Pair trading system and method

• US 7,412,415 B2
• Filed: 07/25/2002
• Issued: 08/12/2008
• Est. Priority Date: 11/29/2001
• Status: Expired due to Term

• Current Assignee: Morgan Stanley
• Original Assignee: Morgan Stanley
• Inventors: Waddell, William Matthew
• Primary Examiner(s): Poinvil; Frantzy
• Application Number:
  US10/206,549
• Publication Number:
  US 20030130929A1
• Time in Patent Office: 2,210 Days
• Field of Search: 705/37, 705/36, 705/35, 705 30- 34
• US Class Current: 705/37
• CPC Class Codes: G06Q 40/03 Credit; Loans; Processing thereof
• 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 is provided for fulfilling a pair trade request and includes the steps of receiving a plurality of pair trade requests; executing a transaction for a first portion of one of the plurality of pair trade requests and matching a second portion of the one of the plurality of pair trade requests against another of the plurality of pair trade requests.

Claims

1. A computer implemented method for fulfilling a pair trade request, comprising the steps of:

receiving a plurality of pair trade requests, comprising one pair trade request and another pair trade request, wherein each pair trade request comprises a request to trade a first security, a request to trade a second security, and a request to trade said first security and said second security with a minimum spread limit, and wherein said first security and said second security each have a bid price and an ask price;

determining the bid/bid spread in the market of said first security and said second security;

determining the ask/ask spread in the market of said first security and said second security;

determining that the minimum spread limit of each pair trade request is met by a range of said bid/bid spread and said ask/ask spread;

executing a transaction between a first portion of the trade of said first security in said one pair trade request and at least one non-pair trade request, provided that the minimum spread limit of said one pair trade request is met by said range of said bid/bid spread and said ask/ask spread; and

matching, using a computer, a second portion of said trade of said first security in said one pair trade request and at least a first portion of the trade of said second security in said one pair trade request against said another pair trade request, provided that a range of the minimum spread limit of said one pair trade request and said another pair trade request overlaps with said range of said bid/bid spread and said ask/ask spread.

2. The method of claim 1, wherein the step of executing a transaction for said first portion of the trade of said first security in said one pair trade request includes the step of:

executing a transaction for said first portion of the trade of said first security in said one pair trade request in an external market.

3. The method of claim 1, wherein the step of executing a transaction is performed by a financial institution having an order inventory and the step of executing a transaction includes the step of:

executing a transaction for said first portion of the trade of said first security in said one pair trade request against said order inventory.

4. The method of claim 1, further comprising:

executing a transaction between a second portion of the trade of said second security in said one pair trade request and at least another non-pair trade request, provided that the minimum spread limit of said one pair trade request is met by said range of said bid/bid spread and said ask/ask spread, and wherein the step of executing said first portion of said one pair trade request and executing said second portion of said one pair trade request includes the steps of;

determining whether the bid price of the first security and the bid price of the second security meet a spread limit;

determining an amount of the second security that can be sold based on a bid size associated with the second security;

calculating an equivalent amount of said first security that can be bought based on the amount of said second security that can be sold;

adjusting said equivalent amount of said first security based on adjustment criteria;

calculating a purchase price for said adjusted equivalent amount of said first security based on the spread limit;

executing an initiating order to buy said adjusted equivalent amount of said first security at said purchase price; and

executing a covering order to sell said amount of the second security.

5. The method of claim 4, wherein the step of executing a covering order to sell includes the step of:

executing a covering order to sell said amount of the second security at the bid price of the second security.

6. The method of claim 4, further comprising the steps of:

determining whether the ask price of the first security and the ask price of the second security meet a spread limit;

determining an amount of the first security that can be bought based on an offer size associated with the first security;

calculating an equivalent amount of said second security that can be sold based on the amount of the second security that can be bought;

adjusting said equivalent amount of said second security based on adjustment criteria;

calculating a selling price for said adjusted equivalent amount of said second security based on the spread limit;

executing an initiating order to sell said adjusted equivalent amount of said second security at said selling price; and

executing a covering order to purchase said amount of the first security.

7. The method of claim 6, wherein the step of executing a covering order to purchase includes the step of:

executing a covering order to purchase said amount of the first security at the ask price of the first security.

8. The method of claim 6, wherein said adjustment criteria include a minimum amount and a maximum amount.

9. The method of claim 8, wherein the step of executing an initiating order includes the step of:

rounding said initiating order to a round lot size.

10. The method of claim 1, wherein the step of executing a first portion of the trade of said first security in said one pair trade request includes the step of:

executing a first portion of the trade of said first security in said one pair trade request in a plurality of tranches.

11. The method of claim 1, wherein said one pair trade request has a first spread limit and said another pair trade request has a second spread limit and wherein said step of matching said second portion of said trade of said first security in said one pair trade request and at least a first portion of the trade of said second security in said one pair trade request against said another pair trade request further includes the steps of:

determining that a range of said first spread limit and said second spread limit overlaps with a market spread;

setting a spread level;

calculating prices for the first security and the second security that are within the market spread and based on said spread level; and

matching said second portion of said trade of said first security in said one pair trade request and at least a first portion of the trade of said second security in said one pair trade request against said another pair trade request based on said calculated prices.

12. The method of claim 11, wherein the step of setting a spread level includes the steps of:

calculating a mean between said first spread limit and said second spread limit; and

setting said spread level as said mean if said mean is within said market spread.

13. The method of claim 12, further including the step of:

identifying a spread amount that is closest to said mean and within said market spread; and

setting said spread level as said spread amount if said mean is not within said market spread.

14. The method of claim 1, wherein said one pair trade request has a first spread limit, a buy ratio and a sell ratio, said another pair trade request has a second spread limit, a buy ratio and a sell ratio and wherein the step of matching a second portion of said trade of said first security in said one pair trade request and at least said first portion of the trade of said second security in said one pair trade request against said another pair trade request further includes the steps of:

determining that said buy ratio and said sell ratio associated with said one trade request does not equal said buy ratio and said sell ratio of said another pair trade request and that an overlap exists between the range of said first spread limit and said second spread limit and a market spread;

determining that market prices exist that are within the overlap;

determining a mismatch amount in said second security based on a difference between said buy ratio and said sell ratio associated with said one pair trade request and said buy ratio and said sell ratio of said another pair trade request;

calculating a cross amount for said first security and said second security;

selecting a crossing price for said first security and said second security that is within said overlap;

determining that said mismatch amount is available at said crossing price for said second security;

matching said second portion of said trade of said first security in said one pair trade request and at least said first portion of the trade of said second security in said one pair trade request against said another pair trade request based on said selected prices; and

executing a transaction for said mismatch amount of said second security at said crossing price for said second security.

15. The method of claim 14, wherein the step of determining that said mismatch amount is available at said crossing price for said second security includes the step of:

determining that said mismatch amount is available in an external market at said crossing price for said second security.

16. The method of claim 14, wherein the step of determining that said mismatch amount is available is performed by a financial institution having an order inventory and the step of determining that said mismatch amount is available at said crossing price for said second security includes the step of:

determining that said mismatch amount is available in said order inventory at said crossing price for said second security.

17. The method of claim 1, wherein said one pair trade request and said another pair trade request indicate a number of spreads and wherein the step of matching a second portion of said trade of said first security in said one pair trade request and at least said first portion of the trade of said second security in said one pair trade request against said another pair trade request, includes the step of:

matching a second portion of said trade of said first security in said one pair trade request and at least said first portion of the trade of said second security in said one pair trade request against said another pair trade request if said number of spreads is greater than a minimum number of spreads.

18. The method of claim 1, including the step of:

receiving a preference for filling at least some of said plurality of trade requests via said executing step.

19. The method of claim 1, including the step of:

receiving a preference for filling at least some of said plurality of trade requests via said matching step.

20. The method of claim 1, wherein a client submits a query regarding a status of said pair trade request and the status of said pair trade request is continuously updated in real time.

21. The method of claim 19, wherein said preference is submitted by a client electronically.

22. The method of claim 1, wherein a client receives a simultaneous report when said pair trade request is filled and the client confirms said pair trade electronically.

23. The method of claim 1, further comprising:

executing a transaction between a second portion of the trade of said second security in said one pair trade request and at least another non-pair trade request, provided that the minimum spread limit of said one pair trade request is met by said range of said bid/bid spread and said ask/ask spread, and wherein the step of executing said first portion of said one pair trade request and executing said second portion of said one pair trade request includes the step of;

determining whether the ask price of the first security and the ask price of the second security meet a spread limit;

determining an amount of the second security that can be bought based on an ask size associated with the second security;

calculating an equivalent amount of said first security that can be sold based on the amount of the second security that can be bought;

adjusting said equivalent amount of said first security based on adjustment criteria;

calculating a selling price for said adjusted equivalent amount of said first security based on the spread limit;

executing an initiating order to sell said adjusted equivalent amount of said first security at said selling price; and

executing a covering order to purchase said amount of said second security.

24. A system for fulfilling a pair trade request, said system receiving a plurality of pair trade requests, comprising one pair trade request and another pair trade request, wherein each pair trade request comprises a request to trade a first security, a request to trade a second security, and a request to trade said first security and said second security with a minimum spread limit, and wherein said first security and said second security each have a bid price and an ask price, comprising:

a pair trading engine for;

determining the bid/bid spread in the market of said first security and said second security;

determining the ask/ask spread in the market of said first security and said second security;

determining that the minimum spread limit of each pair trade request is met by a range of said bid/bid spread and said ask/ask spread for every security;

executing a transaction between a first portion of the trade of said first security in said one pair trade request and at least one non-pair trade request, provided that the minimum spread limit of said one pair trade request is met by said range of said bid/bid spread and said ask/ask spread; and

a pair crossing network for matching a second portion of said trade of said first security in said one pair trade request and at least a first portion of the trade of said second security in said one pair trade request against said another pair trade request, provided that a range of the minimum spread limit of said one pair trade request and said another pair trade request overlaps with said range of said bid/bid spread and said ask/ask spread.

25. The system of claim 24, further comprising a link to an external market wherein said pair trading engine forwards said transaction for said first portion of the trade of said first security in said one pair trade request for execution in said external market via said link.

26. The system of claim 24, further comprising a financial institution having an order inventory and wherein said pair trading engine executes said transaction for said first portion of the trade of said first security in said one pair trade request against said order inventory.

27. The system of claim 24, wherein said pair trading engine determines whether the bid price of the first security in said one pair trade request and the bid price of the second security in said one pair trade request meet a spread limit;

determines an amount of the second security that can be sold based on a bid size associated with the second security;

calculates an equivalent amount of said first security that can be bought based on the amount of said second security that can be sold;

adjusts said equivalent amount of said first security based on adjustment criteria;

calculates a purchase price for said adjusted equivalent amount of said first security based on the spread limit;

executes an initiating order to buy said adjusted equivalent amount of said first security at said purchase price; and

executes a covering order to sell said amount of the second security.

28. The system of claim 27, wherein the pair trading engine executes a covering order to sell said amount of the second security at the bid price of the second security.

29. The system of claim 27, wherein the pair trading engine determines whether the ask price of the first security and the ask price of the second security meet a spread limit;

determines an amount of the first security that can be bought based on an offer size associated with the first security;

calculates an equivalent amount of said second security that can be sold based on the amount of the second security that can be bought;

adjusts said equivalent amount of said second security based on adjustment criteria;

calculates a selling price for said adjusted equivalent amount of said second security based on the spread limit;

executes an initiating order to sell said adjusted equivalent amount of said second security at said selling price; and

executes a covering order to purchase said amount of the first security.

30. The system of claim 29, wherein the pair trading engine executes a covering order to purchase said amount of the first security at the ask price of the first security.

31. The system of claim 27, wherein said adjustment criteria include a minimum amount and a maximum amount.

32. The system of claim 31, wherein the pair trading engine rounds said initiating order to a round lot size.

33. The system of claim 24, wherein the pair trading engine executes at least a portion of the trade of one of said securities in one of said pair trade requests in a plurality of tranches.

34. The system of claim 24, wherein said one pair trade request has a first spread limit and said another pair trade request has a second spread limit and wherein the pair crossing network determines that a range of said first spread limit and said second spread limit overlaps with a market spread;

sets a spread level;

calculates prices for the first security and the second security that are within the market spread and based on said spread level; and

matches said second portion of said trade of said first security in said one pair trade request and at least a first portion of the trade of said second security in said one pair trade request against another of said plurality of pair trade request based on said calculated prices.

35. The system of claim 34, wherein the pair crossing network calculates a mean between said first spread limit and said second spread limit and sets said spread level as said mean if said mean is within said market spread.

36. The system of claim 35, wherein the pair crossing network identifies a spread amount that is closest to said mean and within said market spread and sets said spread level as said spread amount if said mean is not within said market spread.

37. The system of claim 24, wherein said one pair trade request has a first spread limit, a buy ratio and a sell ratio, said another pair trade request has a second spread limit, a buy ratio and a sell ratio and wherein the pair crossing network determines that said buy ratio and said sell ratio associated with said one pair trade request does not equal said buy ratio and said sell ratio of said another pair trade request and that an overlap exists between the range of said first spread limit and said second spread limit and a market spread;

determines that market prices exist that are within the overlap;

determines a mismatch amount in said second security based on a difference between said buy ratio and said sell ratio associated with said one pair trade request and said buy ratio and said sell ratio of said another pair trade request;

calculates a cross amount for said first security and said second security;

selects a crossing price for said first security and said second security that is within said overlap;

determines that said mismatch amount is available at said crossing price for said second security;

matches said second portion of said trade of said first security in said one pair trade request and at least said first portion of the trade of said second security in said one pair trade request against said another pair trade request based on said selected prices; and

executes a transaction for said mismatch amount of said second security at said crossing price for said second security.

38. The system of claim 37, wherein the pair crossing network determines that said mismatch amount is available in an external market at said crossing price for said second security.

39. The system of claim 37, wherein the pair crossing network determines that said mismatch amount is available at said crossing price for said second security in said an order inventory of a financial institution.

40. The system of claim 24, wherein said one pair trade request and said another pair trade request indicate a number of spreads and wherein the pair crossing network matches said second portion of said trade of said first security in said one pair trade request and at least said first portion of the trade of said second security in said one pair trade request against said another pair trade request if said number of spreads is greater than a minimum number of spreads.

41. The system of claim 24, wherein said plurality of pair trade requests include at least some pair trade requests indicating a preference for execution via said pair crossing network, said system further comprising a portfolio manager in communications with said pair crossing network, said portfolio manager receiving said plurality of pair trade requests and routing said at least some of said plurality of trade requests to said pair crossing network according to said preference.

42. The system of claim 24, said system further comprising a pair trading engine for executing at least some of said plurality of pair trade requests, said system further comprising a portfolio manager in communications with said pair trading engine, wherein said plurality of pair trade requests include at least some pair trade requests indicating a preference for execution via said pair trading engine, said portfolio manager receiving said plurality of pair trade requests and routing said at least some of said plurality of trade requests to said pair trading engine according to said preference.

43. The method of claim 24, wherein a client submits a query regarding a status of said pair trade request and the status of said pair trade request is continuously updated in real time.

44. The method of claim 41, wherein said preference is submitted by a client electronically.

45. The method of claim 24, wherein a client receives a simultaneous report when said pair trade request is filled and the client confirms said pair trade electronically.

46. A computer readable storage medium storing instructions for fulfilling a pair trade request that, when executed by a computer, cause to computer to:

receive a plurality of pair trade requests, comprising one pair trade request and another pair trade request, wherein each pair trade request comprises a request to trade a first security, a request to trade a second security, and a request to trade said first security and said second security with a minimum spread limit, and wherein said first security and said second security each have a bid price and an ask price;

determine the bid/bid spread in the market of said first security and said second security;

determine the ask/ask spread in the market of said first security and said second security;

determine that the minimum spread limit of each pair trade request is met by a range of said bid/bid spread and said ask/ask spread;

execute a transaction between a first portion of the trade of said first security in said one pair trade request and at least one non-pair trade request, provided that the minimum spread limit of said one pair trade request is met by the range of said bid/bid spread and said ask/ask spread; and

match a second portion of said trade of said first security in said one pair trade request and at least a first portion of the trade of said second security in said one pair trade request against said another pair trade request, provided that a range of the minimum spread limit of said one pair trade request and said another pair trade request overlaps with said range of said bid/bid spread and said ask/ask spread.