Commodity futures index and methods and systems of trading in futures contracts that minimize turnover and transactions costs

Abstract

This invention relates to methods and systems for reducing transaction costs and minimizes turnover in the trading of futures contracts. The invention further describes an algorithm whose output is a unique method of investing in futures contracts that reduces the rate of turnover, and thus the cost of trading, of certain common trading strategies. The primary application of this method is to a class of strategies referred to as indexing strategies that incorporate a dynamic asset allocation approach using futures contracts.

Description

CROSS REFERENCE TO RELATED APPLICATION [0001] This application claims priority to U.S. Provisional Application No. 60 / 663,648, filed Mar. 21, 2005, entitled “Commodity Futures Index And Methods And Systems Of Trading In Futures Contracts That Minimizes Turnover And Transactions Costs,” the entirety of which is incorporated herein by reference.FIELD OF THE INVENTION [0002] The present invention relates to financial services and more particularly to the trading, i.e. buying and selling, of securities and / or commodities. In an embodiment, the present invention provides a Commodity Futures Index. Embodiments of the present invention also provide methods and systems for trading commodity futures contracts. BACKGROUND OF THE INVENTION [0003] The rate of turnover in a portfolio of futures contracts, and the transaction costs that result from turnover, is a major issue with commodity futures trading and with the various indexes that are representative of futures trading. Turnover in traditi...

AI Technical Summary

Benefits of technology

[0008] The present invention also provides methods and systems for trading financial instruments, that are particularly advantageous for commodity trading. Use of an embodiment of a method and / or system of the present advantageously allows a commodity trader active asset allocation while minimizing transaction costs generally associated with active asset allocation. A user of a method and / or system of the present invention has the ability to actively manage a portfolio to maximize return on investment, and / or take advantage of trading opportunities without markedly increasing transaction costs. As a result, a user of a method and / or system of the present invention is placed in a position to make more money from their investments.

[0009] In an embodiment, the instant invention allows an investor to employ an active trading strategy using futures contracts that will, within certain boundaries, result in lower transactions than a passive strategy. In an embodiment, the instant invention uses a TMS (Transaction Minimizing Strategy) approach, which fixes the maximum roll quantity (described below) in a given market so that it is within 20% of, typically within 5% of, and in certain embodiments equal to the daily roll quantity (also described below). This differs from other published futures strategies. Other published strategies roll from 20% to 100% of their positions on a particular date, which means that these other strategies tend to be more expensive due to the higher transaction costs relative to the present invention. Accordingly, in an embodiment, the instant invention provides a trading approach that utilizes the innovation of the instant invention as well as methods, computer readable media, and systems for using this innovation.

[0010] As set forth above, and in further detail below, embodiments of the present invention relate to methods and systems for reducing transaction costs and minimizing turnover in the trading of futures contracts. In another embodiment, the present invention further provides an algorithm whose output is a method of investing in futures contracts that may reduce the rate of turnover, and thus the cost of trading, of certain common trading strategies.

[0012] In an embodiment, the instant invention may reduce the turnover (i.e., the number of transactions) in futures trading thereby reducing the costs of futures trading by employing a unique method of investing in futures contracts. In particular, in an embodiment, the method of the instant invention employs a transactions minimizing strategy (TMS) against indexing strategies and uses a dynamic asset allocation approach using futures contracts.

[0013] The transactions minimizing strategy (TMS) of the instant invention can result in lower turnover and lower transactions costs. For example, in comparison to a commodity index such as the GSCI (Goldman Sachs Commodity Index) the TMS may result in total turnover that is up to 30% lower. The resulting cost savings on an investment of $100 million may amount to $300,000 per year or more (e.g., a 30% reduction of 1% transactions costs).

Problems solved by technology

Other published strategies roll from 20% to 100% of their positions on a particular date, which means that these other strategies tend to be more expensive due to the higher transaction costs relative to the present invention.

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