Tool for estimating a cost of a trade
View Patent ↗The invention relates to a tool for estimating a pre-trade implementation shortfall for financial instruments. Through evaluating a number of factors, including the size of the order, the average daily volume of the stock, the average bid-ask spread of the stock, the volatility of the stock and the exchange on which the stock trades, the present invention estimates the cost of a trade. Using the disclosed system and method, a trader or fund manager may determine when and how to implement trades of varying size.
1. A system for estimating execution costs of a trade, comprising:
one or more computer processors operable to calculate an average bid-ask spread of one or more securities;
one or more computer processors operable to calculate values associated with one or more markets;
one or more computer processors operable to receive and store data regarding an order size for said one or more securities;
one or more computer processors operable to receive and store data regarding an average daily volume of said one or more securities traded on a specified market;
one or more computer processors operable to calculate data regarding historical volatility of said one or more securities;
one or more computer processors operable to calculate an estimated cost of trading said one or more securities using data comprising a first formula based on said average bid-ask spread, said values associated with one or more markets, said data regarding order size, said data regarding average daily volume, and said data regarding historical volatility; and
an electronic display component, in communication with said one or more computer processors operable to calculate an estimated cost, operable to display said estimated cost,
wherein said first formula comprises a first multiplicative product of at least one of said values associated with one or more markets and said average bid-ask spread.
2. A system as in claim 1 , wherein said first formula comprises a second multiplicative product of at least one of said values associated with one or more markets, said historical volatility, and a square root of a ratio of said order size to said average daily volume.
3. A system as in claim 2 , wherein said first formula comprises a sum of said first multiplicative product and said second multiplicative product.
4. A system as in claim 1 , wherein said first formula comprises a multiplicative product of at least one of said values associated with one or more markets and said historical volatility.
5. A system as in claim 1 , wherein at least one of said values associated with one or more markets is related to spread cost magnitude.
6. A system as in claim 1 , wherein at least one of said values associated with one or more markets is related to size impact magnitude.
7. A system as in claim 1 , wherein said average bid-ask spread is based on data regarding market close for an immediately preceding trading day.
8. A system as in claim 1 , wherein said average bid-ask spread is calculated based on a second formula comprising a total value traded over a given larger time period, values traded in specified smaller time periods that are fractions of said larger time period, and bid and ask prices at the ends of said smaller time periods.
9. A system as in claim 2 , wherein said first formula comprises a sum of at least said first multiplicative product and said second multiplicative product.