Actively Managed ETF Pricing via Staggered Security Time Offsets
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Solution Overview
Problem
The Securities and Exchange Commission's requirements for SEC-approved Exchange Traded Funds (ETFs) have impeded the creation of actively managed ETFs, particularly those focusing on equity securities, due to concerns about revealing the portfolio's holdings affecting pricing and investment strategies, and existing mechanisms are insufficient to enable the existence of managed equity-based ETFs.
Innovation Solution
A pricing mechanism for Collective Investment Vehicles (CIVs) that involves selecting security prices with varying time offsets, generating partial price components, and determining an intra-day indicative value (IIV) by adjusting and aggregating these components, while maintaining confidentiality through pseudo security identifiers and weighting factors, allowing for the publication of IIV.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Loss of information
If portfolio holdings are disclosed to meet SEC requirements, then transparency and investor information are improved, but investment strategy confidentiality and pricing accuracy deteriorate
Solution Approach 1:
The portfolio holdings are divided into multiple subsets or segments that are disclosed separately over time rather than all at once. This segmentation allows the fund to meet SEC transparency requirements while preventing complete portfolio revelation that would compromise investment strategy confidentiality and pricing accuracy.
Solution Approach 2:
The patent implements preliminary disclosure actions by providing advance notice of portfolio holdings at predetermined intervals before actual trading occurs. This preliminary action allows market participants to prepare while the fund maintains strategic flexibility, balancing transparency requirements with pricing accuracy protection.
2Loss of information
If portfolio securities identity is disclosed, then market transparency is improved, but anticipatory positioning and pricing distortion worsen
Solution Approach 1:
The patent implements periodic disclosure of securities identities at regular intervals rather than continuous disclosure. This periodic action creates time windows where identities remain confidential, preventing anticipatory positioning by market participants while still providing eventual transparency to meet regulatory requirements.
Solution Approach 2:
The patent introduces an intermediary mechanism that discloses securities identities through a controlled process rather than direct revelation. This intermediary approach allows for managed disclosure that balances transparency needs with preventing harmful anticipatory positioning effects.
3Reliability
If SEC disclosure requirements are implemented, then investor protection and market transparency are improved, but actively managed ETF creation is impeded
Solution Approach 1:
The patent implements dynamic disclosure mechanisms that adapt the timing and granularity of portfolio information release based on market conditions and fund-specific parameters. This dynamic approach allows actively managed ETFs to maintain operational flexibility while meeting SEC investor protection requirements through customized disclosure schedules.
Data Source
AI summary
An ETF pricing mechanism for use in managed Exchange Traded Fund (ETF) or other collective investment vehicle (CIV) that retains the confidentiality of the vehicle's assets. The method of pricing may comprise: selecting a security price for each portfolio security, wherein each selected security price is associated with a time offset within a pricing interval, and wherein the time offsets are not identical for all of the selected security prices; generating a plurality of partial price components based on the selected security prices; determining a intra-day indicative value (IIV) of a CIV share in response to the plurality of partial price components; and, publishing the determined IIV.