SYSTEM, METHOD AND PROGRAM FOR AGENCY COST ESTIMATION

• US 20090125448A1
• Filed: 06/05/2008
• Published: 05/14/2009
• Est. Priority Date: 06/12/2002
• Status: Active Grant

• Current Assignee: Virtu ITG Software Solutions LLC
• Original Assignee: ITG Software Solutions, Inc. (Virtu Financial, Inc.)
• Inventors: HEIDLE, Hans G., MADHAVAN, Ananth, BORKOVEC, Milan
• Granted Patent: US 8,229,834 B2
• Time in Patent Office: Days
• US Class Current: 705/36.R
• 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 30/0283 Price estimation or determination
• 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, system and computer program product for forecasting the transaction cost of a portfolio trade execution that may be applied to any given trading strategy or an optimal trading strategy that minimizes transaction costs. The system accepts user-defined input variables from customers and generates a transaction cost estimation report based on those variables. Two models are utilized: discretionary and non-discretionary. A specific transaction cost estimation and optimization is performed 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:

receiving over a network, data defining parameters of a proposed trade execution from a user, and data specifying a user-selected trading strategy, said trading strategy data including a sequence of share quantities of securities to be traded per time interval for a given trading horizon;

calculating first estimated transaction costs for the received proposed trade execution based on the user-selected trading strategy and market data using a first agency cost estimation model that considers discretionary and non-discretionary trades;

calculating second estimated transaction costs for the received proposed trade execution based on the user-selected trading strategy and market data using a second agency cost estimation model that considers only non-discretionary trades; and

displaying to the user at least one of the first and second estimated transaction costs;

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

2. The method of claim 1, wherein the method further comprises steps for generating recommendations for optimizing the user-selected trading strategy based on at least one of the first and second estimated transaction costs and providing said recommendations to the user 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 3, 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 2, further comprising a step of receiving a risk aversion profile and hypothetical trade order characteristics through the network and wherein said step of calculating second estimated transaction costs factors said risk aversion profile and hypothetical trade order characteristics.

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 a transaction cost algorithm allows for intra-day calculation of price-based benchmarks.

11. The method of claim 1, further including:

a step of building the first agency cost estimation model using historical transaction data for all executions, including trade data for trade executions for which traders can postpone or abandon trading to take advantage of market conditions; and

a step of building the second agency cost estimation model using historical transaction data for executions only for trades for which traders do not have discretion and must execute regardless of whether market conditions are favorable, and excluding data for opportunistic trade executions.

12. A computer program product including computer executable instructions stored on a computer readable medium, for estimating transaction costs of a security trade execution according to a trading strategy selected by a user, by execution of operations comprising the steps of:

receiving over a network, data defining parameters of a proposed trade execution from a user, and data specifying a user-selected trading strategy, said trading strategy data including a sequence of share quantities of securities to be traded per time interval for a given trading horizon;

calculating first estimated transaction costs for the received proposed trade execution based on the user-selected trading strategy and market data using a first agency cost estimation model that considers discretionary and non-discretionary trades;

calculating second estimated transaction costs for the received proposed trade execution based on the user-selected trading strategy and market data using a second agency cost estimation model that considers only non-discretionary trades; and

displaying to the user at least one of the first and second estimated transaction costs;

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

13. The computer program product of claim 12, wherein operations further comprises steps for generating recommendations for optimizing the user-selected trading strategy based on at least one of the first and second estimated transaction costs and providing said recommendations to the user over the network.

14. The computer program product of claim 12, 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.

15. The computer program product of claim 14, 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.

16. The computer program product of claim 12, further comprising operations for performing a step of receiving a risk aversion profile and hypothetical trade order characteristics through the network and wherein said step of calculating second estimated transaction costs factors said risk aversion profile and hypothetical trade order characteristics.

17. The computer program product of claim 12, comprising operations for performing 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.

18. The computer program product of claim 17, wherein a user is able to change a subset of the dataset under consideration and perform real-time analytic calculations without additional pre-processing.

19. The computer program product of claim 17, wherein a user may add new user aggregates, without additional pre-processing.

20. The computer program product of claim 12, wherein a direct interface is provided to a securities price database to enable the display of transaction cost analysis results in real-time.

21. The computer program product of claim 12, wherein a transaction cost algorithm allows for intra-day calculation of price-based benchmarks.

22. The computer program product of claim 12, further including operations for performing:

a step of building the first agency cost estimation model using historical transaction data for all executions, including trade data for trade executions for which traders can postpone or abandon trading to take advantage of market conditions; and

a step of building the second agency cost estimation model using historical transaction data for executions only for trades for which that traders do not have discretion and must execute regardless of whether market conditions are favorable, and excluding data for opportunistic trade executions.

23. A system for estimating transaction costs of a security trade execution according to a trading strategy selected by a user, comprising:

means for receiving over a network, data defining parameters of a proposed trade execution from a user, and data specifying a user-selected trading strategy, said trading strategy data including a sequence of share quantities of securities to be traded per time interval for a given trading horizon;

means for calculating first estimated transaction costs for the received proposed trade execution based on the user-selected trading strategy and market data using a first agency cost estimation model that considers discretionary and non-discretionary trades;

means for calculating second estimated transaction costs for the received proposed trade execution based on the user-selected trading strategy and market data using a second agency cost estimation model that considers only non-discretionary trades; and

means for displaying to the user at least one of the first and second estimated transaction costs;

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

24. The system of claim 23, wherein the system further comprises means for generating recommendations for optimizing the user-selected trading strategy based on at least one of the first and second estimated transaction costs and providing said recommendations to the user over the network.

25. The system of claim 23, 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.

26. The system of claim 25, 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.

27. The system of claim 24, further comprising means for receiving a risk aversion profile and hypothetical trade order characteristics through the network and wherein said means for calculating second estimated transaction costs factors said risk aversion profile and hypothetical trade order characteristics.

28. The system of claim 23, further comprising means for 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.

29. The system of claim 28, wherein a user is able to change a subset of the dataset under consideration and perform real-time analytic calculations without additional pre-processing.

30. The system of claim 28, wherein a user may add new user aggregates, without additional pre-processing.

31. The system of claim 23, further comprising a server adapted to provide a direct interface to a securities price database to enable the display of transaction cost analysis results in real-time.

32. The system of claim 23, wherein a transaction cost algorithm allows for intra-day calculation of price-based benchmarks.

33. The system of claim 23, further comprising:

means for building the first agency cost estimation model using historical transaction data for all executions, including trade data for trade executions for which traders can postpone or abandon trading to take advantage of market conditions; and

means for building the second agency cost estimation model using historical transaction data for executions only for trades for which that traders do not have discretion and must execute regardless of whether market conditions are favorable, and excluding data for opportunistic trade executions.

34. A system for estimating transaction costs of a security trade execution according to a trading strategy selected by a user, comprising:

a server coupled with an electronic data network configured to receive over a network, data defining parameters of a proposed trade execution from a user, and data specifying a user-selected trading strategy, said trading strategy data including a sequence of share quantities of securities to be traded per time interval for a given trading horizon, calculate first estimated transaction costs for the received proposed trade execution based on the user-selected trading strategy and market data using a first agency cost estimation model that considers discretionary and non-discretionary trades, calculate second estimated transaction costs for the received proposed trade execution based on the user-selected trading strategy and market data using a second agency cost estimation model that considers only non-discretionary trades, and transmit, for display, the first and second estimated transaction costs to a user via the electronic data network;

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

35. The system of claim 34, wherein the system further comprises means for generating recommendations for optimizing the user-selected trading strategy based on at least one of the first and second estimated transaction costs and providing said recommendations to the user over the network.

36. The system of claim 34, wherein said server is further configured to build the first agency cost estimation model using historical transaction data for all executions, including trade data for trade executions for which traders can postpone or abandon trading to take advantage of market conditions, and to build the second agency cost estimation model using historical transaction data for executions only for trades for which that traders do not have discretion and must execute regardless of whether market conditions are favorable, and excluding data for opportunistic trade executions.