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Systems and methods for trading financial assets are disclosed. Financial assets may be traded by locally providing quotes for a financial asset in a foreign currency, locally receiving orders for the financial asset in the foreign currency, and locally filling the orders in the foreign currency.
Hedged quotes for the financial assets may be developed for trading, in a first currency, financial assets priced in a second currency. This application claims the benefit of the filing date of U. The present invention concerns financial methods and systems. In particular, the present invention concerns methods and systems for trading financial assets priced in foreign currencies on a local trading platform and methods and systems for trading financial assets priced in a first currency pursuant to orders priced in a second currency.
Many investors located in the United States invest in foreign financial assets, e. Although the risks and rewards of financial assets traded on foreign exchanges may be similar to those traded on U. Specifically, from the vantage point of U. There are a variety of reasons for the wider price swings.
One reason is the effect of political instability which affects the prices of the foreign financial assets in the foreign currency.
Another is the fact that many foreign markets are smaller than the U. Thus, their assets may be more thinly traded. Yet another reason is that the exchange rates of currencies U.
An investor located in the United States and wanting to purchase financial assets, e. One option is to purchase shares in an exchange traded fund ETF that purchases one or more underlying foreign financial assets, e. The underlying assets of the ETF provide dividends and interest payments in one or more foreign currencies, and the ETF distributes the dividends or interest payments, converted to U.
ADRs represent shares in foreign companies. A foreign company, desiring to issue equity shares on an exchange in the U. The bank bundles the shares into groups and reissues them as ADRs, which are traded on U. ADRs are priced in U. They pay dividends in U. Yet another option is to purchase the foreign financial assets themselves, e.
The foreign trade is settled in the foreign currency, and the foreign stock is delivered, by the foreign broker, to the U. In accordance with an aspect of the present invention, there is provided a method for trading financial assets on a computer system of a local trading platform in a currency foreign to the local trading platform.
The method includes providing, by the computer system of the local trading platform, quotes of the financial assets in the foreign currency. The method also includes receiving, by the computer system of the local trading platform, an order for one or more of the financial assets in the foreign currency and filling, by the computer system of the local trading platform, the order by matching the order in the foreign currency to one or more counterparty orders in the foreign currency.
In accordance with another aspect of the present invention, there is provided a method for trading, in a first currency, a financial asset ordered in a second currency, where the first currency is different from the second currency.
The method includes receiving, in a computer system of a trading platform, at least one substantially real-time series of currency conversion quotes for converting between the first currency and the second currency. The method further includes determining, by the computer system of the trading platform, a hedged quote for the financial asset in the first currency by applying a currency conversion model to the at least one substantially real-time series of currency conversion quotes and a substantially real-time series of quotes for the financial asset priced in the second currency.
The hedged quote is provided by the computer system of the trading platform. The method receives an order for the financial asset by the computer system of the trading platform.
The order is priced in the first currency. The invention is best understood from the following detailed description when read in connection with the accompanying drawings. Included in the drawings are the following figures:. Conventional methods and systems for investing in foreign financial assets suffer from numerous disadvantages.
As described below, the conventional methods and systems may not provide sufficient options to an investor seeking to own foreign financial assets. Further, the conventional methods and systems may force the investor into a particular position regarding a currency, when, in fact, the investor desires another position regarding the currency.
For example, the investor may be forced into a position that would benefit from appreciation of a certain currency, but the investor may instead desire to speculate against appreciation of that currency.
The ETFs described above typically represent a basket of foreign stocks or bonds. For example, an ETF may purchase stocks in multiple foreign mining companies, multiple foreign small cap stocks, etc. Typically, ETFs do not limit their holdings to a particular class of stocks or type of debt in one company. Further, the number of ETFs from which to choose is significantly smaller than the number of classes of stocks and bonds traded. Thus, ETFs may not provide investors with sufficient options for investing in a particular class of shares or type of debt in a foreign company.
ETFs that are available for foreign equity shares may, nevertheless, be undesirable for investors in the United States. Specifically, ETFs expose holders of the ETFs' shares to a particular currency-risk position that they might find undesirable. The reasons are explained below. The foreign equity shares underlying ETFs pay dividends in a foreign currency. These dividends are converted to U. Although the foreign company represented in the foreign equity shares may issue the same dividend from quarter to quarter over a certain period, the dividend, priced in U.
An investor may not want the dividends to be converted to U. Further, the investor may not want to conduct transactions buys and sells in U. Thus, ETFs may not be desirable to an investor as they force the investor into a particular currency position with respect to the U.
An ADR for particular foreign equity shares is only available in the United States if a depository bank in the United States has such foreign equity shares on deposit. Not all classes of equities traded on foreign exchanges have shares on deposit at depository banks in the U.
Thus, ADRs may not provide investors with sufficient options for investing in a particular class of shares. Additionally, ADRs force investors into a particular currency position with respect to the U. Such position may not be desirable to the investor. Finally, purchasing foreign financial assets directly is an option not available to all investors. Foreign financial assets traded in foreign countries in a foreign currency are not listed and traded on exchanges in the United States in the foreign currency.
In order for an investor, located in the United States, to purchase foreign financial assets traded on a foreign exchange, the investor typically makes contact with a broker in the United States who makes contact with a broker in the foreign country where the foreign exchange is located. Not all brokers in the United States, however, have relationships with foreign brokers. Thus, the option of placing orders for foreign financial assets traded in foreign markets in a foreign currency may not be available to all investors in the United States.
Furthermore, for investors who do have brokers that have relationships with foreign brokers, purchasing or selling foreign financial assets requires two broker fees, one for the U. Such double fees may not be desirable. An investor seeking exposure to currency risk to speculate on or hedge against changes in exchange rates typically trades currencies in the FX market or currency futures in the futures markets.
However, an investor may not want to limit his exposure to currency movements by operating in the FX or currency futures markets only. Rather, the investor may want to obtain a desired level of exposure to currency movements in financial assets having their own asset-price risk. In other words, the investor may want to invest in a foreign financial asset, e. Referring now to FIG. The foreign financial assets, designated as , are denominated in a foreign currency. The financial assets may be traded on an exchange not illustrated located in the foreign country, although such trading is not required by embodiments of the present invention.
By providing for the foreign financial assets to be traded in the foreign currency, the system provides options to the investor in exposing himself to currency risk and asset-price risk in the foreign financial assets As illustrated in FIG.
In the system , the foreign issuing entity issues the foreign financial assets directly onto the local trading platform It is to be understood that the system may still include a regulatory body.
The local trading platform , located in the local country, provides a market for the trading of the foreign financial assets priced in the currency of the foreign country. The financial assets are listed at a price denominated in the foreign currency and are traded on the local trading platform in the foreign currency. Settlement takes place in the foreign currency. Examples of an exchange include a stock exchange or a futures and options exchange.
Thus, the foreign assets may be stocks, futures, or options. It does not necessarily refer to the country in which the investor resides although this may be the most common case. Thus, the local trading platform is a trading platform for the trading of financial assets in a currency of a foreign country.
Embodiments in which the functions of the broker and the local trading platform are performed by the same entity are contemplated. In such embodiments, the broker operates the local trading platform Thus, although description below is made with reference to the broker being separate from the local trading platform , it is to be understood that in some embodiments the broker and the local trading platform are the same entity.
In an exemplary embodiment, the information is transmitted in electronic packets that are transmitted over one or more computer networks between computer systems see FIG.
A plurality of financial assets are listed and traded, i. In one exemplary embodiment, the financial assets are issued onto the local trading platform using the method described above with respect to FIG.
Hence, they are issued onto the local trading platform by a foreign issuing entity to be traded in a currency of the country in which the foreign issuing entity is located, i. For example, the local trading platform may be located in the United States, and the issuing entity may be located in Canada. The financial assets traded on the local trading platform in the United States may be priced and traded in Canadian dollars. In another exemplary embodiment, the financial assets are issued in one foreign country and traded in another foreign currency.
An example of such an embodiment is one where a foreign issuing entity located in a foreign country B issues shares onto an trading platform in a local country A to be traded in a currency of another foreign country C. As a more specific example, the local trading platform may be located in the United States, and the issuing entity may be located in the United Kingdom.
The financial assets , issued by the issuing entity in the United Kingdom, are traded in the United States in Canadian dollars, in accordance with this embodiment of the present invention. Rather, it is contemplated that an issuing entity located in a local country may issue foreign financial assets onto a local trading platform.
One or more of the steps of each of the methods , , and may be performed by a computer system operated, respectively, by the investor , the broker , and the local trading platform Each computer system is programmed with software instructions to perform one or more steps of the respective methods , , and