Computer methods and apparatus for optimizing portfolios of multiple participants

• US 7,613,652 B2
• Filed: 01/29/2007
• Issued: 11/03/2009
• Est. Priority Date: 10/31/1997
• Status: Expired due to Term

• Current Assignee: Morgan Stanley Services Group Inc. (Morgan Stanley)
• Original Assignee: Morgan Stanley
• Inventors: Reddy, Stephen David, Lee, Young-Sup, Young, Andrew R., Tick, Evan, Chang, Yoon, Tse, Joan Ka-Wai, Scowcroft, John, Campbell, Roy Edwin II, Towse, Robert C. Jr.
• Primary Examiner(s): MEINECKE DIAZ, SUSANNA M
• Application Number:
  US11/668,279
• Publication Number:
  US 20070150399A1
• Time in Patent Office: 1,009 Days
• Field of Search: 705/36.R, 705/37
• US Class Current: 705/37
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

Computer technology for substantially optimizing portfolios of multiple participants is disclosed. Preferably the portfolios of such multiple participants comprise fixed income instruments. The disclosed systems and methods include using at least one computer system for storing digital data representing portfolio holdings of multiple parties and, in particular, for each participant storing in the computer memory data representing constraints with respect to the desired portfolio. The method and system comprise optimizing using an optimization engine portfolio and constraint information of multiple participants so as to generate a set of trades that would substantially optimize participants portfolios with respect to a known objective.

Claims

1. A computer method for adjusting portfolios of fixed income instruments of multiple parties comprising:

storing in memory of at least one computer digital data representing portfolio holdings of multiple parties;

storing in the memory of at least one computer digital data representing constraints that define trading requirements of the parties;

converting, using at least one computer, the digital data representing the portfolios of multiple parties and the digital data representing the constraints of the multiple parties to optimization digital data adapted for processing by an optimization engine; and

optimizing using at least one computer the optimization digital data so as to generate a set of trades among the parties that rebalance the parties'"'"' portfolios in accordance with parties'"'"' constraints such that the portfolios are substantially optimized with respect to a predetermined objective, wherein for each trade selected from the set of trades, a first party selected from the multiple parties relinquishes a first group of one or more fixed-income instruments from the first party'"'"'s portfolio and receives a second group of one or more fixed-income instruments from a portfolio of one of the other parties, and wherein the first group of fixed-income instruments and the second group of fixed-income instruments have equivalent yields.

2. The method of claim 1 further comprising supplying to the optimization engine digital data representing pricing information for fixed-income instruments of the portfolios, the pricing information being provided by an unbiased source, wherein the unbiased source is not a publicly-available database.

3. The method of claim 1 wherein the digital data representing the constraints includes digital data representing user constraints defining relationships between portfolio instruments that should be satisfied in a resultant portfolio produced by the optimization engine during optimizing.

4. The method of claim 3 wherein the user constraints include digital data representing duration neutrality constraints.

5. The method of claim 3 wherein the user constraints include digital data representing convexity neutrality constraints.

6. The method of claim 3 wherein the user constraints including digital data representing par-value weighted attributes.

7. The method of claim 3 wherein the user constraints include digital data representing proceeds bounding within sectors.

8. The method of claim 1 wherein the digital data representing the constraints includes digital data representing system constraints stored in the memory.

9. The method of claim 8 wherein the system constraints include digital data representing bond conservation constraints.

10. The method of claim 8 wherein the system constraints include digital data representing proceeds neutrality constraints.

11. The method of claim 8 wherein the system constraints include mutual exclusion digital data for avoiding churning.

12. The method of claim 8 wherein the system constraints include mutual exclusion digital data for avoiding wash sales.

13. The method of claim 8 wherein the system constraints include digital data for avoiding trading between subsidiaries of the same parent.

14. The method of claim 1 further comprising storing digital data representing an objective function for optimization.

15. The method of claim 14 wherein the objective function substantially maximizes tax deductions generated by traded participants'"'"' portfolios.

16. The method of claim 14 wherein the objective function substantially maximizes a total book loss in participants'"'"' portfolios.

17. The method of claim 14 wherein the objective function includes data representing economic value of tax deferral.

18. The method of claim 1, wherein the multiple parties comprise two or more affiliated parties, and the portfolio holdings comprise at least one fixed income instrument held by at least one of the two or more affiliated parties.

19. The method of claim 18, wherein:

if the at least one fixed income instrument is not held by any party other than the two or more affiliated parties, then said system constraints comprise a constraint that prevents the two or more affiliated parties from buying the at least one fixed income instrument, and

if the at least one fixed income instrument is held by at least one party other than the two or more affiliated parties, then said system constraints comprise a constraint that requires the amount of the at least one fixed income instrument bought by the two or more affiliated parties to be less than the amount of the at least one fixed income instrument sold by all parties other than the two or more affiliated parties.

20. The method of claim 1, wherein the defined trading requirements comprise distinct trading requirements for each of the two or more affiliated parties.

21. The method of claim 1, wherein the digital data representing the constraints includes digital data representing system constraints stored in the memory, and wherein said system constraints comprise constraints designed to reduce the likelihood of trades between the two or more affiliated parties.

22. The method of claim 21 wherein the digital data representing the constraints includes digital data representing user constraints defining relationships between portfolio instruments that should be satisfied in a resultant portfolio produced by the optimization engine during optimizing.

23. The method of claim 22 wherein the user constraints include digital data representing duration neutrality constraints.

24. The method of claim 22 wherein the user constraints include digital data representing convexity neutrality constraints.

25. The method of claim 22 wherein the user constraints include digital data representing par-value weighted attributes.

26. The method of claim 22 wherein the user constraints include digital data representing proceeds bounding within sectors.

27. The method of claim 21 wherein the system constraints include digital data representing bond conservation constraints.

28. The method of claim 21 wherein the system constraints include digital data representing proceeds neutrality constraints.

29. The method of claim 21 wherein the system constraints include digital data representing non-negativity and boundedness.

30. The method of claim 21 wherein the system constraints include mutual exclusion digital data for avoiding churning.

31. The method of claim 21 wherein the system constraints include mutual exclusion digital data for avoiding wash sales.

32. The method of claim 1 wherein the digital data, stored in computer memory, representing the constraints of the multiple parties is organized in accordance with a formal grammar.

33. The method of claim 32 wherein the formal grammar includes representation of logical relationships among sectors.

34. The method of claim 33 wherein the formal grammar includes specifying bounded linear constraints.

35. The method of claim 34 wherein the formal grammar comprises specifying base attributes and normalization attributes of the constraints.

36. The method of claim 1 wherein the predetermined objective is programmed as an objective function.

37. The method of claim 1 further comprising supplying to the optimization engine digital data representing pricing information for fixed-income instruments of the portfolios, the pricing information being provided by an unbiased source, wherein the unbiased source is not a publicly-available database.

38. The method of claim 1 wherein the step of optimizing comprises computer processing of a linear programming problem.

39. The method of claim 1 wherein the step of optimizing comprises computer processing of a mixed integer programming problem.

40. The method of claim 1 wherein the step of converting further comprises converting digital data stored in the memory representing portfolio and constraint data into a matrix digital data suitable for processing by the optimization engine.

41. The method of claim 1 wherein the step of converting includes parsing the user constraints and building a data structure stored in memory of at least one computer as a tree data structure.

42. The method of claim 1, wherein the at least one computer comprises a central processing unit, the memory and a network interface.

43. The method of claim 42, further comprising the at least one computer receiving the digital data representing portfolio holdings of multiple parties via the network interface.

44. The method of claim 42, further comprising the at least one computer receiving the digital data representing constraints that define trading requirements of the parties via the network interface.

45. A computer system for adjusting portfolios of fixed income instruments of multiple parties comprising at least one central processing unit and operatively associated electronic memory, wherein the computer system is configured to:

store in the memory digital data representing portfolio holdings of multiple parties;

store in the memory digital data representing constraints that define trading requirements of the parties;

convert the digital data representing the portfolios of multiple parties and the digital data representing the constraints of the multiple parties to optimization digital data adapted for processing by an optimization engine executed by the at least one central processing unit; and

optimizing the optimization digital data using the at least one central processing unit so as to generate a set of trades among the parties that rebalance the parties'"'"' portfolios in accordance with parties'"'"' constraints such that the portfolios are substantially optimized with respect to a predetermined objective, wherein for each trade selected from the set of trades, a first party selected from the multiple parties relinquishes a first group of one or more fixed- income instruments from the first party'"'"'s portfolio and receives a second group of one or more fixed-income instruments from a portfolio of one of the other parties, and wherein the first group of fixed-income instruments and the second group of fixed-income instruments have equivalent yields.

46. The system of claim 45 further comprising supplying to the optimization engine digital data representing pricing information for fixed-income instruments of the portfolios, the pricing information being provided by an unbiased source, wherein the unbiased source is not a publicly-available database.

47. The system of claim 45 wherein the digital data representing the constraints includes digital data representing user constraints defining relationships between portfolio instruments that should be satisfied in a resultant portfolio produced by the optimization engine during optimizing.

48. The system of claim 47 wherein the user constraints comprise digital data representing at least one constraint selected from the group consisting of a duration neutrality constraint, a convexity neutrality constraint, a par-value weighted attributes, and proceeds bounding within sectors.

49. The system of claim 45 wherein the digital data representing the constraints includes digital data representing system constraints stored in the memory.

50. The system of claim 49 wherein the system constraints comprise digital data representing at least one constraint selected from the group consisting of a bond conservation constraint, a proceeds neutrality constraint, mutual exclusion digital data for avoiding churning, mutual exclusion digital data for avoiding wash sales, and digital data for avoiding trading between subsidiaries of the same parent.

51. The system of claim 45 further comprising storing digital data representing an objective function for optimization.

52. the system of claim 51 wherein the objective function substantially maximizes at least one value selected from the group consisting of tax deductions generated by traded participants'"'"' portfolios and a total book loss in participants'"'"' portfolios.

53. The system of claim 51 wherein the objective function includes data representing economic value of tax deferral.