System and method for risk management using average expiration times

• US 7,584,130 B1
• Filed: 05/02/2006
• Issued: 09/01/2009
• Est. Priority Date: 11/26/2002
• Status: Expired due to Fees

• Current Assignee: Trading Technologies International, Inc.
• Original Assignee: Trading Technologies International, Inc.
• Inventors: Schluetter, Jens-Uwe
• Primary Examiner(s): WEISBERGER, RICHARD C
• Application Number:
  US11/415,889
• Time in Patent Office: 1,218 Days
• Field of Search: 705 35- 45
• US Class Current: 705/35
• 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
• CPC Class Codes: G06Q 40/08 Insurance

Abstract

A margin requirement is computed while trading. The margin requirement may be calculated while trading because the preferred system takes into account working orders to generate the margin requirement. The on the fly possibility allows the preferred system to provide pre-trade risk calculations, but can also be used to provide post-trade calculations. A generic spread number and the maximum number of outright positions are determined. Average expirations for the generic spread are computed. Using the spread positions, the average expirations and the maximum number of outright positions, a spread margin and an outright margin are calculated, which when summed provide a total margin requirement. Limits based in part on the total margin requirement may be imposed on one or more traders.

Claims

1. A method for computing a weighted margin requirement during a trading day in an electronic trading environment, comprising:

estimating a number of spreads based on a first net filled long position and a first net filled short position corresponding to a first tradeable object and a second net filled long position and a second net short position corresponding to a second tradeable object, and further based on working spread buy and sell positions for exchange provided spreads associated with the first tradeable object and the second tradeable object;

establishing a first time to expire for the first tradeable object and a second time to expire for the second tradeable object, wherein the first time to expire is determined based on a current time and an expiration date of the first tradeable object, and wherein the second time to expire is based on the current time and an expiration date of the second tradeable object;

determining a first average expiration time for long positions of the estimated number of spread based on the first net filled long position and the working spread buy position associated with the first tradeable object and the first time to expire for the first tradeable object, and further based on the second net filled long position and the working spread buy position associated with the second tradeable object and the second time to expire for the second tradeable object;

determining a second average expiration time for short positions of the estimated number of spreads based on the first net filled short position and the working spread sell position associated with the first tradeable object and the first time to expire for the first tradeable object, and further based on the second net filled short position and the working spread sell position associated with the second tradeable object and the second time to expire for the second tradeable object;

determining an average spread length based on the first average expiration time and the second average expiration time;

determining a spread margin requirement using the estimated number of spreads, the average spread length, and a spread base value; and

storing the spread margin requirement.

2. The method of claim 1, wherein determining the first average expiration time comprises:

determining a first weight buy value by multiplying the first time to expire by a sum of the first net filled long position and the working spread buy position associated with the first tradeable object;

determining a second weight buy value by multiplying the second time to expire by a sum of the second net filled long position and the working spread buy position associated with the second tradeable object; and

determining the first average expiration time by adding the first weight buy value and the second weight buy value.

3. The method of claim 2, wherein determining the second average expiration time comprises:

determining a first weight sell value by multiplying the first time to expire by a sum of the first net filled short position and the working spread sell position associated with the first tradeable object;

determining a second weight sell value by multiplying the second time to expire by a sum of the second net filled short position and the working spread sell position associated with the second tradeable object; and

determining the second average expiration time by adding the first weight sell value and the second weight sell value.

4. The method of claim 3, wherein determining the average spread length further comprises:

determining a first average distance for the first and second weight buy values by dividing the first average expiration time by a sum of at least the first net filled long position and the second net filled long position;

determining a second average distance for the first and second weight sell values by dividing the second average expiration time by a sum of at least the first net filled short position and the second net filled short position; and

determining the average spread length by taking a difference between the first average distance and the second average distance.

5. The method of claim 1, further comprising:

multiplying the estimated number of spreads, the average spread length and the spread base value to determine the spread margin requirement.

6. The method of claim 1, further comprising:

determining whether to send an order for a tradeable object to an electronic exchange based on the spread margin requirement and an available margin requirement.

7. The method of claim 6, further comprising:

sending the order to the electronic exchange when the available margin balance is higher than the spread margin requirement.

8. The method of claim 6, further comprising:

refraining from sending the order to the electronic exchange when the available margin balance is lower than the spread margin requirement.

9. The method of claim 1, further comprising:

determining a maximum number of outrights based on the first and second net filled long positions, the net first and second filled short positions, and working buy and sell orders corresponding to the first tradeable object and the second tradeable object;

determining an outright margin requirement based on the maximum number of outrights and an outright base value; and

determining a total margin requirement using the outright margin requirement and the spread margin requirement.

10. The method of claim 9, wherein determining the maximum number of outrights comprises:

determining a first maximum outright value based on the net first and second filled long positions, the net first and second filled short positions, and the working buy orders corresponding to the first tradeable object and the second tradeable object;

determining a second maximum outright value based on the net filled long positions, the net filled short positions, and working sell orders corresponding to the first tradeable object and the second tradeable object; and

determining the maximum number of outrights based on the first maximum outright value and the second maximum outright value.

11. The method of claim 9, further comprising:

determining whether to send an order for a tradeable object to an electronic exchange based on the total margin requirement and an available margin balance.

12. The method of claim 11, further comprising:

sending the order to the electronic exchange when the available margin balance is higher than the total margin requirement.

13. The method of claim 11, further comprising:

refraining from sending the order to the electronic exchange when the available margin balance is less than the total margin requirement.

14. The method of claim 1, wherein estimating the number of spreads comprises:

determining a first maximum leg position for the first tradeable object based on the first net filled long position and the first net filled short positions for the first tradeable, and further based on the working spread buy and sell positions for exchange provided spreads associated with the first tradeable object;

determining a second maximum leg position for the second tradeable object based on the first net filled long position and the second net filled short position for the second tradeable object, and further based on the working spread buy and sell positions for exchange provided spreads associated with the second tradeable object;

determining a total maximum leg position using the first maximum leg position and the second maximum leg position;

determining a number of outrights based on the net filled long positions and the net filled short positions associated with the first tradeable object and the second tradeable object; and

determining the number of spreads based on the total maximum leg position and the number of outrights.

15. The method of claim 14, wherein determining the first maximum leg position comprises:

determining a first absolute value using the first net filled long position and the first net filled short position for the first tradeable object, and further using the working spread buy position for exchange provided spreads associated with the first tradeable object;

determining a second absolute value using the first net filled long position and the first net filled short positions for the first tradeable object, and further using the working spread sell position for exchange provided spreads associated with the first tradeable object; and

determining the first maximum leg position using a maximum of the first absolute value and the second absolute value.

16. The method of claim 14, wherein determining the second maximum leg position comprises:

determining a first absolute value using the second net filled long position and the second net filled short position for the first tradeable object, and further using the working spread buy position for exchange provided spreads associated with the second tradeable object;

determining a second absolute value using the second net filled long position and the second net filled short positions for the first tradeable object, and further using the working spread sell position for exchange provided spreads associated with the second tradeable object; and

determining the second maximum leg position using a maximum of the first absolute value and the second absolute value computed in relation to the second tradeable object.

17. The method of claim 9, wherein the total margin requirement is computed for a trader.

18. The method of claim 9, wherein the total margin requirement is computed for a plurality of traders.

19. The method of claim 9, further comprising displaying the spread margin requirement on a graphical user interface.

20. The method of claim 9, further comprising displaying the outright margin requirement on a graphical user interface.

21. The method of claim 9, further comprising displaying the total margin requirement on a graphical user interface.

22. The method of claim 1, further comprising:

setting the spread base value.

23. The method of claim 11, further comprising:

setting the outright base value.

24. A computer readable medium having program code recorded thereon for execution on a computer to compute a weighted margin requirement during a trading day in an electronic trading environment, comprising:

estimating a number of spreads based on a first net filled long position and a first net filled short position corresponding to a first tradeable object and a second net filled long position and a second net short position corresponding to a second tradeable object, and further based on working spread buy and sell positions for exchange provided spreads associated with the first tradeable object and the second tradeable object;

establishing a first time to expire for the first tradeable object and a second time to expire for the second tradeable object, wherein the first time to expire is determined based on a current time and an expiration date of the first tradeable object, and wherein the second time to expire is based on the current time and an expiration date of the second tradeable object;

determining a first average expiration time for long positions of the estimated number of spread based on the first net filled long position and the working spread buy position associated with the first tradeable object and the first time to expire for the first tradeable object, and further based on the second net filled long position and the working spread buy position associated with the second tradeable object and the second time to expire for the second tradeable object;

determining a second average expiration time for short positions of the estimated number of spreads based on the first net filled short position and the working spread sell position associated with the first tradeable object and the first time to expire for the first tradeable object, and further based on the second net filled short position and the working spread sell position associated with the second tradeable object and the second time to expire for the second tradeable object;

determining an average spread length based on the first average expiration time and the second average expiration time;

determining a spread margin requirement using the estimated number of spreads, the average spread length, and a spread base value; and

storing the spread margin requirement.