Thursday, August 2, 2012

##REO quote pricing rules, again

For each position in a trader's account, she can pick one of the pricing rules. Once a rule is attached to a position, the rule has a life of its own in this "algo-trading" engine. Whenever one of the observables change, the rule would fire a cache trigger to update the quotes, which exists off that position. Everything lives in the cache. CEP-like.

#1 pin rule - "pin my position" to the primary YieldCurve of the desk. We basically add a spread on the pin yield to get the bid-ask yield.

#2 eval rule - use last traded price on the live market for that security. We basically add a spread on the eval yield to get the bid-ask yield.

# DCA rule - use dollar-cost-average to get a "cost price". Convert to yield, and add a spread on it to get the bid-ask yield.

# Treasury rule - we follow the live Treasury quotes. We periodically (10 sec) poll our live cache to reprice our quotes. We basically add a spread on the T yield to get the bid-ask yield.

** Less popular - Libor futures quotes, T-futures quotes.

# Arb rule -- There are 2 "model" accounts, aka prop trading accounts. Any security in those accounts is priced by the model. Outputs both bid and ask. We just take them as is, without adding any spread.

Lastly, MTM rule - there's real time mark-to-market done on most positions - supposed to be fair valuations. This rule basically says take the mark yield and apply a spread to get the bid-ask yield. Now the confusing part - many of the marking rules are the _same_ ones listed above. However, there was a separate family of marking rules and a separate family of quote pricing rules.

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http://www.linkedin.com/in/tanbin