Foreign currency exchange

• US 20060173771A1
• Filed: 02/02/2005
• Published: 08/03/2006
• Est. Priority Date: 02/02/2005
• Status: Abandoned Application

• Current Assignee: Scott Lochwood Johnston
• Original Assignee: Scott Lochwood Johnston
• Inventors: Johnston, Scott Lochwood
• Application Number:
  US11/048,994
• Publication Number:
  US 20060173771A1
• Time in Patent Office: Days
• US Class Current: 705/37
• CPC Class Codes: G06Q 20/10 specially adapted for electronic funds transfer [EFT] systems; specially adapted for home banking systems
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange

Abstract

In accordance with the principles of the present invention, a system is provided to help link foreign exchange liquidity at a given settlement date. Exchange trade is represented as a positive product flow and a negative product flow relative to a side of the exchange trade. An exchange relationship between products is defined. A hierarchy of the products is defined. Cross rates to other foreign exchange products in the system are calculated. In accordance with the present invention, a system is provided to integrate spot/forward and swap markets. A forward event type and a swap event type are defined. In a database, spot and other designated dates are defined. Correct settlement dates for the named dates are determined. When an order is entered into the system, the order is entered into an order book, whereby settlement dates are aligned for transactions. In accordance with the present invention, a system is provided to match products in a swap. Products are matched against resting real orders. Products are then matched against resting implied orders with a prioritization scheme. For any residual resting order, implied markets are computed and again checked for matches. When new implieds are generated/checked, if the original order is a ‘spot’ order implieds are generated/checked first along a product axis, then along a date axis. For all other orders, implieds are generated/checked first along the date axis, then the product axis.

Claims

1. A system which supports a systematic relationship between markets, constituent orders, resulting transactions, and market data, comprising:

establishing a consistent internal data model which represents orders and transactions as a series of flows;

defining a hierarchical relationship between products;

defining a hierarchy of dates; and

defining a system to derive implied and spread markets.

2. The system of claim 1 further including defining a biproduct as the exchange relationship between two products.

3. The system of claim 1 further wherein defining the exchange relationship comprises defining a denominator that is the object of the action ‘

buy’

or ‘

sell’ and

defining a numerator that is the exchanged for the denominator product.

4. The system of claim 1 further including establishing a consistent internal data model that represents orders and transactions as a series of product flows.

5. The system of claim 4 further wherein the product flows can have a variable quantity.

6. The system of claim 4 further including relating the numerator or denominator product flows to numerator or denominator product flows of other byproducts.

7. The system of claim 6 further including not making a functional distinction between numerator and denominator of an order.

8. The system of claim 1 further including establishing a consistent internal data model that represents orders and transactions as a series of currency flows.

9. The system of claim 1 further including defining a price of the exchange as a quantity of a numerator product per a denominator product.

10. The system of claim 9 further including defining the price of the exchange as the quantity of one numerator product per one denominator product.

11. The system of claim 1 further wherein defining the hierarchy of the products comprises defining which product will be the numerator and which product will be the denominator in the exchange relationship.

12. The system of claim 11 further including defining the product that is highest in the hierarchy as the numerator product.

13. The system of claim 11 further including defining the order of preference between products.

14. The system of claim 13 further including defining the product with lowest ordinality as highest in the hierarchy.

15. The system of claim 13 further including defining the ordinality of a biproduct as the sum of ordinalities of the constituent products.

16. The system of claim 1 further wherein defining the hierarchy of dates comprises defining the order of market calculations to be grouped and ordered according to settlement date.

17. The system of claim 1 further including defining a relationship between markets to transform orders, transactions, and market data from one market to another.

18. The system of claim 17 further including defining a system to transform flows of one market to an equivalent or proportional set of flows in another market.

19. The system of claim 17 further including defining the maximum executable quantity of the transformed market as the minimum quantity which is simultaneously executable in each of the constituent markets.

20. The system of claim 1 further including creating a database of external market conventions to reconcile with local standards and conventions.

21. A system to link foreign exchange liquidity at a given settlement date, comprising:

calculating implied markets from related markets;

deriving implied liquidity;

adding the implied liquidity to original liquidity for each market; and

matching trades.

22. The system of claim 21 further including deriving an implied cross rate.

23. The system of claim 22 further including deriving an implied cross rate in accordance with the following relationship between biproducts:

$\mathrm{Biproduct}<br><br>\frac{P_i}{P_j}=\frac{P_i}{P_x}\times <br><br>\frac{P_x}{P_j}$

or, for two levels of indirection;

$\mathrm{Biproduct}<br><br>\frac{P_i}{P_j}=\frac{P_i}{P_x}\times <br><br>\frac{P_x}{P_y}\times <br><br>\frac{P_y}{P_j}$

where P_i and P_j are the numerator currency and denominator currency or product respectively and P_x is another currency.

24. The system of claim 22 further including deriving an implied cross rate order in accordance with:

$\mathrm{order1}=\frac{\mathrm{numerator1}}{\mathrm{denominator1}}<br><br>\text{\hspace{1em}<br><br>}$ $\mathrm{order2}=\frac{\mathrm{numerator2}}{\mathrm{denominator2}}$ $\mathrm{where}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{ordinality}<br><br>\text{\hspace{1em}<br><br>}<br><br>\left(\mathrm{order1}\right)<<br><br>\mathrm{ordinality}<br><br>\text{\hspace{1em}<br><br>}<br><br>\left(\mathrm{order2}\right)$ $\mathrm{if}<br><br>\text{\hspace{1em}<br><br>}<br><br>\left(\mathrm{numerator1}\equiv <br><br>\mathrm{numerator2}\right)<br><br>\text{\hspace{1em}<br><br>}$ $\mathrm{or}<br><br>\text{\hspace{1em}<br><br>}<br><br>\left(\mathrm{denominator1}\equiv <br><br>\mathrm{denominator2}\right)$ $\mathrm{crossrate}=\frac{\mathrm{order2}·<br><br>\mathrm{price}}{\mathrm{order1}·<br><br>\mathrm{price}}<br><br><br><br>\mathrm{else}<br><br><br><br>\mathrm{crossrate}=\mathrm{order1}·<br><br>\mathrm{price}*\mathrm{order2}·<br><br>\mathrm{price}$

25. The system of claim 21 further including determining a maximum available implied quantity available for the cross rate order.

26. The system of claim 25 further including determining a maximum available implied quantity available for the cross rate order in accordance with:

$\mathrm{if}<br><br>\text{\hspace{1em}<br><br>}<br><br>\left(\mathrm{numerator1}\equiv <br><br>\mathrm{numerator2}\right)$ $\mathrm{maxQuantity}=\frac{\begin{array}{c}\min <br><br>\text{\hspace{1em}<br><br>}<br><br>(\mathrm{numerator1}·<br><br>\mathrm{quantity},\\ \mathrm{numerator2}·<br><br>\mathrm{quantity})\end{array}}{\mathrm{crossrate}}$ $\mathrm{else}$ $\begin{array}{c}\mathrm{maxQuantity}=<br><br>\min <br><br>\text{\hspace{1em}<br><br>}<br><br>(\mathrm{denonimator1}·<br><br>\mathrm{quantity},\\ <br><br>\mathrm{denominator2}·<br><br>\mathrm{quantity})\end{array}$

27. The system of claim 21 further including the creation of placeholders for implied orders, which represent the cash-flow equivalent combination of two or more markets.

28. The system of claim 21 further including normalizing orders against a reference currency.

29. The system of claim 28 further wherein normalizing orders against a reference currency comprises changing the hierarchy based on expected most liquid currency ordering at different times.

30. The system of claim 28 further wherein normalizing orders against a reference currency comprises changing the hierarchy based on expected most liquid currency ordering via actual computed liquidity that exists in the order book.

31. The system of claim 21 further including choosing alternative sources of liquidity when filling an order.

32. The system of claim 31 further wherein choosing alternative sources of liquidity when filling an order are selected from the group comprising match in order of age of order—

first into the book matches;

prioritize match by order size;

product hierarchy;

match orders of the same original biproduct first, followed by any subsequent orders; and

combinations thereof

33. A system to expose various markets in multiple currency denominations, comprising:

defining the market as a product having a numerator and a denominator;

calculating implied cross rates from existing foreign exchange markets to the denominator of the market; and

restricting the market from cross rate calculations that would place it in the numerator of the biproduct.

34. The system of claim 33 further including defining another product in the hierarchy with ordinality lower than the currency products.

35. The system of claim 34 further including defining the product in the hierarchy with ordinality lower than the currency products as the denominator.

36. The system of claim 33 further including restricting cross rates from being derived on two products which are not currencies.

37. The system of claim 33 further including not making a functional distinction between numerator and denominator of an order.

38. A system to integrate spot, forward and swap markets, comprising:

defining a forward order type and a swap order type and their relationship to a spot transaction; and

using a date hierarchy to augment the priority and process of matching.

39. The system of claim 38 further wherein defining a forward order type comprises defining an agreement to exchange an agreed upon amount of currency verses a second agreed upon amount of another currency at an agreed upon date in the future.

40. The system of claim 38 further wherein defining a swap order type comprises defining a near and far settlement date.

41. The system of claim 40 further wherein defining a swap order type comprises defining a near and far settlement date, with the near date normally comprising a ‘

spot’

settlement date.

42. The system of claim 38 further including deriving various linked markets in accordance with the following relationship between the three markets:

Spot_bid+Swap_bid=Forward_bid
Spot_ask+Swap_ask=Forward_ask

43. The system of claim 38 further including matching markets related through time.

44. The system of claim 43 further including matching against resting real orders of the original order type and settlement date(s).

45. The system of claim 44 further including matching against resting implied orders with a prioritization scheme which incorporates the date hierarchy.

46. The system of claim 45 further including, if the original order was a spot order, matching and generating implied orders first within the spot settlement date and then the non-spot settlement date.

47. The system of claim 45 further including, if the original order was not a spot order, matching and generating implied orders first within the originating order'"'"'s settlement date and then the spot settlement date.

48. A system to expose a market in multiple currencies with proper settlement dates comprising:

establishing an foreign exchange spot and forward market which supports trading to the proper settlement date for the target financial transactions; and

performing an exchange clearing relationship that facilitates the integration of a foreign exchange market with another financial product market.

49. The system of claim 48 further including deriving a foreign exchange forward market by calculating implied markets from related markets;

adding the implied liquidity to original liquidity for each market; and

matching trades.

50. The system of claim 49 further comprising requiring foreign exchange market makers to contribute foreign exchange forwards with the appropriate settlement date for the target market.

51. The system of claim 49 further including further exposing the financial product in multiple currency markets by:

defining the market as a product having a numerator and a denominator;

calculating implied cross rates from existing foreign exchange markets to the denominator of the market; and

restricting the market from cross rate calculations that would place it in the numerator of the biproduct.

52. The system of claim 48 further including deriving a foreign exchange forward market by defining a forward order type and a swap order type and their relationship to a spot transaction and using a date hierarchy to augment the priority and process of matching.

53. The system of claim 52 further comprising requiring foreign exchange market makers to contribute foreign exchange forwards with the appropriate settlement date for the target market.

54. The system of claim 52 further including further exposing the financial product in multiple currency markets by:

defining the market as a product having a numerator and a denominator;

calculating implied cross rates from existing foreign exchange markets to the denominator of the market; and

restricting the market from cross rate calculations that would place it in the numerator of the biproduct.

55. The system of claim 48 further comprising the exchange serving as the intermediary between transactions between constituent markets.

56. The system of claim 55 further comprising confirming the transaction representing the financial market exposed in a foreign currency to the external customer as a single trade ticket.

57. The system of claim 55 further wherein, if the currency payment for the transaction is a margined transaction, the currency payment reflecting the margin amount and not the total notional amount, generally by executing a percentage of the notional value of the principal market trade.

58. A system to transform a cleared foreign exchange forward market into a futures market comprising:

establishing a foreign exchange forward market that supports trading to the same settlement date as foreign exchange futures;

establishing an exchange clearing relationship which facilitates the integration of a cleared foreign exchange forward market with a foreign exchange futures market; and

defining a relationship between a futures market and a cleared forward market and thereby defining a system to link liquidity via implied markets.

59. The system of claim 58 further including defining a relationship between futures and forward markets.

60. The system of claim 59 further including defining a relationship between futures and forward markets of the form:

$\mathrm{FX}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{Future}<br><br>\text{\hspace{1em}<br><br>}<br><br>\frac{P_i}{P_j}=\mathrm{FX}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{Forward}<br><br>\text{\hspace{1em}<br><br>}<br><br>\frac{P_i}{P_j}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{or},<br><br>\mathrm{FX}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{Future}<br><br>\text{\hspace{1em}<br><br>}<br><br>\frac{P_i}{P_j}=\text{\hspace{1em}<br><br>}<br><br>\mathrm{FX}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{Forward}<br><br>\text{\hspace{1em}<br><br>}<br><br>\frac{P_i}{P_x}\times <br><br>\mathrm{FX}<br><br>\text{\hspace{1em}<br><br>}<br><br>\mathrm{Forward}<br><br>\text{\hspace{1em}<br><br>}<br><br>\frac{P_x}{P_j}$

61. The system of claim 58 further including defining a set of rounding rules.

62. The system of claim 61 further including defining a set of rounding rules wherein forward quantities are rounded down into denominations of the futures contract.

63. The system of claim 62 further wherein implied futures bid prices are rounded down.

64. The system of claim 62 further wherein implied futures offer prices are rounded up.

65. The system of claim 61 further including defining a set of rounding rules wherein forward prices are rounded into proper format and number of decimals as specified in the futures contract.

66. The system of claim 65 further wherein implied futures bid prices are rounded down.

67. The system of claim 65 further wherein implied futures offer prices are rounded up.

68. The system of claim 58 further wherein, upon matching a futures order, the returned forward transaction quantities reflecting the cash flows of the corresponding futures trade.

69. The system of claim 68 further wherein, upon matching a futures order, the returned forward transaction price is the transformed, unrounded futures price.

70. The system of claim 68 further comprising transforming futures quantities into numerator and denominator quantities of a forward contract.

71. The system of claim 68 further comprising rounding futures prices into proper format and number of decimals per convention in the forward market.

72. The system of claim 71 further comprising rounding implied forward bid prices down.

73. The system of claim 71 further comprising rounding implied forward offer prices up.

74. The system of claim 58 further wherein, upon matching a forward order, the returned future transaction quantity reflecting the same amount of currency contracts as equivalent to the amount of currency in the forward transaction.

75. The system of claim 74 further wherein, upon matching a forward order, the returned futures transaction price is the original futures price, with any residual currency amount, accruing to the exchange.

76. The system of claim 58 further including creating a database of external market conventions to reconcile with local standards and conventions.