U.S. patent application number 15/068787 was filed with the patent office on 2016-07-07 for system and method for assigning responsibility for trade order execution.
The applicant listed for this patent is UAT, Inc.. Invention is credited to Allan T. Chiulli, Tom H. Warren.
Application Number | 20160196608 15/068787 |
Document ID | / |
Family ID | 40580291 |
Filed Date | 2016-07-07 |
United States Patent
Application |
20160196608 |
Kind Code |
A1 |
Chiulli; Allan T. ; et
al. |
July 7, 2016 |
System and Method for Assigning Responsibility for Trade Order
Execution
Abstract
An embodiment of the present invention provides a system and
method for a sponsoring organization to: (1) utilize a rules-based
computer system to capture trade orders from sub-advisors (money
management firms) in order to implement a pre trade compliance
review process, thereby enabling the sponsoring organization to
prevent the execution of trade orders by a sub advisor that
violates securities laws and/or account restrictions; and (2)
determine and assign, based on expected market impact of a trade
order to buy or sell securities, whether responsibility (discretion
over the decisions related to how, when and with whom a trade order
is executed) for executing the trade order is assigned to the money
management firm for an investment portfolio or to the sponsoring
organization of that portfolio. Trade orders are categorized in
real-time as "high touch" (significant effort and market impact) or
"low touch" (insignificant effort and market impact).
Inventors: |
Chiulli; Allan T.; (Austin,
TX) ; Warren; Tom H.; (Greenwood Village,
CO) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
UAT, Inc. |
Englewood |
CO |
US |
|
|
Family ID: |
40580291 |
Appl. No.: |
15/068787 |
Filed: |
March 14, 2016 |
Related U.S. Patent Documents
|
|
|
|
|
|
Application
Number |
Filing Date |
Patent Number |
|
|
14082871 |
Nov 18, 2013 |
|
|
|
15068787 |
|
|
|
|
13632767 |
Oct 1, 2012 |
8600867 |
|
|
14082871 |
|
|
|
|
13344789 |
Jan 6, 2012 |
8296222 |
|
|
13632767 |
|
|
|
|
12938694 |
Nov 3, 2010 |
8121935 |
|
|
13344789 |
|
|
|
|
12849032 |
Aug 3, 2010 |
7856396 |
|
|
12938694 |
|
|
|
|
12256196 |
Oct 22, 2008 |
7809632 |
|
|
12849032 |
|
|
|
|
12140047 |
Jun 16, 2008 |
7831503 |
|
|
12256196 |
|
|
|
|
11783690 |
Apr 11, 2007 |
7685057 |
|
|
12140047 |
|
|
|
|
60982320 |
Oct 24, 2007 |
|
|
|
60945196 |
Jun 20, 2007 |
|
|
|
60899393 |
Feb 5, 2007 |
|
|
|
60791209 |
Apr 12, 2006 |
|
|
|
Current U.S.
Class: |
705/37 |
Current CPC
Class: |
G06Q 40/025 20130101;
G06Q 40/04 20130101; G06Q 40/06 20130101 |
International
Class: |
G06Q 40/04 20060101
G06Q040/04 |
Claims
1. A computer-implemented method of trade message routing among a
sponsoring organization, an asset management firm, and a plurality
of trading organizations, the method comprising: receiving messages
at an execution discretion assignment engine, the messages received
through a computer-based order management system, the messages each
containing data corresponding to a trade order from the asset
management firm, and the data incorporating data from an account of
the sponsoring organization in the order management system and
including data of asset name and number of asset units, wherein at
least one of the order management system and the execution
discretion assignment engine provides a computer-based graphical
user interface and associated software program to asset management
firms, wherein the order management system is in communication with
a plurality of first trading organizations designated by the asset
management firm, and a plurality of second trading organizations
designated by the sponsoring organization, and wherein the first
and second trading organizations each operate a respective soft
dollar administration system that records total brokerage costs,
execution costs, and soft dollar costs associated with the asset
management firm; for each message, suspending, by the order
management system, the trade order associated with the each message
to prevent the asset management firm from routing a trade order
message associated with the trade order to a trading organization
until receipt of a return report message corresponding to the trade
order from the execution discretion assignment engine, the return
report message instructing routing of the trade order to either the
plurality of first trading organizations or the plurality of second
trading organizations; determining, with the execution discretion
assignment engine, for each message, whether the data corresponding
to the trade order indicates a low touch order expected to have low
market impact or a high touch order expected to have high market
impact; when the data corresponding to the trade order indicates a
high touch order: formatting, by the execution discretion
assignment engine, the each message as a high touch return report
message instructing routing of the high touch order to the
plurality of first trading organizations, routing the high touch
return report message from the execution discretion assignment
engine to the order management system, allowing the order
management system to discontinue the suspending of the high touch
order to allow execution of the high touch order, and routing, by
the order management system and based on the high touch return
report message, a high touch order message associated with the high
touch order to a first trading organization of the plurality of
first trading organizations, for execution of the high touch order
by the first trading organization, and for determination, by the
soft dollar administration system of the first trading
organization, of a first total brokerage cost for the high touch
order for the sponsoring organization's account in the order
management system based on a sum of the recorded execution and soft
dollar costs associated with the asset management firm; and when
the data corresponding to the trade order indicates a low touch
order: formatting, by the execution discretion assignment engine,
the each message as a low touch return report message instructing
routing of the low touch order to the plurality of second trading
organizations, routing the low touch return report message from the
execution discretion assignment engine to the order management
system, allowing the order management system to discontinue the
suspending of the low touch order to allow execution of the low
touch order, implementing instructions, by the order management
system receiving the low touch return report message, that prevent,
in the absence of override instructions, routing of a low touch
order message associated with the low touch order to a first
trading organization of the plurality of first trading
organizations, and routing, by the order management system and
based on the low touch return report message, the low touch order
message associated with the low touch order to a second trading
organization of the plurality of second trading organizations, for
execution of the low touch order by the second trading
organization, and for determination, by the soft dollar
administration system of the second trading organization, of a
second total brokerage cost for the low touch order for the
sponsoring organization's account in the order management system
based on the recorded execution cost associated with the asset
management firm.
2. The method of claim 1, further comprising, when the data
corresponding to the trade order indicates a high touch order,
receiving from the first trading organization a first report that
indicates execution of the high touch order and the first total
brokerage cost, and when the data corresponding to the trade order
indicates a low touch order, receiving from the second trading
organization a second report that indicates execution of the low
touch order and the second total brokerage cost.
3. The method of claim 1, wherein the order management system is
the asset management firm's order management system.
4. The method of claim 1, wherein determining whether the data
corresponding to the trade order indicates a low touch order
expected to have low market impact or a high touch order expected
to have high market impact, comprises applying logical rules to
market data to determine an expected market impact of the trade
order.
5. The method of claim 1, further comprising reviewing, by the
order management system, the trade order using a rules-based
compliance engine to prevent compliance violations.
6. The method of claim 1, further comprising executing, by the
first trading organization, the high touch order, and executing, by
the second trading organization, the low touch order.
7. The method of claim 1, further comprising discontinuing the
suspending of the trade order upon receiving one of the high touch
return report message and the low touch return report message from
the execution discretion assignment engine.
8. The method of claim 1, further comprising preventing, by the
order management system, routing of the low touch order to the
first trading organization.
9. The method of claim 8, further comprising overriding, by the
order management system, the preventing of the routing of the low
touch order to the first trading organization.
10. The method of claim 1, further comprising: conducting, by a
compliance system associated with the order management system, a
rules-based compliance review of a trade order for compliance
violations prior to the trade order being sent to the execution
discretion assignment engine; conducting, by the compliance system
associated with the order management system, a rules-based
compliance review of the low touch order for compliance violations
prior to sending the low touch order message associated with the
low touch order to the second trading organization; and conducting,
by the compliance system associated with the order management
system, a rules-based compliance review of the high touch order for
compliance violations prior to sending the high touch order message
associated with the high touch order to the first trading
organization.
11. The method of claim 1, further comprising conducting, by a
compliance system associated with the order management system, a
pre-trade compliance process that at least one of suspends and
cancels a trade order determined to violate compliance rules and
that releases a previously suspended trade order that no longer
violates compliance rules.
12. A system for trade message routing among a sponsoring
organization, an asset management firm, and a plurality of trading
organizations, the system comprising: a computer-based order
management system, wherein the order management system creates a
trade order message containing data corresponding to a trade order
from the asset management firm, the data incorporating data from an
account of the sponsoring organization in the order management
system and including data of asset name and number of asset units,
and wherein the order management system is in communication via a
computer network with a plurality of first trading organizations
designated by the asset management firm, and a plurality of second
trading organizations designated by the sponsoring organization;
and a computer-based execution discretion assignment engine in
communication with the order management system, wherein the
execution discretion assignment engine receives from the order
management system the trade order message, wherein the execution
discretion assignment engine determines, for the trade order
message, whether the data corresponding to the trade order
indicates a low touch order expected to have low market impact or a
high touch order expected to have high market impact, wherein the
order management system suspends the trade order associated with
the trade order message to prevent the asset management firm from
routing the trade order message to a trading organization until
receipt of a return message report corresponding to the trade order
from the execution discretion assignment engine, wherein when the
execution discretion assignment engine determines, for the trade
order message, that the data corresponding to the trade order
indicates a high touch order: the execution discretion assignment
engine formats the trade order message as a high touch return
report message instructing routing of the high touch order to the
plurality of first trading organizations, the execution discretion
assignment engine routes the high touch return report message to
the order management system, the order management system receives
the high touch return report message and discontinues the
suspending of the high touch order to allow execution of the high
touch order, and the order management system routes, based on the
high touch return report message, a high touch order message
associated with the high touch order to a first trading
organization of the plurality of first trading organizations, for
execution of the high touch order by a trading system of the first
trading organization, and for a determination, by a soft dollar
administration system of the first trading organization, of a first
total brokerage cost for the high touch order for the sponsoring
organization's account in the order management system based on a
sum of execution and soft dollar costs associated with the asset
management firm recorded by the soft dollar administration system
of the first trading organization, and wherein when the execution
discretion assignment engine determines, for the trade order
message, that the data corresponding to the trade order indicates a
low touch order: the execution discretion assignment engine formats
the trade order message as a low touch return report message
instructing routing of the low touch order to the plurality of
second trading organizations, the execution discretion assignment
engine routes the low touch return report message to the order
management system, the order management system receives the low
touch return report message and discontinues the suspending of the
low touch order to allow execution of the low touch order and
implements instructions that prevent, in the absence of override
instructions, routing of a low touch order message associated with
the low touch order to a first trading organization of the
plurality of first trading organizations, and the order management
system routes, based on the low touch return report message, a low
touch order message associated with the low touch order to a second
trading organization of the plurality of second trading
organizations, for execution of the low touch order by a trading
system of the second trading organization, and for a determination,
by a soft dollar administration system of the second trading
organization, of a second total brokerage cost for the low touch
order for the sponsoring organization's account in the order
management system based on an execution cost associated with the
asset management firm recorded by the soft dollar administration
system of the second trading organization.
13. The system of claim 12, further comprising the first trading
organization and the second trading organization.
14. The system of claim 12, wherein the execution discretion
assignment engine determines whether the data corresponding to the
trade order indicates a low touch order expected to have low market
impact or a high touch order expected to have high market impact by
applying logical rules to market data to determine an expected
market impact of the trade order.
15. The system of claim 12, wherein the order management system
reviews the trade order using a rules-based compliance engine to
prevent compliance violations.
16. The system of claim 12, wherein a compliance system associated
with the order management system conducts a rules-based compliance
review of the trade order for compliance violations prior to
routing the trade order message associated with the trade order to
the execution discretion assignment engine.
17. The system of claim 12, wherein a compliance system associated
with the order management system conducts a rules-based compliance
review of the low touch order for compliance violations prior to
sending the low touch order message associated with the low touch
order to the second trading organization, and conducts a
rules-based compliance review of the high touch order for
compliance violations prior to sending the high touch order message
associated with the high touch order to the first trading
organization.
18. The system of claim 12, wherein a compliance system associated
with the order management system conducts a pre-trade compliance
process that at least one of suspends and cancels a trade order
determined to violate compliance rules and that releases a
previously suspended trade order that no longer violates compliance
rules.
19. A computer-implemented method of trade message routing among a
sponsoring organization, an asset management firm, and a plurality
of trading organizations, the method comprising: generating trade
messages at an order management system, the messages each
containing data corresponding to a trade order from the asset
management firm, and the data incorporating data from an account of
the sponsoring organization in the order management system and
including data of asset name and number of asset units, wherein the
order management system provides a computer-based graphical user
interface and associated software program to asset management
firms, wherein the order management system is in communication with
a plurality of first trading organizations designated by the asset
management firm, and a plurality of second trading organizations
designated by the sponsoring organization, and wherein the first
and second trading organizations each operate a respective soft
dollar administration system that records total brokerage costs,
execution costs, and soft dollar costs associated with the asset
management firm; for each message, suspending the trade order
associated with the each message to prevent the asset management
firm from routing a trade order message associated with the trade
order to a trading organization until directions are created to
route the trade order to either the plurality of first trading
organizations or the plurality of second trading organizations;
when the data corresponding to the trade order indicates a high
touch order expected to have high market impact: formatting the
each message as a high touch order message instructing routing of
the high touch order to the plurality of first trading
organizations, releasing the suspension of the high touch order to
allow execution of the high touch order, implementing instructions
that prevent, in the absence of override instructions, routing of a
high touch order message associated with the high touch order to a
second trading organization of the plurality of second trading
organizations, and routing the high touch order message to a first
trading organization of the plurality of first trading
organizations, for execution of the high touch order by the first
trading organization, and for determination, by the soft dollar
administration system of the first trading organization, of a first
total brokerage cost for the high touch order for the sponsoring
organization's account in the order management system based on a
sum of the recorded execution and soft dollar costs associated with
the asset management firm; and when the data corresponding to the
trade order indicates a low touch order expected to have low market
impact: formatting the each message as a low touch order message
instructing routing of the low touch order to the plurality of
second trading organizations, releasing the suspension of the low
touch order to allow execution of the low touch order, implementing
instructions that prevent, in the absence of override instructions,
routing of a low touch order message associated with the low touch
order to a first trading organization of the plurality of first
trading organizations, and routing the low touch order message
associated with the low touch order to a second trading
organization of the plurality of second trading organizations, for
execution of the low touch order by the second trading
organization, and for determination, by the soft dollar
administration system of the second trading organization, of a
second total brokerage cost for the low touch order for the
sponsoring organization's account in the order management system
based on the recorded execution cost associated with the asset
management firm.
20. The method of claim 19, further comprising, when the data
corresponding to the trade order indicates a high touch order,
receiving from the first trading organization a first report that
indicates execution of the high touch order and the first total
brokerage cost, and when the data corresponding to the trade order
indicates a low touch order, receiving from the second trading
organization a second report that indicates execution of the low
touch order and the second total brokerage cost.
Description
RELATED APPLICATIONS
[0001] This application is a continuation of U.S. patent
application Ser. No. 14/082,871, filed Nov. 18, 2013, which is a
continuation of U.S. patent application Ser. No. 13/632,767, filed
Oct. 1, 2012, now U.S. Pat. No. 8,600,867, which is a continuation
of U.S. patent application Ser. No. 13/344,789, filed Jan. 6, 2012,
now U.S. Pat. No. 8,296,222, which is a continuation of U.S. patent
application Ser. No. 12/938,694, filed Nov. 3, 2010, now U.S. Pat.
No. 8,121,935, which is a continuation of U.S. patent application
Ser. No. 12/849,032, filed Aug. 3, 2010, now U.S. Pat. No.
7,856,396, which is a continuation of U.S. patent application Ser.
No. 12/256,196, filed Oct. 22, 2008, now U.S. Pat. No. 7,809,632,
which claims the benefit of U.S. Provisional Application No.
60/982,320, filed Oct. 24, 2007, and is a continuation-in-part of
U.S. patent application Ser. No. 12/140,047, filed Jun. 16, 2008,
now U.S. Pat. No. 7,831,503, which claims the benefit of U.S.
Provisional Application No. 60/945,196, filed Jun. 20, 2007 and is
a continuation-in-part of U.S. patent application Ser. No.
11/783,690, filed Apr. 11, 2007, now U.S. Pat. No. 7,685,057, which
claims the benefit of U.S. Provisional Application No. 60/791,209,
filed Apr. 12, 2006, and U.S. Provisional Application No.
60/899,393, filed Feb. 5, 2007, all of which are herein
incorporated by reference in their entirety.
COPYRIGHT NOTICE
[0002] A portion of the disclosure of this patent document contains
material that is subject to copyright protection. The copyright
owner has no objection to the facsimile reproduction by anyone of
the patent document or the patent disclosure, as it appears in the
U.S. Patent and Trademark Office patent file or records, but
otherwise reserves all copyright rights whatsoever.
BACKGROUND
[0003] 1. Field of the Invention
[0004] The present invention relates generally to securities
trading and to the management and trading of investment portfolios
and, in particular, to a system, method, process, software and
standards for facilitating a sponsoring organization's unified
trading and control of a money management process.
[0005] The present invention also relates to a system (e.g., a
hosted application), method (organization of activity), process
(division of responsibilities), software (computer-based systems),
and standards (systems, connectivity and communications protocols)
supporting a real-time process inclusive of computer interfaces,
order entry, compliance analysis, market impact analysis, order
routing discretion, execution cost and quality analysis, trade
processing, communications engines, communications networks, and
communications protocols that facilitate centralized portfolio
management and directed brokerage control. This system and method
creates, for the first time for sponsoring organizations, direct,
pre-trade and automated compliance monitoring of trading activity
by sub-advisors providing asset management services to sponsoring
organizations while also creating substantial and recurring savings
in brokerage costs for shareholders and beneficiaries in
sub-advised investment portfolios. This system (referred to as the
unified trading and control system), method, process, software, and
standards are applicable to registered mutual funds, non-registered
mutual funds, and institutional investment portfolios and could be,
for example, utilized by: (1) insurance companies with single or
multi-manager sub-advised variable insurance, mutual fund, and
defined contribution portfolios; (2) mutual fund companies
utilizing sub-advisors for managing their mutual fund offerings,
education funding, and defined contribution portfolios; (3) defined
benefit plan pension funds, trusts, and endowments that utilize
externally managed or unaffiliated money management services; (4)
large company investment portfolios and separate accounts of
insurance companies that utilize outsourced or unaffiliated money
management services for their institutional investment accounts;
and (5) non-registered mutual funds such as hedge funds, group
annuities, and collective investment funds that utilize outsourced
or unaffiliated money management services.
[0006] More particularly, the present invention relates generally
to the management and trading of investment portfolios and to a
system and method for a sponsoring organization to:
[0007] (1) Utilize a rules-based computer system to capture trade
orders from sub-advisors (money management firms) in order to
implement a pre-trade compliance review process, thereby enabling
the advisor to prevent the execution of trade orders by a
sub-advisor that violates securities laws, account restrictions, or
prohibited transactions. The embodiment of the present invention
enables a sponsoring organization to properly implement, for the
first time, its own single, centralized, real-time, rules-based pre
and post trade compliance process across all of its sub-advisors
and the sub-advisors' trading activity.
[0008] (2) Determine and assign, for the first time, based on
expected market impact of a trade order to buy or sell securities,
whether responsibility (discretion over the decisions related to
how, when, and with whom a trade order is executed) for executing a
trade order is assigned to the sub-advisor (money management firm)
for an investment portfolio for high touch trade orders or to the
sponsoring organization of that investment portfolio for low touch
trade orders.
[0009] (3) Minimize, through a real-time, computer-based
optimization analysis, the expected total execution cost of
securities trades in order to lower brokerage costs and improve
investment performance for the sub-advised investment portfolios.
The system and method also generates additional savings in
brokerage costs through a real-time analysis and optimization
process incorporating: (a) the currently offered share price and
number of shares available (liquidity) in the securities markets;
(b) execution costs as input in real-time by executing brokers; (c)
expected price improvement based on current and recent trading
data; (d) time required to execute an order by an executing broker
(time to execute); and (e) the current rate of change in the share
price of a security during the time required to execute the
transaction.
[0010] (4) Provide a number of previously unavailable improvements
in business processes for sponsoring organizations utilizing
sub-advised asset management for their investment portfolios,
including greater control and lower brokerage costs related to the
process of replacing a sub-advisor to an investment portfolio;
lower brokerage costs for model portfolio rebalancing activity;
improved reporting for asset segregation requirements related to
forward settlements; and enhanced governance reporting as
real-time, up-to-the-minute data is available to sponsoring
organizations across their sub-advised investment portfolios
pertaining to holdings, trading activity, compliance violations,
and brokerage and other costs.
DEFINITIONS
[0011] For purposes of describing the present invention, FIG. 1
lists components of the present invention and compares the
corresponding terminology used in the investment products within
the registered mutual fund, unregistered mutual fund, and
institutional investment portfolio markets. FIG. 1 shows that
similar structures and responsibilities in various product
categories have different names.
[0012] As used herein, the terms "advisor" and "board of trustees"
in the context of registered and non registered mutual funds can be
considered the equivalent of the "administrator" and "board of
trustees" in the context of pension plan, endowment, or trust
investment portfolios; the term "sub-advisor" in the context of
registered and non registered mutual funds can be considered the
equivalent of a "money manager" or "externally managed" in the
context of pension plan, endowment, or trust investment portfolios;
and the term "sub account" in the context of a variable insurance
product can be considered equivalent to a "mutual fund" in a
defined contribution plan (such as a 401(k) product) and a pension
plan's "account" with a money manager. In addition, the retail
investors (for example, the individual persons whose personal
accounts aggregate and are commingled into the assets comprising a
fund's investment portfolio) are referred to as "shareholders" in
registered and unregistered mutual funds and as "beneficiaries" in
institutional accounts, pension plans, etc. It is important to note
that the advisor or administrator and associated board of trustees
(boards) have a fiduciary responsibility to the shareholders and
beneficiaries to properly control (minimize) fund and plan
operating expenses, as these expenses reduce the returns
(performance) of the investment portfolios to these same fund
shareholders and plan beneficiaries. The use herein of any of these
terms, as shown in FIG. 1, implies a similar underlying method and
process applicable across registered mutual funds, unregistered
mutual funds, and institutional investment portfolios.
[0013] 2. Background of the Invention
[0014] The system of the present invention relates to the
sub-advised industry. The sub-advised industry consists of large
financial organizations, such as insurance companies, 401k
providers, pension plans, endowments, trusts and certain mutual
fund companies, that operate an investment complex consisting of,
but not limited to, mutual funds and institutional investment
accounts, but do not have money management (asset management)
capabilities within their organizational structure to manage these
investments. As a result, these organizations (as the sponsoring
organization of one or a plurality of investment portfolios in the
investment complex) utilize outside money management firms (usually
mutual fund companies or institutional investment management firms)
to manage their investment portfolios.
[0015] The sub-advised industry, as described above, employs the
following structure: The financial institution (as the sponsoring
organization) acts as the "advisor" with respect to Securities and
Exchange Commission (SEC) registration and supervisory requirements
or Department of Labor (DOL) oversight and, has fiduciary and
regulatory governance responsibility for the investment portfolios.
The money management firm acts as the "sub-advisor" and is
responsible for the investment management decisions and, as
addressed below, the trading activity of the investment portfolio
they are hired to manage. The sponsoring organization, as advisor,
is responsible for marketing, sales, administrative functions,
regulatory filings, compliance supervision and client services in
addition to hiring the sub-advisors, monitoring the performance and
expenses of the investment portfolios, and if necessary, firing the
sub-advisors and selecting their replacements.
[0016] As of Dec. 31, 2006, the total assets managed on a
sub-advised basis, according to Pension & Investments (P&I)
magazine, equaled $2.98 TR. Sub-advised assets grew, according to
data from Financial Research Corporation (FRC), at a 27% annual
rate during the years 2003 to 2006. Sub-advised asset management
dates its inception to the mid 1970s, when mutual fund companies
such as Vanguard began marketing their own brand of mutual funds
with the asset management function outsourced to external asset
management organizations. Shortly thereafter, insurance companies
also began to employ a sub-advised asset management structure in
their investment products in order to reduce overhead and to
leverage the brand recognition and investment performance of the
leading mutual fund companies.
[0017] Additionally, large financial organizations, such as
insurance companies, may acquire a money management firm and
utilize the acquired firm's capabilities to manage a number of
their investment portfolios on a sub-advised basis. In this type of
scenario, the large financial organization may wish to maintain the
separate identity and operations of the acquired money management
firm. Examples of acquisitions of this type include the acquisition
of Delaware Investments by Lincoln Life, Putnam Investments by
Great West Life, MFS by Sun Life of Canada, and Alliance Bernstein
by A.times.A Equitable.
[0018] In the prior art, there are two significant operational
deficiencies in the sub-advised asset management structure. These
deficiencies have been present since the inception of the
sub-advised industry in the mid-1970s. Now, several decades later,
industry participants view these deficiencies as unavoidable and
unsolvable. In fact, these deficiencies are no longer actively
discussed as problematic and are now ingrained in commonly accepted
business practices. It could be said that the sub-advised industry,
without a practical and workable solution, gave up on its efforts
to address these deficiencies and moved on to addressing new
challenges in a growing industry. However, a commonly accepted
business practice, irrespective of length of usage, does not equate
into regulatory approval by or exemptive relief from agencies such
as the SEC or DOL. Examples of recent scrutiny of decades-long
commonly accepted business practices include mutual fund timing and
shelf space marketing agreements, which ultimately became subject
to considerable regulatory focus resulting in substantial
penalties, fines, and adverse publicity.
[0019] Thus, when a sponsoring organization utilizes an external or
affiliated money management firm to manage its investment
portfolios, the current industry practice is for the sponsoring
organization to delegate the responsibility for executing the
resulting trade orders (to buy and sell securities) to the
sub-advisor (external) money management firm.
[0020] The challenges in the prior art that sponsoring
organizations face when using external money management firms as
sub-advisors include:
[0021] (1) There is no mechanism through which the sponsoring
organization, as advisor, can implement a compliance process
whereby the advisor (sponsoring organization) is able to perform a
compliance supervisory review, prior to execution in the market, of
the trade orders generated by the sub-advisors. Therefore, the
advisor, with whom resides regulatory responsibility over all of
their sub-advised investment portfolios, is unable to prevent the
execution of a trade order by a sub-advisor that would otherwise
violate a securities law, account restriction, or prohibited
transaction. This omission is particularly onerous in light of:
[0022] a) the SEC's and the Department of Labor's (DOL) heightened
regulatory and supervision requirements placed on fund and plan
advisors requiring prevention of violations along with proper
supervision and monitoring of all brokerage and operational
expenses incurred by the advisor's investment portfolios; and
[0023] b) more frequent and increasingly larger rogue trader
scandals costing companies billions of dollars (including a $7.2 BB
loss reported by Sogen in early 2008 for unauthorized trading by a
rogue trader).
[0024] (2) Sub-advisors have complete control over all phases of
the execution of trade orders, including selection of the execution
venue (such as the various stock exchanges) or broker and the
associated cost to execute the trades. The result is that the
sponsoring organization cannot exert direct and positive control
over their sub-advisors' decisions related to execution venue or
broker selection, trade costs, and execution quality without
undermining the portfolio managers' (at the sub-advisors)
investment process and/or creating undue and unnecessary complexity
in the trade operations of their sub-advisor money management
firms. Thus, sub-advised investment portfolios often incur
considerably higher brokerage (trading) costs and experience lower
execution quality than what is otherwise commonly available in the
market for securities trading. This disparity between incurred and
available brokerage costs often exceeds two cents per share. This
cost disparity assumes far greater gravity, from the fiduciary
perspective of the advisor, when considering that many of these
fund trusts and pension plans trade multiple billion shares of
equity order flow annually. As such, a sponsoring organization may
incur double-digit millions of dollars in unnecessary brokerage
costs paid entirely by the fund shareholders and plan beneficiaries
who own the sub-advised funds or accounts in their retirement
plans. These additional and unnecessary brokerage costs incurred by
sub-advised investment portfolios result in a dollar-for-dollar
equivalent reduction in investment performance in the year they are
incurred, along with the loss of the compounded benefit in
investment performance over longer periods of time.
[0025] The prior art therefore does not provide a means whereby the
sponsoring organization can assume responsibility for order
execution for their investment portfolios while simultaneously: (1)
implementing a pre-trade compliance process across all their
sub-advisors; (2) exercising appropriate control over and
minimization of brokerage costs resulting from sub-advisor trading
activity; (3) enabling the portfolio manager to have sufficient
control over trade orders where the portfolio manager has very
specific and detailed instructions as to how an order is executed;
(4) protecting the anonymity (or source) of the order from leaking
to other executing brokers; and (5) minimizing the market impact of
a trade order on the price of a security. Significant market impact
is detrimental as, for example, a large buy order may push up the
price of a stock only to see the stock price fall as soon as the
buy order is completed. Likewise, a large sell order may depress
the price of a stock only to see the price rise as soon as the sell
order is completed.
[0026] Despite the clear deficiencies in the prior art, the fact is
that the sponsoring organization, as the advisor, is and always has
been the owner of all trade orders generated by their investment
portfolios, whether or not they are sub-advised by a money
management firm. The sponsoring organization, as a result, retains
complete authority and ultimate fiduciary and regulatory
responsibility as to determining how these trade orders should be
executed. However, in recognition of the absence of an acceptable,
reliable, and practical solution in the prior art, sponsoring
organizations have: (1) forfeited, and continue to forfeit, all
pre-trade compliance review processes by the advisor over the
trading activity of their sub-advisors while incurring incur
substantial fiduciary and regulatory liability; and (2) delegated
all trade order execution responsibilities over their trade orders
to the sub-advisors for their investment portfolios, even when they
are not satisfied with certain aspects of the results (such as
considerably higher than necessary brokerage costs or poor
execution quality) based on the sponsoring organization's concern
that they not interfere with the portfolio manager's execution of
their responsibilities nor create unnecessary complexity in the
money management firm's trade operations process.
[0027] When trading securities, as stated above, asset managers
(money managers) often incur additional trading costs that are over
and above the cost of the trade alone. For example, referring to
FIG. 2, asset managers 201 (such as mutual fund companies or
institutional asset management firms) usually maintain a network of
approximately twenty-five executing brokers 202 (including
broker-dealers (such as Merrill Lynch or UBS Paine Webber), market
makers (such as Knight Capital or Schwab Capital Markets),
exchanges (such as the New York Stock Exchange or NASDAQ),
electronic communication networks (ECNs) (such as INET or TRAC),
direct market access (DMA) vendors (such as Lava Trading, Sonic or
UNX), and block trading systems (such as LiquidNet or
Premier)).
[0028] Executing brokers 202 are often selected for the additional
services (beyond executing the trade) that they can provide to the
asset manager 201 (mutual fund company or institutional asset
manager). The cost of these additional goods and services from
executing brokers 202 (such as company and market research, market
data feeds, trade analytics, and software) is added over and above
the trade's cost of execution and results in a higher trade cost
than what would otherwise be incurred by the fund or investment
portfolio. Thus, a trade may have an execution cost of $0.01 (one
cent) per share and have an additional $0.025 cents (two and
one-half cents) per share added to result in a total brokerage cost
of $0.035 (three and one-half cents) per share. Since many asset
managers trade billions of shares per year, these additional few
cents per share in trade costs cumulatively create a substantial
pool of revenue for the asset manager. The higher brokerage costs
for these additional services utilized by the asset managers 201
(referred to as "soft dollars") are paid for by the shareholders or
beneficiaries as they are penalized by the lower returns (lower
performance) of their funds or accounts. This utilization of "soft
dollars," as illustrated in FIG. 2, is not only a long-standing
industry practice, but these brokerage costs are not included, for
example, in the operating expenses of a mutual fund (such as a
quoted 1.10% annual operating expense) that are disclosed in the
fund prospectus. As such, a fund's trades are often directed to
executing brokers 202 as to maximize the benefits received by the
mutual fund company or institutional asset manager 201.
[0029] In the event of any doubt, the practices associated with
"soft dollars" have long been, and continue to be, utilized by
sub-advisors managing a sponsoring organization's investment
portfolios.
[0030] An exemplary process 200 for trading by asset management
firms, which generates "soft dollars," is shown in FIG. 2 and
described below in the following steps corresponding to the arrows
and their adjacent reference numerals shown in FIG. 2:
[0031] 211) Asset management firm (or money manager or sub-advisor)
201 contracts with executing broker 202 for research.
[0032] 212) The executing broker 202 sends the research to the
asset management 201.
[0033] 213) The executing broker 202 presents the invoice to the
asset management firm 201 for confirmation.
[0034] 214) The asset management firm 201 records the invoice into
a soft dollar administration system 203.
[0035] 215) The asset management firm 201, through the soft dollar
administration system 203, derives the trade obligations for paying
the invoice.
[0036] 216) The asset management firm 201 directs trades to the
executing broker 202 to generate sufficient commission volume to
offset the costs associated with the confirmed invoice.
[0037] 217) The executing broker 202 reports the trade executions
and associated trading costs back to the asset management firm
201.
[0038] 218) The asset management firm 201 updates the soft dollar
administration system 203.
[0039] 219) The executing broker 202 confirms payment of the
invoice to the asset management firm's soft dollar administration
system 203.
[0040] The practice of adding to the cost of trading of securities
to create "soft dollars" is a common and longstanding practice in
sub-advisory relationships, where money managers (asset managers)
are hired (and paid an annual fee) to manage pools of assets that
belong to external or unaffiliated products or organizations.
Furthermore, the sub-advisory contracts with the sponsoring
organization usually contain a clause that eliminates any
requirement that "soft dollar" costs incurred by a specific fund
(and its shareholders or beneficiaries) benefit the fund or account
paying the additional "soft dollar" costs for their trades. As
such, a sub-advised fund or account often pays substantial
brokerage costs for services that do not benefit the shareholders
or beneficiaries paying the additional "soft dollar" expense.
[0041] In fact, most shareholders in mutual funds are not aware
that a fund's brokerage (trading) costs are in addition to the
fund's annual operating expense (as disclosed in the prospectus)
and, as such, serve to lower the investment performance (return) of
their funds. These same fund shareholders are also usually not
aware that the mutual fund companies and institutional asset
managers are using the additional "soft dollar" costs for trades in
their mutual funds as a vaguely disclosed and unaccountable pool of
cash to offset the money manager's operating expenses in order to
increase their corporate profits.
[0042] Overall, the current process utilized by sub-advisors to
direct trades in order to generate "soft dollar" revenue is
complex, expensive to shareholders and beneficiaries, and requires
that the sponsoring organization (such as an insurance company or
pension plan) surrender control over order execution cost, the
selection of executing brokers, and pre-trade compliance with
regulatory requirements, even though the insurance company (as the
sponsoring organization) retains primary regulatory responsibility
for the funds (as the advisor for regulatory purposes) whose assets
are being traded. In essence, the sponsoring organization
responsible for regulatory compliance is notified of the trades
only after their execution, usually well after the close of the
trading day.
[0043] FIG. 3 illustrates a current process 300 for trading by
sub-advisors 301 (e.g., money managers) in a sponsoring
organization's 304 (e.g., insurance company) investment portfolios
(sub accounts). Typically, the complex process shown in FIG. 3
occurs for each trade (usually ten to twenty trades per day per
fund) in each of the thirty to sixty investment portfolios (sub
accounts) offered by a sponsoring organization (such as a variable
annuity product or pension plan).
[0044] The process 300 in FIG. 3 works in the following steps
corresponding to the arrows and their adjacent reference numerals
shown in FIG. 3:
[0045] 310) The sub-advisors 301 create, enter, and direct orders
(trades) to their preferred network of executing brokers 302 (shown
as "Bs") as a single buy or sell order or may break up an order
into smaller orders for execution among several brokers. The
motivation to break orders up among several brokers can be driven
by a sub-advisor's desire to remain anonymous in the market (as no
single broker can discern the sub-advisor's overall investment
strategy), the specific strengths of each executing broker, and/or
the desire to use the fund or plan assets to generate soft
dollars.
[0046] 311) The executing broker(s) 302 execute (fill) the orders
and the sub-advisor 301 is notified electronically that the trade
has been executed along with the price per share. The data for each
trade, such as number of shares, price per share, total value,
execution costs, and contra broker, is transmitted through a number
of electronic communications networks.
[0047] 312) The executing broker(s) 302 also report the trade fill
data to a number of industry organizations and this data is
transmitted to the custodial firm 303 for the sponsoring
organization's 304 assets.
[0048] 313) After the close of trading, the custodial firm 303 for
the sponsoring organization's 304 assets sends a file of the day's
transaction activity and holdings for each fund and investment
portfolio to the sponsoring organization 304.
[0049] 314) In their overnight processing cycle 305, the sponsoring
organization 304 reconciles all activity and holdings for updating
account values and in preparation for the next day's trading
activity.
[0050] In 2007, the industry average costs for executing equity
trades, according to Plexus research was 3.00 cents to 3.50 cents
per share.
[0051] The back office system, through the overnight batch
processing cycle, will reconcile the trades, calculate updated
portfolio account values or fund NAVs (Net Asset Values), and
subsequently update the holdings and values for each client
investing in their products. At the conclusion of this process, the
sponsoring organization may implement some form of compliance
review of the portfolio and its activity as part of a nightly,
weekly, monthly or quarterly process (as the frequency of the
compliance review practice varies widely). Most importantly, the
sponsoring organization 304 has little, if any, direct control over
the sub-advisor's 301 choice of executing broker 202 and the
associated additional brokerage costs incurred by their funds or
accounts through the use of soft dollars. Likewise, the sponsoring
organization 304 has no opportunity to conduct a pre-trade
compliance review of the trades in order to prevent violations of
securities laws, account restrictions or prohibited transactions.
Overall, the current process was established decades ago when the
sub-advised industry was in its infancy and, despite its impressive
$2.98 TR in assets, the sub-advised industry still does not provide
the proper governance practices, comprehensive risk management
methods and full fiduciary control that the practice of utilizing
sub-advised asset management demands from all participants.
BRIEF SUMMARY OF THE INVENTION
[0052] An embodiment of the present invention provides a system
(e.g., referred to as the unified trading and control system),
method, process, software, and standards that simplify the
sub-advisor (money manager) trading process, and for the first
time, provides pre-trade compliance review by the sponsoring
organization over sub-advisor trading activity, increases control
over the trading process by a sponsoring organization, and
substantially lowers brokerage (trading) costs on an annual and
recurring basis for the shareholders and beneficiaries investing in
the funds and investment portfolios. In particular, the present
invention provides a superior trading and control method for the
sub-advised industry. The system, method, process, software, and
standards of the present invention address the major operational
deficiencies in the current trading and operational processes in
the sub-advised industry, resulting in, for the first time, the
ability of sponsoring organizations to: (1) implement a pre-trade
compliance review process that prevents violations in trading
activity by their sub-advisors; (2) substantially lower brokerage
(trading) expenses on a recurring basis; (3) improve investment
performance; (4) improve business processes; and (5) improve
governance reporting.
[0053] Addressing the shortcomings in the prior art, an embodiment
of the present invention empowers the sponsoring organization to
utilize a rules-based computer system to capture trade orders from
sub-advisors in order to implement a pre-trade compliance review
process, thereby enabling the advisor to prevent the execution of
trade orders by a sub-advisor that violate securities laws, account
restrictions, or prohibited transactions. The embodiment of the
present invention enables a sponsoring organization to properly
implement, for the first time, its own centralized, real-time,
rules-based pre and post trade compliance process across all of its
sub-advisors and the sub-advisors' trading activity. Given that a
sponsoring organization may employ in excess of fifty sub-advisor
relationships across hundreds of funds or accounts, the embodiment
of the present invention represents a dramatic improvement over the
prior art.
[0054] In addition, assuming the trade order passes the pre-trade
compliance process without a violation, the system of the present
invention categorizes, utilizing a plurality of customizable rules
incorporating the analysis of real-time and historical market data,
trade orders as high touch orders or low touch orders and
subsequently assigns responsibility (discretion over the decisions
related to how, when, with whom and the cost that a trade order is
executed) over the execution of these orders to the sponsoring
organization when the order is low touch (that is, the order is not
expected to impact the market price of the security being traded
and does not require significant time and effort by a trader) and
to the money management firm when the order is high touch (that is,
the order is likely to adversely impact the market price of the
security being traded and is expected to require significant time
and effort by a trader). Through an embodiment of the present
invention, the sponsoring organization is thus able, for the first
time, to capture and subsequently direct, in real-time, low touch
trade orders to their selected low cost, high quality execution
venues or brokers, which benefits the shareholders and
beneficiaries in these investment portfolios by minimizing
execution costs and improving the quality of execution (rapid speed
of execution and realized price improvement) for those orders.
Simultaneously, this embodiment of the present invention empowers
the sponsoring organization to benefit from the portfolio manager's
favored execution strategies and the expertise of the sub-advisor's
trading group in situations where an order is high touch and needs
to be carefully "worked" to protect anonymity and minimize market
impact. Finally, the portfolio manager retains control over how a
high touch order is executed in circumstances where such control is
desirable while also benefiting from the improved performance of
the investment portfolio that results from the lower brokerage
costs of low touch orders.
[0055] An embodiment of the present invention provides a system and
method for enhancing the sponsoring organization's, as advisor,
regulatory supervision over the trading activity of the sub-advisor
through a pre-trade compliance review process while determining,
based on expected market impact of a trade order to buy or sell
securities, whether the responsibility (discretion over the
decisions related to how, when, with whom and the cost that a trade
order is executed) for executing a trade order is assigned to the
sub-advisor (money management firm) for an investment portfolio or
to the advisor (sponsoring organization) that is the regulatory
entity responsible for the operation of and compliance requirements
for that investment portfolio. Referred to herein as the hi
touch-low touch engine, or "HiLo Engine," or execution discretion
assignment software engine, an embodiment of the present invention
is a rules-based computer system that categorizes trade orders,
using real-time market data, into either: (1) "high touch" orders,
whereby a trade order requires significant time and effort by a
trader and where the order is expected to have a significant market
impact on the price of the stock; or (2) "low touch" orders,
whereby the order does not require significant time and effort by a
trader and where the order is not expected to have any significant
market impact. As such, the HiLo Engine assigns responsibility
(discretion over the decisions related to how, when, with whom and
the cost that a trade order is executed) for the execution of high
touch orders and routes the high touch orders to the sub-advisor
(money management firm), who is able to carefully "work" the order
by implementing sophisticated trading strategies and/or selecting
one or more executing venues or brokers to complete the transaction
with minimal market impact. Likewise, the HiLo Engine assigns
responsibility (discretion) for execution of low touch orders and
routes the low touch orders to the sponsoring organizations to
execute by selecting one or more executing venues or brokers so as
to minimize execution costs and improve the quality of execution
(rapid speed of execution and realized price improvement) for those
orders. The plurality of rules employed by the HiLo Engine for
categorization of trade orders as high touch or low touch is
flexible, utilizes real-time and historical market data, and is
established and revised in real-time by either the sub-advisor
(money management firm) and/or the sponsoring organization,
according to their agreed procedures. The percentage of orders
categorized as high touch or low touch depends on the parameters
utilized in the rules employed by the HiLo Engine. However, given
that many sponsoring organizations trade billions of equity shares
annually, it is likely that a substantial portion of this order
flow is categorized as low touch, is executed by the sponsoring
organization, and generates substantial annual savings in brokerage
costs and improved investment performance for investment portfolios
of sponsoring organizations.
[0056] The HiLo Engine, as an embodiment of the present invention,
incorporates functions as a real-time, rules-based market liquidity
analytical tool; an access and request facility to real-time and
historical market data and specified market data packages; an order
discretion assignment decision-making engine; a manual user
override of order discretion assignment decisions capability; a
rules creation, updating and rules-exception depository; a rules
and rules-exception testing facility; an extensive real-time
reporting system; a rules, data, decision and order execution
discretion assignment audit facility; a multi-level user and
organizational access and rights control and updating facility; an
account activation facility; a multiple venue message transfer
facilitator connectivity system; and an implementation of
specialized message formats. The HiLo Engine integrates a plurality
of sub-advisors (money management firms), sponsoring organizations,
and execution venues and brokers into a single and effective
communication, compliance, and low cost order routing and execution
network. The HiLo Engine's communications network also enables
sponsoring organizations to benefit from a plurality of additional
compliance and regulatory supervisory capabilities that result in
significantly improved business processes including: lower
brokerage costs and greater control associated with the process of
replacing one sub-advisor to a fund or account with another
sub-advisor; lower brokerage costs resulting from model portfolio
asset allocation rebalancing activity; improved governance process
through real-time and historical holdings, activity, brokerage and
other costs reporting and oversight capabilities; enhanced
reporting on asset segregation requirements related to forward
settlements on derivative positions; and stronger, real-time,
enterprise-level risk management controls.
[0057] A further embodiment of the present invention conducts a
real-time analysis of multiple market-based factors in such a
manner as to optimize the execution process in order to achieve the
lowest total execution cost for the participants in a securities
transaction. This optimization process, through the inclusion of
multiple factors in addition to share price ("Best Ex"), results in
a significant savings to participants as important factors are
analyzed in real-time in order to create an optimized list of
executing brokers (including the exchanges, ECNs and alternative
trading systems (ATS)) that provide the lowest expected total
execution cost for a transaction.
[0058] An embodiment of the present invention provides a system
(e.g., a hosted application) and method (organization of activity)
for creating a customizable, computerized, real-time analysis and
optimization process providing for and facilitating the selection
of executing brokers for a securities transaction to provide the
lowest expected total execution cost for that transaction,
inclusive of: (1) the share price and liquidity (number of shares
at a quoted share price from an executing broker) for a security;
(2) the execution costs as specified by executing brokers through a
real-time process of setting and adjusting execution costs
according to the business needs of the executing broker; (3) the
real-time analysis of price improvement in recent trades in a
security or group of securities (as determined over a selected time
period, number of trades, number of shares traded, type of orders
or other similar such parameters); (4) time required to execute an
order by an executing broker (time to execute); and (5) the current
rate of change in the share price of a security during the time
required to execute the transaction.
[0059] The expected total execution cost is the sum of all of these
factors (share price, execution cost, price improvement, time to
execute, and rate of change in the price of a security), converted
into a single dollar and cents number (or in another desired
currency) for purposes of comparing a single executing broker with
one or a plurality of executing brokers and ranking the plurality
of executing brokers from lowest to highest expected total
execution costs. The initiating party to the securities transaction
is thus able to select the executing broker(s) providing the lowest
expected total execution cost and to generate cost savings over
other alternative avenues for executing the transaction.
[0060] As such, the system and method of the present invention
enable a party initiating a securities transaction (the initiating
party) to scan the market for price quotes and the associated
executing brokers quoting liquidity (a number of shares) for the
transaction and, based on the customizable factors selected by that
party, to quickly conduct an analysis and optimization process that
determines the "hot hitters" among a plurality of executing brokers
in terms of creating the lowest expected total execution cost with
respect to: (1) share price; (2) execution cost; (3) expected price
improvement (the difference between actual share price of the
security transaction relative to the currently quoted bid and offer
(ask)); (4) time required to execute an order by an executing
broker; and (5) the current rate of change in the share price of a
security during the time required to execute the transaction.
[0061] A specific implementation of the above inventions is what is
referred to as a unified compliance and control system (UCCS). The
UCCS is a highly sophisticated, scalable and reliable risk
management, compliance supervision, and order management system for
utilization by sponsoring organizations with their sub-advised and
externally managed investment portfolios.
[0062] A key component of UCCS is the HiLo Engine. The HiLo Engine
analyzes trade orders, in real-time relative to an issue's current
and historical liquidity and trading volume, in order to categorize
an order relative to potential market impact and, subsequently,
assigns discretion over the execution of an order as follows: (1)
orders with significant expected market impact are categorized as
"high touch" orders and discretion over the execution of high touch
orders is assigned to the sub-advisor (money management firm) for
the account; and (2) orders with little or no expected market
impact are categorized as "low touch" orders and discretion over
the execution of low touch orders is assigned to the advisor
(sponsoring organization) for the account.
[0063] The HiLo Engine also, in the process of capturing an order
from a money management firm (sub-advisor), routes that order to
the sponsoring organization's rules-based compliance system for a
pre trade, rules-based compliance supervisory review to ensure that
the proposed order does not violate any securities laws, prohibited
transactions, or account restrictions that the sponsoring
organization has set up for the account. Thus, for the first time,
a sponsoring organization is able to prevent the execution of an
order that would otherwise result in a violation of any securities
laws, prohibited transactions, or account restrictions that the
sponsoring organization established for the account.
[0064] Through the implementation of UCCS and its HiLo Engine
component, sponsoring organizations, such as insurance companies,
pension plans, 401k providers, mutual fund companies, bank trust
departments, and other such organizations that utilize sub-advised
(external) asset management services, realize additional desirable
benefits, including: [0065] Improved risk management, including
improved control over the manager replacement process, lower model
portfolio rebalancing costs, comprehensive real-time reporting
(including the most recent up-to-the-minute transactions),
real-time aggregate positions for the master portfolio, model
portfolios and individual funds or accounts; [0066] Comprehensive
compliance, trading and 18f3 segregation reporting; and [0067]
Lower brokerage costs and improved investment performance for their
fund shareholders and plan beneficiaries.
[0068] For purposes of communication with external organizations,
the HiLo Engine utilizes a "web services" communications process to
create, receive, and send messages to order management systems
(OMS) employed by both the sub-advisors and the sponsoring
organizations. As such, the HiLo Engine (HLE) functions in several
different manners, including as a: (a) real-time and rules-based
analytical tool; (b) rules depository for determining high touch
and low order orders; (c) order execution discretion assignment
vehicle between sponsoring organizations and their sub-advisors
(money management firms); (d) comprehensive reporting system; and
(e) transaction message transfer facilitator. As such, the HiLo
Engine also serves as a mission-critical component within an
integrated network providing instant two-way connectivity among
sponsoring organizations, sub-advisors (money management firms),
compliance systems, order management systems and domestic and
international execution exchanges, venues, and brokers.
[0069] The web services interface enables users of the HiLo Engine
to instantaneously create a message, open a connection, send the
message, and close the connection. As such, the utilization of the
HiLo Engine does not require database integration with compliance
and order management systems utilized by the sub-advisor or
sponsoring organization. The web services functionality provides
instant and effective communication and responsiveness among all
entities without sacrificing the critical elements of system
security and data integrity.
[0070] Each order entered by a money management firm for a
sub-advised account is routed to the HiLo Engine, which in turn
routes the order to the sponsoring organization's order management
system for rules-based compliance review.
[0071] The HiLo Engine, for each order submitted to it, returns a
message to the sub-advisor consisting of two reports: a high touch
versus low touch report and a compliance status report.
[0072] For the high touch versus low touch report, the
categorization of an order as high touch or low touch represents
the result of a rules-based, real-time analysis of current and
historical liquidity and trading volume in order to determine the
expected market impact of an order. The money management firm
establishes, and can modify in real-time, the parameters for the
rules utilized to categorize an order as high touch or low touch.
The money management firm can also, in real-time, activate or
deactivate a rule(s) or set up or remove an exception for an
account, symbol, or group of symbols.
[0073] The rules and associated parameters selected by the money
management firm results in the HiLo Engine assigning an order into
one of the following five categories for execution, as follows:
[0074] High touch: The execution of a "high touch" order is
expected to have significant market impact and thus, the order
should be "worked" by the money management firm's trading desk.
[0075] Low touch: The execution of a "low touch" order, such as Buy
500 IBM, is unlikely to create a significant market impact and
whose execution is directed by the sponsoring organization. [0076]
Low touch algo: The execution of a "low touch algo" order is
unlikely to create a significant market impact. However, the use of
an algorithm (such as TWAP or VWAP) may be considered by the
sponsoring organization in order to electronically slice the parent
order into several smaller child orders. [0077] Low Touch TRO: The
execution of a "low touch TRO" order is unlikely to create a
significant market impact. However, the "TRO" or trade rotation
order is applied to a group of orders that may cumulatively create
a significant market impact. Thus, "low touch TRO" indicates that
money management firm may consider a trade rotation order (TRO)
when sending this group of orders to sponsoring organizations.
[0078] Low Touch Algo TRO: A "low touch algo TRO" report suggests
that, as a trade rotation order is implemented for a group of
orders, the sponsoring organization executing a given order may
consider one the use of an algorithm (such as TWAP or VWAP) in
order to electronically slice the order into smaller pieces.
[0079] For the compliance status report, the result of the
sponsoring organization's compliance review consists of one of
three discrete compliance status states for each order submitted:
[0080] Compliance OK: The "OK" message means that the order is
approved for execution. [0081] Under review: The "under review"
message means that the order has violated one or more compliance
rules. No further processing of the order occurs until a review of
the order is satisfactorily concluded. [0082] Order released from
compliance: An order that was held as "under review" is now
approved for execution.
[0083] An order held as "under review" may ultimately fail to
obtain approval. In this case, the sub-advisor cancels or replaces
the order through their trading system and the HiLo Engine carries
the "order canceled" message to the sponsoring organization's order
management system.
[0084] Finally, the HiLo Engine does not function as a compliance
system. Rather, the HiLo Engine performs the task of communicating
the compliance status, and any changes in the compliance status, of
an order (as determined by the sponsoring organization's compliance
system) to the money management firm. As such, the HiLo Engine does
not modify nor compromise the full functionality of the sponsoring
organization's and the money management firm's compliance
systems.
[0085] The HiLo Engine can provide the two reports (high touch vs.
low touch and compliance status) simultaneously in a single message
to the money management firm's order management system, as the
following events occur: [0086] The money management firm executes
("works") each high touch order through their normal trading
relationships and processes; [0087] The sponsoring organization
executes all low touch and low touch algo orders; and [0088] The
money management firm implements any trade rotation order for the
low touch TRO orders in the course of routing these orders to the
sponsoring organization. The sponsoring organization directs the
execution of these orders.
[0089] As the sponsoring organization receives the low touch, low
touch algo, and the low touch TRO algo orders from the sub-advisor
through the HiLo Engine, the sponsoring organization evaluates each
low touch algo and low touch TRO algo in order to determine if an
algorithm is desirable in order to reduce any potential market
impact, with the following possible outcomes: [0090] If an
algorithm is desirable, the sponsoring organization selects the
algorithm and sets the operational parameters for the order. [0091]
If an algorithm is not necessary, then the order is routed to the
market for execution in the same manner as a low touch order.
[0092] Also, additional functionality supported by the HLE
includes: [0093] Execution (fill) reports to the money management
firm for trades by the sponsoring organization, [0094] Order
cancellations by the money management firm, and [0095] Override of
high touch orders by the money management firm to low touch
orders.
[0096] In essence, the HiLo Engine functions as a message service
to relay messages and orders as well as an analytical engine to
assign discretion over order execution based on a real-time
analysis of market data. The HiLo Engine provides an integrated
network providing instant two-way connectivity among sponsoring
organizations, sub-advisors (money management firms), compliance
systems, order management systems, and domestic and international
execution exchanges, venues, and brokers. As such, the HiLo Engine
is the mission-critical communications hub at the center of an
effective communication, compliance, and order execution network.
Finally, the web services integration process and the connectivity
to the HiLo Engine, once in place for a money management firm,
provides full integration with all of their sponsoring
organizations.
[0097] Overall, the system of present invention provides an ongoing
optimization process that has the potential to generate additional
savings for the initiating party on each securities transaction it
engages in and, as such, the system of the present invention has
the potential to generate significant and recurring cost savings
when employed by a single or plurality of actively traded
investment portfolios.
[0098] A further embodiment of the present invention provides the
optimization process in forms of trading other than the above
described equity process using shares in equities as the unit of
trading. For example, the system of the present invention could
also be used across multiple forms of trading such as fixed income,
options, futures, currency, commodities, derivatives, and other
such instruments that utilize a standard category of unit (such as
shares, units, bonds, contracts, etc.) on an exchange for purposes
of implementing an automated and efficient trading process.
BRIEF DESCRIPTION OF THE DRAWINGS
[0099] FIG. 1 is a table that defines the terminology utilized in a
number of investment industry products across numerous markets in
registered mutual funds, non-registered mutual funds, and
institutional investment portfolios.
[0100] FIG. 2 is a schematic diagram illustrating a prior art
process for trading by asset management firms (or money managers or
sub-advisors) that generates "soft dollars."
[0101] FIG. 3 is a schematic diagram illustrating a conventional
process, as embodied in the prior art, for trading by asset
managers in sub-advised investment portfolios.
[0102] FIG. 4 is a schematic diagram illustrating an exemplary
process for facilitating a sponsoring organization's money
management process as the sponsoring organization receives trade
orders from the sub-advisor and selects the executing brokers,
according to an embodiment of the present invention.
[0103] FIG. 5 is a schematic diagram illustrating an exemplary
system and method for facilitating a sponsoring organization's
money management process utilizing a standard trading system,
messaging engine, communications protocol, and communications
network, according to an embodiment of the present invention.
[0104] FIG. 6 is a schematic diagram illustrating an alternative
exemplary system and method for facilitating a sponsoring
organization's money management process utilizing a standard
messaging engine, communications protocol, and communications
network, according to an alternative embodiment of the present
invention.
[0105] FIG. 7 is a schematic diagram illustrating an exemplary
order entry system and process, according to an embodiment of the
present invention.
[0106] FIGS. 8A, 8B, and 8C illustrate exemplary logical rules in
terms of regulatory, prospectus, and board restrictions, and
requirements for a real-time compliance engine, as implemented by
an operating fund trust.
[0107] FIG. 9 is a schematic diagram illustrating the number and
types of restrictions for a plurality of investment portfolios
along with an exemplary computer process for implementing a
compliance engine for an investment portfolio, according to an
embodiment of the present invention.
[0108] FIG. 10 is a schematic diagram illustrating an exemplary
order management system (OMS), according to an embodiment of the
present invention.
[0109] FIG. 11A is a schematic diagram illustrating an exemplary
high touch-low touch engine (HLE) system and process, according to
an embodiment of the present invention.
[0110] FIG. 11B is a schematic diagram illustrating an exemplary
structure of a sub-advised investment management process, including
the sponsoring organization (advisor) and a plurality of
sub-advisors (money management firms) providing asset management
services across a plurality of different investment portfolios,
according to an embodiment of the present invention.
[0111] FIG. 11Ci is a schematic diagram illustrating the exemplary
design, functional modules, connectivity, data feeds, database and
data processing of the HiLo Engine (HLE) also referred to as the
execution discretion assignment software engine (EDASE), according
to an embodiment of the present invention.
[0112] FIG. 11Cii is an exemplary schematic diagram illustrating an
alternative embodiment of the sponsoring organization unified
trading and control system, in which trade orders originate (are
entered) by one or a plurality of portfolio managers employed by
one or a plurality of money management firms (sub-advisors)
responsible for the investment management process for a sponsoring
organization's investment portfolios, according to an embodiment of
the present invention. These orders are sent to the HiLo Engine,
where they are categorized as high touch or low touch according to
the appropriate rules and routed for compliance review by the
advisor. Subsequently, the sponsoring organization executes the low
touch orders while the money management firm executes the high
touch orders. Finally, the sponsoring organization and money
management firm engage in a reconciliation process of their trading
activity with one another.
[0113] FIG. 11D is a schematic diagram illustrating an alternative
embodiment of FIG. 11A according to which the HiLo Engine captures
orders from the sub-advisor (money management firm), categorizes
the order as high touch or low touch, routes the order for
compliance review by the sponsoring organization (advisor), and
routes high touch orders to the sub-advisor (money management firm)
for execution while routing the low touch orders to the sponsoring
organization for execution, according to an embodiment of the
present invention.
[0114] FIG. 11E is a screen shot from an embodiment of the present
invention that illustrates the HiLo Engine's exemplary graphical
user interface (GUI) providing, as shown in a plurality of tests,
activation boxes, measures, parameters, and pre set levels employed
to categorize an order as high touch or low touch, according to an
embodiment of the present invention.
[0115] FIG. 11F is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed by a system
administrator to institute a plurality of system-wide pre set
levels provided to system users as a one-button implementation of
complete sets of tests, measures, and parameters employed to
categorize an order as high touch or low touch, according to an
embodiment of the present invention.
[0116] FIG. 11G is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to institute a
plurality of exceptions to currently employed tests, measures, and
parameters, such as an exception by account or symbol, employed to
categorize an order as high touch or low touch, according to an
embodiment of the present invention.
[0117] FIG. 11H is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to create and name
groups of symbols for use as exceptions to the currently employed
tests, measures, and parameters used to categorize orders as high
touch or low touch, according to an embodiment of the present
invention.
[0118] FIG. 11I is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to transmit an order
or plurality of orders from the sub-advisor to the HiLo Engine for
categorization of trade orders as high touch or low touch,
according to an embodiment of the present invention.
[0119] FIG. 11J is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to communicate the
results of the HiLo Engine's categorization of trade orders as high
touch or low touch for one or a plurality or orders, according to
an embodiment of the present invention.
[0120] FIG. 11K is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to transmit the
order, placement, and decision details for an individual order,
according to an embodiment of the present invention.
[0121] FIG. 11L is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to create roles for
a plurality of sponsoring organization, money management, or system
administration users along with their user rights in the HiLo
Engine, according to an embodiment of the present invention.
[0122] FIG. 11M is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to create a
plurality of user organizations, as sponsoring organizations or
money managers (sub-advisors), in the HiLo Engine, according to an
embodiment of the present invention.
[0123] FIG. 11N is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to provide a system
administrator with account administration capabilities, including
the activation of an account's electronic submission of trade
orders to the HiLo Engine, according to an embodiment of the
present invention.
[0124] FIG. 11O is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to provide a summary
of the current tests, measures, and parameters used by sub-advisors
(money management firms) to categorize orders as high touch or low
touch, according to an embodiment of the present invention.
[0125] FIG. 11P is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to provide a search
capability for real-time and archival reporting and usage
statistics for the HiLo Engine, according to an embodiment of the
present invention.
[0126] FIG. 11Q is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to provide detailed
usage statistical reports summarizing the numbers and percentages
of orders categorized as high touch or low touch, according to an
embodiment of the present invention.
[0127] FIG. 11R is a schematic diagram illustrating an exemplary
structure for creating user roles and assigning various permissions
and responsibilities to these user roles, according to an
embodiment of the present invention.
[0128] FIG. 12A is a schematic diagram illustrating an exemplary
price-cost-liquidity-quality engine, according to an embodiment of
the present invention.
[0129] FIG. 12B is a schematic diagram illustrating an exemplary
National Best Bid and Offer (NBBO) for a security, along with an
exemplary Midpoint Between Bid and Offer (MBBO) and an exemplary
price improvement.
[0130] FIG. 12C is a set of tables that illustrate exemplary market
parameters and resulting execution costs for a securities
transaction with a single stock price.
[0131] FIG. 12D is a set of tables that illustrate the selection of
executing brokers, the associated execution costs, and the
resulting cost savings for three different methods for selecting
executing brokers, including an embodiment of the present
invention, for a securities transaction occurring at a single stock
price.
[0132] FIG. 12E is a set of tables that illustrate exemplary market
parameters and resulting execution costs for a securities
transaction with multiple stock prices.
[0133] FIG. 12F is a set of tables that illustrate the selection of
executing brokers, the associated execution costs, and the
resulting cost savings for three different methods for selecting
executing brokers, including an embodiment of the present
invention, for a securities transaction occurring at multiple stock
prices.
[0134] FIGS. 12G(i) and 12G(ii) are a schematic diagram
illustrating an alternative embodiment of an exemplary system and
method of the present invention creating a customizable,
computerized, real-time analysis and optimization process providing
for and facilitating the selection of executing brokers for a
securities transaction in such manner as to determine the executing
brokers providing the lowest expected total execution cost for that
transaction, according to an embodiment of the present
invention.
[0135] FIG. 13 is a schematic diagram illustrating exemplary
component modules of a trade reconciliation system, according to an
embodiment of the present invention.
[0136] FIG. 14 is a table that highlights the impact on the
sub-advisor according to the prior art and according to an
embodiment of the system of the present invention, according to an
embodiment of the present invention.
[0137] FIG. 15 is a list of exemplary sponsoring organizations
offering variable insurance products.
[0138] FIGS. 16A and 16B are a list of exemplary money management
firms (mutual fund companies) that currently provide or potentially
could provide sub-advisory services to sponsoring organizations
through registered mutual funds, unregistered mutual funds, and
institutional investment accounts.
[0139] FIG. 17 is a list of exemplary firms providing order
management systems (OMS).
[0140] FIGS. 18 A and 18B are a list of many exemplary executing
broker firms providing trade execution services.
[0141] FIG. 19 is a schematic diagram illustrating an embodiment of
the present invention in which a plurality of sponsoring
organizations and a plurality of sub-advisors (money managers)
utilize a plurality of order management systems (OMSs) to execute
orders with a plurality of executing brokers.
[0142] FIG. 20 is a schematic diagram illustrating an embodiment of
the present invention in which a sub-advisor utilizes a plurality
of manager order management systems to execute orders for a
plurality of funds or investment portfolios with a plurality of
executing brokers.
[0143] FIG. 21 is a schematic diagram illustrating an embodiment of
the present invention in which a plurality of sponsoring
organizations use a standard order management system,
communications engine, communications protocol, and communications
network to communicate with a plurality of sub-advisors (money
managers) in order to execute orders with a plurality of executing
brokers.
[0144] FIG. 22 is a schematic diagram illustrating a use case
analysis of an exemplary implementation of a system, method,
process, software, and standards for facilitating the unified
trading and control of a sponsoring organization's money management
process, according to an embodiment of the present invention.
[0145] FIG. 23 is a table providing a compilation of research
demonstrating estimated exemplary savings available to fund trusts
(groups of funds) showing the name of the fund trust, the total
sub-advised equity assets of the fund trust, the current execution
costs for trading (in cents per share), the annual turnover rate
for the trust, the effective (total) turnover rate for the trust,
and the number of shares traded in 2005 by the trust. FIG. 23 also
shows the estimated exemplary annual savings in millions of dollars
and basis points (b.p.) of annual savings realized by the fund
trust at execution costs of 1.00 cent per share. The data for
estimates in this table was compiled from publicly available
documents filed by each fund trust with the SEC, including the
prospectus, annual report, and statement of additional
information.
[0146] FIGS. 24A, 24B, 24C, and 24D are tables providing a
compilation of research calculating estimated exemplary annual
savings for four popular fund trusts (group of funds) and the
individual funds (with their sub-advisor) comprising the trust,
showing the annual cost savings (at an execution cost of 1.00 cent
per share) both in dollars and percentages. FIGS. 24A-24D also show
an estimated exemplary beneficial effect of the annual compounding
of these recurring savings for a 1, 3, 5, and 10 year period. The
data for estimates in these tables were compiled from publicly
available documents filed by each fund trust with the SEC,
including the prospectus, annual report, and statement of
additional information.
DETAILED DESCRIPTION OF THE INVENTION
[0147] An embodiment of the present invention provides a unified
trading and control system. FIG. 4 illustrates an exemplary
sub-advisor (money manager) trading process 400 according to an
embodiment of the present invention. The following numbered steps
correspond to the arrows and their associated reference numerals
shown in FIG. 4.
[0148] 410) The sub-advisor 301 (or money manager) for each
investment portfolio provides the changes (buy and sell orders) in
the sub-advised fund or investment portfolio to the sponsoring
organization 304 (acting as the advisor or administrator) as to the
sub-advisor's decisions regarding, for example: (1) employing the
daily net cash contribution or withdrawal (a decision usually made
prior to the opening of trading); (2) changing the percentage,
share, or dollar allocations of each security in the investment
portfolio (decisions that can occur at the beginning of and
throughout the day); (3) changing how the current model (the
percentage allocation by security totaling to 100%) compares to the
target model; and (4) other money management and trading
decisions.
[0149] Once these decisions (and the resulting orders) are
determined by the sub-advisor or money manager 301, the sub-advisor
calculates the resulting number of shares to buy or sell for each
security and communicates the desired orders to the sponsoring
organization 304. (As needed, selected orders could be executed or
"worked" by the sub-advisor 301 according to criteria agreed to by
the sponsoring organization and sub-advisor.)
[0150] 411) The sponsoring organization 304 maintains (separate and
apart from the sub-advisors 301) its own group of relationships
with executing brokers 302. The sponsoring organization routes the
orders to executing broker(s) 302 of their own choice for
execution, thereby enabling the sponsoring organization 304 to seek
out and utilize the lowest cost source of execution, and thereby
eliminate the "soft dollar" related brokerage charges (and the
resulting additional expense to the fund shareholders and plan
beneficiaries) incurred when the sub-advisor is directing the
trades. Through an embodiment of the present invention, the
sponsoring organization 304 is able to select executing brokers 302
providing the lowest possible execution cost (which presently could
be one cent or less per share) consistent with regulatory
requirements for Best Execution (best share price), thereby
generating additional savings for the fund shareholders and plan
beneficiaries and improving fund performance.
[0151] 413) The executing brokers 302 report the trade fills back
to the sponsoring organization 304.
[0152] 414) The sponsoring organization reports the trade fills
back to the sub-advisor 301.
[0153] The sponsoring organization 304 also, in an embodiment of
the present invention, implements a pre-trade compliance review and
an immediate post execution review to ensure the trade is compliant
with prospectus, SEC, and board requirements. If the trade is not
compliant with these regulatory requirements, the sponsoring
organization 304 (as advisor for regulatory purposes) is able to
prevent the order from being executed or immediately address any
violations following execution.
[0154] FIG. 4 illustrates the areas of operational responsibility
according to an embodiment of the present invention, as summarized
in Table 1 below.
TABLE-US-00001 TABLE 1 Areas of Operational Responsibility
Sub-advisors Create Buy and Sell Orders 301 Execute or "Work"
Orders per Agreed Criteria Sponsoring Maintain Network of Executing
Brokers Organizations Select Executing Brokers for Orders 304 Seek
Lowest Cost Execution Maintain Order Routing Table Eliminate "Soft
Dollars" from Trade Costs Pass Savings Through to Shareholders or
Beneficiaries Single and Comprehensive Compliance System and
Methodology for all Sub-advisors to Utilize for Trading Pre and
Post Trade Compliance Review Option Executing Execute Trades at
Lowest Possible Cost Brokers Compete: Cost, Coverage, Liquidity,
Technology 302 and Service
[0155] An embodiment of the present invention is shown in FIG. 5 as
exemplary process 500, whereby the sponsoring organization utilizes
a standard system along with a plurality of other sponsoring
organizations to implement a standard method and process that
enables the sub-advisors and executing brokers, through the
creation of a single operational structure with one sponsoring
organization, to easily and rapidly duplicate that same operating
structure with a plurality of sponsoring organizations across
multiple industries. This standardization eliminates the potential
for unmanageable complexity created for sub-advisors and executing
brokers as a multiplicity of sponsoring organization select and
implement their own individual method and process utilizing a wide
variety of vendors, systems, procedures, communications engines,
communications protocols, and communications networks.
[0156] FIG. 5 illustrates the exemplary process 500 according to an
embodiment of the present invention. The process 500 works in the
following steps corresponding to the arrows and their associated
reference numerals shown in FIG. 5.
[0157] 510) A plurality of sub-advisors 301 direct orders to the
sponsoring organization 304 through the communications network
502.
[0158] 511) The sponsoring organization's order management system
503 receives a plurality of orders from the sub-advisor 301.
[0159] 512) The sponsoring organization's order management system
503 utilizes a communications engine 504 that incorporates a
communications protocol 505 that translates each order into a
usable format.
[0160] 513) Each order is directed to the compliance engine 506
that reviews the order with respect to prospectus, board, and SEC
regulations and requirements.
[0161] 514) If a violation occurs (Violation=Yes), the order is
routed to the sub-advisor 301 for further evaluation and
review.
[0162] 515) If a violation does not occur (Violation=No), the order
is routed to the order management system (OMS) 503, which,
utilizing the communications engine 504 and communications protocol
505, translates the order into a format acceptable to the executing
brokers 202.
[0163] 516) The sponsoring organization's order management system
503 routes the order to the executing brokers 202 through the
communications network 502.
[0164] 517) The executing broker 202 receives the order and
executes the trade.
[0165] 518) The executing broker 202 sends the trade fills report
to the sponsoring organization 304 and sub-advisor 301 through the
communications network 502.
[0166] 519) The sponsoring organization 304 receives the trades
fill report.
[0167] 520) The sub-advisor 301 receives the trade fills
report.
[0168] The standard system 501 for facilitating the sponsoring
organization's 304 unified trading and control of their money
management process consists of the following components in an
integrated format: order management system 503, communications
engine 504, communications protocol 505, and communications network
502. An alternative embodiment of the present invention with an
alternative standard system 507 consists of the following
components in an integrated format: order management system 503,
communications engine 504, and communications protocol 505.
[0169] An alternative embodiment of the present invention is shown
in FIG. 6 as exemplary process 600, whereby the sponsoring
organization 304 utilizes a variance on the common standard system
with other sponsoring organizations to provide a standard method
and process that enables the sub-advisors 301 and executing brokers
202, through the creation of a single operational structure with
one sponsoring organization, to easily and rapidly duplicate that
same operating structure with a plurality of sponsoring
organizations across multiple industries. The likelihood of
increasing compatibility of systems over time, and increased
industry acceptance of the system of the present invention, could
potentially ease the standardization requirement and allow these
additional options to become feasible. The standard system 601 and
602 comprises the following standard components in an integrated
format: communications engine 504, communications protocol 505, and
communications network 502. An alternative embodiment of the
standard system 601 consists of a communications engine 504 and
communications protocol 505. Finally, it is conceivable that, over
time, communications integration across the industry evolves to the
point where the standard consists solely of a communications
protocol 505.
[0170] The present invention, in the embodiments illustrated in
FIGS. 4, 5, and 6, provides a simpler process, lower trade
execution costs, and enhanced pre-trade trade compliance and
prevention of violations in trading by the sub-advisor, whereby the
sponsoring organization (the advisor with direct regulatory
responsibility for the investment portfolios), not the sub-advisor
or money manager, exercises controls over the sub-advisor trading
process and where and how the trades are executed (the order flow)
on behalf of their fund shareholders and plan beneficiaries.
[0171] I. Exemplary System and Process of the Present Invention
[0172] The present invention provides a system, method, process,
software, and standards for achieving a desired social utility of
improving regulatory compliance, risk management and fiduciary
control while also generating significant and recurring cost
savings (and the resulting improved investment performance) for
fund shareholders and plan beneficiaries.
[0173] A. System
[0174] An exemplary system is based on a number of components and
includes an order entry system, compliance engine, order management
system, a hi touch-low touch engine (HLE), a
price-liquidity-cost-quality engine (PLCQ), trade reconciliation
system, communications engines, communications protocols, and
communications networks, as further described below.
[0175] 1) Order Entry System
[0176] FIG. 7 is a schematic diagram illustrating an order entry
system and process 700, according to an embodiment of the present
invention. The process 700 works in the following steps
corresponding to the arrows and their adjacent reference numerals
in FIG. 7.
[0177] 725) The order entry system is a computer-based graphical
user interface (GUI) and associated software program(s) that can be
customized to fit the preferences of the individual portfolio
manager and his or her personal style of managing money. (The
individual who is the portfolio manager for the investment
portfolio is typically an employee of the mutual fund company or
institutional asset manager acting as sub-advisor.) The order entry
GUI 701 displays, among other data, the investment portfolio's
total value, cash, and securities along with the number of shares,
share price, and dollar value of each position 702. FIG. 7 shows an
exemplary order entry GUI 702 providing this exemplary data. The
order entry system provides important functionality in two
respects:
[0178] a) Daily Net Cash: The order entry system provides data on
the daily net contribution or withdrawal of cash from the
investment portfolio, and enables the portfolio manager to
implement decisions such as maintain this cash, sell specific
securities to cover any net withdrawal, buy certain securities,
buy/sell the current model, buy/sell the target model, or buy/sell
as to move the current model closer to the target model.
[0179] b) Order Execution Options: The order entry system provides
options for the order type for each trade, for example: market,
limit, good to closing, and fill or kill. Also, the system can
allow a portfolio manager to freeze a security's current shares,
that is, exclude the security from any and all future trading.
[0180] 726) The portfolio manager utilizes the order entry system
to implement the buy and sell orders for securities through the
creation of a trade ticket 703. The responsibility for entering the
buy and sell orders into the order entry system remains with the
sub-advisor (the portfolio manager or their associated trading
desk/operations group) in an embodiment of the present invention.
FIG. 7 shows an exemplary trade ticket 703 accessible through the
order entry GUI.
[0181] 727) As the order is entered by the sub-advisor (who hits,
e.g. ENTER on the order entry screen), the order entry system
calculates the necessary number of shares and dollars for each
security to buy or sell. Given that the order is determined at the
investment portfolio level, the order entry system does not have
nor require access to information at the account level for
individual fund shareholders or plan beneficiaries. The record of
the order is entered into the trade blotter 704. Thus, for example,
when an asset manager increases the allocation by 1% in IBM in a
$100 MM investment portfolio, the result is an aggregate buy of $1
MM of IBM. Given a price of $80 per share for IBM, the buy order is
12,500 shares. This process is repeated for each buy and sell order
implemented by the portfolio manager.
[0182] 728) The order is routed to the compliance engine 506.
[0183] 729) If a violation occurs (Violation=Yes), the order is
routed to the order entry GUI 701 for review and evaluation by the
portfolio manager, trade desk and/or compliance officer.
[0184] 730) If a violation does not occur (Violation=No), the order
is routed to the order management system (OMS) 503,
[0185] 731) The order management system 503 utilizes the order
routing table 705 to direct the order for execution.
[0186] 732) The order routing table 705 directs the order to, among
other venues, a market maker 706, an electronic commerce network
(ECN) 707, a direct market access (DMA) vendor 708, or an exchange
709.
[0187] 733) Once the order is executed, the trade fill report is
sent back to the order management system 503.
[0188] 734) The order entry GUI is updated with the revised
positions, number of shares, price per share, values, and cash
data. FIG. 7 shows an exemplary screen image of the updated order
entry GUI 710.
[0189] 2) Compliance Engine
[0190] The compliance engine, also referred to as a rules-based
compliance violation detection engine, is a graphical user
interface (GUI) and associated software program(s) linked to a
computerized rules-based logic engine that enables each buy or sell
order (or combinations of buy and sell orders) to be analyzed in
real-time, according to a set of customizable logical rules, such
as rules specifying that foreign securities cannot exceed 15% of a
portfolio's total value or that the portfolio cannot hold the
securities of the sub-advisor nor the sponsoring organization. The
compliance analysis occurs both prior to and immediately following
the execution of each trade (or group of trades) as well as at the
close of each trading day for compliance with prospectus,
regulatory, and board requirements. Any pending order or group of
pending orders that may result in any type of violation of
securities laws, account restriction or prohibited transaction are
held in suspense (and not executed) and tagged with a warning flag,
and a violation notice is sent to the compliance group, portfolio
manager, and trade/operations group. The order or group of orders
in question, subsequent to the review of the violation, may be
amended, canceled, or approved for execution. Trades (or groups of
trades) that are executed are also analyzed to ensure that the
resulting trades do not violate any requirements for the portfolio.
(Post-execution price changes that occur later during the trading
day could subsequently trigger a violation not present at the time
of execution.) Approved orders are routed to the order management
system (OMS) to begin the execution process.
[0191] FIGS. 8A, 8B, and 8C illustrate exemplary logical rules in
terms of regulatory, prospectus, and board restrictions and
requirements for a real-time compliance engine, as specified in the
disclosure documents of an operating fund trust.
[0192] FIG. 9 is a schematic diagram illustrating an exemplary
compliance review process 900, according to an embodiment of the
present invention, for implementing a compliance engine for a
plurality of investment portfolios. In the instance for this
operating fund trust, there are a total of 274 individual
restrictions that could apply to all, many, or a single investment
portfolio or fund. FIG. 9 shows the actual restrictions by category
for five of the fund trust's investment portfolios, with the number
of the individual restrictions shown in a breakdown of five
categories, ranging from 41 to 63 compliance and regulatory
restrictions per investment portfolio.
[0193] The exemplary compliance review process 900 works as
described in the following steps corresponding to the arrows and
their adjacent reference numerals as shown in FIG. 9.
[0194] 925) An order for an investment portfolio 902 is entered
into the order management system 503, which records the transaction
in the trade blotter.
[0195] 926) The order management system 503 routes the order to the
compliance engine 506 for pre-trade review.
[0196] 927) The compliance engine 506 matches the order to the
restrictions for that particular investment portfolio 903 and
conducts an analysis to determine if the order will result in a
violation of any applicable restriction. Exemplary restrictions and
their frequencies are illustrated in table 901 of FIG. 9.
[0197] 928) If Violation=Yes 904, the order is not executed and
requires a review.
[0198] 929) The rejected order is then routed into the order
evaluation process 905.
[0199] 930) The reviewed order evaluation process 905 gathers input
from at least one of the compliance group 908, portfolio manager
907, and the trading/operations group 906. The order may be
canceled at this point, revised, or allowed to be executed in its
existing form 909.
[0200] 931) If the order is to be executed, the reviewed order 909
is routed to the order management system 503 for updating the trade
blotter and resubmission to the compliance engine 506.
[0201] 932) If, in step 927, Violation=No 910, the order is routed
to the order management system 503.
[0202] 933) The order management system 503 routes the order for
execution 911.
[0203] 934) The order is executed and the trade fill report is
generated.
[0204] 935) The trade fill report is routed back to the compliance
engine 506 for post trade and ongoing compliance review and
analysis.
[0205] Overall, in an embodiment of the present invention, the
sponsoring organization (the advisor with direct regulatory
responsibility for the investment portfolios) has the option, which
is not available in the prior art, to review all pending orders and
prevent violations of prospectus, regulatory, and board
requirements prior to the orders being executed. The sponsoring
organization, in an embodiment of the present invention, also has
the option, which is not available in the prior art, to review all
executed trades on a real-time basis to prevent post-execution
violations of prospectus, regulatory, or board requirements.
Finally, for the first time, the sponsoring organization, as
advisor or plan administrator, has the means to place each fund or
account and each sub-advisor on the sponsoring organization's
implementation of a common, centrally operated compliance engine,
process and set of restrictions (as opposed to each different
sub-advisor or money manager performing compliance reviews on as
many different systems.) The sponsoring organization, as advisor to
the fund or administrator to the pension plan, has a regulatory
(SEC) responsibility to ensure compliance of its funds and plan
with all regulatory requirements and to certify, in writing, that
these investment portfolios do not violate the securities laws.
Thus, in contrast to the prior art, the present invention enables
the advisor or administrator to fulfill such responsibilities prior
to execution of an order, enables an immediate review of all
executed trades, and allows a single standardized compliance review
process to be implemented across all sub-advisors and the funds or
accounts. The present invention therefore empowers the advisor or
administrator to properly fulfill their regulatory responsibility
by their preventing the execution of orders that violate securities
laws, account restrictions or prohibited transactions.
[0206] 3) Order Management System
[0207] FIG. 10 is a schematic diagram illustrating the order
management system (OMS) 503, according to an embodiment of the
present invention. The order management system is a computerized
processing system with a graphical user interface (GUI) and
associated software program(s) enabling the organization conducting
the trading activity to maintain a real-time trade blotter for all
their pending orders and executed trades. An order management
system can comprise one or more of the following modules: portfolio
modeling engine 1002, order entry 700, trade blotter 704, order
routing table 705, and communications engine 504. The portfolio
modeling engine 1002 enables a money manager to evaluate "what if"
scenarios with the portfolio prior to implementing any trade
orders. The trade blotter 704 enables real-time monitoring of all
trading activity such as open orders 1003, cancel/correct orders
1004, and executed orders 1005. The OMS 503 enables the utilization
of various trading strategies, keeping track of positions, P&L,
order acceptance and release, sending 101's (Indications of
Interest), and amending orders. The order routing table 705 is a
central database for maintaining the instructions for directing
orders to selected executing brokers. The communications engine 504
is used to create data formats acceptable to other order management
systems.
[0208] The order management system 503 also provides logical
workflow solutions to assist in maintaining proper communication
between the various front, middle, and back office functions and
systems for allocations of large orders as well as keeping track of
partial fills of trade orders. Finally, the order management system
503 utilizes market data sources 1001 and provides robust and
flexible compliance, regulatory and audit reporting capabilities
1006, including NYSE Rule 123, OATs, ACT, Short Sale, and Limit
Order Handling Rule reports, as well as capturing, time-stamping,
and archiving all activity for timely reconciliation and
trouble-shooting.
[0209] The order management system 503 functions as described in
the following steps, which correspond to the arrows and their
associated reference numerals shown in FIG. 10.
[0210] 1020) The order management system 503 links with a plurality
of real-time and batch market data feeds 1001.
[0211] 1021) The portfolio manager utilizes the portfolio modeling
engine 1002 to perform "what if" analyses for the investment
portfolio and enters orders into the order entry module 700.
[0212] 1022) The orders are recorded in the trade blotter 704.
[0213] 1023) The trade blotter 704 enables views of the trade data
such as open orders 1003, cancel and correct orders 1004, and
executed trades 1005. (The compliance review process, as
illustrated in FIG. 9, can occur at this point in the process, but
is not shown.)
[0214] 1024) The orders are sent to order routing table 705 for
selecting executing brokers and receiving directions to those
executing brokers 202.
[0215] 1025) The order routing table 705 transmits the order to the
communications engine 504, which translates the order into a format
accepted by executing brokers 202.
[0216] 1026) The order is routed to the communications network
502.
[0217] 1027) The communications network 502 routes the order to the
selected executing broker(s) 202.
[0218] 1028) The executing broker(s) execute the order and send the
trade fill report(s) through the communications network 502.
[0219] 1029) The communications network 502 directs the trade fill
report back to the order management system 503 and the
communications engine 504 translates the order into a format used
by the order management system 503.
[0220] 1030) The trade fill report updates the trade blotter 704
with the details of the trade fill report(s).
[0221] 1031) The trade report data is used to update the portfolio
holdings for the order entry module 700.
[0222] 1032) The order management system 503 submits transaction
reporting 1006 to the appropriate industry transaction processing
and reporting entities. [0223] 4) Hi Touch-Low Touch Engine (HiLo
Engine or HLE)
[0224] The hi touch-low touch engine, which may also be referred to
as the high low engine, HiLo Engine, HLE, or execution discretion
assignment software engine (EDASE), is a graphical user interface
(GUI) and associated software program(s) linked to a computerized
rules-based logic engine that enables each buy or sell order (or
combinations of buy and sell orders) to be analyzed in real-time,
according to a set of customizable logical rules, to: (1) determine
the expected market impact of an order and categorize an order as
high touch or low touch; and (2) accordingly route the low touch
orders for execution by the sponsoring organization and the high
touch orders for execution by the sub-advisor. In a preferred
embodiment, these logical rules can be adjusted in real-time.
[0225] Orders are categorized as high touch or low touch orders
depending on their expected market impact. For example, the
immediate execution in the market of an order to buy 500,000 shares
for an equity that currently trades 100,000 shares daily at $40.00
per share will almost certainly result in an increase in the share
price of that equity. As such, the large order could drive up the
price of the equity by several dollars per share. Once the
execution of that order is completed, the trading volume will
likely return to its original 100,000 shares per day trading volume
and the share price could return to the pre-trade level of $40.00
per share. A possible result is that the purchasers of the 500,000
shares will experience an immediate loss on their investment. The
phenomenon of driving up the share price through a very large buy
order or lowering the share price through a very large sell order
is referred to as "market impact." It is usually desirable to
"work" orders with significant expected market impact. By "working"
orders, traders are able to utilize a variety of tools, such as
institutional trading desks, trade algorithms, crossing networks,
dark pools of liquidity, sending IOIs (indications of interest),
and other such techniques (including manually watching the market
for the appropriate times to execute small portions of the total
order) to eliminate or reduce the expected market impact of a large
order. The orders that require special handling ("working") are
referred to as "high touch trades."
[0226] On the other hand, there may be situations in which an order
represents a small percentage of a measure such as daily trade
volume. For example, an order to buy 1,000 shares for an equity
trading several million shares daily will have little or no
expected market impact on the price of that equity. Once entered,
such an order is transmitted, executed, and reported as the
electronic systems and computers (also referred to as "black
boxes") communicate with each other with little or no human
interaction. The orders with low or no expected market impact are
referred to as "low touch trades."
[0227] Finally, once an execution strategy is selected for a high
touch order, the order may be broken up into several smaller orders
that are executed over a period of time. These smaller orders may
now qualify as low touch orders, as each individual order, when
executed over a period a time, may now result in little or no
market impact.
[0228] An embodiment of the present invention provides a system and
method for: [0229] (1) Enabling the sponsoring organization, as
advisor, to implement, for the first time, its own centralized,
real-time, rules-based pre and post trade compliance process across
all of its sub-advisors and the sub-advisors' trading activity in
order to prevent the execution of a trade order by a sub-advisor
that would otherwise result in a violation of the securities laws,
account restrictions, or prohibited transactions; and [0230] (2)
Enabling the sponsoring organization, for the first time, to assign
responsibility (discretion over the decisions related to how, when,
with whom and the cost that a trade order is executed) for
executing a trade order based on a rules-based analysis using
real-time and historical market data to determine the expected
market impact of a trade order to buy or sell securities, to the
sub-advisor (money management firm) hired to manage an investment
portfolio or to the advisor (sponsoring organization) of that
investment portfolio. [0231] (3) Implementing a standard and
specialized communications methodology and system inclusive of a
specialized communications protocol as a communications message
delivery method, a specialized communications format for creating
messages, a dedicated communications network for sending and
receiving messages, specialized message transfer facilitation
software and dedicated computer processor for supporting the
message creation and delivery function.
[0232] The current technology available for sending trade related
messages, as represented in the prior art, has several significant
deficiencies that result in the prior art's inability to support
the functionality required by the HiLo Engine. As a result, an
exemplary HiLo Engine of the present invention provides specialized
communication protocols, communications format, communications
network, message transfer facilitation software and dedicated
computer processors to achieve the desired functionality. The prior
art is represented by an industry-wide standard message protocol
and format that is available to all firms in the securities trading
industry. This standard, called the Financial Information eXchange
(FIX) format and protocol, is employed by trading systems around
the globe to transmit trade related messages among money management
firms and executing brokers. However, that prior art, as embodied
by FIX, does not, and cannot be modified to, support the
functionality requirements of the HiLo Engine, as follows:
[0233] (1) The FIX message formats do not support the high touch
versus low touch decisions generated by the HiLo Engine.
[0234] (2) The FIX message formats do not support the Algo, TRO, or
Algo TRO decisions generated by the HiLo Engine.
[0235] (3) The FIX message formats do not support the compliance
status messages, such as hold orders or release orders, generated
by the HiLo Engine.
[0236] (4) The FIX message communications methodology requires that
the money management firm maintain a FIX session (an open and
operational communications loop) with each executing broker
selected by each of their sponsoring organizations. Most large
money management firms maintain a list of twenty or fewer executing
brokers with whom they maintain an open FIX session. The deficiency
with the prior art FIX session technology is that, since the money
management firm does not know in advance the sponsoring
organization's selection of the executing broker for the low touch
orders, the money management firm thus needs to maintain hundreds
of open FIX sessions with the universe of executing brokers. Such
an expansive communications structure, via FIX sessions, is simply
not feasible given the limitations of the current FIX protocol and
technology.
[0237] (5) Many firms implement their own unique "dialect" as to
the specific implementation and of the FIX protocol in one of its
many versions that have been released over time along with
modifications customized to that firm's specific business needs.
These variations in FIX dialect result in increasing the challenges
associated with the already difficult and potentially troublesome
process of matching an order directed by the sponsoring
organization to an executing broker with the FIX session operated
by the sub-advisor searching for results related to that specific
order. As a result, these orders and their related communications
could easily get lost in the vast global volume of FIX-based
transmissions.
[0238] Overall, given the limitations inherent in the prior art, an
embodiment of the HiLo Engine of the present invention, in order to
properly achieve the required functionality, implements a
specialized communication protocol, communications format,
communications network, message transfer facilitation software, and
dedicated computer processors. The communications protocol utilized
in the present embodiment of the HiLo Engine (HLE) incorporates a
web services-based messaging system between all participants. This
messaging system is fast, effective and reliable. The present
embodiment also protects the database integrity and security for
systems employed by all participants as these user databases avoid
any direct integration with the HiLo Engine (HLE) or with other
system of other users. Future embodiments of the present invention
could employ various database integration methods as new technology
develops.
[0239] An embodiment of the present invention, referred to as the
hi touch-low touch engine or "HiLo Engine" is a computer system
that employs a plurality of rules to categorize trade orders, in
real-time incorporating real-time market data, as high touch
orders, whereby a trade order requires significant time and effort
by a trader and where the order is expected to have a significant
market impact on the price of the stock; or low touch orders,
whereby the order does not require significant time and attention
by a trader and where the order is not expected to have any
significant market impact. As such, the HiLo Engine assigns
responsibility (discretion) for the execution of high touch orders
to the sub-advisor (money management firm), who is able to
carefully "work" the order by selecting one or more executing
venues or brokers to complete the transaction with minimal market
impact. Likewise, the HiLo Engine assigns responsibility
(discretion) for execution of low touch orders to the sponsoring
organizations to execute by selecting one or more executing venues
or brokers as to minimize execution costs and improve the quality
of execution (rapid speed of execution and realized price
improvement) for those orders. The rules for categorization are
flexible and are established and revised by either the money
management firm or the sponsoring organization as a real-time
process, according to their agreed procedures.
[0240] The HiLo Engine, as an embodiment of the present invention,
incorporates functions as a real-time, rules-based market liquidity
analytical tool; an access and request facility to real-time market
data and specified market data packages; an order discretion
assignment decision-making engine; a manual user override of order
discretion assignment decisions capability; a rules creation,
updating and rules-exception depository; a rules and
rules-exception testing facility; an extensive real-time reporting
system; a rules, data, decision and order execution discretion
assignment audit facility; a multi-level user and organizational
access and rights control and updating facility; an account
activation facility; a multiple venue message transfer facilitator
connectivity system; and an implementation of specialized message
formats. The HiLo Engine integrates a plurality of sub-advisors
(money management firms), sponsoring organizations and execution
venues and brokers into a single and effective communication,
compliance, and low cost order routing and execution network. The
HiLo Engine's communications network also enables sponsoring
organizations to benefit from a plurality of additional compliance
and regulatory supervisory capabilities that result in
significantly improved business processes including: lower
brokerage costs and greater control over the process of replacing
one sub-advisor to a fund or account with another sub-advisor;
lower brokerage costs resulting from model portfolio asset
allocation rebalancing activity; improved governance process
through reporting of real-time and historical holdings, activity,
brokerage and other costs; enhanced reporting on asset segregation
requirements related to forward settlements on derivative
positions; and stronger, real-time, enterprise-level risk
management controls.
[0241] The percentage of orders categorized as high touch or low
touch depends on the parameters utilized in the rules employed by
the HiLo Engine. Given that many sponsoring organizations trade
billions of equity shares annually, it is likely that most of this
order flow is categorized as low touch, executed by the sponsoring
organizations and resulting in substantial annual savings in
brokerage costs and improved investment performance for their
investment portfolios.
[0242] FIG. 11A is a schematic diagram illustrating an exemplary
HiLo Engine (HLE) system and process 1100, according to an
embodiment of the present invention. The process 1100 works as
described in the following steps, which correspond to the arrows
and their adjacent reference numerals shown in FIG. 11A.
[0243] 1125) The sub-advisor 301, sponsoring organization 304, and
board of trustees 1101 determine the rules for categorizing an
order as high touch or low touch.
[0244] 1126) The rules for categorizing an order as high touch or
low touch are input into the trade routing rules database 1102.
These rules can be changed in real-time.
[0245] 1127) The HiLo Engine (HLE) 1105 utilizes the rules from the
trade routing rules database 1102 to categorize orders as high or
low touch orders.
[0246] 1128) The HiLo Engine (HLE) 1105 incorporates a real-time
feed of market data 1104 for use in analyzing and determining the
expected market impact of an order.
[0247] 1129) The portfolio manager 1103, using the sub-advisor's
order management system 503 SA, enters an order that is routed, via
the sub-advisor routing loop, to the HiLo Engine 1105 for real-time
analysis and categorization as a high touch or low touch order.
Although the HiLo Engine 1105 is illustrated as located within the
unified trading and control system, one of ordinary skill in the
art would appreciate that the HiLo Engine 1105 could be located
elsewhere, such as at the sub-advisor 301 or sponsoring
organization 306.
[0248] 1130) The HiLo Engine 1105 determines the expected market
impact of orders received from the sub-advisor order management
system (OMS) 503 SA and categorizes orders with significant
expected market impact as "high touch" orders 1106.
[0249] 1131) The high touch order 1106 is further categorized as
orders to be "worked" by a block trading desk, crossing system,
matching system, dark pool of liquidity, or some other form of
institution to institution trading system or exchange 1109. These
worked orders are routed for review by the sponsoring
organization's compliance engine 506 and, once approved, are ready
for execution.
[0250] 1132) As an alternative to step 1131, the high touch order
1106 is divided into a series of smaller orders 1108 by a trading
algorithm or a set of manual decisions 1107.
[0251] 1133) The trading algorithm or set of manual decisions
divides the order into a series of smaller orders 1108 for
execution over a period of time.
[0252] 1134) Each of the smaller orders 1108 resulting from the
original high touch order are re-routed to the HiLo Engine 1105 via
the sub-advisor re-routing loop.
[0253] 1135) The HiLo Engine 1105 evaluates the re-routed smaller
orders 1108 and categorizes the orders with significant market
impact as high touch orders 1109.
[0254] 1136) High touch orders 1109, from both the original and
re-routed orders, are directed via auto routing 1110 to the
sub-advisor's order management system 503 SA.
[0255] 1137) The sub-advisor's order management system 503 SA
receives the high touch order 1109 and selects the executing
broker(s) 202.
[0256] 1138) The sub-advisor order management system 503 SA routes
the high touch orders to the executing broker(s) 202 for
execution.
[0257] 1139) Once the orders are executed by the executing brokers
202, the trade fill data for the high touch trades 1106 is routed
to the sub-advisor order management system 503 SA.
[0258] 1140) The sub-advisor order management system 503 SA
determines, when applicable, the allocation of shares for the
sponsoring organization and routes the trade allocation data along
with the trade fill data (for trades not requiring a special
allocation) for the high touch trades to the sponsoring
organization's order management system 503 SO.
[0259] 1141) The sponsoring organization's order management system
503 SO routes the trade allocation data for the sponsoring
organization's allocation of shares of the high touch trade and the
trade fill data for the high touch trades (not requiring a special
allocation) to the sponsoring organization's trade reconciliation
system 1117. Steps 1130 through 1141 constitute the high touch
order processing loop.
[0260] 1142) Returning to steps 1129 and 1134, when the high
touch-low touch engine 1105 receives orders from the sub-advisor
order management system (OMS) 503 (as either the original and
re-routed orders) that it determines will have little or no
significant expected market impact, the hi touch-low touch engine
1105 categorizes those orders as "low touch" orders 1111 that can
be processed as "electronic" or "black box" orders, which computer
systems can execute with virtually no human intervention. The "low
touch" order can be either original orders or re-routed orders from
the sub-advisor order management system 503 SA.
[0261] 1143) The HiLo Engine 1105 directs trades that do not
require a trade rotation order to the sponsoring organization 304.
For example, a single order for a single fund would not require a
trade rotation order.
[0262] 1144) The HiLo Engine 1105 routes trades requiring a trade
order rotation to the trade order rotation engine 1112 in order to
determine a trade order rotation between the sub-advisor 301 and
the sponsoring organization(s) 304 and 1116. For example, when an
asset manager places a plurality of orders in a given security for
execution across a plurality of investment portfolios, trade order
rotation is required. Such trade order rotation is preferably
random. The trade order rotation could be, for example, a defined
procedure comprising random selection, sequential selection, or
algorithmic random selection.
[0263] 1145) The trade order rotation engine 1112 prepares trade
rotation instructions 1113 for the sub-advisor 301.
[0264] 1146) The trade rotation instructions 1113 are communicated
to the sub-advisor's order management system 503 SA via auto
routing 1110 (along steps 1146a and 1146b).
[0265] 1147) The trade rotation engine 1114 determines the trade
rotation order between a plurality of sponsoring organizations,
such as the sponsoring organization 304 and any number of
additional sponsoring organizations as represented by sponsoring
organization (SO.sub.x) 1116. The trade rotation order could also
be determined as a single trade rotation order between the
sub-advisor 301 and sponsoring organizations 304 and 1116.
[0266] 1148) The trade rotation engine 1114 prepares trade rotation
instructions 1115 for the sponsoring organizations 304 and
1116.
[0267] 1149) The trade rotation instructions 1115 are communicated
to the sponsoring organizations 304 and 1116.
[0268] 1150) The trade orders are routed to the sponsoring
organization's order management system (OMS) 503 SO.
[0269] 1151) The sponsoring organization's order management system
(OMS) 503 SO routes the orders for review by the sponsoring
organization's compliance engine 506 and, once approved, selects
the executing brokers 202 and routes the orders through the
communications network 502 for execution.
[0270] 1152) The communications network 502 directs the orders to
the designated executing brokers 202 for execution.
[0271] 1153) The executing brokers 202 execute the trade and report
the trade fills back to the communications network 502.
[0272] 1154) The communications network 502 reports the trade fill
reports back to the sub-advisor's order management system (OMS) 503
SO.
[0273] 1155) The sponsoring organization's order management system
(OMS) 503 SO routes the orders to the sponsoring organization's
trade reconciliation system 1117. Although, for clarity, FIG. 11A
shows the trade compliance, execution, and reconciliation process
(steps 1150-1155) only for sponsoring organization (SO 1) 304, the
same or similar process would occur for the additional sponsoring
organizations (SO.sub.x) 1116. Steps 1142 through 1155 constitute
the low touch order processing loop.
[0274] FIG. 11B is a schematic diagram illustrating an exemplary
structure of a sub-advised investment management process whereby a
sponsoring organization 304, as advisor, hires and supervises a
plurality of sub-advisors 301 to manage, for example, large cap
growth, large cap value, mid cap growth, and small cap growth
investment portfolios. In the prior art of this industry structure,
the sub-advisors are responsible for making investment decisions
and the buying and selling (trading) for the securities held by
these investment portfolios.
[0275] FIG. 11Ci is a schematic diagram illustrating the exemplary
design, functional modules, connectivity, data feeds, database and
data processing of the HiLo Engine (HLE), a computer processor and
software application also referred to as the execution discretion
assignment software engine (EDASE), according to an embodiment of
the present invention.
[0276] FIG. 11Ci illustrates a sponsoring organization 304 and a
plurality of sub-advisors 301 maintaining a single connection,
through the EDASE's external communications network 11CiJ, to the
EDASE's central connectivity point 11CiA. The central connectivity
point 11CiA enables the sponsoring organizations 304 and
sub-advisors 301 to utilize a single connection to the EDASE 1105,
regardless of how many other of their associated users (a plurality
of sub-advisors 301 for a sponsoring organization 304 and a
plurality of sponsoring organizations 304 for a sub-advisor 301).
This single connection 11CiA to all associated users is a point of
novelty for the EDASE 1105.
[0277] The central connectivity point 11CiA represents a computer
processor and software application that receives all communication
to and from the sponsoring organization 304 and the sub-advisors
301 as input from the graphical user interface (GUI) 11CiL. The
graphical user interface 11CiL is the primary means through which
users send and receive communications from the EDASE 1105. The
graphical user interface 11CiL represents: a) EDASE's specialized
graphical user interface; b) in an alternative embodiment, the
integration of the EDASE's messages into the graphical user
interface of the sponsoring organizations order management system
SO 503 and sub-advisors order management system SA 503; or c) a
combination of both the EDASE 1105 or the user's order management
system's graphical user interfaces, depending on the desired
function.
[0278] The central connectivity point 11CiA, using the EDASE's
internal communications network 11CiK, routes or receives the
messages from the translation module 11CiB, a computer processor
and software application responsible for: a) normalizing all
inbound communications messages from to the EDASE's 1105 internal
format and routing the normalized message to the appropriate EDASE
1105 functional module; and b) translating all outbound
communications to the EDASE's 1105 specialized message formats and
routing the outbound messages to the central connectivity point
11CiA. The translation module 11CiB also, using the internal
communications network 11CiK, requests and sends updates to the
EDASE's database module 11CiI for purposes of updating the EDASE's
1105 database records.
[0279] The translation module 11CiB reads the message header and
routes the message to the appropriate EDASE 1105 functional module,
as follows:
[0280] The admin module 11CiC represents a computer processor and
software application that, through the EDASE's internal
connectivity network 11CiK, accepts messages from the EDASE's
graphical user interface (GUI) 11CiL and enables users to set up
user roles and permission schema, including users and viewers for
the sponsoring organization 304, sub-advisors 301, and EDASE
administrator 11CiM. The admin module 11CiC accepts a data feed
from the sponsoring organization's order management system 503 SO
to set up, modify or remove investment portfolios in the EDASE
1105. The admin module 11CiC also enables users to activate
submission of orders from the investment account to the EDASE 1105.
The admin module 11CiC, using the internal connectivity network
11CiK, requests and sends updates to the EDASE's database module
11CiI for purposes of updating the EDASE's 1105 database
records.
[0281] With reference to FIG. 11R, the HiLo Engine supports a wide
variety of users and their required functionality needs. There are
three categories of users: sponsoring organizations, money
management firms (sub-advisors), and system administrators.
[0282] The HiLo Engine, to properly support the sponsoring
organizations, money management firms and system administrative
functions, provides seven user roles as defined below.
[0283] The money management firm (sub-advisor) has three roles,
including administrators, traders, and viewers.
[0284] Administrator: The money manager administrator performs the
following functions: [0285] Adds, changes rights and removes trader
and viewer users; [0286] Controls rule activation, governing
parameters and rule exceptions; [0287] Create exception rules for
accounts, securities or groups of securities; and [0288] Activates
and deactivates accounts to submit orders to the HiLo Engine.
[0289] Trader: The trader is authorized to interact with the HiLo
Engine in the normal trading process supporting sub-advised
accounts, including submitting orders, cancel requests and
overrides of touch levels. Traders (similar to the money management
firm administrator) are also able to: [0290] Controls rule
activation, governing parameters and rule exceptions; and [0291]
Create exception rules for accounts, securities or groups of
securities.
[0292] The money manager trader is not able to activate and
deactivate accounts to submit orders to the HiLo Engine. The money
management firm determines whether the money manager administrator
money manager trader or both are responsible to create and maintain
the HiLo Engine rules and parameters.
[0293] Viewer: The viewer is authorized to utilize the HiLo
Engine's reporting functionality for the sub-advisor's sub-advised
accounts.
[0294] The sponsoring organization has two roles, including
administrator and viewer.
[0295] Administrator: The sponsoring organization administrator is
the single user that performs the following functions: [0296] Adds
and removes viewers; and [0297] Assigns money management firms
(sub-advisors) to the sponsoring organization's accounts.
[0298] Viewer: The viewer is authorized to utilize the HiLo
Engine's reporting functionality for the sponsoring organization's
sub-advised accounts.
[0299] The system administrator has two roles, including
administrator and viewer.
[0300] System Administrator: The system administrator has the
following functionality: [0301] Controls the parameters for the pre
set levels; [0302] Add sponsoring organizations and money
management firms to the HiLo Engine (HLE); [0303] Create and remove
users within sponsoring organizations and money management firms;
and [0304] Assign money management firms to accounts.
[0305] Viewer: The viewer enables system personnel to utilize the
HiLo Engine's (HLE). Reporting functionality.
[0306] The order entry module 11CiD represents a computer processor
and software application that, through the EDASE's internal
connectivity network 11CiK, accepts messages from the EDASE's
graphical user interface (GUI) 11CiL, or in an alternative
embodiment, is integrated directly with the sponsoring
organization's order management system SO 503 and the money
management firm's order management system SA 503, and enables users
to engage in transactions related to the entry and execution of
orders by the EDASE 1105 through the following functions:
submission of a single order or group of orders, order cancel
requests, order cancel request status, order execution fill, order
execution fill corrections, order cancel confirmations, order
cancel partial fills, order replace, compliance review hold order,
compliance review approve order, compliance review release order
for execution and updating of open Good Til Cancel (GTC) orders.
The order entry module 11CiD allows order entry for the purposes of
testing rules and their parameters for categorizing orders as high
touch or low touch. The order entry module 11CiD also, using the
internal communications network 11CiK, requests and sends updates
to the EDASE's database module 11CiI for purposes of updating the
EDASE's database records.
[0307] In an exemplary embodiment of the HiLo Engine, there are two
destinations for messages from the HiLo Engine. These destinations,
in an exemplary embodiment, are organized between the money
management firm order management system and the sponsoring
organization order management system as follows.
[0308] Money management firm order management system (OMS): The
money management firm's OMS utilizes a Master HLE Trading Desk
composed of three sub trading desks to process the various order
categorization messages from the HiLo Engine (HLE): [0309] High
Touch Desk: The money management firm executes the high touch
orders. [0310] Low Touch Desk: The money manager does not execute
the low touch orders. Rather, the sponsoring organization executes
the low touch orders and the resulting fill reports are sent by the
HiLo Engine (HLE) to the money management firm's order management
system (OMS) and shown on the Low Touch Desk. [0311] Low Touch TRO
Desk: The low touch TRO orders are not executed by the money
management firm.
[0312] Rather, the money management firm implements the trade
rotation order (TRO) among the sponsoring organizations, which in
turn execute the low touch orders. The resulting fill reports are
sent by the HiLo Engine (HLE) to the money management firm's order
management system (OMS) and shown on the Low Touch desk.
[0313] Sponsoring organization order management system (OMS): The
sponsoring organization's OMS utilizes a Master HLE Trading Desk
composed of four sub trading desks to process the various order
categorization messages from the HiLo Engine: [0314] High Touch
Desk: The money management firm executes the high touch orders. The
sponsoring organization receives the fills through the HiLo Engine
(HLE) for the allocations at the end of the trading day from their
custodian. [0315] TRO Desk: The money management firm implements
the trade rotation order (TRO) needed among their sponsoring
organization's accounts. This desk tracks the low touch TRO orders
until the money management firm releases the orders for execution
by the sponsoring organizations. [0316] Low Touch Desk: The
sponsoring organization executes the low touch orders. The
resulting fill reports are sent by the HiLo Engine (HLE) to the
money management firm's order management system (OMS). [0317] Low
Touch Algo Desk: Low touch algo orders are executed by the
sponsoring organizations, who evaluate whether the order requires
the use of a trading algorithm (such as TWAP or VWAP). The
resulting fill reports are sent by the HiLo Engine (HLE) to the
money management firm's order management system (OMS).
[0318] The rules module 11CiE represents a computer processor and
software application that enables users, through the EDASE's
graphical user interface 11CiL at the sponsoring organizations 304
and sub-advisors 301, according to their agreed procedures, to
create, modify activate, deactivate and eliminate rules for the
assignment of discretion over the execution of order through the
categorization of orders as high touch or low touch. Thus, through
the rules module 11CiE, the user can specify the tests, measures
and parameters for categorizing orders as high touch or low touch,
create and modify pre set levels as well as create exceptions to
the rules for accounts, group of accounts, individual issues
(symbols) and groups of issues. The rules module 11CiE also enables
creation of parameter for the algorithm and trade rotation order
tests for low touch orders. The rules module 11CiE also, using the
internal communications network 11CiK, requests and sends updates
to the EDASE's database module 11CiI for purposes of updating the
EDASE's database records.
[0319] There are three "primary" rules utilized by the HiLo Engine
in categorizing an order as high touch or low touch. Money
management firms (sub-advisors) are assigned control over the
selection of the rules to utilize and their associated governing
parameters (such as percentages and time periods). In alternative
embodiments, the sponsoring organization of both firms could
control the rules, according to an agreed procedure. If an order
fails one or more of the activated primary rule tests, then the
order is categorized as high touch.
[0320] In an exemplary embodiment of the present invention, the
money management firm can select any one, two, or all three of the
following three primary rules (top of book, average hourly
liquidity, and average daily trading volume), and make changes in
real-time with respect to the rules and associated parameters, for
categorizing orders as high touch or low touch:
[0321] Top of book (current liquidity): The top of book rule
examines the current liquidity available in shares of an issue
across the exchanges and leading ECNs (protected markets) on the
side (buy or sell) of the order in comparison to the number of
shares in each order. The governing parameters are: Percentage,
such as 300%.
[0322] Average hourly liquidity: The average hourly liquidity rule
examines the average top of book liquidity over specified time
period, such as a number of hours. The average hourly liquidity
data captures the average top of book liquidity for the time period
specified. The governing parameters are: Percentage, such as 300%,
and number of hours, such as two (most recent) hours.
[0323] Average daily trading volume: The average daily trading
volume rule examines the average daily trading volume for a
specified number of the most recent trading days. The governing
parameters are: Percentage, such as 5%, and number of trading days,
such as 20 days.
[0324] The three rules can be activated in any combination of one,
two, or three rules, as desired by the sub-advisor. The money
manager administrator and/or money manager trader can change, in
real-time, the selection and activation of rules and the associated
parameters.
[0325] A further aspect of the present invention uses secondary
rules. Secondary rules provide valuable, but not mandatory,
suggestions to assist with the proper execution of low touch
orders. Money management firms can control the governing parameters
(such as percentages and time periods) for these rules. The money
management firms can determine the governing parameters for two
secondary rules (low touch algo and low touch trade rotation
order):
[0326] Low touch algo: The low touch algo rule provides a
suggestion that the sponsoring organization's order routing desk
consider employing an algorithm in the execution of an order. The
governing parameters are: The top of book (%), average hourly
liquidity (% and number of hours) and average daily volume (% and
number of days) parameter structure is identical to the primary
rules. However, it is expected that the parameters utilized for the
low touch algorithm rules may be equal to or less the parameters
for an individual order.
[0327] Low touch TRO (trade rotation order): The low touch TRO rule
provides a suggestion that a trade rotation order be considered by
the sub-advisor's trading desk in the execution of a group of
orders on the same side of the same security. This analysis
excludes high touch orders in the group. The governing parameters
are: The top of book (%), average hourly liquidity (% and number of
hours) and average daily volume (% and number of days) parameter
structure is identical to the primary rules. However, it is
expected that the parameters utilized for the TRO rules may be
equal or exceed the parameters for an individual order.
[0328] Orders can be categorized as both low touch algo and low
touch TRO; thus, an order can be categorized as "low touch TRO
algo." This order requires a trade rotation order as part of a
group of orders. The sponsoring organization, once receiving the
individual order, may consider utilizing an algorithm to execute
the order.
[0329] In a further aspect of the present invention, as an option
for quickly setting and changing the parameters for rules, the HiLo
Engine provides five pre set levels for governing parameters for
the primary and secondary rules. The money manager admin or trader
can change the selected levels with the click of a button, for
example, from Level 1 to Level 3 or from Level 3 to Level 5, and
the HiLo Engine immediately changes the governing parameters for
the rules. The system administrator controls the parameters for the
five pre set levels. The higher levels increase the percentage of
orders categorized as low touch.
[0330] In a further aspect of the present invention that provides
touch overrides, the money manager trader can override the touch
level for an order from a high touch order (executed by the money
management firm) to low touch (executed by the sponsoring
organization).
[0331] In a further aspect of the present invention, the HiLo
Engine enables money management firms to create exceptions to the
primary rules utilized for categorizing orders. Exceptions are easy
to create, administer and review. The primary rules are as
follows:
[0332] Primary Rules: Primary rules govern the categorization of
orders as high touch or low touch in the absence of exceptions.
[0333] The exception rules are as follows: [0334] Account rules:
Account rules enable users to set up exceptions to primary rules
for designated accounts. [0335] Symbol rules: Symbol rules enable
users to set up exceptions to primary or account rules for
designated individual securities. [0336] Symbol group rules: Symbol
group rules enable users to set up exceptions to primary or account
rules for designated groups of individual securities.
[0337] The hierarchy among exception rules is as follows: [0338]
Symbol group rules override symbol, account and primary rules.
[0339] Symbols rules override account and primary rules. [0340]
Account rules override primary rules. [0341] Primary rules are
utilized when there are no symbol, symbol group or account
exceptions.
[0342] The operations module 11CiF represents a computer processor
and software application that enables users, through the EDASE's
graphical user interface 11CiL at the sponsoring organizations 304
and sub-advisors 301, to perform the following operations
functions: start and stop the EDASE 1105, recover from lost data
feed, monitor current operating status, login and log out, track
order and internal processing errors and utilize a heartbeat
function to check on connectivity with external users. The
operations module 11CiF is monitored by the EDASE administrator
11CiM and using the internal communications network 11CiK, requests
and sends updates to the EDASE's database module 11CiI for purposes
of updating the EDASE's database records.
[0343] The reporting module 11CiG represents a computer processor
and software application that enables users, through the EDASE's
graphical user interface 11CiL, at the sponsoring organizations 304
and sub-advisors 301, to perform real-time queries of the database
module 11CiI for following reporting functions: View rules and
their related tests, measures, parameters and exceptions related to
high and low touch, trade rotation order and algorithm orders;
routing statistics for orders, order discretion assignment audit
reports and archives, overrides of order discretion assignments by
users, lost and incomplete orders and open Good Til Cancel (GTC)
orders. The reporting module 11CiG provides a data export facility
and, using the internal communications network 11CiK, requests and
receives reports from the EDASE's database module 11CiI.
[0344] The decision analysis module 11CiH represents a computer
processor and software application that functions as the "brain" of
the EDASE 1105 for purposes of, for a specific order, gathering the
necessary market data, compiling the necessary rules, performing
the required calculations, evaluating the results, categorizing the
order as high touch, low touch, low touch algo, low touch TRO or
low touch algo TRO, adding the compliance review status and
creating the message for the users to receive the output of the
EDASE 1105. This message is routed, using the internal
communications network 11CiK, to the translation module 11CiB for
purposes of creating the desired message format for the users. The
decision analysis module 11CiH also, using the internal
communications network 11CiK, requests and sends updates to the
EDASE's database module 11CiI for purposes of updating the EDASE's
database records.
[0345] The database module 11CiI represents a computer processor
and software application that functions as the primary repository
for all current and historical data and archiving of necessary data
for the EDASE 1105. The database module's 11CiI field structure
includes data on: securities; accounts; organizations including
sponsoring organizations, money management firms and EDASE
administrators; rules with tests, measures and parameters; pre set
levels; exceptions by accounts, groups of accounts, symbols and
groups of symbols; users, roles and permissions; active and
deactivated accounts; order routing decisions and overrides;
canceled and replaced orders; lost orders and operational
statistics such as CPU utilization. The database module 11CiI is
updated, using the internal communications network 11CiK, through
communication with the other functional modules within the EDASE
1105 and serves as an archive for all EDASE 1105 data and
activity.
[0346] Data feeds represent critical inputs to EDASE 1105. A market
data feed 1001, using a dedicated line in the external
communications network 11CiJ, is incorporated into the functions of
the EDASE 1105. Messages originating from the sponsoring
organizations 304 and sub-advisors 301, utilizing the external
communications network 11CiJ, also represent important data feeds
regarding new organizations, order entry, cancel and correct of
orders, compliance status, new and activated accounts, trade fill
reports, changes in the rules, user updates and associated
operational information.
[0347] Messages perform a critical function in the EDASE 1105.
Messages represent database records composed of various fields in a
format that is specialized to the EDASE 1105 as these messages are
utilized to communicate various events to the users. The EDASE
1105, through the external communications network 11CiJ, utilizing
the following messages: new orders, new orders with high touch-low
touch decision, high touch to low touch override, high touch Good
Til Cancel (GTC) updates, compliance=OK, compliance under review,
order released from compliance, cancel order request, cancel
response--cancel confirmed, cancel response--cancel rejection,
cancel response--cancel unfilled portion of order, sponsoring
organization initiated cancel, execution fill, execution fill
modification, empty message (heartbeat) and order error.
[0348] FIG. 11Cii is a schematic diagram illustrating an exemplary
sponsoring organization trading process in which trade orders
originate (are entered) by a portfolio manager or a plurality of
portfolio managers employed by a money management firm or a
plurality of money management firms responsible for the investment
management process for a sponsoring organization's investment
portfolios, according to an embodiment of the present invention.
The process shown in FIG. 1Cii is an alternative to the embodiment
of FIG. 22, discussed below.
[0349] As shown in FIG. 11Cii, the sub-advisor's (money management
firm's) order management system (OMS) 503 SA routes the orders to
the HiLo Engine 1105. The HiLo Engine 1105 performs two
functions:
[0350] (1) Routes the trade orders to the sponsoring organization's
304 rules-based compliance system 506 SO for a compliance
supervisory review prior to the execution of the trade order. If
there is a violation of the securities laws, account restrictions,
or prohibited transactions, then the order is held by the
sponsoring organization's 304 compliance system 506 SO pending
resolution between the sponsoring organization compliance group
1180 and the sub-advisor's compliance group 2202; and
[0351] (2) Utilizes a rules-based engine, and the agreed rules of
the sponsoring organization 304 and sub-advisor (money management
firm) 301 for determining whether an order is high touch or low
touch, to categorize each trade order as high touch or low touch.
The high touch orders are routed back to the sub-advisor 301, who
has responsibility (discretion) over the execution of the high
touch orders by selecting one or more executing venues or brokers
202. The low touch orders are routed to the sponsoring organization
304, who directs the low touch orders for execution by selecting
one or more low cost, high quality executing venues or brokers
202.
[0352] FIG. 11Cii is an exemplary illustration of an alternative
embodiment of the unified trading and control system 2200 with
respect to a real-time computerized process involving a sponsoring
organization 304 and a plurality of trade orders, trading or order
management systems (OMS) 503 SA and 503 SO, the HiLo Engine 1105,
sub-advisors 301, portfolio managers 1103, and executing brokers
202.
[0353] An exemplary workflow utilization process is as follows
(where the numbered steps below correspond to the numbers indicated
in FIG. 11Cii):
[0354] 11Cii1) The portfolio manager 1103 at the sub-advisor 301
creates trade orders as to buy and sell securities and sends the
orders to order entry system 700. The portfolio manager(s) for an
investment portfolio communicates orders (such as buy or sell a
security or a plurality of securities) via means such as electronic
order entry, telephone discussions, text messages, personal
conversations, written instructions, or other means to the money
management firm's trading desk.
[0355] 11Cii2) Orders are entered into order entry system 700 and
added to the sub-advisor's 301 order management system (OMS) 503
SA.
[0356] 11Cii3) The sub-advisor's 301 order management system (OMS)
503 SA routes the order to the sub-advisor's compliance system 506
SA for compliance review according to the compliance rules
established by the sub-advisor 301.
[0357] 11Cii4) The orders passing the compliance review process
(OK) are sent to the sub-advisor's trading desk operating the order
management system (OMS) 503 SA.
[0358] 11Cii5) An order violating the sub-advisor's 301 compliance
rules is routed to the sub-advisor's compliance department 2202 for
further review.
[0359] 11Cii6) The sub-advisor's order management system (OMS) 503
SA sends all orders for a sponsoring organization's 304 accounts to
the HiLo Engine 1105. The HiLo Engine 1105 applies the appropriate
rules set agreed upon by the sponsoring organization 304 and
sub-advisor 301 to analyze each order relative to current and
historical liquidity and trading volume for the issue represented
in the order as to categorize an order as high touch or low touch.
The set of rules for categorizing orders is customizable by firm,
portfolio manager, investment portfolio, trader, or individual
security, group of securities, or through an alternative
schema.
[0360] 11Cii7) The HiLo Engine 1105 routes all orders for a
sponsoring organization 304 to that sponsoring organization's
compliance system 506 SO for review prior to execution according to
the compliance rules established by the sponsoring organization
304.
[0361] 11Cii8) An order violating the sponsoring organization's 304
compliance rules is routed to the sponsoring organization's
compliance department 1180 for further review.
[0362] 11Cii9) The sponsoring organization's compliance department
1180 contacts the sub-advisor's compliance department 2202 for
resolution of the order triggering the violation in the sponsoring
organization's 304 compliance review process. The order may be
canceled, replaced, modified, or subsequently approved for
execution.
[0363] 11Cii10) The high touch orders passing the sponsoring
organization's 304 compliance review process (OK) are routed to the
HiLo Engine 1105.
[0364] 11Cii11) The high touch orders are routed by the HiLo Engine
1105 to the sub-advisor's order management system (OMS) 503 SA.
[0365] 11Cii12) The high touch orders are directed by the
sub-advisor's order management system (OMS) 503 SA to executing
brokers 202.
[0366] 11Cii13) The orders are executed by the executing broker 202
and the executing broker 202 sends trade fill reports to the
sub-advisor's order management system (OMS) 503 SA.
[0367] 11Cii14) The executing broker 202 sends trade details for
the high touch executed orders to the Depository Trust Clearing
Corporation (DTCC) 1181.
[0368] 11Cii15) DTCC 1182 transmits the details of all trade
executions by the sub-advisor 301 to the sub-advisor's custodian
1182.
[0369] 11Cii16) On the trade date, the sub-advisor's custodian 1182
transmits the details of all trade executions to the sub-advisor's
trade reconciliation, or fund accounting, group 1183.
[0370] 11Cii17) The HiLo Engine 1105 sends low touch orders passing
the sponsoring organization's 304 compliance review process (OK) to
the sponsoring organization's order management system (OMS) 503
SO.
[0371] 11Cii18) The low touch orders are routed by the sponsoring
organization's order management system (OMS) 503 SO to an executing
broker 202.
[0372] 11Cii19) The low touch orders are executed by the executing
broker 202 and the executing broker 202 sends trade fill reports to
the sponsoring organization's order management system (OMS) 503
SO.
[0373] 11Cii20) The sponsoring organization's order management
system 503 SO sends the trade fill data for low touch order
executions to the HiLo Engine 1105.
[0374] 11Cii21) The HiLo Engine 1105 sends the trade fill data for
the low touch order executions to the sub-advisor's order
management system (OMS) 503 SA.
[0375] 11Cii22) The executing broker 202 sends trade details for
low touch executed orders to the Depository Trust Clearing
Corporation (DTCC) 1181.
[0376] 11Cii23) DTCC 1181 transmits the details of all trade
executions by the sponsoring organization 304 to the sponsoring
organization's custodian 303.
[0377] 11Cii24) On the trade date plus one day, the sponsoring
organization's custodian 303 transmits the details of all trade
executions to the sponsoring organization's fund accounting group
1184.
[0378] 11Cii25) On the trade date plus two, the sponsoring
organization's fund accounting group 1184 sends a comparison file
to the sub-advisor's fund accounting group 1183. Any errors in
transactions by either the sponsoring organization 303 or the
sub-advisor 301 are reconciled.
[0379] According to an embodiment of the present invention, the
HiLo Engine performs as follows. With orders whereby the expected
market impact is significant, the order is categorized as high
touch and routed back to the money management firm's OMS. The
sub-advisor's (money management firm's) trade desk may "work" the
order by selecting one or more executing venues or brokers to act
upon specific instructions by the portfolio manager, to protect the
anonymity of the money management firm as the source of the order
and/or to minimize the market impact of the order. For orders
whereby the expected market impact is not significant, then the
order is categorized as low touch and routed to the sponsoring
organization's OMS. The sponsoring organizations execute the trade
order by selecting one or more executing venues or brokers so as to
minimize execution costs and improve the quality of execution
(rapid speed of execution and realized price improvement). The
execution of trade orders by the sponsoring organization also
protects the anonymity of the money management firm as the source
of the order.
[0380] The HiLo Engine may also add additional considerations to
low touch orders (which can be referred to as low touch special
orders) such as whether:
[0381] (a) The HiLo Engine may suggest the sponsoring organization
consider utilizing an electronic trading algorithm with the low
touch order in order to divide a parent order into a plurality of
smaller child orders for execution according to a predetermined
strategy. If so, the sponsoring organization can select the
specific algorithm (such as TWAP, VWAP, arrival price, or
implementation shortfall) and the associated parameters (such as
start time, finish time, and level of aggressiveness) for the
selected algorithm for execution through one or more executing
venues or brokers. Also, a money management firm may utilize a
trading algorithm for a high touch order and, as a result, divide
the high touch order into a number of high touch and low touch
orders. The low touch orders generated by the money management
firm's algorithm could be executed by the sponsoring
organization.
[0382] (b) In circumstances where an individual order does not have
a significant expected market impact, but the cumulative impact of
a group of orders for the same side (buy or sell) of the same
security for a plurality of accounts managed by a sub-advisor being
executed simultaneously could potentially have a greater than
desired market impact, the HiLo Engine may suggest that a trade
rotation order (TRO) be implemented for such a group of low touch
orders. The sub-advisor (or the system administrator or another
party) determines the timing of the release of the orders for
execution by the sponsoring organization. Each sponsoring
organization, upon receiving the order once it is released within
the trade rotation order (TRO), executes the order as it would any
low touch or low touch algorithm order.
[0383] FIG. 11D is a schematic diagram illustrating an alternative
embodiment of FIG. 11A according to which the HiLo Engine captures
orders from the sub-advisor, categorizes the orders as high touch
or low touch, routes the order to compliance review by the
sponsoring organization, and routes the low touch orders to either
the sponsoring organization (advisor) and the high touch orders to
the sub-advisor (money management firm), according to an embodiment
of the present invention.
[0384] Referring to FIG. 11D, an exemplary HiLo Engine utilization
process is as follows (where the numbered steps below correspond to
the numbers indicated in FIG. 11D):
[0385] 11D1) The sub-advisor 301 enters an order into the
sub-advisor's order management system (OMS) 503 SA.
[0386] 11D2) The sub-advisor's order management system (OMS) 503 SA
creates a message to route the order to the HiLo Engine 1105.
[0387] 11D3) The HiLo Engine 1105 receives the message from the
sub-advisor 301 and reads the order.
[0388] 11D4) The HiLo Engine 1105 prepares a data packet request
for the order and sends the request to the real-time market data
provider 1001.
[0389] 11D5) The real-time market data provider 1001 creates and
routes the requested data packet to the HiLo Engine 1105.
[0390] 11D6) The HiLo Engine 1105 receives the market data packet
for the order and, applying the appropriate customizable rules,
categorizes the order as high touch or low touch.
[0391] 11D7) The HiLo Engine 1105 creates a message to route the
order and high touch or low touch decision to the sponsoring
organization's compliance system 506 SO.
[0392] 11D8) The sponsoring organization's compliance system 506 SO
receives the message containing the order from the HiLo Engine 1105
and performs a compliance check of the order for any violation of
securities laws, account restrictions, or prohibited
transactions.
[0393] 11D9a) If the order is low touch and compliance=OK, the
sponsoring organization's compliance system 506 SO routes order to
the sponsoring organization's order management system (OMS) 503
SO.
[0394] 11D9b) The sponsoring organization's order management system
(OMS) 503 SO determines order routing and sends the order to the
executing broker 202. The executing broker 202 fills the order and
sends the fill report to the sponsoring organization's order
management system (OMS) 503 SO.
[0395] 11D9c) The sponsoring organization's order management system
(OMS) 503 SO creates a message to send the fill report to HiLo
Engine 1105.
[0396] 11D9d) The HiLo Engine 1105 sends the fill report message to
the sub-advisor's order management system (OMS) 503 SA.
[0397] 11D 10a) If the order is high touch and compliance=OK, the
sponsoring organization's compliance system 506 SO sends a "high
touch and compliance=OK" message to the HiLo Engine 1105.
[0398] 11D10b) The HiLo Engine 1105 sends the "high touch and
compliance=OK" message to the sub-advisor's order management system
(OMS) 503 SA for the sub-advisor 301 to determine and implement the
proper execution strategy for the order.
[0399] 11D11) If order is high touch or low touch and
compliance=violation, the sponsoring organization's compliance
system 506 SO holds the order and sends a message to alert the
sponsoring organization 304 and sub-advisor 301 of the potential
violation. If the order is low touch and the violation is
overridden, then the message is compliance=approval and steps 11D9a
through 11D9d occur. If the order is high touch and the violation
is overridden, then the message is compliance=approval and steps
11D10a through 11D10b occur.
[0400] 11D12) With compliance=denial of override of violation, the
sponsoring organization's compliance system 506 SO holds the order
until the order is canceled, replaced by another order, or a final
disposition of the order is determined.
[0401] FIG. 11E is a screen shot from an embodiment of the present
invention illustrating the HiLo Engine's exemplary graphical user
interface (GUI) providing a plurality of tests 11E1, activation
boxes 11E2, measures 11E3, parameters 11E4 and pre set levels 11E5
employed to categorize an order as high touch or low touch,
according to step 11D6 of an embodiment of the present
invention.
[0402] The HiLo Engine provides an exemplary graphical user
interface (GUI) referred to as a "TMP Screen" whereby "T"
represents the tests 11E1, "M" represents the measures 11E3, and
"P" represents the parameters 11E4, as described in the rules
module 11CiE, according to an embodiment of the present invention.
The activation boxes 11E2 on the TMP screen are utilized to select
and activate (or deactivate by unchecking) the boxes representing
the plurality of measures available for each test. The TMP screen
also allows inputting of the associated parameters utilized by each
test. Drop down boxes provide access to pre set levels 11E5 (such
as 1 for a lowest percentage of orders categorized as low touch
through 5 for the highest percentage of orders categorized as low
touch in the present embodiment) for specific combinations of tests
11E1, measures 11E3, and parameters 11E4.
[0403] FIG. 11E is an exemplary illustration of how an embodiment
of the present invention operates with respect to a real-time
computerized process involving a graphical user interface (GUI) for
establishing, monitoring, and changing the computerized rules, and
real-time market data, utilized to determine if a trade order is
high touch or low touch. The HiLo Engine provides a TMP screen for
tests 11E1, measures 11E2 and parameters 11E4, as follows:
[0404] (1) Tests 11E1 are configured to determine if the trade
order is high touch versus low touch, if a trade algorithm is
recommended (and categorized as low touch algorithm), and if a
trade rotation order (TRO) is recommended for a group of orders
that are individually categorized as low touch (and categorized as
low touch TRO). Additional and/or alternative tests 11E1 are easily
implemented in the HiLo Engine.
[0405] Referring to the column headings in FIG. 11E, the Hi/Lo
represents the result of the analytical process used to categorize
an order as high touch (Hi) or low touch (Lo), whereby the
sub-advisor is assigned discretion over the execution of the high
touch orders and the sponsoring organization is assigned discretion
over the execution of the low touch orders. The HiLo Engine (HLE)
also conducts an analytical process to determine if consideration
of a trading algorithm for low touch orders is merited (Algo) or if
the application of a trade rotation order (TRO) should be
considered for a group of orders. An order can also be Lo Algo TRO,
which represents a low touch order with a suggestion that a trade
rotation order be considered for a group of orders and a suggestion
that a trade algorithm be considered for a specific order in the
group of orders
[0406] (2) Activation boxes 11E2 are check boxes to select and
activate/deactivate the appropriate measures 11E3 that are utilized
by the HiLo Engine for determining whether an order is high touch
or low touch. The activation boxes 11E2 allow the HiLo Engine user
to select any or all of the measures 11E3 they wish to employ in
the HiLo Engine. For example, a user may check the activation boxes
11E2 for "Top of Book" and "Average Daily Volume." In the example
shown in FIG. 11E, the unchecked "Average Hourly Liquidity Measure"
would not be utilized for any of the tests 11E1. The unchecking of
an activation box 11E2 deactivates a measure 11E3. Activation and
deactivation of measures 11E3 are implemented by the HiLo Engine in
real-time.
[0407] (3) Measures 11E3 represent the rules utilized for
categorizing orders as high touch or low touch. A plurality of
measures 11E3 may be utilized and, in the embodiment of the present
invention, if one or more of the measures 11E3 fails according to
the parameters 11E4, then the order is categorized as high touch.
Thus, in FIG. 11E, three measures 11E3 are shown (Top of Book,
Average Hourly Liquidity, and Average Daily Volume) and an order
failing any one or more of the activated measures 11E3 could be
categorized as high touch. Further embodiments of the present
invention could include additional or alternative measures 11E3
(such as a pre-determined maximum number of shares for an order to
be low touch) as desired by the user.
[0408] (4) Parameters 11E4 are the specific market data values that
orders are compared against when categorized as high touch or low
touch. For example, a parameter 11E4 could represent an order whose
number of shares represents less than 3% of the average daily
volume of shares traded for that issue over the last twenty-two
trading days is a low touch order. The parameters 11E4 are 3% and
twenty-two days. Or, a parameter 11E4 could be that all orders
whose number of shares represent less than the average of 100% of
the top of book liquidity (the total shares shown available at the
best available share price) for that issue over the previous one
hour are low touch. The parameters 11E4 are 100% and one hour.
[0409] Therefore, in the representative screen shot of FIG. 11E, a
HiLo Engine user utilizes the input boxes and drop down menus to
select the measures 11E3 and to specify the parameter 11E4 values
for the evaluation of trade orders as high touch or low touch. A
user may check activation boxes 11E2 for Top of Book and set the
"Hi/Lo" parameters 11E4 at 300% and two minutes, skip the low
algorithm test 11E1 by not specifying any parameters 11E4 for it
and implement the trade rotation order test 11E1 by specifying 500%
and two minutes as parameters 11E4. Likewise, the Average Hourly
Liquidity and Average Daily Volume measures 11E3 could be utilized
in a similar fashion.
[0410] (5) Through the use of pre set levels 11E5, the system
administrator of the HiLo Engine provides pre-set groups of
parameters 11E4 to categorize an order as high touch or low touch.
A selection such as "1" in the present embodiment results in a
lower percentage of orders categorized as low touch and routed to
the sponsoring organization for execution while a selection such as
"5" in the present embodiment results in a higher percentage of
orders categorized as low touch. Thus, a user could check any of
the five (in the present embodiment) boxes and the measures 11E3,
and parameters 11E4 fields are automatically provided to and
utilized by the system.
[0411] All of the variables on the TMP screen shown in FIG. 11E can
be reviewed and changed in real-time by the user. The HiLo Engine
also provides summary and detailed statistical reporting as to the
categorization results, including but not limited to, the
percentage of orders and number of shares traded determined as high
touch, low touch, override of high touch to low touch, override of
low touch to high touch, algorithm requirements, trade rotation
order requirements and processing errors by sponsoring
organization, money management firm, groups of investment
portfolios, individual investment portfolios, groups of securities,
and individual securities. An audit facility for reviewing rules,
data, decisions and discretion assignment is also provided for
reviewing the HiLo Engine's (HLE) processing results for a specific
or plurality of orders. Alternative and additional user statistics
are also available for system performance reporting purposes,
including but not limited to, the users and their roles on the
system, the availability of the HiLo Engine to the user, down time,
connectivity maintenance, processing times, percentage of CPU
utilization, and other such performance-related statistics.
[0412] FIG. 11F is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed by a system
administrator to institute a plurality of system-wide pre set
levels 11E5 (in categorizing trade orders as high touch or low
touch) that are provided to system users, as described in the rules
module 11CiE, as a one-button implementation of complete sets of
rules employed to categorize an order as high touch or low touch,
according to step 11D6 of an embodiment of the present invention.
Measures 11E3 and tests 11E1 are shown along with a plurality of
pre set levels 11E5 (with five levels available in this embodiment)
along with the desired parameters 11E4. Users can select a pre set
level 11E5 and thereby utilize the combination of measures 11E3,
tests 11E1, and parameters 11E4 associated with the selected pre
set level 11E5. The pre set levels 11E5 are established and
modified by the system administrator and are customizable in
real-time.
[0413] FIG. 11G is a screen shot illustrating an exemplary HiLo
Engine graphical user interface (GUI) employed to institute a
plurality of exceptions, as described in the rules module 11CiE, by
accounts or symbols (such as an individual security) to the
measures 11E3 employed to categorize an order as high touch or low
touch, according to step 11D6 of an embodiment of the present
invention. Exceptions by account or symbol 11G1 are implemented in
the HiLo Engine though the "Exception to Rules" GUI of FIG. 11G by
selecting the activation box and creating a separate set of
measures 11E3, tests 11E1, and parameters 11E4 associated with the
account or symbol exception. The "Force to Hi Touch" button 11G2
enables the HiLo Engine user to automatically categorize all orders
for an account or symbol as high touch.
[0414] FIG. 11H is a screen shot illustrating an exemplary HiLo
Engine graphical user interface (GUI) employed to create groups of
symbols for use as exceptions, as described in the rules module
11CiE, to the rules used to categorize orders as high touch or low
touch, according to step 11D6 of an embodiment of the present
invention. Through this GUI, a user is able to create exceptions to
the measures 11E3, tests 11E1, and parameters 11E4 for a group of
symbols and name the exception group for future reference.
[0415] FIG. 11I is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to transmit an order
from the money management firm (sub-advisor) to the HiLo Engine, as
described in the order entry module 11CiD, for categorization of
the trade order as high touch or low touch, according to steps 11D1
and 11d2 of an embodiment of the present invention. Such a facility
provides a direct link between the money manager and the HiLo
Engine and also can enable the HiLo Engine user to test scenarios
with various combinations of tests 11E1, measures 11E3, and
parameters 11E4 in order to become more familiar with the operation
of the HiLo Engine. In an alternative embodiment, the sub-advisor's
trading system utilizes an electronic integration and messaging
process to submit trade orders to the HiLo Engine as the
sub-advisor's trading groups enters the orders into their trading
system.
[0416] FIG. 11J is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to report the
results, as described in the reporting module 11CiG and in the
decision analysis module 11CiH, of the HiLo Engine's analysis and
categorization of an order as high touch or low touch, according to
step 11D6 of an embodiment of the present invention. Symbol 11J1
and order number 11J2 represent a specific order while order
details 11J3 refers to the number of shares, the side (buy or
sell), and the order type (such as market or limit). The decision
11J4 (such as high touch, low touch, low touch algo, and low touch
TRO) and order status 11J5 (such as success or error) show the
results of the HiLo Engine's categorizing an order as high touch or
low touch.
[0417] FIG. 11K is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to provide the user,
as described in the reporting module 11CiG, with data as to the
order details 11J3 (such as entry time, decision time, order ID,
account, sponsoring organization, symbol, order type, quantity,
side, and time in force (TIF)) and high touch or low touch decision
11J4 for an individual order, according to step 11D6 of an
embodiment of the present invention.
[0418] FIG. 11L is a screen shot illustrating an exemplary HiLo
Engine graphical user interface (GUI) employed to create roles for
a plurality of users, as described in the admin module 11CiC, along
with their rights in the HiLo Engine, according to step 11D6 of an
embodiment of the present invention. User name 11L1 and security
role 11L2 control the access, rights, and responsibilities for each
of a plurality of users of the HiLo Engine.
[0419] FIG. 11M is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to create a
plurality of user organizations, as described in the admin module
11CiC, as either sponsoring organizations or sub-advisors (money
management firms), in the HiLo Engine, according to, according to
step 11D6 of an embodiment of the present invention. The system
administrator utilizes organization ID 11M1 and organization name
11M2 to identify the organization accessing the HiLo Engine. Money
manager 11M3 identifies the user organization as a money management
firm and ascribes the associated money management rights to an
organization. Add new organization 11M4 enables the system
administrator to add a new organization as a user of the HiLo
Engine.
[0420] FIG. 11N is a screen shot illustrating an exemplary HiLo
Engine graphical user interface (GUI) employed to provide account
(investment portfolio) administrative capabilities, as described in
the admin module 11CiC, including the activation of an account's
electronic submission of trade orders to the HiLo Engine, according
to step 11D6 of an embodiment of the present invention. The
sponsoring organization administrator utilizes the account
administration screen to create accounts (investment portfolios) on
the HiLo Engine, including the name and number of the account
(investment portfolio). The money manager administrator activates
the account for submitting orders to the HiLo Engine. Organization
ID 11M1 denotes the sponsoring organization's name along with the
associated identification number of the sub-advisor (money
management firm) while activate account 11N1 activates the
electronic integration between the sub-advisor and the HiLo Engine
for the selected account to enable the sub-advisor to
electronically submit orders to the HiLo Engine and to receive
communications from the HiLo Engine for the activated account
regarding categorization as high touch or low touch, compliance
status, trade fill reports, and order cancellations.
[0421] FIG. 11O is a screen shot illustrating an exemplary HiLo
Engine graphical user interface (GUI) employed to provide a
sponsoring organization with a summary of the rules and parameters,
as described in the rules module 11CiE and in the reporting module
11CiG, used by their sub-advisors (money management firms) to
categorize orders as high touch or low touch, according to step
11D6 of an embodiment of the present invention. Money manager ID
1101 identifies the money management firm. Measures 11E3 show the
selected measures 11E3. Pre set level 11E5 shows if a pre set level
11E5 is utilized in categorizing an order as high touch or low
touch. Tests 11E1 show the HiLo, TRO, and algo tests 11E1 and their
customized parameters 11E4 for the measure 11E3. Active status 1101
shows whether a measure is currently activated and utilized by the
HiLo Engine.
[0422] FIG. 11P is a screen shot illustrating an exemplary HiLo
Engine graphical user interface (GUI) employed to provide
customizable and real-time search capability, as described in the
reporting module 11CiG, for real time and archival reporting and
usage statistics for the HiLo Engine, according to step 11D6 of an
embodiment of the present invention. The HiLo Engine's search
capability can include the following customizable parameters:
account, money manager, sponsoring organization, routed, error,
overridden, date from, date to, order ID, and symbol.
[0423] FIG. 11Q is a screen shot that illustrates an exemplary HiLo
Engine graphical user interface (GUI) employed to provide detailed
usage statistical reports, as described in the reporting module
11CiG, summarizing the number and percentage orders as categorized
as high touch or low touch, according to step 11D6 of an embodiment
of the present invention. Organized by sponsoring organization and
account for the money management firms, and by money management
firm and account for the sponsoring organization, the report shows
the following data by percentage of orders, number of orders, or
both: number of orders, high touch orders, low touch orders,
overrides of high touch to low touch, overrides of low touch to
high touch, order suggesting the use of a trade algorithm, orders
suggesting the use of a trade rotation order, and the errors
experienced by the system.
[0424] FIG. 11R is a schematic diagram illustrating an exemplary
structure for creating user roles ad assigning various permissions
and responsibilities to these user roles, according to an
embodiment of the present invention.
[0425] Additional functionality included in the HiLo Engine (HLE)
1105 consists of: post trade and post compliance processes whereby
passive violations (violations due to changes in market prices,
rather than trading activity) are highlighted and appropriate
action taken to return the investment portfolio to proper
compliance; release of previously suspended orders by the
sponsoring organizations; execution fill reports, modification to
execution fill reports; notices regarding trade errors; transaction
summary reports by the sponsoring organization and money management
firms to each other; trade reconciliation process between the
sponsoring organization and money management firms; order cancel
and cancel and replace process; cancel unexecuted shares; deny
cancel order requests; sponsoring organization initiated order
cancel; and real-time checks on communications links between the
HLE and the sponsoring organizations and money management
firms.
[0426] The HiLo Engine (HLE) is unique in that it provides a
real-time, pre-trade compliance review process that enables
sponsoring organizations, for the first time, to prevent violations
in trading activity by sub-advisors, and performs an expected
market impact analysis and assigning of discretion over order
execution and selection of executing brokers to different
organizations utilizing real-time market data and customizable
rules. The result of the HiLo Engine's discretion assignment
process, also for the first time, is lower brokerage costs and
improved investment performance for sub-advised investment
portfolios. The innovative capabilities and functionality of the
HiLo Engine (HLE) are absent from the prior art.
[0427] An example of the present invention provides, in a method
for facilitating unified trading and control for a sponsoring
organization's money management process using a plurality of money
management firms to manage the sponsoring organization's investment
portfolios, a method for assigning responsibility for trade order
execution comprising:
[0428] defining a plurality of investment portfolios containing
securities, each portfolio having a particular investment
strategy;
[0429] assigning at least one money management firm for each
investment portfolio, wherein the at least one money management
firm provides at least one portfolio manager to make investment
recommendations for the each investment portfolio;
[0430] receiving at the sponsoring organization from the money
management firms investment recommendations for the plurality of
investment portfolios in the form of orders comprising a number of
units to trade for each security based on the recommendations;
[0431] receiving from the sponsoring organization, for each of the
plurality of investment portfolios, compliance review parameters
comprising at least one of the regulatory laws, regulatory rules,
account restrictions, prohibited transactions, prohibited holdings,
and prospectus requirements applicable to the each investment
portfolio;
[0432] determining, according to the compliance review parameters,
and prior to execution of an order, if the execution of the order
would result in a violation of at least one of the compliance
review parameters;
[0433] suspending, pending examination of the order, the execution
of the order if execution of the order would result in a violation
of the compliance review parameters for the associated investment
portfolio;
[0434] examining the suspended order to determine whether the
suspended order is canceled, modified, replaced, or approved for
execution;
[0435] determining, at any time, for each investment portfolio,
whether the each investment portfolio is in compliance with
compliance review parameters associated with the each investment
portfolio, and if at least one violation of the each investment
portfolio's compliance review parameters is found, determining
actions needed to return the each investment portfolio into
compliance with the compliance review parameters of the each
investment portfolio and implementing the actions to return the
each investment portfolio to compliance with its compliance review
parameters;
[0436] identifying market impact parameters upon which to determine
whether expected market impact of an order is high or low;
[0437] determining, for each order, an organization given
discretion for executing a trade for the each order, wherein
determining the organization given discretion for executing an
order depends on whether an expected market impact of an order is
low or high; [0438] if the order is in compliance with the
compliance review parameters for the associated investment
portfolio and the expected market impact of the order is low such
that the order is a low touch order: [0439] identifying any other
low touch orders on the same side of a trade transaction for the
same security, [0440] assessing, if such low touch orders are
identified, a cumulative expected market impact of all of the low
touch orders, [0441] determining, for the low touch orders, a set
of trade rotation order parameters to determine an expected market
impact of the low touch orders, [0442] identifying, if the expected
market impact for the low touch orders on the same side of the
trade transaction for the same security exceeds the trade rotation
order parameters, a trade rotation order among the low touch
orders, according to a defined procedure for the trade rotation
order that is in compliance with regulatory requirements, [0443]
determining, for the low touch order, a set of algorithm parameters
to determine if the expected market impact of an order is
sufficient to utilize a trading algorithm, [0444] determining, for
the low touch order, if expected market impact exceeds the
parameters for using a trading algorithm, [0445] identifying, if
the low touch order exceeds the trade algorithm parameters, a trade
algorithm in the execution of the order, [0446] routing the low
touch trade to the sponsoring organization, and [0447] selecting at
least one executing venue or broker according to a determination of
the most cost effective strategy for the low touch trade, wherein
the sponsoring organization selects the at least one executing
venue or broker; [0448] routing the low touch order, by the
sponsoring organization, to the at least one selected executing
venue or broker for execution, [0449] if the order is in compliance
with the compliance review parameters for the associated investment
portfolio and the expected market impact of the order is high such
that the trade for the each order is a high touch order: [0450]
routing the high touch order to the money management firm for
selection of at least one executing venue or broker for the high
touch order, and [0451] routing the high touch order, by the money
management firm, to the at least one selected executing venue or
broker for execution.
[0452] A further aspect of this example of the present invention
provides that wherein for a high touch order, the money management
firm formulates a trade strategy for the high touch order that
results in a modified order comprising high touch orders and low
touch orders, and wherein the each resulting order is in compliance
with compliance review parameters for the associated investment
portfolio, and wherein the method further comprises:
[0453] routing at least one resulting low touch order to the
sponsoring organization, wherein the sponsoring organization
selects at least one executing venue or broker for the resulting
low touch orders;
[0454] routing each resulting low touch order, by the sponsoring
organization, to the at least one selected executing venue or
broker for execution;
[0455] routing at least one resulting high touch order to the money
management firm, wherein the money management firm selects the at
least one executing venue or broker for the resulting high touch
orders; and
[0456] routing each resulting high touch order, by the money
management firm, to the at least one selected executing venue or
broker for execution.
[0457] A further aspect of this example of the present invention
provides that wherein for a low touch order, the method further
comprises dividing the low touch order into a plurality of smaller
orders for execution and routing each low touch order to the at
least one selected executing venue or broker for execution.
[0458] A further aspect of this example of the present invention
provides that wherein identifying the trade rotation order
comprises: [0459] determining the trade order rotation for
execution between a sub advisor initiating the trade and the at
least one sponsoring organization acting as advisor or
administrator for the respective investment portfolio or plurality
of investment portfolios; and [0460] determining the trade order
rotation among the plurality of sponsoring organizations acting as
advisor or administrator for the respective investment portfolio or
plurality of investment portfolios.
[0461] A further aspect of this example of the present invention
provides that the method further comprises aggregating low touch
orders, wherein low touch orders on the same side of a trade for an
issue for at least one sponsoring organization are aggregated into
a single block for trading and, once executed, units are allocated
among the sponsoring organizations.
[0462] A further aspect of this example of the present invention
provides that wherein the sponsoring organization crosses orders on
one side of an issue generated by the investment portfolios of the
sponsoring organization against orders on the opposite side of the
same issue generated by additional investment portfolios of the
sponsoring organization.
[0463] A further aspect of this example of the present invention
provides that the method further comprises providing updates to the
sponsoring organization on remaining open orders for the sponsoring
organization's investment portfolios, wherein the money management
firm provides data to the sponsoring organization with respect to
at least one partially-filled open orders that remain eligible for
further trading activity on trading days following the current
trading day.
[0464] A further aspect of this example of the present invention
provides that the method further comprises overriding assignment of
execution discretion of high and low touch orders, wherein one of
the money management firm and the sponsoring organization override
the execution discretion assignment of an order in order for one
of:
[0465] the money management firm to assign execution discretion
over the execution of the high touch order to the sponsoring
organization;
[0466] the money management firm to assign execution discretion
over the execution of the low touch order to money management
firm;
[0467] the sponsoring organization to assign execution discretion
over the execution of the low touch order to the money management
firm; and
[0468] the sponsoring organization to assign execution discretion
over the execution of the high touch order to the sponsoring
organization.
[0469] A further aspect of this example of the present invention
provides that the method further comprises assigning and updating
execution assignment parameters, wherein the rules and procedures
implemented to determine assignment of discretion over an order to
one of the sponsoring organization and the money management firm
are created, modified and maintained, in real-time, in an agreed
procedure by the money management firm and the sponsoring
organization.
[0470] A further aspect of this example of the present invention
provides that the method further comprises assigning and updating,
in real-time, by the sponsoring organization for the at least one
investment portfolio, the compliance review parameters.
[0471] A further aspect of this example of the present invention
provides that the method further comprises receiving an order
cancellation request by the money management firm, receiving a
denial of the order cancellation request from the sponsoring
organization, and denying the order cancellation request.
[0472] A further aspect of this example of the present invention
provides that the method further comprises receiving an order
cancellation request by the money management firm, and
implementing, by the sponsoring organization, the order
cancellation request for remaining unexecuted units of the original
order.
[0473] A further aspect of this example of the present invention
provides that the method further comprises receiving an order
cancellation request initiated by the sponsoring organization for
an order from the money management firm.
[0474] A further aspect of this example of the present invention
provides that wherein assets of the each investment portfolio
comprise one of registered mutual funds, non-registered mutual
funds, institutional investment portfolios, variable insurance
funds, variable fund LLCs, regulated investment company funds,
defined contribution plans, 529 plans, hedge funds, group
annuities, collective investments, deferred compensation plans,
separately managed accounts (SMAs), institutional funds, separate
accounts of insurance companies, pension plans, endowments, and
trusts.
[0475] A further aspect of this example of the present invention
provides that the method further comprises determining a cost
effective strategy for a trade order using an optimization analysis
of share price, liquidity, execution cost or mark-up, expected
price improvement, and execution speed.
[0476] Another example of the present invention provides, in a
system for facilitating unified trading and control for a
sponsoring organization's money management process using a
plurality of money management firms to manage the sponsoring
organization's investment portfolios, a method for assigning
responsibility for trade order execution comprising:
[0477] defining a plurality of investment portfolios containing
securities, each portfolio having a particular investment
strategy;
[0478] assigning at least one money management firm for each
investment portfolio, wherein the at least one money management
firm provides at least one portfolio manager to make investment
recommendations for the each investment portfolio;
[0479] receiving at the sponsoring organization from the money
management firms investment recommendations for the plurality of
investment portfolios in the form of orders comprising a number of
units to trade for each security based on the recommendations;
[0480] receiving from the sponsoring organization, for each of the
plurality of investment portfolios, compliance review parameters
comprising at least one of the regulatory laws, regulatory rules,
account restrictions, prohibited transactions, prohibited holdings,
and prospectus requirements applicable to the each investment
portfolio;
[0481] determining, according to the compliance review, and prior
to execution of an order, if the execution of the order would
result in a violation of at least one of the compliance review
parameters;
[0482] suspending, pending examination of the order, the execution
of the order if execution of the order would result in a violation
of the compliance review parameters for the associated investment
portfolio;
[0483] examining the suspended order to determine whether the
suspended order is canceled, modified, replaced, or approved for
execution;
[0484] identifying market impact parameters upon which to determine
whether expected market impact of an order is high or low;
[0485] determining, for each order, an organization given
discretion for executing a trade for the each order, wherein
determining the organization given discretion for executing an
order depends on whether an expected market impact of an order is
low or high; [0486] if the order is in compliance with the
compliance review parameters for the associated investment
portfolio and the expected market impact of the order is low such
that the order is a low touch order: [0487] identifying any other
low touch orders on the same side of a trade transaction for the
same security, [0488] assessing, if such low touch orders are
identified, a cumulative expected market impact of all of the low
touch orders; [0489] determining, for the low touch orders, a set
of trade rotation order parameters to determine an expected market
impact of the low touch orders; [0490] identifying, if the expected
market impact for low touch orders on the same side of the trade
transaction for the same security exceeds the trade rotation order
parameters, a trade rotation order among the low touch orders,
according to a defined procedure for the trade rotation order that
is in compliance with regulatory requirements, [0491] determining,
for the low touch order, a set of algorithm parameters to determine
if the expected market impact of an order is sufficient to utilize
a trading algorithm, [0492] assessing, for the low touch order, if
expected market impact exceeds the parameters for using a trading
algorithm, [0493] identifying, if the low touch order exceeds the
trade algorithm parameters, a trade algorithm in the execution of
the order, [0494] routing the low touch trade to the sponsoring
organization, and [0495] selecting at least one executing venue or
broker according to a determination of the most cost effective
strategy for the low touch trade, wherein the sponsoring
organization selects the at least one executing venue or broker;
[0496] routing the low touch order, by the sponsoring organization,
to the at least one selected executing venue or broker for
execution, [0497] if the order is in compliance with the compliance
review parameters for the associated investment portfolio and the
expected market impact of the order is high such that the trade for
the each order is a high touch order: [0498] routing the high touch
order to the money management firm for selection of at least one
executing venue or broker for the high touch order, and [0499]
routing the high touch order, by the money management firm, to the
at least one selected executing venue or broker for execution.
[0500] A further aspect of this example of the present invention
provides that wherein for a high touch order, the money management
firm formulates a trade strategy for the high touch order that
results in a modified order comprising high touch orders and low
touch orders, and wherein the each resulting order is in compliance
with compliance review parameters for the associated investment
portfolio, and wherein the method further comprises:
[0501] routing at least one resulting low touch order to the
sponsoring organization, wherein the sponsoring organization
selects at least one executing venue or broker for the resulting
low touch orders;
[0502] routing each resulting low touch order, by the sponsoring
organization, to the at least one selected executing venue or
broker for execution;
[0503] routing at least one resulting high touch order to the money
management firm, wherein the money management firm selects the at
least one executing venue or broker for the resulting high touch
orders; and
[0504] routing each resulting high touch order, by the money
management firm, to the at least one selected executing venue or
broker for execution.
[0505] A further aspect of this example of the present invention
provides that wherein for a low touch order, the method further
comprises dividing the low touch order into a plurality of smaller
orders for execution and routing each low touch order to the at
least one selected executing venue or broker for execution.
[0506] A further aspect of this example of the present invention
provides that wherein identifying the trade rotation order
comprises: [0507] determining the trade order rotation for
execution between a sub advisor initiating the trade and the at
least one sponsoring organization acting as advisor or
administrator for the respective investment portfolio or plurality
of investment portfolios; and [0508] determining the trade order
rotation among the plurality of sponsoring organizations acting as
advisor or administrator for the respective investment portfolio or
plurality of investment portfolios.
[0509] A further aspect of this example of the present invention
provides that the method further comprises aggregating low touch
orders, wherein low touch orders on the same side of a trade for an
issue for at least one sponsoring organization are aggregated into
a single block for trading and, once executed, units are allocated
among the sponsoring organizations.
[0510] A further aspect of this example of the present invention
provides that wherein the sponsoring organization crosses orders on
one side of an issue generated by the investment portfolios of the
sponsoring organization against orders on the opposite side of the
same issue generated by additional investment portfolios of the
sponsoring organization.
[0511] A further aspect of this example of the present invention
provides that the method further comprises providing updates to the
sponsoring organization on remaining open orders for the sponsoring
organization's investment portfolios, wherein the money management
firm provides data to the sponsoring organization with respect to
at least one partially-filled open orders that remain eligible for
further trading activity on trading days following the current
trading day.
[0512] A further aspect of this example of the present invention
provides that the method further comprises overriding assignment of
execution discretion of high and low touch orders, wherein one of
the money management firm and the sponsoring organization override
the execution discretion assignment of an order in order for one
of:
[0513] the money management firm to assign execution discretion
over the execution of the high touch order to the sponsoring
organization;
[0514] the money management firm to assign execution discretion
over the execution of the low touch order to money management
firm;
[0515] the sponsoring organization to assign execution discretion
over the execution of the low touch order to the money management
firm; and
[0516] the sponsoring organization to assign execution discretion
over the execution of the high touch order to the sponsoring
organization.
[0517] A further aspect of this example of the present invention
provides that the method further comprises assigning and updating
execution assignment parameters, wherein the rules and procedures
implemented to determine assignment of discretion over an order to
one of the sponsoring organization and the money management firm
are created, modified and maintained, in real-time, in an agreed
procedure by the money management firm and the sponsoring
organization.
[0518] A further aspect of this example of the present invention
provides that the method further comprises assigning and updating,
in real-time, by the sponsoring organization for the at least one
investment portfolio, the compliance review parameters.
[0519] A further aspect of this example of the present invention
provides that the method further comprises receiving an order
cancellation request by the money management firm, receiving a
denial of the order cancellation request from the sponsoring
organization, and denying the order cancellation request.
[0520] A further aspect of this example of the present invention
provides that the method further comprises receiving an order
cancellation request by the money management firm, and
implementing, by the sponsoring organization, the order
cancellation request for remaining unexecuted units of the original
order.
[0521] A further aspect of this example of the present invention
provides that the method further comprises receiving an order
cancellation request initiated by the sponsoring organization for
an order from the money management firm.
[0522] A further aspect of this example of the present invention
provides that wherein assets of the each investment portfolio
comprise one of registered mutual funds, non-registered mutual
funds, institutional investment portfolios, variable insurance
funds, variable fund LLCs, regulated investment company funds,
defined contribution plans, 529 plans, hedge funds, group
annuities, collective investments, deferred compensation plans,
separately managed accounts (SMAs), institutional funds, separate
accounts of insurance companies, pension plans, endowments, and
trusts.
[0523] Another example of the present invention provides a system
for facilitating unified trading and control for a sponsoring
organization's money management process using a plurality of money
management firms to manage the sponsoring organization's investment
portfolios, and for assigning responsibility for trade order
execution, the system comprising:
[0524] a computer user interface configured to [0525] receive a
designation of a plurality of investment portfolios containing
securities, each portfolio having a particular investment strategy,
[0526] receive instructions from money management firms to create,
enter, modify and cancel orders for the plurality of investment
portfolios, and [0527] receive orders to trade securities of the
plurality of investment portfolios;
[0528] a communications computer module configured to communicate
through an external communications network with a sponsoring
organization order management system and a money management firm
order management system;
[0529] a translation computer module configured to translate
communications from the sponsoring organization order management
system and the money management firm order management system into a
standard data format;
[0530] a rules-based compliance computer module configured to store
and apply compliance review parameters of the plurality of
investment portfolios; and
[0531] a decision analysis computer module configured to determine
an organization given discretion for executing a trade for a
particular order based on market impact parameters that define
whether expected market impact of the particular order is low or
high,
[0532] wherein the computer user interface is configured to receive
from the money management firm order management system an order to
trade a security and transmit the order to the translation computer
module,
[0533] wherein the translation computer module is configured to
translate the order into the standard data format and transmit the
translated order to the rules-based compliance computer module,
[0534] wherein the rules-based compliance computer module is
configured to [0535] determine if a violation of the compliance
review parameters of the associated investment portfolio would
occur as a result of execution of the order, [0536] suspend
execution of the order until receiving one of a cancel instruction
from the money management firm order management system, a replace
instruction from the money management firm order management system,
and a release instruction from the sponsoring organization order
management system, and [0537] determine, at any time, if an
investment portfolio is in compliance with its compliance review
parameters, and if a violation is found, forward instructions to
the money management firm order management system outlining actions
needed to return the investment portfolio back to compliance with
its compliance review parameters,
[0538] wherein the decision analysis computer module is configured
to [0539] receive the order after the order has been determined to
be in compliance with applicable compliance review parameters, and
[0540] determine, based on the market impact parameters, whether
expected market impact of the order is high or low,
[0541] wherein, if the decision analysis computer module determines
the expected market impact to be low such that the order is a low
touch order, then [0542] the decision analysis computer module is
configured to [0543] identify any other low touch orders on the
same side of a trade transaction for the same security, [0544]
determine, if such low touch orders are identified, a cumulative
expected market impact of all of the low touch orders; [0545]
determine, for the low touch orders, a set of trade rotation order
parameters; [0546] determine if the expected market impact for the
low touch orders on the same side of a trade transaction for the
same security exceeds the trade rotation order parameters, [0547]
identify, if the expected market impact for the low touch orders on
the same side of the trade transaction for the same security
exceeds the trade rotation order parameters, a need for a trade
rotation order among the low touch orders, according to a defined
procedure for the trade rotation order that is in compliance with
regulatory requirements, [0548] determine, for the low touch order,
a set of algorithm parameters to determine if expected market
impact of an order is sufficient to use a trading algorithm, [0549]
determine, for the low touch order, if the expected market impact
exceeds the parameters for using a trading algorithm, [0550]
identify, if the low touch order exceeds the trade algorithm
parameters, a need for a trade algorithm in the execution of the
order, [0551] create a message containing instructions that the
order is approved, that the order is categorized as low touch, and,
for a low touch order or group of low touch orders exceeding at
least one of the applicable trade rotation and trade algorithm
parameters, a recommendation of at least one of a trade rotation
order, an algorithm, and a trade rotation order and algorithm, and
[0552] forward the message to the translation computer module,
[0553] the translation computer module is configured to translate
the message into a data format accepted by the sponsoring
organization order management system and forward the translated
message to the communications computer module, [0554] the
communications computer module configured to forward the translated
message to the sponsoring organization order management system, so
that the sponsoring organization order management system can select
at least one executing venue or broker according to a determination
of the most cost effective strategy for the low touch order and
route the low touch order to the selected executing venue or
broker,
[0555] wherein, if the decision analysis computer module determines
the expected market impact to be high such that the order is a high
touch order, then [0556] the decision analysis computer module is
configured to [0557] create a message containing instructions that
the order is approved and categorized as high touch, and [0558]
forward the message to the translation module, [0559] the
translation computer module is configured to translate the message
into a data format accepted by the money management firm order
management system and to forward the translated message to the
communications computer module, and [0560] the communications
computer module configured to forward the translated message to the
money management firm order management system, so that the money
managements firm can select at least one executing venue or broker
according to a determination of the most cost effective strategy
for the high touch order and route the high touch order to the
selected executing venue or broker.
[0561] A further aspect of this example of the present invention
provides that the system further comprises an administrative
computer module configured to accept messages from a computer user
interface and enable users to: set up user roles and permission
schema, including users and viewers for sponsoring organization,
sub-advisors and system administrator; accept a data feed from the
sponsoring organization order management system to set up, modify
or remove investment portfolios; activate submission of orders from
the investment account; and request and send updates to the
database module for purposes of updating database records.
[0562] A further aspect of this example of the present invention
provides that the system further comprises a software order entry
module configured to accept messages from a computer user interface
and enables users to engage in transactions related to entry and
execution of orders through: submission of a single order or group
of orders; order cancel requests; order cancel request status;
order execution fill; order execution fill corrections; order
cancel confirmations; order cancel partial fills; order replace;
compliance review hold order; compliance review approve order;
compliance review release order for execution; updating of open
Good Til Cancel (GTC) orders; testing rules and their parameters
for categorizing orders as high touch or low touch; and requesting
and sending updates to a database module for purposes of updating
database records.
[0563] A further aspect of this example of the present invention
provides that the system further comprises a software rules module
that enables users, through a computer user interface at sponsoring
organizations and sub-advisors, to: create, modify activate,
deactivate and eliminate rules, according to their agreed
procedures, for the assignment of discretion over the execution of
order through the categorization of orders as high touch or low
touch; specify tests, measures, and parameters for categorizing
orders as high touch or low touch; create and modify pre set
levels; create exceptions to rules for accounts, group of accounts,
individual issues and groups of issues; create parameters for
algorithms and trade rotation order suggestions for low touch
orders; and request and send updates to a database module for
purposes of updating database records.
[0564] A further aspect of this example of the present invention
provides that the system further comprises a software operations
module that enables users, through a computer user interface at the
sponsoring organizations and sub-advisors, to perform operations
comprising: start and stop the system; recover from lost data feed;
monitor current operating status; login and log out of the system;
track orders and internal processing errors; utilize a heartbeat
function to check on connectivity with external users; and request
and send updates to a database module for purposes of updating
database records.
[0565] A further aspect of this example of the present invention
provides that the system further comprises a software reporting
module that enables users, through a computer user interface, at
the sponsoring organizations and sub-advisors, to perform reporting
functions comprising: viewing rules and related tests, measures,
parameters, and exceptions; viewing routing statistics for orders;
performing real-time queries of a database module; viewing order
discretion assignment audit reports and archives; viewing overrides
of order discretion assignments by users; viewing lost and
incomplete orders; viewing open Good Til Cancel (GTC) orders;
operating a data export facility; and viewing reports from a
database module.
[0566] A further aspect of this example of the present invention
provides that, wherein, for a specific order, the decision analysis
computer module is configured to: gather market data; compile
rules; perform required calculations; evaluate results of the
calculations; categorize the specific order as one of high touch,
low touch, low touch algo, low touch TRO, and low touch algo TRO;
add compliance review status; create a message for users to receive
the categorization and compliance review status; route the message
to a translation module; and request and send updates to a database
module for purposes of updating database records.
[0567] A further aspect of this example of the present invention
provides that the system further comprises a software database
module that functions as a primary repository for all current and
historical data and archiving of necessary data and whose field
structure includes data on: securities; accounts; organizations
including sponsoring organizations, money management firms and
system administrators; rules with tests, measures, and parameters;
pre set levels; exceptions by accounts, groups of accounts,
symbols, and groups of symbols; users, roles, and permissions;
active and deactivated accounts; order routing decisions and
overrides; canceled and replaced orders; lost orders and
operational statistics such as CPU utilization; updates with the
other functional modules within the system; and archived data and
activity.
[0568] A further aspect of this example of the present invention
provides that wherein the system is configured to receive data
feeds comprising: [0569] market data feed, and [0570] messages
originating from sponsoring organizations and sub-advisors
regarding new organizations, order entry, cancellation and
correction of orders, compliance status, new and activated
accounts, trade fill reports, changes in rules, user updates, and
associated operational information.
[0571] A further aspect of this example of the present invention
provides that wherein the system is configured to create messages
composed of various fields within database records in the standard
data format, and to utilize the messages to communicate events to
users comprising: new orders; new orders with high touch-low touch
decision; high touch to low touch override; high touch Good Til
Cancel (GTC) updates; compliance=OK; compliance under review; order
released from compliance; cancel order request; cancel
response--cancel confirmed; cancel response--cancel rejection;
cancel response--cancel unfilled portion of order; sponsoring
organization initiated cancel; execution fill; execution fill
modification; empty message (heartbeat); and order error.
[0572] A further aspect of this example of the present invention
provides that wherein if a trade strategy for the high touch order
results in a modified order comprising high touch orders and low
touch orders and the each resulting order is in compliance with the
compliance review parameters for the investment portfolio,
[0573] the system is configured to [0574] route the low touch
orders to the sponsoring organization order management system for
selection of at least one executing venue or broker and to route
the low touch orders to the selected at least one executing venue
or broker for execution, and [0575] route the high touch orders to
the money management firm order management system for selection of
at least one executing venue or broker and to route the high touch
orders to the selected at least one executing venue or broker for
execution.
[0576] A further aspect of this example of the present invention
provides that wherein the sponsoring organization order management
system is configured to transform a low touch order into a
plurality of smaller orders and to route each smaller order to the
selected at least one executing venue or broker for execution.
[0577] A further aspect of this example of the present invention
provides that wherein the system is configured to implement a trade
order rotation according to a computer-defined procedure that is
applicable when a money management firm places a plurality of
orders on the same side of a buy or sell order in a given security
for execution across a plurality of investment portfolios belonging
to a plurality of sponsoring organizations.
[0578] A further aspect of this example of the present invention
provides that wherein the system is configured to determine trade
order rotation by: [0579] determining the trade order rotation for
execution between a sub advisor initiating the trade and the
sponsoring organization or plurality of sponsoring organizations
acting as advisor or administrator for the respective investment
portfolio or plurality of investment portfolios; and [0580]
determining the trade order rotation among the plurality of
sponsoring organizations acting as advisor or administrator for the
respective investment portfolio or plurality of investment
portfolios.
[0581] A further aspect of this example of the present invention
provides that wherein the system is configured to implement a trade
rotation order comprising one of random selection, sequential
selection, and algorithmic random selection.
[0582] A further aspect of this example of the present invention
provides that wherein the system is configured to aggregate trades,
wherein low touch orders on the same side of a buy or sell for the
same security for the at least one sponsoring organization are
aggregated into a single block for trading and, once executed,
units are allocated among the at least one sponsoring
organization.
[0583] A further aspect of this example of the present invention
provides that wherein the sponsoring organization order management
system is configured to cross orders for a security generated by
investment portfolios of at least one sponsoring organization
against orders for the opposite side of the security generated by
additional investment portfolios of at least one sponsoring
organization.
[0584] A further aspect of this example of the present invention
provides that wherein the system is configured to transmit a
communications message from the money management firm order
management system to the sponsoring organization order management
system comprising data records summarizing a status of an
individual or a plurality of open or partially filled orders (Good
Til Cancel or GTC) that remain eligible for further trading
activity on trading days following the current or recently
concluded trading day.
[0585] A further aspect of this example of the present invention
provides that wherein the system is configured to receive a message
overriding execution discretion authority from one of the money
management firm order management system and the sponsoring
organization order management system, wherein the message overrides
a discretion assignment of a trade order in order for one of:
[0586] the money management firm to assign discretion over the
execution of the trade order to the sponsoring organization;
[0587] the money management firm to assign discretion over the
execution of the trade order to the money management firm;
[0588] the sponsoring organization to assign discretion over the
execution of the trade order to the money management firm; and
[0589] the sponsoring organization to assign discretion over the
execution of the trade order to the sponsoring organization.
[0590] A further aspect of this example of the present invention
provides that wherein the system is configured to receive
assignments and updates of market impact parameters through a
computer user interface, wherein the market impact parameters are
created, modified, activated, deactivated and maintained, in
real-time.
[0591] A further aspect of this example of the present invention
provides that wherein the system is configured to
[0592] receive an order cancellation request from the money
management firm order management system requesting cancellation of
an order submitted by the money management firm,
[0593] receiving instructions from the sponsoring organization
order management system to deny the order cancellation request,
and
[0594] denying the order cancellation request.
[0595] A further aspect of this example of the present invention
provides that wherein the system is configured to
[0596] receive an order cancellation request from the money
management firm order management system requesting cancellation of
an order submitted by the money management firm, wherein the
submitted order is partially executed, and
[0597] issue instructions to the sponsoring organization order
management system implement the order cancellation request for the
remaining unexecuted shares of the submitted order.
[0598] A further aspect of this example of the present invention
provides that wherein the system is configured to
[0599] receive an order cancellation request from the sponsoring
organization order management system requesting cancellation of an
order submitted by the money management firm, and
[0600] forward a message to the money management firm order
management system to initiate a cancel request for the submitted
order from the money management firm.
[0601] A further aspect of this example of the present invention
provides that wherein the system is configured to implement
standards for communications with the sponsoring organization order
management system and the money management firm order management
system, the standards comprising a designated communications
protocol, a designated message format, and a designated
communications network.
[0602] A further aspect of this example of the present invention
provides that wherein the sponsoring organization software order
management system determines the most cost effective strategy for a
trade order using an optimization analysis of share price,
liquidity, execution cost or mark-up, expected price improvement,
and execution speed.
[0603] Another example of the present invention provides a system
for facilitating unified trading and control for a sponsoring
organization's money management process using a plurality of money
management firms to manage the sponsoring organization's investment
portfolios, and for assigning responsibility for trade order
execution, the system comprising:
[0604] a computer user interface configured to [0605] receive a
designation of a plurality of investment portfolios containing
securities, each portfolio having a particular investment strategy,
[0606] receive instructions from money management firms to create,
enter, modify and cancel orders for the plurality of investment
portfolios, and [0607] receive orders to trade securities of the
plurality of investment portfolios;
[0608] a communications computer module configured to communicate
through an external communications network with a sponsoring
organization order management system and a money management firm
order management system;
[0609] a translation computer module configured to translate
communications from the sponsoring organization order management
system and the money management firm order management system into a
standard data format;
[0610] a rules-based compliance computer module configured to store
and apply compliance review parameters of the plurality of
investment portfolios; and
[0611] a decision analysis computer module configured to determine
an organization given discretion for executing a trade for a
particular order based on market impact parameters that define
whether expected market impact of the particular order is low or
high,
[0612] wherein the computer user interface is configured to receive
from the money management firm order management system an order to
trade a security and transmit the order to the translation computer
module,
[0613] wherein the translation computer module is configured to
translate the order into the standard data format and transmit the
translated order to the rules-based compliance computer module,
[0614] wherein the rules-based compliance computer module is
configured to [0615] determine if a violation of the compliance
review parameters of the associated investment portfolio would
occur as a result of execution of the order, [0616] suspend
execution of the order until receiving one of a cancel instruction
from the money management firm order management system, a replace
instruction from the money management firm order management system,
and a release instruction from the sponsoring organization order
management system, and
[0617] wherein the decision analysis computer module is configured
to [0618] receive the order after the order has been determined to
be in compliance with applicable compliance review parameters, and
[0619] determine, based on the market impact parameters, whether
expected market impact of the order is high or low,
[0620] wherein, if the decision analysis computer module determines
the expected market impact to be low such that the order is a low
touch order, then [0621] the decision analysis computer module is
configured to [0622] identify any other low touch orders on the
same side of a trade transaction for the same security, [0623]
determine, if such low touch orders are identified, a cumulative
expected market impact of all of the low touch orders; [0624]
determine, for the low touch orders, a set of trade rotation order
parameters; [0625] determine if the expected market impact for the
low touch orders on the same side of a trade transaction for the
same security exceeds the trade rotation order parameters, [0626]
identify, if the expected market impact for the low touch orders on
the same side of the trade transaction for the same security
exceeds the trade rotation order parameters, a need for a trade
rotation order among the low touch orders, according to a defined
procedure for the trade rotation order that is in compliance with
regulatory requirements, [0627] determine, for the low touch order,
a set of algorithm parameters to determine if expected market
impact of an order is sufficient to use a trading algorithm, [0628]
determine, for the low touch order, if the expected market impact
exceeds the parameters for using a trading algorithm, [0629]
identify, if the low touch order exceeds the trade algorithm
parameters, a need for a trade algorithm in the execution of the
order, [0630] create a message containing instructions that the
order is approved, that the order is categorized as low touch, and,
for a low touch order or group of low touch orders exceeding at
least one of the applicable trade rotation and trade algorithm
parameters, a recommendation of at least one of a trade rotation
order, an algorithm, and a trade rotation order and algorithm, and
[0631] forward the message to the translation computer module,
[0632] the translation computer module is configured to translate
the message into a data format accepted by the sponsoring
organization order management system and forward the translated
message to the communications computer module, [0633] the
communications computer module configured to forward the translated
message to the sponsoring organization order management system, so
that the sponsoring organization order management system can select
at least one executing venue or broker according to a determination
of the most cost effective strategy for the low touch order and
route the low touch order to the selected executing venue or
broker,
[0634] wherein, if the decision analysis computer module determines
the expected market impact to be high such that the order is a high
touch order, then [0635] the decision analysis computer module is
configured to [0636] create a message containing instructions that
the order is approved and categorized as high touch, and [0637]
forward the message to the translation module, [0638] the
translation computer module is configured to translate the message
into a data format accepted by the money management firm order
management system and to forward the translated message to the
communications computer module, and [0639] the communications
computer module configured to forward the translated message to the
money management firm order management system, so that the money
managements firm can select at least one executing venue or broker
according to a determination of the most cost effective strategy
for the high touch order and route the high touch order to the
selected executing venue or broker.
[0640] 5) Price-Liquidity-Cost-Quality (PLCQ) Engine
[0641] The price-liquidity-cost-quality (PLCQ) engine is a
graphical user interface (GUI) and associated software program(s)
linked to a computerized, real-time and customizable rules-based
logic engine that enables each buy or sell order (or combinations
of buy and sell orders) to be analyzed, according to a set of
customizable logical rules, to determine, through an optimization
process, the most cost effective order composition in terms of one
or more of share price, number of shares, execution cost or
mark-up, expected price improvement, and execution speed. The
output of the price-liquidity-cost-quality (PLCQ) engine is a list
of the executing brokers, share price, number of shares, execution
cost or mark-up, expected price improvement, and execution speed
for the sponsoring organizations and sub-advisor to utilize in
selecting executing brokers for their orders.
[0642] The price per share, number of shares and execution costs or
mark-ups are based on actual data gathered through real-time market
data feeds and inputs from executing brokers. The price per share
and number of shares reflect current market data. The execution
cost or mark-up per share reflects the real-time cost entered into
the price-liquidity-cost-quality (PLCQ) engine by the executing
brokers and can vary on a security-by-security basis and over time
(as executing brokers adjust their executions costs or mark-ups to
reflect their desire to accumulate, reduce, or liquidate their
position in a security).
[0643] The trade quality analysis engine provides a real-time and
customizable analysis of the historical and expected price
improvement for each security, by executing broker, in an order.
Currently, orders are executed at the National Best Bid and Offer
(Ask) or NBBO. As such, an equity issue may be available to buy at
$42.25 per share (ask or offer) and to sell at $42.00 per share
(bid). The difference between the bid and offer (ask) is the spread
($0.25). As such, the ideal price point between the bid and offer
is the Mid Point between Bid and Offer (MPBO). For this security,
the midpoint between bid and offer is $42.125 per share. The trade
quality engine performs a real-time analysis of the share prices
and times of execution for recently executed trades to determine
how close the share price for a trade was to the MPBO. The range of
such a calculation could range from a trade occurring at a $42.125
(at the MPBO, which is a 0% effective to quoted spread.) (While it
is possible, orders are rarely executed below the MPBO.) A buy
order occurring at $42.25 or a sell order occurring at $42.00 is
considered 100% of the NBBO and does not provide any price
improvement, which equates to a 100% effective-to-quoted spread.
Unfortunately, orders can also be executed above the spread (above
$42.25 on a buy or below $42.00 on a sell). These transactions are
considered "outside the spread" and, as a result, these trades have
an effective-to-quoted spread that exceeds 100%. The
effective-to-quoted analysis is performed for each order and the
time period utilized for this analysis is customizable and
performed for periods of time ranging from sub-seconds to minutes,
hours, days, and longer, according to the desires of the user. An
optimization engine that calculates the most cost effective group
of executing brokers for the order, then utilizes this data. This
data is then transmitted to the order management system of the
sub-advisor or sponsoring organization.
[0644] The quality data can also include factors such as speed of
execution, which reflects the time that is required for an
executing broker, upon receipt of the order, to complete the
execution of the order.
[0645] Currently, the securities industry focuses on share price
and liquidity ("best execution") when determining the optimal order
composition. The price-cost-liquidity-quality (PLCQ) engine's
capacity to factor in additional real-time and customizable
factors, such as execution cost and expected price improvement,
represents a considerable step forward in providing shareholders
and plan beneficiaries with the lowest total execution cost in a
routine and automated manner.
[0646] FIG. 12A is a schematic diagram illustrating the
price-cost-liquidity-quality (PLCQ) engine's 1201 system and
process 1200, according to an embodiment of the present invention.
The process 1200 works as described in the following steps, which
correspond to the arrows and their adjacent reference numerals
shown in FIG. 12.
[0647] 1225) Sub-advisors 301 and sponsoring organizations 304 and
1116 transmit their individual orders to the
price-liquidity-cost-quality (PLCQ) engine through the graphical
user interface (GUI) 1202 or through a data feed from their order
management system 503 (not shown).
[0648] 1226) The order is entered into the price-cost-liquidity
database 1203.
[0649] 1227) Executing brokers 202 utilize a graphical user
interface (GUI) 1204 to enter the execution costs 1204 for orders
into the price-cost-liquidity-quality (PLCQ) engine 1201. The
execution cost data 1204 can be changed on a real-time basis for
each security.
[0650] 1228) The execution cost data 1204 is incorporated into the
price-liquidity-cost database 1203.
[0651] 1229) Real-time market data 1205 is delivered to the
price-cost-liquidity-quality engine 1201 and incorporated into the
price-liquidity-cost database 1203.
[0652] 1230) The price-liquidity-cost data is incorporated into the
execution quality analysis engine 1206.
[0653] 1231) The system archive 1207 for the execution quality
analysis engine 1206 provides real-time and historical data on the
quality of execution, that is, the effective-to-quoted spread to
the execution quality analysis engine 1206.
[0654] 1232) The execution quality analysis engine 1206 combines
the price-liquidity-cost data and the real-time and historical data
and delivers the data to the order optimization engine 1208.
[0655] 1233) The data 1209 incorporates the share price, number of
shares available from each executing broker, execution cost or
mark-up, broker identification, and quality of execution
(calculated effective-to-quoted spread).
[0656] 1234) The order optimization engine 1208 combines the lowest
execution cost based on the price-liquidity-cost data and factors
in the expected price improvement data to determine, through the
optimization process, the most cost effective combination of
executing brokers for the order. For this order, the most cost
effective group of brokers combine for an execution cost of $69.00
with an expected price improvement resulting from an
effective-to-quoted spread of 10% for 11,000 shares, 20% for 2,000
shares, and 25% for 7,000 shares.
[0657] 1235) The order optimization engine 1208 routes the
optimized executing broker combination to the graphical user
interface 1202.
[0658] 1236) The sub-advisors 301 and sponsoring organizations 304
and 1116 (or any asset manager 201) utilizes the graphical user
interface 1202 (or data feed) to review the optimized executing
broker combination for that order for use in the order entry
process 700 (not shown).
[0659] The price-cost-liquidity-quality (PLCQ) engine 1201 is
unique in that it performs a real-time computer analysis and
subsequent assigning of execution costs and expected execution
quality relative to current share price and liquidity offered by a
network of executing brokers. This automated, real-time, and
customizable capability does not exist in the prior art and
represents a technology innovation in the system of the present
invention.
[0660] Further aspects of a price-cost-liquidity-quality (PLCQ)
engine (e.g., as disclosed in FIG. 12A and steps 1225 through 1236
above) are as follows.
[0661] An embodiment of the present invention provides a real-time
optimization process that enables an initiating party to a
securities transaction (such as a mutual fund company,
institutional money manager, hedge fund, insurance company, pension
plan, individual investor, etc.) to conduct a real-time
optimization analysis for determining the "hot hitter" among
executing broker(s) (and the optimal order among a plurality of
executing brokers) expected to provide the lowest expected total
execution cost for a securities transaction, inclusive of share
price, liquidity, execution costs, price improvement, time to
execute, and rate of change in the price of a security. This
optimization also provides the optimal order among a plurality of
executing brokers expected to provide the lowest expected total
cost for the securities transaction until the desired number of
instruments is bought or sold. As the initiating party to the
transaction directs orders to the executing brokers with the lowest
expected total cost for their securities transaction (and
implements such an optimization process as part of a routine
operating procedure for trading securities), the initiating party
realizes significant and recurring cost savings that would not
otherwise be realized in its securities transactions. An embodiment
of the present invention is applicable to a single order or, in an
alternative embodiment, to each individual order created through a
trading algorithm that divides a single larger order into a series
of smaller sub-orders. Indeed, the present invention is especially
well suited for optimizing the execution of small orders.
[0662] For example, the concept of selecting the "hot hitter" in
executing brokers has a logical resemblance to the process through
which a manager of a baseball team selects a pinch hitter during
the late innings of a close baseball game. The manager for a
baseball team will examine all the relevant statistics among the
players available for pinch-hitting duty. One statistic that is
likely to weigh heavily in the selection process is the individual
batting averages of the available players over the last five to ten
games. A manager would be more likely to select to pinch hit, all
other factors being equal, a player hitting over 0.300 over the
last five games than a player hitting under 0.200 over the last
five games. In the same manner, an initiating party would desire to
send a securities transaction to such a "hot hitting" executing
broker, as is made possible by the system and process of the
present invention, which facilitate an optimization analysis and
inform the initiating party of the identity and associated
statistics of the "hot hitting" executing broker(s).
[0663] An embodiment of the present invention incorporates an
optimization process analyzing real-time and recent data to
determine the executing brokers who are the "hot hitters"--that is,
the executing brokers providing the lowest expected total execution
cost for a transaction in a given security at a particular moment
in time (the time in which the order is ready for execution in the
market). Given the nature of this type of analysis, the "hot
hitter" (or "hit hitters" for larger orders) among executing
brokers is likely to vary over time according to: (1) the
individual security and the security type in the transaction; (2)
the most recent trades in the security; (3) the time period
utilized in this analysis; (4) the number of shares recently traded
in the security; (5) the number of orders executed recently in the
security; (6) the speed in which the share price of a security is
moving up or down (the market velocity); (7) by buy or sell orders;
(8) the order size; (9) the speed in which the executing broker can
complete the trade (time to execute); and (10) other similar
factors that impact the overall quality of execution for a
securities transaction.
[0664] The result of the optimization analysis is that a given
securities transaction (such as a buy or sell order) is analyzed
according to real-time and recent market data including:
[0665] The most favorable quoted share price for the security;
[0666] The number of shares available from an executing broker (or
a plurality of executing brokers) at the most favorable quoted
share prices (liquidity);
[0667] The execution cost (usually in cents per share, although
sometimes basis points are utilized) posted by executing
brokers;
[0668] The recent price improvement provided by the various
executing brokers;
[0669] The speed of execution (time to execute) by the executing
brokers; and
[0670] The current rate of change in the price of a security.
[0671] As a final output, an embodiment of the present invention
conducts an optimization analysis that incorporates the above
parameters through real-time and recent data inputs and produces
the executing broker or a list of executing brokers that provides
the lowest expected total execution cost for a securities
transaction. The embodiment of the present invention is a real-time
process that strives to minimize any latency effect by utilizing:
(1) the most current market data available with respect to shares
prices, shares available and the executing broker; and (2) the
fastest possible analytical process involving the market data. The
result of this quest for speed and accuracy is that, before another
party can buy or sell the desired shares, the party initiating the
securities transaction is able to automatically route orders to the
designated lowest cost executing brokers or, if such integration is
unavailable, either electronically or manually upload the orders to
another system capable of routing orders to these designated
executing brokers.
[0672] The data for the most favorable quote for a security, for
the quotes for the subsequent most favorable share prices (known as
the depth of the market), and for the number of shares available
per price from various executing brokers (liquidity) is provided
through a real-time market data feed. There are numerous vendors
providing this type of data.
[0673] In an embodiment of the present invention, the execution
costs (usually cents and/or fractions of cents per share) are
determined by the executing broker and communicated through a
graphical user interface (GUI) that enables an executing broker to
set and change prices on a real-time basis. (Execution costs could
also be set contractually and not changed in real-time).
Alternatively, the executions costs can be communicated through
other means, such as through reports on paper. An executing
broker's pricing could be determined by: (1) security; (2) groups
of securities; (3) buy or sell orders; (4) orders that add or
remove liquidity from their order books; and (5) size of orders.
The execution costs can also vary according to the following
mutually exclusive conventions, including: (1) listed or OTC
securities; (2) domestic or international securities; (3) market or
limit orders; (4) day or good-to-cancel orders; (5) orders executed
by the broker or passed through to another broker for execution;
and (6) other similar conventions.
[0674] The total expected execution cost could be customized based
on the different types of orders, which types each affect pricing
differently. For example, determining the total expected execution
cost can be customized, in real-time, based on customized
parameters such as whether the order involves listed securities or
OTC securities, whether the order is domestic or international,
whether the order is a market order or a limit order, whether the
order is a good-to-cancel order or a day order, whether the order
involves a large quantity of units or a small quantity of units, or
whether the order must be passed through to another venue for
execution (e.g., for regulatory reasons).
[0675] An executing broker, through the real-time capability to
update execution costs, has the capability to respond to its
business needs and circumstances through real-time alterations to
its execution cost schedule. The result of any change is an
immediate impact on the optimization analysis to determine lowest
expected total execution cost for a securities transaction. For
example, an executing broker who desires to liquidate excess
inventory in a given security may lower the executing cost for an
order or, alternatively, pay a rebate for order flow to the
initiating party until such inventory has been sold. An executing
broker could also acquire inventory in a security through a similar
process of customizing execution costs (or paying for order flow).
In both examples, an embodiment of the present invention
immediately incorporates the revised (more favorable) execution
cost in the optimization analysis for determining the executing
brokers providing the lowest expected total execution cost for a
particular securities transaction, with the result that this
executing broker appear more favorably in the rankings of executing
brokers providing the lowest expected total cost execution.
[0676] The executing brokers are enabled, through an embodiment of
the present invention, to use a real-time marketplace for execution
costs to conduct a wide variety of real-time sales strategies (such
as discounts, inventory acquisition and liquidation, etc.) across a
wide swath of securities in order to attract order flow to their
company. This flexibility with respect to sales strategies enables
the executing broker to more efficiently attract vital order flow
to its organization. Order flow (the volume of shares directed to
its organization for execution) is critical to the financial
well-being of an executing broker, as order flow is a necessary
pre-condition to generating revenues for its organizations. An
embodiment of the present invention immediately and automatically
incorporates the changes in their execution costs into the
optimization analysis.
[0677] An embodiment of the present invention also incorporates a
real-time calculation of expected price improvement in securities
transactions. Such an analysis reflects the variation of share
prices executed relative to the National Best Bid and Offer
(NBBO).
[0678] FIG. 12B illustrates an example of a National Best Bid and
Offer 1225 with a security trading at a National Best Offer (the
price at which a buyer may acquire the security) of $42.02 per
share and a National Best Bid (the price at which a seller may sell
the security) of $42.00 per share. The spread (the difference
between Bid and Offer is $42.02 less $42.00, or $0.02 per share
(two cents per share)). Ideally, the spread (two cents per share)
is retained by the executing broker (or exchange) as compensation
for providing the service of executing the transaction (acting as a
broker) between the buyer and seller of the security.
[0679] A buyer and seller of a security, in order to get the best
possible share price (a higher share price for the seller and a
lower share price for the buyer), will endeavor to obtain the
closest possible share price to the Midpoint Between Bid and Offer
(MBBO). In FIG. 12B, the MBBO is $42.01 per share. As a result,
when a purchase of a security occurs at a share price lower that
the National Best Offer ($42.02 per share in this example) or the
sale of a security occurs at a higher price than the National Best
Bid ($42.00 per share in this example), the corresponding benefit
is referred to as price improvement.
[0680] In FIG. 12B, the MBBO is $42.01 per share and, in this
example, a transaction price of $42.015 would represent a one-half
cent per share price improvement over the National Best Offer of
$42.02 per share. Obviously, such a difference is small on an
individual share basis, but such a benefit has the potential to
accumulate to significant amounts for a multi-billion dollar,
actively traded investment portfolio over the course of a
significant time period, such as a year or longer.
[0681] An embodiment of the present invention incorporates an
analysis of the transactions executed by individual executing
brokers relative to the NBBO on a security by security basis in
order to determine what amount, if any, of price improvement was
achieved by the initiating party (the actual buyer or seller of
securities) to the transaction. A customizable optimization
analysis examines the price improvement achieved in a security by
each executing broker over data groups such as: (1) time periods in
terms of seconds, minutes, hours, days, etc.; (2) recent trades
such as the last five, ten, twenty-five, fifty, etc. transactions;
(3) recent trades such as specific volumes of shares traded; (4)
buy or sell transactions; and (5) other similar such grouping
mechanisms. Finally, the initiating party and the executing broker
may negotiate an agreed level of price improvement for their
transactions.
[0682] With such data on price improvement by executing brokers for
a security, the financial benefit in terms of cents (or fractions
of a cent per share) is calculated and incorporated into the
optimization process for determining the executing broker providing
the lowest expected total execution cost for a transaction in a
specific security.
[0683] Overall, the price improvement analysis enables the
initiating party to analyze and determine the executing brokers
showing favorable price quotes and liquidity in order to determine
the executing brokers that are the "hot hitters" with respect to
price improvement. As stated earlier, the optimization analysis
also responds in real-time to changes in execution costs as the
executing brokers change them during the trading day. The result is
that the optimization analysis, to determine the "hot hitting"
executing brokers with respect to price improvement (and execution
costs), responds to actual recent performance in terms of price
improvement by the executing brokers. In the event more than one
executing broker provides the lowest expected total execution cost,
then an embodiment of the present invention can allocate the shares
among these executing brokers according to methods such as pro
rata, an even division, or taking the shares from the executing
broker offering the largest to the smallest number of shares. As
such, the present invention creates a real-time accountability
process for price improvement (and execution costs) that serves the
best interests of the initiating party while simultaneously
rewarding those executing brokers that provide the greatest price
improvement (and lowest execution costs) by automatically directing
significant order flow to their organizations.
[0684] An embodiment of the present invention also evaluates and
ranks the time required to execute an order by the executing
brokers. The time to execute for executing brokers (which currently
range from milliseconds to multiple seconds) becomes an important
factor in: (1) obtaining the most favorable quote (as other parties
may step up to buy or sell the available shares at the most
favorable quote); and (2) preventing the quoted prices from moving
away from the initiating party (higher prices for a buyer and lower
prices for a seller) in times of high market volatility or rapid
market movement (such as often happens at the opening 30 minutes or
closing 30 minutes of the market).
[0685] An embodiment of the present invention also evaluates and
incorporates the rate of change in the price of a security (market
velocity). As such, the velocity (the rate of change in the price
of a security is moving) can become a disadvantage to an initiating
party in the event when an order is entered for a security where:
(1) the velocity is high; and (2) the quoted price is moving away
from the initiating party's desired price.
[0686] An embodiment of the present invention determines and ranks
the time required to execute an order for securities and order
types by executing broker. These results are combined with the
current market velocity calculations (the rate of change in cents
per second per share of a security) to create an expected execution
speed cost factor. The execution speed cost factor can be expressed
as the market velocity (rate in change of price, e.g., cents per
second) multiplied by the execution time (e.g., in seconds). For
example, if a security's price is dropping at the rate of one-half
cent per second and the executing broker requires two seconds to
execute the order, the execution speed cost factor for this
hypothetical buy order is one cent per share. Obviously, the
execution speed cost factor becomes more important in times of high
market volatility and less important in times of low market
volatility. Still, an executing broker with a fast execution speed
can expect to consistently rank higher than an executing broker
with a considerably slower execution speed.
[0687] Overall, an embodiment of the PLCQ engine of the present
invention combines the factors listed in the following Table 2 in a
real-time optimization process that utilizes real-time market data
and recent trading history to determine the executing broker(s)
that provides the lowest expected total execution cost:
TABLE-US-00002 TABLE 2 PLCQ Optimization Process Factors P Price
Lowest Share Price From Real-time Market Most Favorable Quote(s)
Data Feed L Liquidity Shares Available From an Real-time Market
Executing Broker at a Quoted Data Feed Price C Cost Execution Cost
per Share as Real-time Entry by Input by an Executing Broker
Executing Broker Q Quality Price Improvement Provided on a
Calculated From Security by an Executing Broker Recent Trade Data
Quality Execution Speed (Time Required Calculated From to Execute
an Order) Recent Trade Data Quality Rate of Change in the Price of
Calculated From a Security Recent Trade Data
[0688] FIG. 12C is an exemplary illustration of how an embodiment
of the present invention operates with respect to real-time market
parameters and three executing brokers (A, B, and C). The market
parameters 1226 at the time an initiating party enters an order are
as follows:
[0689] (1) The share price is $42.00 per share.
[0690] (2) The order size is buy 4,500 shares.
[0691] (3) The spread on the security (the difference between the
bid and offer) is one and one half cents ($0.0015).
[0692] (4) The security velocity (the current rate of change in the
price of the bid and offer) is one quarter of a cent per second
($0.0025/second).
[0693] FIG. 12C also provides the executing broker parameters 1227
for executing brokers A, B, and C with respect to their following
respective parameters: number of shares available at the quoted
share price (liquidity); their respective cost per share to execute
the order; their most up-to-date price improvement statistics
(e.g., including executing broker A's trades executed outside the
spread at 110% --a poor quality of execution); and time to execute
an order.
[0694] FIG. 12C further provides the expected total execution cost
per share 1228 for all available shares for each executing broker.
As such, when utilizing the most favorable quote price and
adjusting for execution cost per share, price improvement, and
execution speed by converting these factors into cents per share,
expected total execution cost per share can be calculated using the
following exemplary formula:
Expected Total Execution Cost Per Share=Share price+/-execution
cost per share+/-expected price improvement+/-execution speed(time
to execute the trade*rate of change in the price of the
security).
[0695] The result of this calculation is as shown in the following
Table 3:
TABLE-US-00003 TABLE 3 Expected Total Execution Cost Per Share
Executing Total Execution Broker Cost per Share A $42.0340 B
$42.0025 C $42.0210
[0696] In different embodiments of the present invention, various
weightings and probabilities could be assigned to the factors and
the manner in which the factors (e.g., quoted unit price, current
execution costs, expected price improvement, and expected execution
speed) are combined and incorporated into the calculation of this
formula. In one embodiment, total expected execution cost is
customized based on customized input received, in real-time, from
the party initiating the securities transaction. That customized
input can include, for example, weightings, statistical analysis,
probabilities, types of orders, and numerical parameters
determining the calculation of expected price improvement and
expected execution cost, as well as instructions as to how the
factors are combined and incorporated into a calculation of the
total expected execution cost.
[0697] FIG. 12D provides an exemplary illustration of the result of
the optimization analysis with respect to the determination of the
executing broker(s) providing the lowest expected total execution
cost. FIG. 12D also illustrates how the choice of executing broker
can vary according to three different selection methods: (1)
liquidity--the executing broker(s) with the highest number of
shares available; (2) broker execution cost--the executing
broker(s) willing to execute the order at the lowest per share
charge; and (3) expected total execution cost--which represents an
embodiment of the present invention optimizing real-time and recent
data on share price, liquidity, execution cost, price improvement,
and execution speed in order to determine the executing brokers(s)
providing lowest expected total execution cost for an order.
[0698] FIG. 12D shows that the executing broker selection 1229 and
optimal rankings are as follows: by liquidity, the optimal broker
rankings are A, B, and C; by execution cost, the optimal broker
rankings are B, A, and C; and by total execution cost, the optimal
broker rankings are B, C, and A.
[0699] FIG. 12D also compares expected total execution cost 1230
and calculates the cost penalties from using the liquidity method
and/or execution cost method to select executing brokers compared
to using the expected total execution cost method (an embodiment of
the present invention). At a buy order of 2,000 shares, the cost
penalty for the liquidity method is $53.75 and for the execution
cost method is $6.50. At 3,500 shares, the cost penalty for both
the liquidity and execution cost method is $13.00. Thus, even on a
single small order, there are substantial savings to be realized in
favor of the initiating party. These savings accrue to far more
significant amounts when utilized by large fund groups trading
several billion shares annually. The cost savings in basis points
are shown in Table 4 below, which may provide a more meaningful
measurement of cost savings:
TABLE-US-00004 TABLE 4 Cost Savings In Basis Points Number of
Liquidity Exec Cost Shares (bps) (bps) 500 7.50 0.00 1,000 7.50
0.00 1,500 7.50 0.00 2,000 6.40 0.77 2,500 4.24 1.24 3,000 2.28
1.03 3,500 0.88 0.88 4,000 0.39 0.39 4,500 0.00 0.00
[0700] The above savings begin to move lower as the liquidity in
the example is exhausted. In essence, this phenomenon reflects the
principle that, when all the liquidity is consumed by an order, the
selection of executing broker becomes less important than in
circumstances when an order consumes part of the available
liquidity at quoted prices. Thus, the present invention represents
an optimization of the small order execution process. In addition,
the system of the present invention provides the capability to
slice an order up among multiple executing brokers when the
initiating party desires greater anonymity from the executing
brokers, with the added benefit that the system of the present
invention slices and routes these orders to multiple executing
brokers in such a manner as to also minimize the total execution
cost for the order.
[0701] FIG. 12E is an exemplary illustration of an embodiment of
the present invention in which the optimal group of executing
brokers providing the lowest expected total execution cost, when
factoring in all variables, may not always utilize all the
executing brokers providing the lowest quoted price for a
security.
[0702] The market parameters 1231 and executing broker parameters
1232 in FIG. 12E are similar to FIG. 12C, except that they are
shown for five executing brokers (A, B, C, D, and E) that are
quoting liquidity at two different share prices ($42.00 and
$42.02). The method for calculating expected total execution cost
per share 1233 is identical to FIG. 12C, with the results shown in
Table 5 as follows:
TABLE-US-00005 TABLE 5 Expected Total Execution Cost Per Share
Executing Total Execution Broker Cost per Share A $42.0340 B
$42.0025 C $42.0210 D $42.0290 E $42.0200
[0703] FIG. 12F provides an exemplary illustration of the result of
the optimization analysis with respect to the determination of the
executing broker(s) providing the lowest total cost execution. FIG.
12F shows that the executing broker selection 1234 and optimal
rankings are as follows: by liquidity, the optimal broker rankings
are A, B, C, D, and E; by execution cost, the optimal broker
rankings are B, A, C, E, and D; and by total execution cost, the
optimal broker rankings are B, E, C, D, and A.
[0704] FIG. 12F also compares expected total execution cost 1235
and calculates the cost penalties from using the liquidity method
and/or execution cost method to select executing brokers compared
to using the total execution cost method (an embodiment of the
present invention). At a buy order of 2,000 shares, the cost
penalty for the liquidity method is $54.25 and for the execution
cost method is $7.00. At 3,500 shares, the cost penalty for both
the liquidity and execution cost method is $27.00. At a buy order
of 5,500 shares, the cost penalty for the liquidity method is
$19.00 and for the execution cost method is $10.00. Again, even on
a single small order, there are substantial savings to be realized
in favor of the initiating party. These savings accrue to far more
significant amounts when utilized by large fund groups trading
several billion shares annually, as shown by the savings in basis
points shown in Table 6 below:
TABLE-US-00006 TABLE 6 Savings In Basis Points Number of Liquidity
Exec Cost Shares (bps) (bps) 500 7.50 0.00 1,000 7.50 0.00 1,500
7.50 0.00 2,000 6.46 0.83 2,500 4.33 1.33 3,000 2.88 1.63 3,500
1.84 1.84 4,000 1.37 1.37 4,500 1.00 1.00 5,000 0.90 0.69 5,500
0.82 0.43 6,000 0.65 0.30 6,500 0.51 0.18 7,000 0.24 0.08 7,500
0.00 0.00
[0705] FIG. 12F also provides an exemplary illustration that, under
the lowest expected total execution cost analysis, executing
brokers providing lower quoted share prices may drop in the
optimized broker rankings while lower ranked executing brokers
providing higher quoted share prices may rise in the optimized
broker rankings to achieve the lowest expected total execution
cost. Both types of events are a direct result of utilizing
execution cost and quality considerations in determining the lowest
expected total execution cost for the initiating party.
[0706] In providing a price-cost-liquidity-quality (PLCQ)engine, an
embodiment of the present invention preferably includes the
following systems, services, and data:
[0707] Order management system (and/or execution management
system).
[0708] Connectivity network between initiating parties and
executing brokers.
[0709] FIX engines for translating orders into a standard data
protocol.
[0710] Network of executing brokers.
[0711] GUI for executing brokers to establish and change their
execution costs in the PLCQ engine.
[0712] Real-time market data feeds.
[0713] Archive of market data on trade executions.
[0714] As a further embodiment of the system 1200 and
price-cost-liquidity-quality (PLCQ) engine 1201 shown in FIG. 12A,
FIGS. 12G(i) and 12G(ii) illustrate an exemplary implementation of
a price-cost-liquidity-quality (PLCQ) engine 1201, according to an
embodiment of the present invention. The actors include a system
administrator managing the price-cost-liquidity-quality (PLCQ)
engine 1201, an initiating party for the securities transaction
1236, and a plurality of executing brokers 202 able to provide
quotes and liquidity for the security in the transaction. The
systems include a GUI (graphical user interface) 1202 for the party
initiating the securities transaction and a GUI (graphical user
interface) 1204 for the plurality of executing brokers 202 to
establish execution costs, a real-time feed for current market data
1205, and an archive for market execution data 1207.
[0715] FIGS. 12G(i) and 12G(ii) also illustrate an exemplary
process of the present invention having the following steps, which
correspond to the reference numerals shown in FIGS. 12G(i) and
12G(ii).
[0716] In step 1260 in FIG. 12G(i), an initiating party 1236
utilizes a GUI 1202 to create (or receive) an order 1250 to buy or
sell a security.
[0717] In step 1261, utilizing the price-liquidity-cost database
1203, the initiating party 1236 requests real-time market quotes
1251 through a market data feed 1205 from a plurality of executing
brokers 202, including share price and number of shares available
(liquidity) for the transaction.
[0718] In step 1262, the initiating party 1236 requests data on
execution costs 1252 uploaded through the execution cost GUI 1204
for the plurality of executing brokers 202 to establish and change,
in real-time, execution costs for various securities. The execution
costs are usually quoted in cents (and/or fractions thereof) per
share. Execution costs can also be quoted in basis points on the
transaction amount.
[0719] In step 1263, utilizing the execution quality analysis
engine 1206, the system of the present invention conducts an
analysis of price improvement 1253 according to the customized
parameters established by the initiating party, to determine the
price improvement (if any) provided by the plurality of executing
brokers quoting liquidity for the security in the transaction. This
analysis accesses the system archives 1207 for historical data for
a plurality of transactions executed by a plurality of executing
brokers 202. The results of the price improvement analysis are
converted to cents per share.
[0720] In step 1264, the system of the present invention conducts
an analysis of time required to execute an order by examining, for
individual executing brokers, trade execution data to compare the
time the executing broker received an order to the time the order
was actually executed. This difference represents the execution
time for the executing broker. The system of the present invention
also examines real-time transaction data to determine the current
velocity for the security (the current rate of change in the price
of the security). The execution time data (in number of seconds
and/or fractions thereof) is multiplied by the velocity of the
security (the current rate of change in the price of the security)
to determine the cent per share cost of the execution speed 1254
for the plurality of executing brokers 202 have executed a
plurality of transactions.
[0721] Referring now to FIG. 12G(ii), in step 1265, utilizing the
order optimization engine 1208, the system of the present invention
combines the share price (e.g., in dollars and cents) offered by
each executing broker 202 along with their current execution cost
in cents per share, the expected price improvement in cents per
share, and the execution speed cost in cents per share. The
resulting total is the expected total execution cost per share 1255
for the security, in cents per share, for each executing broker 202
that is quoting liquidity (in numbers of shares) for the security
in the transaction.
[0722] In step 1266, the system of the present invention ranks the
plurality of executing brokers 202, for example, in order from the
lowest total execution cost to the highest expected total execution
cost 1256.
[0723] In step 1267, the system of the present invention, using the
expected total execution cost, develops rankings 1257 to specify
the executing broker 202 or plurality of executing brokers 202 and
the order in which the executing brokers 202 should be utilized so
as to ensure the lowest total execution cost is achieved 1257.
[0724] In step 1268, the optimized broker selection order is
communicated to the initiating party 1236 through the GUI 1202 or
the optimized broker selection order is implemented through the
system of the present invention, through tangible output such as an
electronic feed or upload of the executing broker rankings, or a
manual conversion of the data into another system to route the
orders to the desired executing brokers. The order routing can also
be printed on paper or displayed in a graphical user interface.
[0725] In one embodiment of the present invention, the tangible
output of the optimized broker selection order comprises issuing
instructions to route all or part of the order for the current
securities transaction to the executing broker having the lowest
total expected execution cost. In addition, in some cases, more
than one executing broker may have the lowest total expected
execution cost. Accordingly, an embodiment of the method comprises
determining a plurality of executing brokers having the lowest
total expected execution cost, and issuing instructions to route
the order for the current securities transaction among those
plurality of executing brokers having the lowest total expected
execution cost based on customized parameters. Customized
parameters can include, for example, an even division among the
plurality of executing brokers, a pro rata allocation among shares
available, or an allocation based on the largest to smallest
quantity of shares available from each of the plurality of
executing brokers.
[0726] In a further embodiment of the present invention, the
methods described above for selecting executing brokers are
repeated, for example, to accommodate a large order that, if
executed in one transaction, might undesirably impact the price of
the security. Thus, for example, a large order can be divided into
many small sub-orders executed at certain frequencies over a period
of time. The methods for selecting executing brokers for an order
can be repeated over time based on customized parameters
determining the number, timing, and frequency of the repeated
selection of executing brokers for an order. The customized
parameters can, for example, include one or more of: (1) a
specified interval until an order is completely filled or filled to
a specified percentage; (2) a specified number of repetitions; (3)
a specified time interval; (3) a specified duration; (4) a
specified change in unit price; (5) a specified percentage within a
target price; and (6) a specified unit price.
[0727] For purposes of description, the above system and process
utilizes equity shares as the unit of trading. However, the system
of the present invention could also be utilized across multiple
forms of trading such as fixed income, options, futures, currency,
commodities, derivatives, and other such instruments that utilize a
standard category of unit (such as shares, units, bonds, contracts,
etc.) for purposes of implementing an automated and efficient
trading process.
[0728] As one of ordinary skill in the art would appreciate, in
addition to the components of (1) the share price multiplied by the
number of shares and (2) the execution cost multiplied by the
number of shares, the total transaction cost may also include
charges for additional items such as confirmation delivery
("postage"), SIPC charges, and transaction taxes. These additional
items have not been included in the above analyses in order to
focus on the market-based factors in determining the total cost of
a securities trade to the participants in the transaction. However,
in a further embodiment of the present invention, the costs of
these additional items are factored into the total execution
cost.
[0729] 6) Trade Reconciliation System
[0730] FIG. 13 is a schematic diagram illustrating a trade
reconciliation system 1300, according to an embodiment of the
present invention. The trade reconciliation system is a
computerized trade processing system that functions in the back
office system for the investment portfolios. The trade
reconciliation system can comprise general ledger and accounting
1301, position manager 1302, and stock record 1303 modules. The
position manager 1302 can comprise an auto cage 1304 that connects
to clearing organizations 1305. The position manager module 1302
and stock record module 1303 support the trade processing module
1306 that provides commission accounting 1307 and trade processing
1308. The stock record also supports the purchase and sales module
1309, which incorporates data through external data providers 1310
and market connections 1311. The trade reconciliation system 1300
provides real-time, multi-currency trade settlement rules, trade
comparisons, trade confirmation and affirmations, purchases and
sales, trade exception processing, commission calculations,
accruals, cash flows, and trial balances. In essence, the trade
reconciliation system 1300 operates in an automated fashion through
the incorporation of real-time and batch data feeds from a variety
of different sources. In its simplest form, the trade
reconciliation process ensures that: (1) all trades are properly
accounted; (2) all trading, pricing, and processing errors have
been identified and addressed; and (3) all accounts are in balance.
At the conclusion of this process, the entire system is ready for
the next day's trading activity.
[0731] In the prior art, the trade reconciliation process is the
responsibility of both the sub-advisor and the sponsoring
organization while the balancing of accounts is the responsibility
of the sponsoring organization. In an embodiment of the present
invention, the responsibility for both the trade reconciliation
process and the balancing of accounts shifts to the sponsoring
organization.
[0732] 7) Additional Systems
[0733] The system of the present invention can also include
additional systems to support order execution processing. These
systems include a communications engine to translate and direct all
messages between the appropriate parties; a communications protocol
for directing the message generation and transmission process; a
message format for various message types, headers, fields names,
field data formats and acceptable parameters as to eliminate
confusion as to message content, instructions, and destination; and
a communications network to connect all sub-advisors, sponsoring
organizations, and executing brokers with real-time, reliable, and
scalable connectivity
[0734] B. Process
[0735] In an embodiment of the present invention, the functional
responsibilities, personnel requirements, system requirements,
regulatory responsibilities, and data flows are dramatically
different from the prior art. From a perspective of responsibility
for the sub systems, Table 7 below illustrates how the operating
responsibilities for the various systems change from the prior art
to an embodiment of the present invention.
TABLE-US-00007 TABLE 7 Operating Responsibilities of the Present
Invention System Responsibility Prior Art Present Invention Order
Entry Sub-advisor Sub-advisor Compliance Engine Sub-advisor
Sponsoring Organization and Sub-Advisor Order Management
Sub-advisor Sponsoring Organization System and Sub-Advisor High
Touch - Low Not Sponsoring Organization Touch Engine Applicable
Real-Time Automated Process Price - Liquidity - Not Sponsoring
Organization Cost - Quality Engine Applicable Real-Time Automated
Process Trade Reconciliation Sub-advisor Sponsoring Organization
Communications Engine Sub-advisor Sponsoring Organization
Communications Protocol Sub-advisor Sponsoring Organization
Communications Network Sub-advisor Sponsoring Organization
[0736] With respect to the responsibilities of the sub-advisor,
there are substantial differences between the prior art and the
present invention. These differences are summarized in FIG. 14,
which is a table that highlights the impact on the sub-advisor
according to an embodiment of the present invention. The unified
trading and control system is flexible in its implementation in
that implementation can proceed on a fund by fund or manager by
manager basis even as trading responsibility for certain funds or
portfolios, such as an emerging markets or micro cap stocks, may
remain with the sub-advisors (assuming the sub-advisor has
proficiency with these less liquid issues that the sponsoring
organization may not possess.) Also, the money manager (or
portfolio manager) may desire more control over the trading of
specific assets or issues, the utilization of certain trade
strategies or the direction of orders to a specific executing
broker. The authorization of such exceptions remains with the
sponsoring organization as the sponsoring organization can
authorize those exceptions that benefit the fund shareholders or
plan beneficiaries. Overall, in an embodiment of the present
invention, there are multiple benefits for the sub-advisor with
respect to lower operating expenses, less operating and trade error
risk and, of course, superior fund performance.
[0737] Finally, an important user group that must be comfortable
with the system implementation of the present invention is the
portfolio managers making the daily buy and sell decisions in the
fund or investment portfolio. The system of the present invention
addresses the portfolio managers' concern that their asset
management process is not interfered with as new systems,
processes, and procedures are implemented.
[0738] C. Rationale for Implementation of Standards in the System
of the Present Invention
[0739] An embodiment of the present invention provides a standard
system comprising one or more of the following components:
communications protocol, communications format, communications
network, message transfer facilitation software, and dedicated
computer processor. The standard for the system of the present
invention provides simplicity, reliability, scalability, and cost
effectiveness in contrast to the complexity, expense, and
potentially chaotic processing caused a plurality of sponsoring
organizations making individual systems decisions without regard to
the burden that the plurality of systems and configuration places
on their sub-advisors and executing brokers. As such, the standard
represents a single group of specific components for use by all
parties, in which a sub-advisor or executing broker implementing
the system of the present invention with a single sponsoring
organization is able to duplicate, as a "cookie cutter" type
process, the initial implementation, inclusive of process,
procedures, protocols, and connectivity, with each subsequent
sponsoring organization that requires their implementation of the
system of the present invention. The result is that the standard,
as a single group of specific components for use by all parties,
vastly simplifies the implementation process for all parties and
creates a far more reliable, cost effective, and scalable
system.
[0740] For example, a single mutual fund company (such as AIM,
Janus, or Oppenheimer) may act as a sub-advisor to ten to twenty
different sponsoring organizations (usually managing between one
and five funds per sponsoring organization). As such, a mutual fund
company may manage twenty to sixty separate sub-advised funds
alongside their thirty to fifty proprietary mutual funds (and as
many or more institutional and private accounts). A money manager
at a mutual fund company making a single trade (such as: buy IBM)
in a single strategy (such as large cap growth) could easily impact
ten to twenty separate individual portfolios utilizing the large
cap growth strategy. These orders are communicated to the
sponsoring organizations through standard communications messages
sent through a communications protocol, communications format,
communications network, message transfer facilitation software, and
dedicated computer processors. It is clear that the money manager
achieves a high level of automation and significant reduction in
operating risk (and associated trading losses), as trading across a
plurality of accounts is implemented through a single standard and
integrated system.
[0741] In comparison, the potential complexity of the various
implementations of the system of the present invention reflects the
following factors.
[0742] The National Association of Variable Annuities (NAVA), the
variable insurance industry trade group, indicates that it has over
fifty members acting as sponsoring organizations for their mutual
fund, variable annuity, and defined contribution (401k, 403b and
457) financial products (see FIG. 15). The number of additional
sponsoring organizations, such as private and public pension funds,
easily adds several hundred more sponsoring organizations to the
list shown in FIG. 15.
[0743] The Investment Company Institute (ICI), the mutual fund
industry trade group, has over three hundred member mutual fund
companies suitable to provide money management services to
sub-advised funds (see FIGS. 16A and 16B) and there are hundreds of
additional institutional managers capable of functioning as a
sub-advisor to an investment portfolio.
[0744] There are also over forty providers of order management
systems (see FIG. 17) and there are several hundred firms offering
their services as executing brokers (see FIGS. 18A and 18B for a
partial list).
[0745] In addition, there are over 75 companies offering over 115
different communications engines for trade order messaging,
translation, and destination routing. These communications engines
usually utilize a common industry communications protocol (usually
the Financial Information eXchange format or "FIX"). However, each
communications engine has its own unique "dialect" as to the
specific implementation of the protocol. As such, despite the
common industry protocol, there remain substantial challenges in
the interoperability and ease of communications between the
pluralities of communications engines. Finally, there are over 25
communications networks available for sponsoring organizations to
utilize as their means of connectivity to sub-advisors and
executing brokers, thereby requiring each sub-advisor and executing
brokers to link as a node to each system selected by at least one
sponsoring organization.
[0746] Given the plurality of sponsoring organizations (as shown in
FIG. 15 and inclusive of additional sponsoring organizations such
as mutual funds utilizing sub-advisors, defined contribution plan
sponsors, pension and defined benefit sponsors, and other user
groups of considerable size), sub-advisors (as shown in FIGS. 16A
and B), order management systems (as shown in FIG. 17), executing
brokers (as shown in FIGS. 18A and 18B) along with the 115
communications engine with each utilizing a specific "dialect"
reflecting its original time and purpose of creation, several
communications protocols for messaging and 25 communications
networks, the number of potential unique configurations of these
organizations and systems is so overwhelming as to create such
complexity and chaos as to prevent an implementation of the system
of the present invention based on the well justified concerns that
any level of industry acceptance could result in unacceptable
complexity, operating costs, personnel costs, order entry errors,
trade processing errors, and associated reduced performance of
investment portfolios. Given that the sub-advisor is required to
compensate an investment portfolio for all losses resulting from
their errors of any kind, the likely result of an absence of a
standard is the refusal by sub-advisors to cooperate with an
implementation of the system of the present invention.
[0747] FIG. 19 provides an exemplary structure 1900 illustrating
the complexity created by a plurality of sponsoring organizations
304 deciding to implement the embodiment of the present invention
without a standard system 1901. In this illustration, twenty-two
different sponsoring organizations 304 select ten different order
management systems 1901. The sponsoring organizations 304 utilize a
total of forty-two different sub-advisors 301 in their financial
product or pension portfolios along with eight different executing
brokers 202 (while in actual practice the actual number of
sponsoring organizations 304, sub-advisors 301, and executing
brokers 202 would be considerably higher than the illustration in
FIG. 19). Each sub-advisor 301 is asked to move from a single
system to a plurality of systems 1901 (as there are over forty
systems available to a sponsoring organization as shown in FIG. 17)
selected by each sponsoring organization. As a result, a single
trade by a single sub-advisor 301 may require order entry into ten
or more different systems selected by sponsoring organizations.
Such a process could be complex, chaotic, costly, and rife with
errors. The associated expense for resolving the errors (as the
fund shareholders and plan beneficiaries are not responsible for
such errors and must be reimbursed for any losses) could make
sub-advisors 301 unwilling to implement such a process.
[0748] FIG. 20 illustrates the complexity of such an embodiment
2000 without a standard 1901 through a focus on the complexity
facing a single sub-advisor 301 managing nine proprietary funds
2001 utilizing a single system 1901 and nine sponsoring
organization funds or investment portfolios for sponsoring
organizations 2002 utilizing a plurality of systems 1901. The
illustration demonstrates, even at the small scale of a single
sub-advisor, the inherent complexity and potential chaos of such an
implementation without the use of a standard system.
[0749] Therefore, to reduce this complexity, an embodiment of the
present invention provides a single standard. FIG. 21 illustrates
the simplicity, ease of use, and efficiency resulting from an
embodiment 2100 utilizing a designated standard single manager
order management system 2101 for use by all sponsoring
organizations 304. The standard order management system and single
network node connection by a single party to all parties reflects a
vast improvement in the operating reliability, costs, and ease of
implementation and operation. As shown, a single system 2101 (e.g.,
in this illustration, a standard order management system,
communications engine, communications protocol, communications
format, and/or communications network; however, an embodiment could
require fewer of the listed standard components) can be used as an
easily and rapidly duplicated image used by sponsoring
organizations 304. A standard--implemented through, for example, a
designated order management system, communications engine, or
communications protocol--creates the leverage for allowing rapid
industry adoption of the system of the present invention.
[0750] II. Exemplary System Components, Services, and Data of a
Sponsoring Organization
[0751] In an embodiment of the present invention, the following
systems, services, and data are preferably in place for a
sponsoring organization's investment portfolios:
[0752] Custody firm to hold the securities and cash for benefit of
the funds and plans.
[0753] Daily net cash contribution or withdrawal per investment
portfolio--e.g., can be provided by the sponsoring organization to
the system administrator.
[0754] Security master data service.
[0755] Best execution monitoring service.
[0756] Transaction cost accounting system.
[0757] System administrator for the HiLo Engine (HLE).
[0758] HiLo Engine (HLE).
[0759] Sponsoring organization (advisors).
[0760] Investment portfolios of the sponsoring organization.
[0761] Money management firms (sub-advisors).
[0762] Portfolio manager or teams of portfolio managers for the
investment portfolio.
[0763] Order management systems (and/or execution management
systems) at the sponsoring organization and money management
firms.
[0764] Compliance systems at the sponsoring organization and money
management firms.
[0765] Connectivity network between sponsoring organization, money
management firms, and executing venues or brokers.
[0766] Standard message format and transmission protocol for
communication with the HiLo Engine.
[0767] Network of executing venues or brokers.
[0768] Real-time market data feeds.
[0769] Archive of market data on trade executions.
[0770] Trade reconciliation systems at the sponsoring organization
and money management firms.
[0771] III. Exemplary Implementation of the Present Invention
[0772] With reference to FIG. 22, which is an alternative to the
embodiment shown in FIG. 11Cii, an exemplary system of the present
invention is as follows. The actors include a system administrator
administering the unified trading and control system 2200, a
sub-advisor 301 acting as money manager for the investment
portfolios, a portfolio manager (money manager) 1103 responsible
for making investment decisions for a fund or investment portfolio,
a sub-advisor trade/operations group 2201, a sub-advisor compliance
group 2202, a sponsoring organization compliance group (not shown),
a sponsoring organization 304 controlling party for the assets and
responsible for client books and records, a custodial firm holding
all securities and cash (not shown), and executing brokers 202 as
the parties to whom the buy or sell order is directed to be
executed (filled).
[0773] The system includes a unified trading and control system
2200 including a portfolio modeling system 1103, an order entry
system 700, a sub-advisor compliance engine 506 SA, a sub-advisor
order management system (OMS) 503 SA, the hi touch-low touch engine
1105, the trade order rotation engine 1112 and 1113, the sponsoring
organization standard order management system (OMS) 503 SO, a
sponsoring organization compliance system 506 SO, the
price-liquidity-cost-quality engine 1200, the sponsoring
organization's communications network 502, the network of executing
brokers supporting the sponsoring organization 302, the individual
executing brokers 202, and the trade reconciliation system
1117.
[0774] FIG. 22 also illustrates an exemplary process of the present
invention having the following steps, which correspond to the
arrows and their adjacent reference numerals shown in FIG. 22.
[0775] 2225) Sub-advisor 301 provides a portfolio manager 1103 for
the fund or investment portfolio.
[0776] 2226) Portfolio manager 1103 sends the trade order to the
trade/operations group 2201 for order entry.
[0777] 2227) Trade/operations group 2201 enters the order into the
order entry system 700.
[0778] 2228) As an alternative to step 2226 and 2227, the portfolio
manager 1103 enters the trade order directly into the order entry
system 700.
[0779] 2229) The order entry system 700 routes the order to the
compliance engine 506 SA for evaluating the order relative to
regulatory and prospectus requirements and restrictions.
[0780] 2230) If a violation occurs (Violation=Yes), the order is
stopped from execution and routed for review by the sub-advisor.
The violation is also reported to the sponsoring organization
compliance group (not shown) and to any or all of the sub-advisor
groups shown in steps 2231, 2232, and 2233.
[0781] 2231) If a violation occurs (Violation=Yes), the order can
be routed to the trade/ops group 2201.
[0782] 2232) If a violation occurs (Violation=Yes), the order can
be routed to the compliance group 2202.
[0783] 2233) If a violation occurs (Violation=Yes), the order can
be routed to the portfolio manager 1103.
[0784] 2234) If a violation does not occur (Violation=No), the
order is routed to the order management system (OMS) 503 SA, which,
through the sub-advisor routing loop, directs the order for
sub-advised funds or accounts to the HiLo Engine (HLE) 1105.
Although FIG. 22 depicts the HiLo Engine 1105 as located within the
unified trading and control system, one of ordinary skill in the
art would appreciate that the HiLo Engine 1105 could be located
elsewhere, such as at the sub-advisor 301 or sponsoring
organization 306.
[0785] 2235) The HiLo Engine 1105 determines the expected market
impact of orders received from the sub-advisor order management
system (OMS) 503 and categorizes orders with significant expected
market impact as "high touch" orders 1106.
[0786] 2236) The high touch order 1106 is further categorized as
orders to be "worked" by a block trading desk, crossing system,
matching system, dark pool of liquidity, or some other form of
institution to institution trading system or exchange 1109. These
high touch trades are routed to the sponsoring organization's
compliance engine 506 SO for pre-execution review and approval and,
once approved, are ready for execution. (The sponsoring
organization compliance review step is not shown).
[0787] 2237) As an alternative to step 2236, the high touch order
1106 is divided into a series of smaller orders 1108 by a trading
algorithm or a set of manual decisions 1107.
[0788] 2238) The trading algorithm or set of manual decisions
divides the order into a series of smaller orders 1108 for
execution over a period of time.
[0789] 2239) Each of the smaller orders 1108 resulting from the
original high touch order is re-routed, via the sub-advisor
re-routing loop, to the HiLo Engine 1105. Step 2239 starts the
sub-advisor rerouting loop.
[0790] 2240) The HiLo Engine evaluates the re-routed smaller orders
1108, categorizes the orders with significant market impact as high
touch orders 1109, and routes these orders to be "worked" 1109.
[0791] 2241) High touch orders 1109 are directed via auto routing
1110 to the sub-advisor's order management system 503 SA. Although
FIG. 22 depicts the HiLo Engine 1105 as located within the unified
trading and control system, one of ordinary skill in the art would
appreciate that the HiLo Engine 1105 could be located elsewhere,
such as at the sub-advisor 301 or sponsoring organization 306.
[0792] 2242) The sub-advisor's order management system 503 SA
receives the high touch order 1106 and selects the executing
broker(s) 202.
[0793] 2243) The sub-advisor order management system 503 SA routes
the high touch orders 1106 to the executing broker(s) 202 for
execution.
[0794] 2244) Once the orders are executed by the executing brokers
202, the trade fill data for the high touch trades 1106 is routed
to the sub-advisor order management system 503 SA.
[0795] 2245) The sub-advisor order management system 503 SA
determines, when applicable, the allocation of shares for the
sponsoring organization and routes the trade allocation data along
with the trade fill data (for trades not requiring a special
allocation) for the high touch trades to the sponsoring
organization's order management system 503 SO.
[0796] 2246) The sponsoring organization's order management system
503 SO routes the trade allocation data for the sponsoring
organization's allocation of shares of the high touch trade and the
trade fill data (for trades not requiring a special allocation) to
the sponsoring organization's compliance engine 506 SO.
[0797] 2247) If a violation occurs (Violation=Yes), the trade
allocation data for the sponsoring organization's allocation of
shares of the high touch trade is routed for review by both the
sponsoring organization 306 and the sub-advisor 301.
[0798] 2248) If a violation does not occur (Violation=No), the
trade allocation data for the sponsoring organization's shares of
the high touch trade is routed to the sponsoring organization's
order management system (OMS) 503 SO.
[0799] 2249) The sponsoring organization's order management system
(OMS) 503 SO routes the trade allocation data for the sponsoring
organization's shares of the high touch trade to the sponsoring
organization's trade reconciliation system 1117. Steps 2235 through
2249 constitute the high touch order processing loop.
[0800] 2250) Returning to steps 2234 and 2239, when the HiLo Engine
1105 receives orders from the sub-advisor order management system
(OMS) 503 SA (as either the original and re-routed orders) that it
determines will have little or no significant expected market
impact, the HiLo Engine (HLE) 1105 categorizes those orders as "low
touch" orders 1111 that can be processed as "electronic" or "black
box" orders, which computer systems can execute with virtually no
human intervention. The "low touch" order 1111 can be either
original orders or re-routed orders from the sub-advisor order
management system 503.
[0801] 2251) The HiLo Engine 1105 directs low touch orders 1111
that constitute an exemplary order for an exemplary fund (and thus
does not require a trade rotation order) to the sponsoring
organization 304. For example, a single order for a single fund
would not require a trade rotation order.
[0802] 2252) The HiLo Engine 1105 routes trades requiring a trade
order rotation to the trade order rotation engine 1112 in order to
determine a trade rotation order between the sub-advisor 301 and
the sponsoring organization(s) 304 and 1116. For example, an order
involving several sub-advisor funds and several sponsoring
organization funds would require a trade rotation order. As another
example, when an asset manager places a plurality of orders in a
given security for execution across a plurality of investment
portfolios, trade order rotation is required.
[0803] 2253) The trade order rotation engine 1112 prepares trade
rotation instructions 1113 for the sub-advisor 301.
[0804] 2254) The trade rotation instructions 1113 are communicated
to the sub-advisor's order management system 503 SA via auto
routing 1110 (along steps 2254a and 2254b).
[0805] 2255) The trade rotation engine 1114 determines the trade
rotation order between a plurality of sponsoring organizations,
such as the sponsoring organization 304 and any number of
additional sponsoring organizations as represented by sponsoring
organization (SO.sub.x) 1116. The trade rotation order could also
be determined as a single trade rotation order between the
sub-advisor 301 and sponsoring organizations 304 and 1116.
[0806] 2256) The trade rotation engine 1114 prepares trade rotation
instructions 1115 for the sponsoring organizations 304 and
1116.
[0807] 2257) The trade rotation instructions 1115 are communicated
to the sponsoring organizations 304 and 1116.
[0808] 2258) The orders are routed to the sponsoring organization's
order management system (OMS) 503 SO. This step is illustrated for
an exemplary sponsoring organization 306 with a similar process
implemented by all sponsoring organizations (SO.sub.x) 1116.
[0809] 2259) The sponsoring organization's order management system
(OMS) 503 SO routes the order to the compliance engine 506 SO for
evaluating the order relative to regulatory and prospectus
requirements and restrictions.
[0810] 2260) If a violation occurs (Violation=Yes), the order is
stopped from execution and routed for review by the sponsoring
organization's compliance group (not shown) and the sub-advisor's
compliance group 2202.
[0811] 2261) If a violation does not occur (Violation=No), the
order is routed to the price-liquidity-cost-quality (PLCQ) engine
1200, which examines the current market share prices, liquidity,
execution cost, and quality factors such as expected price
improvement (and execution speed) to determine the optimal
combination of executing brokers providing the most cost effective
execution options.
[0812] 2262) The price-liquidity-cost-quality (PLCQ) engine 1200
communicates the optimal cost effective order composition of
executing brokers to the sponsoring organization's order management
system (OMS) 503 SO.
[0813] 2263) The sponsoring organization's order management system
(OMS) 503 SO selects the executing brokers 202 and routes the
orders for execution through the communications network 502.
[0814] 2264) The communications network 502 directs the orders to
the network of executing brokers 302 and to the designated
executing brokers 202 for execution.
[0815] 2265) The executing brokers 202 execute the trade and report
the trade fills back to the communications network 502.
[0816] 2266) The communications network 502 reports the trade fill
reports back to the sub-advisor's order management system (OMS) 503
SA.
[0817] 2267) The sub-advisor's order management system (OMS) 503 SA
sends the trade fill reports back to the compliance engine 506 SA
for post trade compliance review. If a violation occurs
(Violation=Yes), the process as shown in steps 2230, 2231, 2232,
and 2233 is implemented.
[0818] 2268) If a violation does not occur (Violation=No), the
compliance engine 506 SA routes the trade fill reports to the order
entry system 700.
[0819] 2269) The order entry system 700 provides the trade fill
reports to the sub-advisor's trade/operations group 2201, portfolio
manager 1103, compliance group 2202, and the sub-advisor's 301
business support systems.
[0820] 2270) The communications network 502 reports the trade fill
reports back to the sponsoring organization's order management
system (OMS) 503 SO. The sponsoring organization also performs a
post-execution compliance check through the compliance engine 506
SO. If a violation occurs (Violation=Yes), the process is
implemented as shown in steps 2246, 2247, and 2248 and the
sponsoring organization's compliance group (not shown) is
notified.
[0821] 2271) If a violation does not occur (Violation=No), the
sponsoring organization's order management system (OMS) 503 SO
routes the orders to the sponsoring organization's trade
reconciliation system 1117. Steps 2250 through 2271 constitute the
high touch order processing loop.
[0822] Additional aspects of the present invention provide more
functionality to the unified trading control system 2200 as
described below.
[0823] One aspect of the present invention, provides a post trade
and post close compliance review processes that occur after the
execution of trade or after the close of the market whereby passive
violations, consisting of violations due to changes in market
prices, rather than trading activity are highlighted and
appropriate action taken to return the investment portfolio to
proper compliance with the compliance review parameters for that
investment portfolio. A post trade compliance review process may
also occur when pre-trade compliance review of an order is not
feasible, such as when shares of an Initial Public Offering (IPO)
are allocated to the money management firm who subsequently
allocates a portion of these shares across a plurality of
sub-advised accounts.
[0824] Another aspect of the present invention provides, pending
the review of an order by the sponsoring organization, the release
of previously suspended orders by the sponsoring organizations for
execution and routing, for execution, the low touch orders to the
sponsoring organization and the high touch orders to the
sub-advisor.
[0825] Another aspect of the present invention provides the
cancellation of an order by the money management firm along with
the cancellation and replacement, by the money management firm, of
an order with a modified order. This process may involve the
sponsoring organization, if the order is partially filled,
cancelling the unexecuted shares or possibly denying the money
management firm's cancel order requests. Finally, the sponsoring
organization may initiate an order cancel process for an order
initiated by the money management firm.
[0826] Another aspect of the present invention provides that the
execution of an order by the sponsoring organization requires that
the sponsoring organization have a process to provide notice of the
executed trade to the money management firm though execution fill
reports along with associated notices involving modifications to
execution fill reports and notices regarding trade errors.
Furthermore, a further aspect provides that at the closing of the
market at the end of the trading day, records of transaction
activity are sent, as transaction summary reports, by the
sponsoring organization and money management firms to each other to
assist in the daily trade reconciliation process between the
sponsoring organization and money management firms.
[0827] Another aspect of the present invention provides that the
sponsoring organization may participate in more sophisticated
trading activity by aggregating their orders, among their accounts
or with a plurality of other sponsoring organizations or market
participants, into a single block trade; crossing their orders with
a plurality of other sponsoring organizations or market
participants, or crossing both side of their own orders internally
when they hold simultaneous buy and sell orders for the same
security (as may occur when rebalancing model portfolios).
[0828] Another aspect of the present invention provides the
implementation of new rules for categorizing orders with respect to
expected market impact, and the introduction of new methods for
measuring market impact, such as alternative tests, measures and
parameters. For example, a maximum number of shares could be
implemented for determining orders as low touch. The present
invention specifies a number of methods, but this list is certainly
not considered exhaustive and the present invention is not limited
to any specific methods for determining expected market impact.
[0829] Another aspect of the present invention provides the
utilization of a real-time communications system that provides
real-time checks, such as a heartbeat function, on communications
links between the HLE and the sponsoring organizations and money
management firms.
[0830] Overall, as shown by the various embodiments described
above, the system and process of the present invention provide a
comprehensive pre-trade compliance process that prevents the
execution of orders that violates securities laws, account
restrictions and prohibited transactions along with clear,
substantial, quantifiable, recurring, and compounding cost savings
and the resulting improved investment performance to fund
shareholders and plan beneficiaries. The present invention provides
a highly desirable social utility of considerable, recurring, and
compounding shareholder and plan beneficiary savings. Indeed, a
reasonably effective implementation of the embodiment of the
present invention could easily benefit millions of Americans
through substantially improved performance of their investment
portfolios.
[0831] FIG. 23 shows estimated exemplary projected annual savings,
based on 2005 trade data, potentially generated by an embodiment of
the present invention for a number of fund trusts in the variable
insurance industry for average trade execution costs of 1.00 cent
per share. Given that sponsoring organizations (as advisor for
regulatory purposes) and the associated fund board of directors and
plan investment consultants have a fiduciary responsibility to
control (minimize) operating expenses, there exists a fiduciary
obligation to evaluate and, if appropriate, implement any process
(such as those provided by the system of the present invention)
that provides substantial, recurring, and quantifiable cost savings
and improved performance to fund shareholders and plan
beneficiaries. The data for estimates in this table was compiled
from publicly available documents filed by each fund trust with the
SEC, including the prospectus, annual report, and statement of
additional information.
[0832] Furthermore, the savings to the fund shareholder and plan
beneficiaries occur each year that the funds and accounts utilize
the system and process of the present invention. Thus, these
benefit of these savings compound and become increasingly more
valuable over time. FIGS. 24A, 24B, 24C, and 24D represent a
compilation of research for four popular fund trusts (groups of
funds) with $38.7 BB, $12.7 BB, $6.7 BB, and $5.3 BB in assets, and
shows estimated exemplary total compounded shareholder savings and
resulting improved investment performance, at an average execution
cost of 1.00 cent per share, over a 1, 3, 5, and 10 year period.
The data for estimates in these tables were compiled from publicly
available documents filed by each fund trust with the SEC,
including the prospectus, annual report, and statement of
additional information. Such improved performance could,
potentially, improve the decile (ranking by tenths) or quartile
(ranking by quarter) performance ratings of these funds relative to
their peers (who are not utilizing the embodiment of the present
invention). Given that these investment portfolios are associated
with personal goals for each fund shareholder and plan beneficiary
such as a comfortable retirement, higher education, and improved
health care, the social utility created by the embodiment of the
present invention is potentially dramatic for millions of
Americans.
[0833] For illustration purposes, portions of this specification
describe the present invention in the context of variable insurance
(including variable fund LLCs and registered investment companies
(RICs), mutual fund, or pension plan market). However, as one of
ordinary skill in the art would appreciate, the systems and methods
described herein apply equally well to other similar markets, such
as a sub-advised mutual fund market, the defined contribution
market, 529 plans, hedge funds, collective investments, deferred
compensation plans, institutional accounts, separate accounts of
insurance companies, defined benefit pension plans, endowments, and
trusts. For that reason, and notwithstanding the particular
benefits associated with using the present invention in connection
with the variable insurance or pension plan markets, the system and
method described herein should be considered broadly applicable to
any market in need of centralized portfolio management, directed
brokerage control, and/or direct and automated compliance
monitoring by the sponsoring organization with primary regulatory
responsibility for a given sub-advised pool of assets.
[0834] In accordance with an embodiment of the present invention,
instructions adapted to be executed by a processor to perform a
method are stored on a computer-readable medium. The
computer-readable medium can be accessed by a processor suitable
for executing instructions adapted to be executed. The terms
"instructions configured to be executed" and "instructions to be
executed" are meant to encompass any instructions that are ready to
be executed in their present form (e.g., machine code) by a
processor, or require further manipulation (e.g., compilation,
decryption, or provided with an access code, etc.) to be ready to
be executed by a processor.
[0835] In the context of this document, a "computer-readable
medium" can be any means that can contain, store, communicate,
propagate, or transport the program for use by or in connection
with the instruction execution system, apparatus, or device. The
computer readable medium can be, for example, but is not limited
to, an electronic, magnetic, optical, electromagnetic, infrared, or
semi-conductor system, apparatus, device, or propagation medium.
More specific examples (a non-exhaustive list) of computer-readable
medium would include the following: an electrical connection having
one or more wires, a portable computer diskette, a random access
memory (RAM), a read-only memory (ROM), an erasable, programmable,
read-only memory (EPROM or Flash memory), an optical fiber, and a
portable compact disk read-only memory (CDROM). Note that the
computer-readable medium could even be paper or another suitable
medium upon which the program is printed, as the program can be
electronically captured, via for instance, optical scanning of the
paper or other medium, then compiled, interpreted, or otherwise
processed in a suitable manner, if necessary, and then stored in a
computer memory.
[0836] The foregoing disclosure of the preferred embodiments of the
present invention has been presented for purposes of illustration
and description. It is not intended to be exhaustive or to limit
the invention to the precise forms disclosed. Many variations and
modifications of the embodiments described herein will be apparent
to one of ordinary skill in the art in light of the above
disclosure. The scope of the invention is to be defined only by the
claims appended hereto, and by their equivalents.
[0837] Further, in describing representative embodiments of the
present invention, the specification may have presented the method
and/or process of the present invention as a particular sequence of
steps. However, to the extent that the method or process does not
rely on the particular order of steps set forth herein, the method
or process should not be limited to the particular sequence of
steps described. As one of ordinary skill in the art would
appreciate, other sequences of steps may be possible. Therefore,
the particular order of the steps set forth in the specification
should not be construed as limitations on the claims. In addition,
the claims directed to the method and/or process of the present
invention should not be limited to the performance of their steps
in the order written, and one skilled in the art can readily
appreciate that the sequences may be varied and still remain within
the spirit and scope of the present invention.
* * * * *