Method and apparatus for deriving benchmarks for trading instruments

This invention relates to methods, apparatus and systems for deriving benchmarks for use in trading instruments, particularly but not exclusively, financial instruments such as foreign exchange (FX), including FX spot, FX forwards and other foreign exchange products.

Benchmarks are used in the trading of instruments such as FX spot to provide a reference point which indicates the actual state of the market and which is neither biased to the buy side or sell side of the market. As markets can move very rapidly it is important to recalculate the benchmarks frequently and to distribute them to participating traders and other interested parties so that the benchmarks remain a reliable indicator.

Benchmarks may be derived in a number of ways. However, all are based on the market history, and access to good information as to the current state of the market, and trades conducted in the market is essential. Typically, a financial institution will trade a variety of currency pairs and benchmarks need to be established in each of those pairs.

The present invention aims to provide an improved algorithm for calculation of benchmarks. The algorithm calculates benchmarks on the basis of the prices of deals conducted since a previous benchmark was established, quotes at present in the market and the previous benchmark price. The invention further aims to provide a computerized system which can calculate those benchmarks according to the algorithm and then deliver them to traders.

More specifically there is provided a method of establishing a benchmark price for trades in a instrument at a given time, comprising: acquiring from at least one trading system the price at which deals in the instrument have been conducted since a previous benchmark price was established; acquiring the prices of quotes at present in the trading system; calculating a market price from the deal prices and the quote prices; and calculating a benchmark price from the previous benchmark price and the market price.

Preferably, the benchmark is established periodically every t seconds. This enables the benchmark price to remain an accurate reflection of the true state of the market.

Preferably, the calculation of market prices includes the weighting of deal prices according to size and/or age. Weighting may be performed in terms of multiples of a minimum deal size, preferably according to the formula W(d_i)=V_i*2^−ct where V_i is the volume of the deal, t is the elapsed time since the previous benchmark, and c is a constant determining the speed at which deals are marked down over time.

Preferably, the calculation of market prices includes the summing of the weights of all deal prices occurring since the previous benchmark.

The market price may be calculated from a deal price obtained from the arithmetic average of individual deal prices for deals conducted since the previous benchmark was established, weighted by their deal weight. Deal price calculation may further include calculation of a scatter for deals conducted since the previous benchmark price was established. This deal price scatter may be derived from the standard deviation of deals measured with respect to deal price and weight.

The calculation of market prices may also comprise weighting quote prices according to size and age. Weighting may be in terms of a minimum quote size and may be according to their distance from the best quote in the market. Weighting may be performed according to the formula: W(Q_i)=V_i*2^−P(Qi)−B where V_i is the volume of a quote, P(Q_i) is the quote price and B is the best bid or offer depending on whether Q_i is a bid or an offer.

All quote prices occurring since the previous benchmark may also be summed and adjusted by a constant representing demand as part of the process of obtaining the market price.

Preferably, a quote scatter price is also calculated for all quotes entered into the market since the previous benchmark price was established. This scatter may be derived from the standard derivation of quote prices measured with respect to quote price and weight.

Preferably, the market price is derived from an average of the quote and deal prices each sealed by its own weight. A market price weight is calculated from the sum of the deal and quote price weights. Preferably a market price scatter is calculated, for example from the standard derivation of weighted market prices.

Preferably, a phantom price is also calculated. If no prices have been entered since the last benchmark, this phantom price is equal to the previous benchmark. If prices have been entered, this price is zero.

The phantom price may have a weight which is equal to a very small constant, for example 0.5*10⁻⁶. The phantom price may also have a scatter which is equal to a small constant, such as 1% of the base figure of the instrument being traded.

Preferably, the benchmark price is derived from the market price, a market price weight, the previous benchmark price, and a previous benchmark price weight. The latter weight may be calculated from the sum of the market price weight and the last benchmark price weight modified by a time markdown.

Preferably, a benchmark price error is also calculated. This error may be a standard error derived from the benchmark scatter and the benchmark price weight.

A further aspect of the invention provides a method of establishing a benchmark price for trades in a instrument at a given time, comprising: acquiring from at least one trading system deal price information relating to prices at which deals in the instrument have been conducted since a previous benchmark price was established; calculating from the deal price information, a deal price weight, a deal price and a deal scatter; acquiring from the at least one trading system price quote information relating to the prices of quotes at present in the trading system; calculating from the quote price information a quote price weight, a quote price and a quote price scatter; calculating a market price weight, a market price and a market price scatter from the deal price weight, the deal price and the deal price scatter, the quote price weight, the quote price and the quote price scatter; and calculating a benchmark price from the previous benchmark price and the market price.