Pair trading system and method

• US 7,769,677 B2
• Filed: 02/15/2008
• Issued: 08/03/2010
• Est. Priority Date: 11/29/2001
• Status: Active Grant

• Current Assignee: Morgan Stanley Services Group Inc. (Morgan Stanley)
• Original Assignee: Morgan Stanley
• Inventors: Waddell, William Matthew
• Primary Examiner(s): Poinvil; Frantzy
• Application Number:
  US12/070,152
• Publication Number:
  US 20080222022A1
• Time in Patent Office: 900 Days
• Field of Search: 705 10- 44
• 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, said pair trade request performed by a financial institution having an order inventory, the method comprising the steps of:

receiving a plurality of pair trade requests, comprising at least one pair trade request, wherein said 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 said 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 in an external market, 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

executing a transaction between one of a second portion of said trade of said first security in said one pair trade request or a first portion of the trade of said second security in said one pair trade request, and at least one non-pair trade request in said order inventory, 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;

wherein at least one of said steps is implemented with a computer.

2. The method of claim 1, further comprising:

executing a transaction between a 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 steps of executing said first portion of the trade of said first security in said one pair trade request and executing said portion of the trade of said second security in said one pair trade request include 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.

3. The method of claim 2, 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.

4. The method of claim 2, 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.

5. The method of claim 4, 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.

6. The method of claim 4, wherein said adjustment criteria include a minimum amount and a maximum amount.

7. The method of claim 4, wherein the step of executing an initiating order includes the step of:

rounding said initiating order to a round lot size.

8. The method of claim 1, further comprising:

executing a transaction between a 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 steps of executing said first portion of the trade of said first security in said one pair trade request and executing said portion of the trade of said second security in said one pair trade request includes 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 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.

9. The method of claim 1, wherein at least one of the executing steps include the step of:

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

10. The method of claim 1, wherein said plurality of pair trade requests comprises another pair trade request, wherein said another pair trade request comprises a request to trade said first security, a request to trade said second security and 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 method further comprises the steps of:

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

matching another portion of said trade of said first security in said one pair trade request and at least another portion of said 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.

11. The method of claim 10, wherein said matching step 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 another portion of said trade of said first security in said one pair trade request and at least said another 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. A computer-implemented method for fulfilling a pair trade request, comprising the steps of:

receiving a plurality of pair trade requests, comprising at least one pair trade request, wherein said 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 said 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 a first 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;

executing a transaction between a first portion of the trade of said second security in said one pair trade request and at least a second 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

repeating the executing steps until the pair trade request is fulfilled;

wherein at least one of said steps is implemented with a computer.

15. The method of claim 14, wherein at least one of the repeated steps includes the step of:

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

16. The method of claim 14, wherein at least one of the repeated executing steps is performed by a financial institution having an order inventory and at least said one of said repeated steps includes the step of:

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

17. The method of claim 14, wherein said plurality of pair trade requests comprises another pair trade request, wherein said another pair trade request comprises a request to trade said first security, a request to trade said second security and a request said first security and said second security with a second minimum spread limit, the method further comprising the steps of:

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

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.

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

receive a plurality of pair trade requests, comprising at least one pair trade request, wherein said 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 said 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 in an external market, 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

execute a transaction between one of a second portion of said trade of said first security in said one pair trade request or a first portion of the trade of said second security in said one pair trade request, and at least one non-pair trade request in said order inventory, 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.

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

receive a plurality of pair trade requests, comprising at least one pair trade request, wherein said 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 said 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 a first 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;

execute a transaction between a first portion of the trade of said second security in said one pair trade request and at least a second 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

repeat the executing steps until the pair trade request is fulfilled.

20. The method of claim 19, wherein at least one non-pair trade request is selected from the group consisting of:

an external market order and an order from an inventory from a financial institution.