Method for agency cost estimation

Abstract

A method 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.

We claim: 
     
         1 . A method for estimating transaction costs of a security trade execution according to a specified trading strategy, comprising the steps of:
 by one or more computers, receiving electronic data defining parameters of a proposed trade, said data specifying a trading strategy among a plurality of predefined trading styles defining how share quantities of securities to be traded are to be traded over a specified trading time period;   by said one or more computers, estimating first and second transaction costs for the received proposed trade based on the specified trading strategy and market data, wherein said first transactions costs are based on discretionary trades; and   outputting electronic data defining at least one of the first and second transaction costs.   
     
     
         2 . The method of  claim 1 , wherein the method further comprises steps for generating recommendations for optimizing the trading strategy based on at least one of the first and second transaction costs and outputting electronic data defining said recommendations that can be displayed on a computer terminal. 
     
     
         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 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 a first agency cost estimation model for use in estimating said first transactions costs, 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 a second agency cost estimation model for use in estimating said second transactions costs, 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.