WO2011114334A2 - Method and system for performing zero-sum trading - Google Patents

Abstract

A method for performing a zero-sum trading in secondary market environment, A method for performing a zero-sum trading. In secondary market environment, traders are allowed to join one of the closed groups according to the different criteria. During each trading session, the price of each tradable asset is displayed and order execution of trades is performed according to spread-based broker dealer rules and an individual trader's returns is calculated. A total group bonus being the sum of all individual traders' returns, if exist, Is calculated for this session in this group multiplied by -1 and an individual bonus for each trader is calculated as a part of the total group bonus, based on a distribution formula. At the end of each trading session, an ending balance is set in each trader's account as the sum of trader's beginning balance, trader's return at the end of the session, and trader's individual bonus at the end of the session.

Description

METHOD AND SYSTEM FOR PERFORMING ZERO-SUM

TRADING

Field of the Invention

The present invention relates to the field of e-trading. More particularly, the invention relates to a method and system for trading financial products on secondary markets, and systems and methods for determining allocation of returns of participants based on group trading results.

Background of the invention

In recent years, due to numerous technological advances and mainly the internet which enabled quick and easy access to active leveraged markets, the Retail trader sector's participation in these markets has increased significantly. Many retail traders enter these markets searching for quick tools to increase their capital through speculation. The returns achieved by traders are determined as a function of the absolute results of the transactions they place in the markets. Correctly anticipating or "speculating" the direction of a certain assets price will result in profits, while losses will be incurred if the asset price moves in the opposite direction. These returns or losses are determined based on the absolute results of the retail trader against the full range of market participants (i.e. when compared against additional market participants unbeknownst to the retail trader).

Though these markets consider themselves to be the providers of a "level playing ground" offering so-called "equal opportunities" to all participants maintained through regulation or market conduct, there are several inherent deficiencies in these markets that prevent the retail traders sector from having an equal chance of gaining profits compared to the professional traders sector. Retail traders are inherently at a disadvantage when competing against professional high volume traders, institutional firms, banks and brokerage houses, because of the price spread values determined by broker-dealer and the cost of all fees and commissions involved in trading, in addition to leverage and overtrading with limited capital retail traders will often find themselves holdin the short end of the stick, resulting in losses on their trading account. In Forex (Foreign Exchange) and CFDs (Contract For Difference) trading environment, brokers that define spreads and take the opposite side of the traders' positions, is usually the main cause of traders losses.

In the current trading environment (and this is true for all active leveraged markets), the retail sector of traders is at a disadvantage compared to other market participants, causing this sector to consistently lose money to other market participants.

Proprietary empirical study shows that 85%-95% of retail traders' accounts will be at a loss over the course of 1 year. Over 65% of retail traders accounts will be at a loss over the course of 1 month. These statistics clearly show that retail traders, knowingly or not, are in competition with market forces beyond their skill level, not to mention the fact that professional traders are constantly chipping away at their profits and broker dealers "squeezing" overpriced spreads and commissions out of them, resulting in the instances of retail trader's success being few and far apart.

Therefore, it is an object of the present invention to provide the retail trading sector with even odds for gaining profits when trading secondary markets, such as Forex and CFDs, an actual fighting chance.

It is another object of the present invention to provide a system for determining the chances of success according to the skill level of the traders. Other objects and advantages of the invention will become apparent as the description proceeds.

Summary of the Invention

The present invention relates to a method for facilitating a zero-sum trading in secondary markets, such as Forex and CFDs environment. This is achieved by facilitating a zero-sum trading concept in these markets for retail traders, enabling them to take part in a true "level" trading environment, a unique closed circuit group where their skill level will determine their chances for success (shielded from the interference of the previously mentioned vague "market forces", professional traders and broker dealers), while competing with other participants from the retail trading sector. It is based on a spread trading environment, which will determine groups based on a similar account size and, optionally, on other suitable parameters related to the trading, thus establishing common grounds for retail traders.

The method for facilitating a zero-sum trading in secondary markets comprises: a) creating one or more closed groups, each of which having one or more different selection criteria; b) setting trading sessions, wherein a start and an end periods of time for each of said created closed group is determined; c) allowing traders to join one of said closed groups according to said different criteria; d) during each trading session performing the following tasks:

displaying the price of each tradable asset and performing order execution of trades according to spread-based broker dealer rules (preferably, according to standard Forex and CFD rules) and calculating an individual trader's returns (if applicable, inclusive of commissions); calculating a total group bonus as sum of all individual trader's returns inclusive commissions (if applicable) for this session in this group multiplied by -1; and

- calculating, (and optionally also displaying), an individual bonus for each trader as a part of the total group bonus based on at least one distribution formula;

and e) at the end of each trading session, setting ending balance on each trader's account as the sum of the trader's beginning balance, trader's return at the end of the session, and trader's individual bonus at the end of the session.

According to an embodiment of the invention, the method further comprises defining, for each of the closed groups, a minimal Initial Capital (IC) and a minimal Maintenance Capital (MC), wherein at the beginning of each trading session, the capital of each trader is bigger than said IC; if during each trading session the sum of the current capital of each trader and the return inclusive commissions is less or equal to MC, then the account of each trader is liquidated.

According to an embodiment of the present invention, the one or more criteria are selected from the group consisting of: homogeneous capital levels, homogeneous skill-based trading, homogeneous frequency-based trading, homogeneous or heterogeneous contracts/assets and homogeneous or heterogeneous style-based trading. Preferably, allowing each of the traders to join one of the closed groups based on one or more of the criteria either prior to the start of a defined trading session, or during the trading session.

According to an embodiment of the invention, the method further comprises allowing traders to perform operations such as switching between the created groups, leaving a group, or creating new closed groups. Preferably, each of the operations results in a penalty for the trader.

According to an embodiment of the invention, the trading session can be predefined as a day, week, months, or any other custom definition.

Preferably, the distribution formula used for determining the relative share of each participant's bonus out of the total group bonus has as parameters capital, balance, return, and other values of traders' performance and personal profile.

The present invention further relates to a system for facilitation a zero- sum trading in secondary markets environment which comprises: a) a user manager unit, for creating user accounts and for allowing each trader to interact with its created user account; b) a database, for storing data related to each created user account; c) a group manager unit, for creating and managing one or more closed groups, each of which having one or more different criteria, for setting trading sessions, and for allowing traders to join one of said closed groups according to said different criteria; d) a feed gateway unit, for integrating third party data feeds related to tradable asset; e) means for displaying the price of each tradable asset; f) a trading server for performing order execution of trades according to spread-based broker dealer rules; g) a report system, for updating, in real time, the performance status of traders' user accounts during their participation in a trading session; h) a feed distribution unit, for allocating real time quotes to each of participants' user accounts; i) means for calculating an individual trader's returns inclusive commissions, for calculating a total group bonus and for calculating an individual bonus for each trader as a part of said total group bonus based on at least one distribution formula; j) means for setting an ending balance on each trader's account as the sum of trader's beginning balance, trader's return at the end of the session, and trader's individual bonus at the end of the session; and k) a billing system, for financially managing each created user account.

According to an embodiment of the invention, the further comprises means for displaying the calculated individual bonus for each trader.

Brief Description of the Drawings

In the drawings:

Fig. 1 is a flow chart generally illustrates the method of the invention; and

Fig. 2 schematically illustrates a zero-sum trading in secondary markets environment, according to an embodiment of the invention.

Detailed Description of Preferred Embodiments

The present invention relates to a method and system for trading in the Forex (Foreign Exchange) market. The system proposed by the present invention provides the end user with real-time streaming quotes for the different currency pairs that are available in the Forex market (currencies are quoted in terms of their price in another currency). Participants in Forex include central banks, corporations, individual investors and speculators, and hedge funds. With the advent of electronic trading platforms, self-directed retail investors now have access to the same liquidity as larger market participants, and trade alongside them.

Currencies are always quoted in pairs (e.g. GBP/USD). The first currency is called the base currency and the second currency is called the counter or quote currency (base/quote).

Forex quotes are always provided with bid and ask prices. The difference between these two prices is the spread, or the cost of the trade. The bid represents the price at which the Forex dealer is willing to buy the base currency (GBP in our above example) in exchange for the counter currency (USD). Conversely, the ask price is the price at which the Forex dealer is willing to sell the base currency in exchange for the counter currency. Most currencies are quoted to four decimal places (with the exception of the Japanese Yen which is 2). So, for example, if the bid/ask on the GBP/USD currency pair is 1.7995/1.7999, the difference is 4 units, each unit of price is known as a pip, so the difference or spread is 4 pips.

"Dealing Spread" refers to the difference between the bid and ask quotes. The "Dealing Spread" (4 pips as shown in the above example) would normally be considered the Forex dealer's "commission". This will not be the case in present invention, as will be detailed in the "distribution formulas" to follow.

The Bid is the price buyers are willing to buy, and the Ask is the price that sellers are willing to sell at any given time. Meaning, when placing a trade at any given moment, the end users will be given the ask price for their "Buy" orders and the bid price for their "Sell" orders.

In Forex trading the end user can trade long or short which means they can take a view on any currency pair and place a relevant trade. If they feel that the UK economy is strong and the US Dollar will weaken against the Sterling they would execute a BUY GBP/USD order. By doing so they would have bought British pounds in the expectation of making profits when they will appreciate versus the US dollar. If they feel the UK will continue to weaken and this will hurt the British Pound, they would execute a SELL GBP/USD order. By doing so they would have sold British pounds in the expectation to make profits when they will depreciate versus the US dollar. The system of the present invention enables retail end users to trade the Forex market with the above mentioned rules, except for the fact that they will not be trading alongside and against larger market participants, who may have a crippling effect on retail trader's chances for success, but rather in a closed circuit group consisting solely of their peers (other retail traders), thus creating a level playing ground for demonstrating their Forex trading skills.

The present invention further relates to a method for facilitation a zero- sum trading in closed groups. According to an embodiment of the invention, in order to create a fair trading environment, traders are separated or divided into groups which, for example, can be divided by one or more criteria, such as: (a) homogeneous capital levels, (b) homogenous skill-based trading, (c) homogeneous frequency-based trading, (d) homogeneous or heterogeneous contracts/assets (e) homogeneous or heterogeneous style-based trading, etc.

According to an embodiment of the invention, traders will be allowed to join one closed groups based, for example, on one or more of the above criteria either prior to the start of a defined trading session, or during current trading session. Also, traders will be able to switch groups, leave a group, or create new groups. Each such operation might demand a penalty: (a) part of the trader's loss will stay in the previous room, (b) part will be added to the new group, or (c) part will be added to the newly created group.

Preferably, trading session time periods (i.e., the start and the end trading period) can be predefined as a day, week, months, or any other custom definition. For example, the larger time period is, may refer to the higher chances that group will loose money (e.g., 75% if session is defined as a day, 90% if session is defined as a week, and almost 100% otherwise). According to an embodiment of the invention, for each closed group the system defines minimal Initial Capital (IC) and minimal Maintenance Capital (MC). At the beginning of each session N traders have capital CI, C2, CN respectively (where Ci > IC). During the trading session their return inclusive commission is Ri. If during a trading session Ci+Ri <= MC, then account "i" is liquidated. At the end of the trading session, the ending balance on each account (Bi) is equal to the capital of each account (Ci) plus the return spread of each account (i.e., Bi = Ci + Ri). The trader's returns during trading session are calculated according to standard Forex and CFD rules based of executed orders and size of transactions.

The distribution formulas are calculated as follows:

Total Return (TR) =

Average Return (AR) = (TR) / N.

Since retail traders are at a disadvantage, in the majority of trading sessions Total Return is a negative value (i.e., TR < 0). By adding it back to the group we provide an environment with a true Zero-Sum trading concept.

The Total Return can be calculated in a variety of ways and may be based on how it will be distributed among the participants in the group.

For example, the simplest, and in some cases the most "socialistic" way of distribution is to add the value of (Average Return)*(-1) to each account. Then all participants of the group will equally benefit from Zero-Sum concept, i.e.: Bi = Ci + Ri - (Average Return)

Of course, in rare cases when a group will make money as a whole, Average Return will be positive (i.e., TR > 0) and all participants will get less money in their accounts (i.e., Bi minus Average Return).

In a very unlikely case, where Average Return will be higher than MC maintenance capital, for example, the following procedure or steps can be used:

1. For all traders [(Ci+Ri) < (Average Return)], set ending capital to zero (i.e., Bi=0) and reduce (Ci+Ri) from TR (i.e., from Total Return);

2. Calculate new Average Return on the remaining group;

3. Go back to step 1. If all remaining [(Ci+Ri) >= (Average Return)], then: [Bi = (Ci+Ri) - (Average Return)];

There might be different objective in redistributing Total Return to participants rather than simplicity: in case of a Total Return being negative (i.e., TR < 0), a "bonus" system can be used by giving higher bonuses to the participants who have generated higher than average returns (i.e., Fi represents the bonus of each participant trader):

Bi = (Ci+Ri) - Fi*(Total Return);

where Fi > Fj if Ri > Rj (Ri and Rj represent different traders), and the sum of Fi is equal to 1 (i.e., Sum Fi =1):

Or opposite, the bonus system helps the group with larger losses: Bi = (Ci+Ri) - Fi*(Total Return); where Fi > Fj if Ri>Rj, and Sum Fi = 1. Or alternatively, the bonus system helps the group having larger absolute trading results.

Formula Fi=f(R,C) can be constant, linear, logarithmic, square root, power transform, or any other predefined return allocation approach, based on returns or capital.

Same bonus system logic is applicable in case of total win of the group (i.e., TR > 0); where group will be "penalized" for good performance.

The method of the present invention is generally shown by the flow chart of Fig. 1. The flow starts at block 1, in which an account is opened and funded to each new user (i.e., trader). At the next step, block 2, the new user is added to the system of the present invention, by an operator of the system or trading platform. Preferably, the new user is assigned to a default trading group or, alternatively, at the next step, block 3, the user can choose to join a desired group other than the default one. At the next step, block 4, the user starts to trade in a specific trading session related to its associated group. During the trading session, the user trades with the determined risk control and according to the liquidation rules (block 5). At the next step, block 6, when the trading session ends, the system of the present invention recalculates the account balance of the user, using one of the distribution formulas, according to an embodiment of the present invention. At the next step, block 7, user may deposit or withdraw the funds, or may change a trading group. At the next step, block 8, after the user withdraws the funds, if desired, the user account can be closed.

According to an embodiment of the invention, in order to aid other traders or non-participations users to decide which closed group to join, the statistics about each closed group will be displayed in public. For example, at least one or more of the following items will be published: display of group and traders results, formula, bonuses and final returns over time, etc.

According to an embodiment of the invention, a risk control mechanism based on risk control groups is used. Risk control groups provide a mechanism to control the user account risks. A risk control group specifies the leverage/margin values for the user contracts included in it. Preferably, when a user joins the trading group the corresponding risk control group is assigned automatically. Preferably, each risk control group consists of a list of contracts with leverage/margin values for each contract. New or existing risk control group might be assigned for each user of the system of the present invention. Leverage value for Forex trading defines a ratio between total and actual required capital. For example, if Leverage value defined for the traded contract as 1:100 and a user is willing to buy 100K then the actual required capital should be IK. From the other side Margin value for Futures trading defines the actual capital required for trading 1 lot. For example, if Margin value defined for the traded contract as $3K and the user is willing to buy 5 lots then the required actual capital for the trade should be $15K. Besides that, as a part of the new mechanism, defining custom contract commissions for each user is allowed.

Based on Net Liquidity Value (current user balance minus minimal user balance plus user's total Profit and Loss (P&L)) and total margin, risk control mechanism decides whether the trade is permitted or not.

Preferably, the system of the present invention further comprises a Warning and Liquidation mechanism. In addition to the leverage and margin values for different contracts the risk control group includes warning and liquidation values. The warning value allows monitoring of the ratio between user account's net liquidity value and total margin. Once the ratio falls below the warning value level, the user will be warned about the low net liquidity value. If the ratio falls below the liquidation value level, user's positions will be liquidated one after the other until the ratio exceeds the liquidation value level again.

Risk limitation calculations can be based, for example, on the following parameters of trading contracts:

- Net Liquidity Value (NLV) balance

- Minimal Account Balance

- Total P&L

- Number of open positions

where:

NLV = (User Balance) - (Minimal Account Balance) + (Total P&L) Total Margin (TM):

TM = (total Used Margin) + (order Required Margin)

Warning (WR) : NLV / TM <= WR

Liquidation (LQ): NLV / TM <= LQ

Risk Control: NLV / TM <= LQ

A Contract For Difference (CFD) is a contract between two parties, typically described as "buyer" and "seller", stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. (If the difference is negative, then the buyer pays instead to the seller.)

According to an embodiment of the invention, for a CFD contract, the limitation parameter is the Margin level. The margin is the minimum amount the user should have in their account to be able to open new positions or hold the existing ones. When holding a number of positions (N), the account balance (B) is calculated on the Margin (M) value by the following formula in order to buy a new position:

B = M*(N+1)

Preferably, for a Forex contract, the limitation parameter is the Leverage level. The leverage is the multiplier of the user account balance to calculate the available amount for opening new positions or holding existing ones.

Looking now at Fig. 2, a system platform 10 for zero-sum trading in secondary markets environment is illustrated, according to an embodiment of the invention. The system 10 comprises a user manager unit 11, a group manager unit 12, a database 13, a billing system 14, a report system 15, a feed distribution unitl6, a trading server 17, and a feed gateway unit 18.

The system platform 10 is connected to the Internet 19, and users of the system (i.e., such as traders 20 and 21) are connected to the system 10 via the Internet 19.

The user manager unit 11 allows traders to create user account and to interact with their account, for example, to login into the system 10, to view and set information regarding their user account, such as account balance, risk control definitions, etc. The group manager unit 12 is used for creating and managing closed groups. For example, group manager unit 12 allows calculating the P&L for each group, updating each user P&L at the end of each trading session, setting group rules, setting trading session, etc. The database 13 is used for storing data related to the user account, for example, according to the calculation of the group manager unit 12 as well as relevant personal information of each user (e.g., login information, current account balance, trading history and the like).

The billing system 14 is used for financially managing the user account and it may be connected (e.g., via the internet or through other secure channels) to the traders' bank account in order to perform tasks such as deposits or withdrawals of funds. The trading server 17 is used for managing the trading tasks, such as user P&L position, trading order execution (e.g., buy and/or sell limitations), risk control, liquidation, etc.

Report system 15 is used for updating, in real time, the performance status of traders' user accounts during their participation in a trading session. Feed gateway 18 is used for integrating third party data feed (i.e., relevant trading- or asset-related information from a third party feed source) into the system 10, preferably, based on system 10 requirements. The third party feed source can be Forex and CFD real-time data quotes retrieved from a third party data provider. Feed distribution 16 allocates real time quotes to each of participants' accounts.

The method of the present invention may further use additional common known in the art mechanisms, such as order rejection mechanism, warning and liquidation mechanism, and the like, in order to protect the traders and operator of the platform on which the secondary markets trades are taking place (i.e., the system of the present invention).

Preferably, the platform further provides status report of the user account with a predefined or customizable update frequency. For example, the status report may include: totals for the user account and a summary of orders per contract. Traders can view the current status of each user account at any given moment. According to an embodiment of the invention, one or more fraud detection mechanisms are used, such as fraud detection mechanism of idle accounts. There is an inherent problem in the system that a 'clever' trader may enjoy the effects of the bonus system without actually trading. Therefore, in order to prevent such a situation, for example, the system of the present invention does not provide bonuses to traders whose absolute Ri is less than a predefined value (or equal zero). Other fraud detection mechanisms may also be used, as are known to a person skilled in the art, such as fraud detection mechanism which tries to detect trade on two accounts in opposite directions. The fraud detection mechanism tries to identify such accounts (opposite trading, same IP address, and/or group of accounts whose total P&L is zero, session after session). As well as any number of accounts, that consistently hedging each other with the trades that they place using separate accounts, or trying to synchronize their combined returns to achieve zero P&L.

The present invention offers its participants (i.e., the traders) a truly unique concept in today's trading industry, and determines the winners based on their trading skills relative to the skills of other retail traders, by comparing the results of all participants within the group and distributing the profits based on a unique normalization algorithm which will factor in the results of all participants to establish a true equilibrium of rules and conditions applying to all participants equally, and transferring all excess funds back into the equation (funds which under normal circumstances would find their way into the pockets of professional traders or broker dealers), thus allocating the relative profits/losses respectively amongst the participants of the group based solely on trading skills (as previously mentioned, all participants are from within the retail trading sector).

There is a need for such an invention, as the reputation of high leveraged markets is beginning to deteriorate since more and more retail traders understand that it is becoming an extremely difficult environment for them to make profits on. With the lack of any proper alternative, many retail traders continue trading high leveraged markets though the odds are clearly against them (and whether they are aware of it or not) and their chances for success are extremely low. Providing an appropriate alternative for retail traders, which would put their actual trading capabilities to the test as compared to their retail peers, would have an immediate effect on their chances for success.

While some embodiments of the invention have been described by way of illustration, it will be apparent that the invention can be carried into practice with many modifications, variations and adaptations, and with the use of numerous equivalents or alternative solutions that are within the scope of persons skilled in the art, without departing from the spirit of the invention or exceeding the scope of the claims.

Claims

1. A method for facilitation a zero-sum trading in secondary market environment, comprising the steps of:

a. creating one or more closed trading groups, each of which having one or more different criteria;

b. setting trading sessions, wherein a start and an end periods of time for each of said created closed group is determined;

c. allowing traders to join one of said closed groups according to said different criteria;

d. during each trading session:

- displaying the price of each tradable asset and performing order execution of trades according to spread-based broker dealer rules and calculating an individual trader's returns (if applicable, inclusive of commissions);

calculating a total group bonus being the sum of all individual traders' returns (if applicable, inclusive of commissions), if exist, for this session in this group multiplied by -1; and calculating an individual bonus for each trader as a part of the total group bonus based on at least one distribution formula; e. at the end of each trading session, setting an ending balance in each trader's account as the sum of trader's beginning balance, trader's return at the end of the session, and trader's individual bonus at the end of the session.

2. A method according to claim 1, further comprising displaying the calculated individual bonus for each trader.

3. A method according to claim 1, further comprising defining, for each of the closed group, a minimal Initial Capital (IC) and a minimal Maintenance Capital (MC), wherein at the beginning of each trading session, the capital of each trader is bigger than said IC; if during a trading session the sum of the current capital of a trader and the return inclusive commissions is less than or equal to MC, then the account of the trader is liquidated.

4. A method according to claim 1, wherein one or more criteria are selected from the group consisting of: homogeneous capital levels, homogeneous skill-based trading, homogeneous frequency-based trading, homogeneous or heterogeneous contracts/assets and homogeneous or heterogeneous style-based trading.

5. A method according to claim 1, wherein allowing each of the traders to join one of the closed groups based on one or more of the criteria either prior to the start of a defined trading session, or during the trading session.

6. A method according to claim 1, further comprising allowing traders to perform operations switch between the created groups, leave a group, or create new closed groups.

7. A method according to claim 6, wherein each of the operations results in a penalty for the trader.

8. A method according to claim 1, wherein the trading session can either predefined as a day, week, months, or any other custom definition.

9. A method according to claim 1, wherein the distribution formula used for determining the relative share of each participant's bonus out of the total group bonus has as parameters capital, balance, return, and other values of traders' performance and personal profile.

10. A system for facilitation a zero-sum trading in secondary markets environment comprising:

a. a user manager unit, for creating user accounts and for allowing each traders to interact with its created user account;

b. a database, for storing data related to each created user account; c. a group manager unit, for creating and managing one or more closed groups, each of which having one or more different criteria, for setting trading sessions, and for allowing traders to join one of said closed groups according to said different criteria;

d. a feed gateway unit, for integrating third party data feeds related to tradable asset;

e. means for displaying the price of each tradable asset;

f. a trading server for performing order execution of trades according to spread-based broker dealer rules;

g. a report system, for updating, in real time, the performance status of traders' user accounts during their participation in a trading session;

h. a feed distribution unit, for allocating real time quotes to each of participants' user accounts;

i. means for calculating an individual trader's returns inclusive commissions, for calculating a total group bonus and for calculating an individual bonus for each trader as a part of said total group bonus based on at least one distribution formula;

j. means for setting an ending balance on each trader's account as the sum of trader's beginning balance, trader's return at the end of the session, and trader's individual bonus at the end of the session; and k. a billing system, for financially managing each created account.

A system according to claim 10, further comprising means displaying the calculated individual bonus for each trader.