Trading Patterns

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Trading Patterns

• Information System EngineeringPatterns In
  System Design Analysis 372-1-4601

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List Of Content

• Motivation
• Trading Patterns
• Introduction
• Contract
• Portfolio
• Quote
• Scenario
• Bibliography

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Motivation

• "Wall Street is littered with poorly designed
  in-house systems projects that have been tossed
  into the digital dust heap. Groenfeldt
• Software developers treat analysis just by
  looking at the requirements at the surface
• Patterns, or  object models, often repeat
  themselves in many projects
• Financial systems implement complex financial
  problems

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Trading Patterns

• Trading Patterns
• A Collection of patterns related to the banking
  industry
• Why Patterns?
• Patterns makes the development of banking
  applications more efficient
• Patterns helps us addressing the problem by
  creating a better conceptual model
• Patterns will assist the analyst/developer not
  only in conceiving the model but also in
  communicating with the users

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Trading Patterns

• Enable to create a system that is flexible as
  possible in order to be easily extendable to
  support new instruments, pricing models and risk
  management methodology

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Trading Patterns - Introduction

• Trading is a set of patterns focus on goods
  exchange
• Those patterns look at the buying and selling
  goods and the prices of these goods with respect
  to the stock market in rapidly changing
  conditions
• These patterns use the experience of a trading
  system of a bank
• These patterns take a look at the different
  angles from a selling and a buying perspective
• The trading system must understand the goods
  exchange in different circumstances

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Trading Patterns - Contract

• Contract
• Represents the simplest financial deal, namely,
  buying some instrument from another party at a
  certain future time for a certain price
• The kernel of all trading applications are
  contracts, also referred to as deals or trades
• A contract is a legal deal between two or more
  parties (usually two)
• The parties agree to swap some assets or cash
  flows either on the spot or at a later time

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Trading Patterns - Contract
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Trading Patterns Contract (1)

• Long short are terms for buy sell,
  respectively
• The amount of the instrument is traded with the
  counterparty
• Disadvantage ?
• The single party limits the kind of contracts
  that can be represented

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Trading Patterns Contract (1) example

• CITIBANK sells 2 million US dollars (USD) for 1
  million British pounds for British Railways
• Contract Short
• Counterparty British Railways
• Instrument USD/GBP
• Amount 1 million
• Price 2

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Trading Patterns Contract (2)

• Indicating buyers and sellers by separate
  relationships
• Support internal or completely external deals

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Trading Patterns Contract (3)

• Less concise
• Better Support the traders view

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Eurex Trading System

• .
• Eurex is the world's leading futures and options
  market for euro denominated derivative
  instruments.
• Its electronic trading platform provides access
  to a broad range of international benchmark
  products.
• With market participants connected from 700
  locations worldwide
• Trading volume at Eurex exceeded 1.014 billion
  contracts in 2003

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Trading Patterns Portfolio

• Portfolio
• A collection of contracts that can be valued as a
  whole
• A bank will look at a group of related contracts
  and assess their joint risk
• Collection of contracts by
• A single trader
• A particular instrument
• A particular counterparty
• Or some other combinations

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Trading Patterns Portfolio
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Trading Patterns Portfolio (1)

• The value of a portfolio is the sum of the values
  of underlying contracts
• What should be the cardinality of the association
  ?
• (1 ,1)
• Cant consider contract in
  different perspectives
• (1 , n)
• We need to build an application
  that would search all the contracts and assign
  them to portfolios

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Trading Patterns Portfolio (2)

• Solution
• We can give portfolio a Boolean method, which
  takes a contract as argument

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Devon Exchange System

• .
• Provides back-office processing requirements of
  firms participating in the European
  exchange-traded derivatives markets
• DEVON gives the user the possibility to use a
  filter to add deals to a portfolio at a given
  time, but the portfolio keeps a reference of all
  deals it contains and does not use the filter
  later on
• DEVON allows the user to create a scenario by
  loading a file of exchange rates or manually
  setting the rates. The date can be shifted back
  and forward. The scenario can then be applied to
  a real or hypothetical portfolio

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Trading Patterns Portfolio (2)

• The portfolio then consists of all contracts for
  which the Boolean method evaluates to true
• This is a powerful notion because we can
  construct portfolios by any combination of
  properties of contracts
• How is the Boolean Method implemented ?
• A block of code that returns true or false when
  given a contract as argument
• Very easy in Smalltalk, Lisp
• More tricky in C, Java (need a compiled
  function)

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Trading Patterns Portfolio

• Portfolios are commonly formed from a number of
  properties of contract
• Counterparty
• Dealer (primary party)
• Instruments
• Dates of deals
• We can combine these attributes into a particular
  contact selector object

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Trading Patterns Portfolio (3)

• Contract Selector object is used to match the
  given contract argument and those that match,
  become part of the portfolio
• Contract Selector object cant select all
  possible portfolios but it can cover most of them

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Trading Patterns Portfolio (3) example

• A portfolio consists all the deals involving
  Aroma Coffee Makers stock to John Smith
• Filter properties of contract
• Counterparty John Smith
• Instruments Aroma Coffee Makers
• Java Demo

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Trading Patterns Portfolio (4)

• we can abstract the interfaces of both the
  Boolean method and the contract selector into a
  single abstract type the portfolio filter

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Trading Patterns Portfolio (4)

• Portfolio filter selects contracts for a
  portfolio
• Operation
• SelectContracts takes a collection of contracts
  as parameter and returns another collection of
  contracts
• IsIncluded evaluated for each contract in the
  input collection and, if true, adds it to the
  result

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Trading Patterns Portfolio

• Should portfolios be transient or permanent ?
• Transient filled on demand. The filter is
  specified and all instances of contract are
  checked to see if they match the filter.
• Permanent are created in the same way but not
  discarded. When new contracts created they are
  checked against them
• Query processing
• Contracts Creation
• Storage

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Trading Patterns - Portfolio Modeling Principles

• If a set of objects (like contracts) can be
  formed with various criteria, a portfolio should
  be used
• By using abstraction the implementation can vary
  easily by sub-classing
• The essential characteristic of a portfolio is
  that of an object that encapsulates the selection
  mechanism

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Trading Patterns - Quote

• Quote
• A set of numbers to represent the prices
• Anything traded on a financial market has a price
• Usually, the price is not a single number

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Trading Patterns - Quote
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Trading Patterns Quote

• We quote two numbers
• price to buy (which is the bid)
• price to sell ( the offer )
• Other two numbers are derived
• spread the difference between the bid and the
  offer
• Median the average of bid and offer

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Trading Patterns Quote (1)

• Use a separate quote object
• Brings the particular responsibilities together
  into a simple reusable code

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Trading Patterns Quote example

• Example The USD/GBP rate is 0.67/0.68
• Instrument USD/GBP
• Quote
• Bid 0.67
• Offer 0.68
• Mid 0.675
• Spread 0.1

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Trading Patterns Quote (2)

• Two-way prices are common, but sometimes one-way
  prices are used
• One-way quote is treated as a quote, with the bid
  equal to the offer

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QTPlus

• .
• The premier windows-based quote and charting
  product
• Real Time or Delayed Streaming Quotes
• Powerful Charting Capabilities
• Providing with constant news and market updates
• Allows you to design your own workbooks

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Trading Patterns - Quote Modeling Principles

• When multiply attributes interact with a behavior
  that might be used in several types, the
  attributes should be combined into a new
  fundamental type
• If the difference between two similar types is
  often ignored then an abstract subtype can be
  used
• If the distinction between them is usually
  important, then abstract subtype should not be
  used

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Trading Patterns - Scenario

• Scenario
• represents the state of the market at a certain
  point in time and the elements within the
  scenario represent the prices at that point
• The notion of Scenario is used in every system
  providing some risk management functionality
• Simulation is used to perform a "what-if"
  scenario against a portfolio
• Simulated Market Data temporarily replaces real
  market data while running a risk management or
  pricing application

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Trading Patterns - Scenario
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Trading Patterns Scenario

• The TimePoint indicates at what time the quote is
  correct for the instrument
• Shows how prices change over time and keep
  history of this changes
• How can you find the closing prices for a market
  ?
• It involves taking all the stocks within that
  market and looking for the latest quotes for the
  stock

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Trading Patterns Scenario (1)

• This allow a group of prices at a single time to
  be treated as a single object
• What about markets that do not have a single
  publisher for a price (foreign exchange markets)

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Trading Patterns Scenario (2)

• We add the party that publishing the price to the
  model (like different banks)

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Trading Patterns Scenario (2) example

• An Import/Export snacks merchant considers the
  price of goods in a number of European countries.
• Instruments goods
• Party a specific market
• Quote two-way prices
• He can look on the opportunities where the price
  difference is grater than transporting costs
• As we can see from this example The scenario
  object provides a base to pull together all the
  factors in a hypothetical case so that different
  cases can be compared easily

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Trading Patterns Scenario (2)

• In the this model of scenario, we haven't
  described how the prices are obtained
• Where do they come from?
• In general, there are three origins for a price
• publication by some body that is widely quoted
• Calculations from other prices or market
  characteristics
• Opinion of an individual trader or team of
  analysts

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Trading Patterns Scenario (3)
Incomplete
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Trading Patterns Scenario (3)

• Sourced Scenario
• This represents the fact that the price has been
  obtained from an information source
• For example, consider an analyst looking at the
  prices of some goods. The analyst can treat each
  company as an information source for getting the
  price. The sourcing index could be a page number
  in a catalog. He can create a scenario for each
  company or consolidate them into a single
  scenario for all companies.

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Trading Patterns Scenario (3)

• Market Indicator
• In scenarios, it is common to have things other
  than instruments
• For example, an important concept in derivative
  contracts is volatility - which is an indicator
  of  how much the value of the instrument is
  changing or interest rates for foreign currency
  markets
• Hence we need a supertype that encompasses
  instruments, volatilities, and others

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Trading Patterns Calculating Scenario elements

• The algorithm for calculating the price can be an
  object in his own right
• The calculated scenario element has a list of
  scenario elements and a formula

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Trading Patterns Calculating Scenario elements

• This allows a single formula to be reused by
  several calculated scenario
• Example
• A trade is specialist on the FFR. He determines
  the exchange rate between NLG and FFR by cross
  rates using DEM.
• Market Indicator ltNLG/FFRgt
• Calculated Scenario Element ltNLG/DEMgt
  ltDEM/FFRgt
• Formula lt / gt

By Reuters
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Trading Patterns Scenario Modeling Principles

• Scenario should be used when a combination of
  prices or rates should be considered as a group
• Scenario should be used when a collection of
  indicators change in series of time points

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Bibliography

• Analysis Patterns Reusable Object Models
  M.Fowler
• Why In-House Systems Fail, Derivatives Strategy
  T.Groenfeldt
• Risk Management Framework P.Marsura
• ET SwapsManager Using Object Technology in the
  Financial Engineering Domain E. Gamma, T.
  Eggenschwiler

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