System and method for estimating and optimizing transaction costs

Abstract

A method and system for forecasting the transaction cost of a portfolio trade execution that may be applied to any given trade strategy or an optimal trade strategy that minimizes transaction costs. In preferred embodiments, a server comprises one or more computers that act as an automated forecaster whereby it accepts user-defined input variables from customers and generates a transaction cost estimation report based on those variables. The server is programmed with specific transaction cost estimation and optimization algorithms that model the transaction costs of a specific trade execution based on the user's trading profile and market variables.

1 - 14 . (canceled) 
     
     
         15 . A method for estimating transaction costs of a security trade execution according to a trading strategy selected by a user, the method performed by a transaction cost optimization server coupled to one or more electronic markets and one or more client devices via an electronic communication network, said method comprising the steps of:
 receiving, at said transaction cost optimization server from a client device over said electronic communication network, data defining parameters of a proposed trade execution from a user, and data specifying a user-selected trading strategy that is selected from among a plurality of predefined trading styles displayed in a user interface on the client device, or is specifically defined by said user using the user interface;   estimating, by said transaction cost optimization server, the transaction costs of the received proposed trade execution based on the user-selected trading strategy and market data;   optimizing, by said transaction cost optimization server using real-time market conditions, said estimated transaction costs under said user-selected trading strategy; and   providing, by said transaction cost optimization server over said electronic communication network to a device associated with said user, at least one recommended action based on said optimizing step,   wherein said at least one recommended action is displayed in the user interface in real-time based on the market conditions, wherein said user minimizes transaction costs by said at least one recommended action in executing said trade.   
     
     
         16 . The method of  claim 15 , wherein the method further comprises providing, by the transaction cost optimization server, an estimation report to the customer over the network. 
     
     
         17 . The method of  claim 15 , wherein an adjustment factor adjusts for trade difficulty and the real-time market conditions to allow for an accurate comparison of trades performed under different circumstances and trading conditions. 
     
     
         18 . The method of  claim 17 , 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. 
     
     
         19 . The method of  claim 15 , wherein a plurality of servers are connected to a plurality of customers over said electronic communication network, and customers enter their risk aversion profile and hypothetical trade order characteristics through the communication network to the server associated with transaction cost optimization. 
     
     
         20 . The method of  claim 15 , wherein the user interface allows a user to identify relevant data and trends in a dataset, and to locate factors that affect transaction performance. 
     
     
         21 . The method of  claim 20 , wherein a user is able to change a subset of the dataset under consideration and perform real-time analytic calculations without additional pre-processing. 
     
     
         22 . The method of  claim 20 , wherein a user may add new user aggregates, without additional pre-processing. 
     
     
         23 . The method of  claim 15 , 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. 
     
     
         24 . The method of  claim 15 , wherein the server is programmed with a specific strategy transaction cost algorithm that allows for intra-day calculation of price-based benchmarks for optimizing said estimated transaction costs. 
     
     
         25 . The method of  claim 19 , wherein each server accepts proposed orders and other customer input data directly over the communication network from customers wishing to estimate the transaction costs of one or more securities to be traded according to the particular trading strategy set by the customer, and all servers have access to multiple trading destinations, access to real-time and historical market data, and real-time analytic data, and each server has access to other servers on the communication network such that market and historical data, or compilations of data, can be exchanged between the servers, and the servers can interoperate more efficiently. 
     
     
         26 . The method according to  claim 15 , wherein said transaction cost estimation takes into account temporary price impact, permanent price impact, and price improvement factors. 
     
     
         27 . The method according to  claim 15 , wherein said transaction cost estimation recommends specific share quantity trade executions for each of a number of time duration bins according to the trading strategy selected by the user, to optimize transaction costs under said selected trading strategy. 
     
     
         28 . A system for estimating and optimizing transaction costs of proposed execution trades of securities according to a risk value selected by a user, the system comprising:
 a plurality of transaction cost optimization servers connected to a plurality of client devices over an electronic communication network with one or more electronic markets, each transaction cost optimization server configured to:
 receive, from a client device over said electronic communication network, said user-selected risk value and data specifying parameters of a proposed trade order that are selected from a user interface on the client device, 
 estimate the transaction costs of the received proposed trade execution based on the user-selected risk value and market data, 
   optimize, using real-time market conditions, said estimated transaction costs under said user-selected risk value and market data; and   provide, to a client device associated with said user over said electronic communication network, at least one recommended action based on said optimization,   wherein said at least one recommended action is displayed in the trading interface in real-time based on the market conditions, and wherein a user minimizes transaction costs by performing said at least one recommended action in executing said trade.