System for pricing financial instruments

• US 20080091585A1
• Filed: 11/20/2007
• Published: 04/17/2008
• Est. Priority Date: 03/18/2002
• Status: Active Grant

• Current Assignee: NYSE American LLC (Intercontinental Exchange, Inc.)
• Original Assignee: American Stock Exchange, LLC (Intercontinental Exchange, Inc.)
• Inventors: Baker, Charles, Gastineau, Gary, Norman, Terry, Alexander, Carol, MacQueen, Jason, Weber, Clifford
• Granted Patent: US 7,526,445 B2
• Time in Patent Office: Days
• US Class Current: 705/36.00R
• 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
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

A method of determining an estimate of the market value of a traded unit of a financial instrument, and apparatus for carrying out the method, said instrument comprising a fund of individually priced securities and the exact composition of said fund being withheld from the market, said method comprising selecting a plurality of mutually independent risk factors, each risk factor being representative of market behaviour estimated to be significant to the price behaviour of the traded unit, obtaining information from a third party holding information regarding the composition of said fund regarding the actual significance of said risk factors to the value of said traded unit, and calculating a value for said traded unit on the basis of said significances.

Claims

1. Apparatus for determining an estimate of the market value of a traded unit of a financial instrument, said instrument comprising a fund of individually priced securities and the exact composition of said fund being withheld from the market, said apparatus comprising:

historical data storage means storing data defining transactions and pricing information of a set of investable financial instruments over a period of time;

correlation determination means for determining cross correlations between price variation behaviour of investable financial instruments;

correlation storage means for storing cross correlations therein;

risk factor determining means for extracting from said cross correlations a plurality of mutually independent risk factors, each risk factor being representative of market behaviour estimated to be significant to the price behaviour of the traded unit;

interrogation means in communication with a third party holding information regarding the composition of said fund, operable to send to said third party information describing said risk factors and an instruction to return significance information regarding the actual significance of said risk factors to the value of said traded unit, and to receive from said third party said significance information and definite price information describing the value of said traded unit of said financial instrument at a particular point in time; and

price determining means for calculating on the basis of said significances, on the basis of actual market values of instruments attributable to said risk factors, and on the basis of said definite price information, a value for said traded unit at a time later than said particular point in time.

2. Apparatus in accordance with claim 1 wherein said correlation determination means includes correlation measuring means for measuring correlation between instruments traded in said market, and matrix determination means for constructing a matrix of said measured correlations, and operable to store said matrix in said correlation storage means.

3. Apparatus in accordance with claim 2 wherein said risk factor determining means comprises eigenvector extraction means for extracting from said matrix a plurality of eigenvectors representing combinations of instruments in determined weighted combinations representative of correlations in the behaviour of instruments on the market.

4. Apparatus in accordance with claim 3 wherein said risk factor determining means further includes eigenvalue extracting means for extracting, with said eigenvectors, corresponding eigenvalues, importance determining means for determining, on the basis of relative magnitude of said eigenvalues, the relative importance of said eigenvectors in determining the behaviour of prices of said instruments on said market, and eigenvector selecting means for selecting, on the basis of a predetermined threshold, a sufficient number of said eigenvectors as risk factors for use in determining the estimated price of said traded unit.

5. Apparatus in accordance with claim 4 wherein said eigenvector selecting means comprises processing means for processing said eigenvectors in descending order of magnitude of corresponding eigenvalues, and thereafter for selecting the eigenvectors having largest eigenvalue magnitudes such that the smallest number of eigenvectors are selected that the sum of the magnitudes of their respective eigenvalues is at least the predetermined threshold, said selected eigenvectors being determined as risk factors.

6. Apparatus in accordance with claim 3 and further including investable set defining means for defining a set of instruments traded on said market and from which said fund can be composed, instrument performance measuring means for measuring, over a predetermined period, trading activity in each instrument in said set, and subset defining means for defining a subset of said set as comprising instruments having trading activity above a certain threshold of a given predetermined measure.

7. Apparatus in accordance with claim 6 wherein said predetermined measure is a measure of price liquidity.

8. Apparatus in accordance with claim 7 wherein said measure of price liquidity comprises a count, over a predetermined period, of the number of occasions wherein a price changes more than a predetermined amount in a predetermined sample time period.

9. Apparatus in accordance with claim 8 wherein said price change is determined as a difference between logarithms of prices at the beginning and end of a sample time period.

10. A computer program operable to configure a computer as a price calculation apparatus in accordance with claim 3.

11. A storage medium storing a computer program in accordance with claim 2.

12. A storage medium storing a computer program in accordance with claim 3.

13. A signal carrying information which defines a computer program in accordance with claim 2.

14. A signal carrying information which defines a computer program in accordance with claim 3.