Systems and methods for post-trade transaction cost estimation of transaction costs

• US 20080109288A1
• Filed: 10/24/2007
• Published: 05/08/2008
• Est. Priority Date: 10/24/2006
• Status: Abandoned Application

• Current Assignee: Virtu ITG Software Solutions LLC
• Original Assignee: ITG Software Solutions, Inc. (Virtu Financial, Inc.)
• Inventors: Heidle, Hans, Domowitz, Ian, Borkovec, Milan
• Application Number:
  US11/976,433
• Publication Number:
  US 20080109288A1
• Time in Patent Office: Days
• US Class Current: 705/7
• CPC Class Codes: G06Q 10/06375 Prediction of business process outcome or impact based on a proposed change
• 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 system for post-trade estimation of transaction costs. The system may include transaction cost estimation facilities configured to receive order data relating to a plurality of trade orders, receive execution data relating to a plurality of trades corresponding to the plurality of trade orders, to calculate post trade estimated transaction costs for each of the plurality of trade orders based upon a pre-trade cost estimation model, the execution data, and actual market conditions at an execution time of the plurality of trades, and to store the post trade estimated transaction costs. The system may also include data storage facilities coupled with the transaction cost estimation facilities and configured to store at least the post trade estimated transaction costs in an accessible format.

Claims

1. A method for estimating transaction costs, comprising:

for a plurality of proposed trade orders associated with a trading entity, calculating estimated pre-trade transaction costs for each of the proposed trade orders based on a selected trade strategy and on historical market data;

receiving execution data relating to a plurality of executed trades corresponding to said proposed trade orders;

calculating estimated post-trade transaction costs for each said executed trade based upon corresponding cost of said estimated pre-trade transaction costs and on corresponding execution data of said execution data; and

aggregating estimated post-trade transaction costs to generate an aggregated estimated post-trade transaction cost for said trading entity.

2. The method as claimed in claim 1, where said calculating estimated post-trade transaction costs step is based upon market returns and trade imbalances relating to said proposed trade orders.

3. The method as claimed in claim 1, wherein said calculating estimated post-trade transaction costs step includes execution of the equation:

4. The method as claimed in claim 3, where γ

₁, γ

₂, . . . , γ

_N are coefficients estimated for different exchanges and liquidity groups using a data regression;

5. The method as claimed in claim 1, wherein a trading horizon is divided into a number of bins, and each said step is performed in at least one bin, and said calculating estimated post-trade transaction costs step incorporates a normalized actual volume during the bin;

a normalized actual volatility during the bin;

a normalized actual spread during the bin; and

a stock-specific momentum proxy during the bin.

6. The method as claimed in claim 5, wherein the stock-specific momentum proxy is determined using intra-day market return and stock specific trade imbalances during the bin;

sector return and trade imbalances during the bin;

or sector return, industry return, and trade imbalances.

7. The method as claimed in claim 6, wherein which data is used in determining the stock-specific momentum proxy is based on a liquidity measure of a specific stock.

8. A computer program product comprising a computer storable medium storing computer executable instructions for estimating transaction costs, said computer executable instruction performing operations comprising:

for a plurality of proposed trade orders associated with a trading entity, calculating estimated pre-trade transaction costs for each of the proposed trade orders based on a selected trade strategy and on historical market data;

receiving execution data relating to a plurality of executed trades corresponding to said proposed trade orders;

calculating estimated post-trade transaction costs for each said executed trade based upon corresponding cost of said estimated pre-trade transaction costs and on corresponding execution data of said execution data; and

aggregating estimated post-trade transaction costs to generate an aggregated estimated post-trade transaction cost for said trading entity.

9. The computer program product as claimed in claim 8, where said calculating estimated post-trade transaction costs operation is based upon market returns and trade imbalances relating to said proposed trade orders.

10. The computer program product as claimed in claim 8, wherein said calculating estimated post-trade transaction costs operation includes execution of the equation:

11. The computer program product as claimed in claim 10, wherein γ

₁, γ

₂, . . . , γ

_N are coefficients estimated for different exchanges and liquidity groups using a data regression;

12. The computer program product as claimed in claim 8, wherein a trading horizon is divided into a number of bins, and each said step is performed in at least one bin, and said calculating estimated post-trade transaction costs step incorporates a normalized actual volume during the at least one bin;

a normalized actual volatility during the at least one bin;

a normalized actual spread during the at least one bin; and

a stock-specific momentum proxy during the at least one bin.

13. The computer program product as claimed in claim 12, wherein the stock-specific momentum proxy is determined using intra-day market return and stock specific trade imbalances during the at least one bin;

sector return and trade imbalances during the at least one bin;

or sector return, industry return, and trade imbalances.

14. A system for market simulation utilizing post-trade estimation of transaction costs, comprising:

transaction cost estimation facilities configured to receive order data relating to a plurality of trade orders, receive simulated execution data relating to a plurality of simulated trades corresponding to said plurality of trade orders, to calculate post trade estimated transaction costs for each of said plurality of trade orders based upon a pre-trade cost estimation model, said execution data, and simulated market conditions at an execution time of said plurality of trades, and to store said post trade estimated transaction costs;

a market simulator for simulating said market conditions utilizing historical trade data and generating simulate market data; and

data storage facilities coupled with said transaction cost estimation facilities and configured to store at least said post trade estimated transaction costs in an accessible format.

15. The system as claimed in claim 14, wherein

said transaction cost estimation facilities are configured to calculate estimated post-trade transaction costs further based upon market returns and trade imbalances relating to said proposed trade orders;

said calculating estimated post-trade transaction costs operation includes execution of the equation;

$\mathrm{Post\_Cost}<br><br>\left(S,{\left(n_{\mathrm{ij}}\right)}_{i=1,\mathrm{\dots <br><br>}<br><br>\text{\hspace{1em}<br><br>},T;<br><br>j=1,\mathrm{\dots <br><br>}<br><br>\text{\hspace{1em}<br><br>},N}\right)=\mathrm{Pre\_Cost}<br><br>\left(S,{\left(n_{\mathrm{ij}}\right)}_{i=1,\mathrm{\dots <br><br>}<br><br>\text{\hspace{1em}<br><br>},T;<br><br>j=1,\mathrm{\dots <br><br>}<br><br>\text{\hspace{1em}<br><br>},N}\right)+{\mathrm{\gamma <br><br>}}_1·<br><br>X_1<br><br>\left(S,T\right)+\mathrm{\dots <br><br>}+{\mathrm{\gamma <br><br>}}_N·<br><br>X_N<br><br>\left(S,T\right)$

where S is an order size, T is a trading horizon (in days) and X_j(S,T) are trade factors over a trading period (V(T)−

E(V(T)))/E(V(T)),

a normalized actual volatility over the trading period (σ

(T)−

E(σ

(T)))/E(σ

(T)),

a normalized actual spread over the trading period (s(T)−

E(s(T)))/E(s(T)), intra-day volatility, a proxy of a signed intra-day stock-specific momentum over the trading period m((n_ij),T)/E(σ

(T)), and

where γ

₁, γ

₂, . . . , γ

_N are coefficients estimated for different exchanges and liquidity groups using a data regression;

$\mathrm{Realized\_Cost}<br><br>\left(S,{\left(n_{\mathrm{ij}}\right)}_{i=1,\mathrm{\dots <br><br>}<br><br>\text{\hspace{1em}<br><br>},T;<br><br>j=1,\mathrm{\dots <br><br>}<br><br>\text{\hspace{1em}<br><br>},N}\right)-\mathrm{Pre\_Cost}<br><br>\left(S,{\left(n_{\mathrm{ij}}\right)}_{i=1,\mathrm{\dots <br><br>}<br><br>\text{\hspace{1em}<br><br>},T;<br><br>j=1,\mathrm{\dots <br><br>}<br><br>\text{\hspace{1em}<br><br>},N}\right)={\mathrm{\gamma <br><br>}}_1·<br><br>X_1<br><br>\left(S,T\right)+\mathrm{\dots <br><br>}+{\mathrm{\gamma <br><br>}}_N·<br><br>X_N<br><br>\left(S,T\right)+\mathrm{\varepsilon <br><br>};<br><br>$

a trading horizon is divided into a number of bins, and each said step is performed in at least one bin, and said calculating estimated post-trade transaction costs step incorporates a normalized actual volume during the bin, a normalized actual volatility during the bin, a normalized actual spread during the bin, and a stock-specific momentum proxy during the bin; and

said stock-specific momentum proxy is determined using either the intra-day market return and stock specific trade imbalances during the bin, sector return and trade imbalances during the bin, or sector return, industry return, and trade imbalances, based on a liquidity measure of a specific stock.

16. A system for post-trade estimation of transaction costs, comprising:

transaction cost estimation facilities configured to receive order data relating to a plurality of trade orders, receive execution data relating to a plurality of trades corresponding to said plurality of trade orders, to calculate post trade estimated transaction costs for each of said plurality of trade orders based upon a pre-trade cost estimation model, said execution data, and actual market conditions at an execution time of said plurality of trades, and to store said post trade estimated transaction costs; and

data storage facilities coupled with said transaction cost estimation facilities and configured to store at least said post trade estimated transaction costs in an accessible format.

17. The system as claimed in claim 16, where said transaction cost estimation facilities are configured to calculate estimated post-trade transaction costs further based upon market returns and trade imbalances relating to said proposed trade orders.

18. The system as claimed in claim 16, wherein said calculating estimated post-trade transaction costs operation includes execution of the equation:

19. The system as claimed in claim 18, wherein γ

₁, γ

₂, . . . , γ

_N are coefficients estimated for different exchanges and liquidity groups using a data regression;

20. The system as claimed in claim 16, wherein a trading horizon is divided into a number of bins, and each said step is performed in at least one bin, and said calculating estimated post-trade transaction costs step incorporates a normalized actual volume during the bin;

a normalized actual volatility during the bin;

a normalized actual spread during the bin; and

a stock-specific momentum proxy during the bin.

21. The system as claimed in claim 20, wherein the stock-specific momentum proxy is determined using intra-day market return and stock specific trade imbalances during the bin;

sector return and trade imbalances during the bin;

or sector return, industry return, and trade imbalances.

22. The system as claimed in claim 21, wherein which data is used to in determining the stock-specific momentum proxy is based on a liquidity measure of a specific stock.

23. A system for post-trade estimation of transaction costs, comprising:

transaction cost estimation means for receiving order data relating to a plurality of trade orders, execution data relating to a plurality of trades corresponding to said plurality of trade orders, and generating post trade estimated transaction costs for each of said plurality of trade orders based upon a pre-trade cost estimation model, said execution data, and actual market conditions at an execution time of said plurality of trades; and

data storage means for storing at least said post trade estimated transaction costs in an accessible format.

24. The system as claimed in claim 23, wherein said transaction cost estimation means further comprises:

pre-trade modeling means for generating pre-trade estimated transaction costs for said plurality of trade orders based upon said pre-trade cost estimation model; and

post-trade modeling means for generating post-trade estimated transaction costs for said plurality of trade orders based upon said pre-trade cost estimation transaction costs, said execution data, and actual market conditions at an execution time of said plurality of trade orders.

25. The system as claimed in claim 23, further comprising display means for displaying said post trade estimated transaction costs to a user of the system.