an automated forecaster whereby it accepts user-defined input variables from customers and generates a transaction cost estimation report based on those variables. The server is programmed with specific transaction cost estimation and optimization algorithms that model the transaction costs of a specific trade execution based on the user'"'"'s trading profile and market variables.

Claims

1. A method for estimating transaction costs of a security trade execution according to a trading strategy selected by a user, comprising the steps of:

providing a server connected to a communication network, said server being programmed with a specific strategy transaction cost optimization algorithm;

receiving at said server over said network data defining parameters of a proposed trade execution from a user, and data specifying a user-selected trading strategy; and

estimating the transaction costs of the received proposed trade execution based on the user-selected trading strategy and market data, and recommending actions determined by said specific strategy transaction cost optimization algorithm that minimize said transaction costs under said user-selected trading strategy, whereby a user may minimize transaction costs by taking said actions in executing said trade;

wherein, said user-selected trading strategy may be selected from among a plurality of predefined trading styles, or may be specifically defined by said user.

2. The method of claim 1, wherein the method further comprises providing an estimation report to the customer over the network.

3. The method of claim 1, wherein an adjustment factor adjusts for trade difficulty and market conditions to allow for an accurate comparison of trades performed under different circumstances and trading conditions.

4. The method of claim 1, wherein said adjustment factor provides an expected trading cost for each security for each day based on a statistical analysis of measures of trade difficulty.

5. The method of claim 1, wherein a plurality of servers are connected to a plurality of customers over a communication network, and customers enter their risk aversion profile and hypothetical trade order characteristics through the communication network to the server associated with transaction cost optimization.

6. The method of claim 1, comprising the further step of:

providing a user interface to allow a user to identify relevant data and trends in a dataset, and to locate factors that affect transaction performance.

7. The method of claim 6, wherein a user is able to change a subset of the dataset under consideration and perform real-time analytic calculations without additional pre-processing.

8. The method of claim 6, wherein a user may add new user aggregates, without additional pre-processing.

9. The method of claim 1, wherein the server is adapted to provide a direct interface to a securities price database to enable the display of transaction cost analysis results in real-time.

10. The method of claim 1, wherein the transaction cost algorithm allows for intra-day calculation of price-based benchmarks.

11. The method of claim 5, wherein each server accepts proposed orders and other customer input data directly over the communication network from customers wishing to estimate the transaction costs of one or more securities to be traded according to the particular trading strategy set by the customer, and all servers have access to multiple trading destinations, access to real-time and historical market data, and real-time analytic data, and each server has access to other servers on the communication network such that market and historical data, or compilations of data, can be exchanged between the servers, and the servers can interoperate more efficiently.

12. A method according to claim 1, wherein said transaction cost estimation takes into account temporary price impact, permanent price impact, and price improvement factors.

13. A method according to claim 1, wherein said transaction cost estimation recommends specific share quantity trade executions for each of a number of time duration bins according to the trading strategy selected by the user, to optimize transaction costs under said selected trading strategy.

14. A system for estimating and optimizing transaction costs of proposed execution trades of securities according to a risk value selected by a user, comprising:

a plurality of servers, each server being programmed with a specific transaction cost estimation and optimization algorithm, receiving from said user data specifying parameters of a proposed trade order and estimating the transaction costs of the received proposed trade execution based on the user-selected risk value and market data, and recommending actions determined by said specific strategy transaction cost optimization algorithm that minimize said transaction costs under said user-selected risk value, whereby a user may minimize transaction costs by taking said actions in executing said trade;

said plurality of servers being connected to a plurality of clients over a communication network, wherein a user enters at a client a selected risk value and data specifying parameters of a proposed trade order and transmits them from said client over said communication network to a server associated with the transaction cost estimation and optimization, and receives said estimation of transaction costs according to a selected from said server over said communication network.