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December 18, 2007

BNY Algo Helps Lower the Cost of Transitions

By James Ramage

BNY ConvergEx wants to protect the value of investors' assets better during a portfolio's transition process. And the firm has developed an algorithm to do it called TOPx. Whenever one portfolio is sold and another is purchased, the algo will minimize the sum of the market impact and opportunity costs incurred in the transition. To do this, TOPx will reoptimize each individual stock's trading schedule within the portfolio on a continual basis to minimize the overall transition cost as trading conditions change.

Furthermore, it looks at every stock both in isolation and then in a portfolio context, said Kal Bassily, global head of transition management for BNY Global Transition Management. TOPx identifies the marginal contribution to risk for every stock toward the overall risk in the portfolio and then gives users a trading strategy that takes that contribution to risk into account.

"You might have a stock in your transition portfolio that contributes a whole lot of risk to that whole portfolio," Bassily said. "So the algorithm will trade that in a speedy manner to get rid of the risk. There may be another stock in the portfolio that diversifies overall portfolio risk, in which case you trade that at a very slow pace, because you want to hold onto that risk diversifier."

During the day, TOPx reacts to movement in the marketplace and irregular volume patterns. And it reoptimizes at intervals throughout the day, so that at any point during the implementation period, users have a strategy that has been reoptimized no more than three minutes prior.