Rebalance Algorithms

Note
The securities mentioned are for illustrative purposes only and not necessarily current holdings invested in by FMR LLC. References to specific company stocks should not be construed as recommendations or investment advice.

Standard
Household (if entitled)

Standard

Rebalance to Target - Standard
Rebalance to Tolerance - Standard
Rebalance to Tolerance - Out of Tolerance Securities Only
Invest Cash - Buy Proportional
Invest Cash - Minimize Trades
Generate Cash

Rebalance to Target - Standard

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Overview

The Rebalance to Target - Standard algorithm is designed to minimize drift from a specified model. The system attempts to bring every security in each account as close as possible to its model Target by doing the following:

  1. Sells any security that exists in the account but does not exist in the model.

  2. Sells down any security to its Target.

    Note
    Applies to securities above their Target.

  3. Uses the funds generated from the sales in Steps #1 and #2 to begin buying proportionally up to their Targets any securities that are below their Targets.
    • Proportional: Calculates the difference from Target for every security (Target% – Current% = Difference From Target). Use any position below its Target in the next step.

    • Sum Difference From Target: Divides each security's Difference From Target by the Sum of all Difference From Target amounts. Uses the result as the proportion for each security when creating the Buy Orders.

      Note
      This value is the sum of the amounts for all below Target securities.

    • Multiplies the Available Cash amount (Note Cash generated from selling securities in Steps #1 and #2 and any existing cash that is not restricted or constrained by user settings) by each under Target security's Proportion value. The result is the dollar ($) amount of each security that the system should buy.
    • Converts the dollar ($) Buy Order amount to the appropriate security unit using the most current price available.
      • Equity = Shares
      • Mutual Fund = Dollars
      • Fixed Income Security = Dollars
  4. The rebalance stops when:
    All cash is reinvested.
    OR
    All securities reach their targets.
    OR
    Both of these situations occur.
  5. If cash still remains after all securities are brought to Target, a PART SUCCESS Status displays along with the following message: There is too much cash available. Partial results are available.
    OR
    If there is not enough Available Cash to bring all securities up to their Targets, a PART SUCCESS Status displays along with the following message: There is not enough cash available to buy all securities up to their targets. Partial results are available.
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Example

The Technology Stocks Model is applied to your client's accounts. Periodically, you check to see if the weightings still reflect those specified in the model.

The model contains the following securities:

Symbol Target % Minimum % Maximum %
FB 25% 22.5% 27.5%
ORCL 25% 22.5% 27.5%
MSFT 20% 18% 22%
INTC 15% 13.5% 16.5%
CSCO 15% 13.5% 16.5%

Based on the current market conditions, you notice the weightings in your client's accounts no longer reflect the criteria of the model.

Account Market Value = $100,000

Symbol Current % Current $ Value Target % Difference
FB 27% $27,000 25% +2%
ORCL 28% $28,000 25% +3%
MSFT 17% $17,000 20% (-3%)
INTC 12.5% $12,500 15% (-2.5%)
CSCO 15.5% $15,500 15% +0.5%

You must rebalance this account in order to bring it back in line with the model. You decide to rebalance the account using the Technology Stocks Model. You also want to minimize overall drift, so you choose the Rebalance to Target algorithm. The system performs the following:

  1. Sells any security that exists in the account but does not exist in the model and that is not blocked by a restriction. In this example, all securities in the account also are in the model. Therefore, no sells are necessary at this point.
  2. Sells any security above its target down to its target. In this example, FB, ORCL, and CSCO are all above their targets. So, the system sells those three securities down to their targets. The total funds generated = $5,500.

  3. Takes the funds generated thus far (Steps #1 and #2), in this case $5,500, and begins to buy those securities that lie beneath their targets up to their targets. The system creates these buy orders proportionally using a Proportion calculated for each security.

    • Proportional: Calculates the difference from target for every security (Target % - Current % = Difference From Target).
    • Sums the Difference From Target Amounts: In this example, the Sum of all Differences From Target = 5.5%.

    • Divides each security's Difference From Target amount by the Sum of all Differences From Target amounts. The proportions are shown in the following table.

      Symbol Difference From Target Sum of All Differences Proportion
      FB +2% 5.5% -
      ORCL +3% 5.5% -
      MSFT (-3%) 5.5% 0.545
      INTC (-2.5%) 5.5% 0.455
      CSCO 0.5% 5.5% -

  4. Multiplies the available funds, or $5,500 for this example, by each security's Proportion value. The result is the dollar ($) amount of each security that the system should buy.

    Symbol Proportion $ Value of Trade
    FB - -
    ORCL - -
    MSFT 0.545 $3,000
    INTC 0.455 $2,500
    CSCO - -
  5. Converts the dollar ($) trade amounts to the appropriate security unit.
    • Equity = Shares
    • Mutual Fund Buy = Dollars
    • Mutual Fund Sell = Dollars or Shares
    • Fixed Income Security = Dollars
    Symbol Action $ Price $ Trade Shares Rounded Shares
    FB Sell $26.18 $2,000 76.394 76
    ORCL Sell $38.46 $3,000 78.003 78
    MSFT Buy $37.60 $3,000 79.787 79
    INTC Buy $24.31 $2,500 102.838 102
    CSCO Sell $22.30 $500 22.422 22

Note
Any Cash left over due to rounding of sell trades remains in Cash.

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Rebalance to Tolerance - Standard

Overview

The Rebalance to Tolerance - Standard algorithm is designed to reduce the number of trades, and as a result, to reduce the overall transaction costs associated with rebalancing. The system accomplishes this by doing the following:

  1. Sells any security that exists in the account but does not exist in the model.

  2. Sells down any security to its Target.

    Note
    Applies to securities above their upper Tolerance levels.

  3. Uses the funds generated from the sales in Steps #1 and #2 to begin buying proportionally up to their Tolerance any securities that are below their lower Tolerance levels.

    Note
    See Proportional description above.

  4. If more cash is required to bring securities below their lower Tolerance levels up to those levels, begins selling those securities that are within Tolerance and above Target, one at a time, starting with the security that is farthest from its Target. The system sells the security to the point where sufficient cash is generated or to Target, whichever comes first.
  5. If more cash is still required, sells the next security that is within Tolerance, above Target, and farthest from its Target down to Target and then checks if more cash is needed.
  6. Repeats Step #5 until no additional cash is required, which indicates the rebalance is complete.
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Example

The Technology Stocks Model is applied to your client's accounts. Periodically, you check to see if the weightings still reflect those specified in the model.

The model contains the following securities:

Symbol Target % Minimum % Maximum %
FB 25% 22.5% 27.5%
ORCL 25% 22.5% 27.5%
MSFT 20% 19% 21%
INTC 15% 14% 16%
CSCO 15% 13.5% 16.5%

Based on the current market conditions, you notice the weightings in your client's accounts no longer reflect the criteria of the model.

Account Market Value = $100,000

Symbol Current % Current $ Value Target % Difference
FB 27% $27,000 25% +2%
ORCL 28% $28,000 25% +3%
MSFT 17% $17,000 20% (-3%)
INTC 12.5% $12,500 15% (-2.5%)
CSCO 15.5% $15,500 15% +0.5%

You must rebalance this account in order to bring it back in line with the model. You decide to rebalance the account using the Technology Stocks Model. You want to bring any position that drifted outside its tolerance back within that band. Therefore, you decide to use the Rebalance to Tolerance - Standard algorithm and the system performs the following:

  1. Sells any security that exists in the account but does not exist in the model and that is not blocked by a restriction. In this example, all securities in the account also are in the model. Therefore, no sells are necessary.
  2. Sells any security that is above its upper Tolerance level down to its Target. In this example, ORCL is the only security that is above its upper Tolerance level. So, the system sells ORCL down to its Target and takes the position from $28,000 to $25,000. The total funds generated = $3,000.
  3. Takes the funds generated thus far (in Steps #1 and #2), which is $3,000 in this example, and begins buying those securities that lie beneath their lower Tolerance level up to their Tolerance. In this example, MSFT and INTC are both below their lower Tolerances. So, the system buys MSFT up to its lower Tolerance, which results in a $2,000 buy and leaves $1,000 un-invested.
  4. More cash is needed to bring INTC back to within Tolerance, so the system looks for a security that is within Tolerance but above Target. It begins selling that security until either sufficient cash is generated or the security reaches its Target. In this example, a sell for $500 of FB is generated to bring it to $26,500 or 26.5%.

  5. After the rebalance the account consists of the following positions.

    Symbol Current % Current $ Value Target % Difference
    FB 26.5% $26,500 25% +1.5%
    ORCL 25% $25,000 15% 0%
    MSFT 19% $19,000 20% (-1%)
    INTC 14% $14,000 15% (-1%)
    CSCO 15.5% $15,500 15% +0.5%

  6. Converts the dollar ($) trade amounts to the appropriate security unit.

    • Equity = Shares
    • Mutual Fund Buy = Dollars
    • Mutual Fund Sell = Dollars or Shares
    • Fixed Income Security = Dollars
    Symbol Action $ Price $ Trade Shares Rounded Shares
    FB Sell $26.18 $500 19.099 19
    ORCL Sell $38.46 $3,000 78.003 78
    MSFT Buy $37.60 $2,000 53.191 53
    INTC Buy $24.31 $1,500 61.703 61
    CSCO Zero Trade - - - -

Note
Any Cash left over due to rounding of sell trades remains in Cash.

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Rebalance to Tolerance - Out of Tolerance Securities Only

Overview

The Rebalance to Tolerance - Out of Tolerance Securities Only algorithm is designed to generate trades only for out of tolerance securities. Therefore, only securities that are out of tolerance are considered during the rebalance. All other securities are not traded and Zero Trade line items are generated for these securities. The system performs the following steps during the rebalance process:

  1. Sells any security that exists in the account but does not exist in the model.
  2. Generates Zero Trade line items for any security that is within tolerance and does not consider them any further.

  3. Sells down any security to its Target.

    Note
    Applies to securities above their upper Tolerance levels    .

  4. Uses the funds generated from the sales in Steps #1 and #2 to begin proportionally buying any securities that are below their lower Tolerance levels up to their Tolerance.

    Note
    See Proportional description above    .

  5. If more cash is required to bring securities that are below their lower Tolerance levels up to those levels, begins selling the security, which was already sold to its Target, down to its lower Tolerance level. The system sells the security until it reaches its lower Tolerance or sufficient cash is generated, whichever comes first.
  6. If more cash is still required, sells the security that started the rebalance, is next farthest from its Target, and was already sold to that Target down to its lower Tolerance and then checks to see if more cash is needed.
  7. Repeats Step #6 until no additional cash is required, which indicates the rebalance is complete.
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Example

The Technology Stocks Model is applied to your client's accounts. Periodically, you check to see if the weightings still reflect those specified in the Model.

The model contains the following securities:

Symbol Target % Minimum % Maximum %
FB 25% 22.5% 27.5%
ORCL 25% 22.5% 27.5%
MSFT 20% 19% 21%
INTC 15% 14% 16%
CSCO 15% 13.5% 16.5%

Based on the current market conditions, you notice the weightings in your client's accounts no longer reflect the criteria of the model.

Account Market Value = $100,000

Symbol Current % Current $ Value Target % Difference
FB 27% $27,000 25% +2%
ORCL 28% $28,000 25% +3%
MSFT 17% $17,000 20% (-3%)
INTC 12.5% $12,500 15% (-2.5%)
CSCO 15.5% $15,500 15% +0.5%

You must rebalance this account in order to bring it back in line with the model. You decide to rebalance the account using the Technology Stocks Model, but you only want to trade those securities that are out of tolerances. Therefore, you decide to use the Rebalance to Tolerance - Out of Tolerance Securities Only algorithm and the system performs the following:

  1. Sells any security that exists in the account but does not exist in the model and that is not blocked by a restriction. In this example, all securities in the account also are in the model. Therefore, no sells are necessary.
  2. Sells any security that is above its upper Tolerance level down to its Target. In this example, ORCL is the only security that is above its upper Tolerance level. So, the system sells ORCL down to its Target and takes the position from $28,000 to $25,000. The total funds generated = $3,000.
  3. Takes the funds generated thus far (in Steps #1 and #2), which $3,000 in this case, and begins buying those securities that lie beneath their lower Tolerance level up to their Tolerance. In this example, MSFT and INTC are below their lower Tolerances. So, the system buys MSFT up to its lower Tolerance, which results in a $2,000 buy and leaves $1,000 un-invested.
  4. The system then moves to INTC and invests the remaining $1,000, bringing INTC to 13.5% which is still below its lower Tolerance.

  5. More cash is needed to bring INTC back to within Tolerance. Since only out of tolerance securities are considered during this rebalance, ORCL is the only security that can be sold. The system now sells an additional $500 worth of ORCL bringing it to 24.5%. After the rebalance the account consists of the following positions:

    Symbol Current % Current $ Value Target % Difference
    FB 27% $27,000 25% +2%
    ORCL 24.5% $24,500 25% (-0.5%)
    MSFT 19% $19,000 20% (-1%)
    INTC 14% $14,000 15% (-1%)
    CSCO 15.5% $15,500 15% +0.5%

  6. Converts the dollar ($) trade amounts to the appropriate security unit.

    • Equity = Shares
    • Mutual Fund Buy = Dollars
    • Mutual Fund Sell = Dollars or Shares
    • Fixed Income Security = Dollars
    Symbol Action $ Price $ Trade Shares Rounded Shares
    FB Zero Trade - - - -
    ORCL Sell $38.46 $3,500 91.004 91
    MSFT Buy $37.60 $2,000 53.191 53
    INTC Buy $24.31 $1,500 61.703 61
    CSCO Zero Trade - - - -

Note
Any Cash left over due to rounding of sell trades remains in Cash.

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Invest Cash - Buy Proportional

Overview

The Invest Cash - Buy Proportional algorithm is designed to invest cash by generating buy trades on a proportional basis.

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Example

Your client asks you to invest his $5,000 of Core Cash. His account is assigned to the Technology Stocks Model and contains the following positions for a total of $105,000:

Symbol Current $ Value Current % Holding
FB $27,000 25.71%
ORCL $28,000 26.67%
MSFT $17,000 16.19%
INTC $12,500 11.9%
CSCO $15,500 14.76%
FCASH $5,000 4.76%

The model contains the following securities:

Symbol Target % Minimum % Maximum % $ Target
FB 25% 22.5% 27.5% $26,250
ORCL 25% 22.5% 27.5% $26,250
MSFT 20% 18% 22% $21,000
INTC 15% 13.5% 16.5% $15,750
CSCO 15% 13.5% 16.5% $15,750

The system performs the following:

  1. Generates buy trades on a proportional basis. First, it must calculate each security's Proportion by doing the following:

    • Calculates each security's Current % Holding (shown above).
    • Calculates each security's Difference From Target amount.
    • Sums the negative (-) Target differences.
    • Divides each security's Difference From Target by the sum of all Target differences, which determines the Proportions for each security.

    In this example the proportions are:

    Symbol Difference From Target% Proportion
    FB 0.714% 0
    ORCL 1.667% 0
    MSFT (-3.81%) 0.53
    INTC (-3.095%) 0.43
    CSCO (-0.238%) 0.03

    Note
    Since FB and ORCL are still above their targets (Proportion = 0 for these securities), no Buys are needed.

  2. Multiplies the Cash to Invest amount by each security's Proportion value.

    The trade Actions are as follows:

    Symbol Action $ Value of Trade
    FB Zero Trade -
    ORCL Zero Trade -
    MSFT Buy $2,666.67
    INTC Buy $2,166.67
    CSCO Buy $1.66.67
    FCASH C -

    Value of the securities after the three trades:

    Symbol End $ End %
    FB $27,000 25.71%
    ORCL $28,000 26.67%
    MSFT $19,666.67 18.73%
    INTC $14,666.67 13.97%
    CSCO $15,666.67 14.92%
    FCASH $0 0%
    TOTAL $105,000 100%
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Invest Cash - Minimize Trades

Overview

The Invest Cash - Minimize Trades algorithm is designed to generate buy orders on a farthest from target basis and stop the rebalance when all Available Cash is invested, all model securities reach their targets, or both situations occur. In many cases, this process results in fewer trades than the Invest Cash - Buy Proportional algorithm and in turn, reduces the overall transaction costs associated with the rebalancing.

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Example

Your client just deposited $5,000 in his account. His account is assigned to the Technology Stocks Model and contains the following positions for a total of $105,000:

Symbol Current $ Current %
FB $27,000 25.714%
ORCL $28,000 26.667%
MSFT $17,000 16.19%
INTC $12,500 11.905%
CSCO $15,500 14.762%
FCASH $5,000 4.762%

The model contains the following securities:

Symbol Target % Minimum % Maximum % $ Target
FB 25% 22.5% 27.5% $26,250
ORCL 25% 22.5% 27.5% $26,250
MSFT 20% 18% 22% $21,000
INTC 15% 13.5% 16.5% $15,750
CSCO 15% 13.5% 16.5% $15,750

The system performs the following:

  1. The rebalancing begins by calculating the Available Cash taking into consideration user-defined cash options, restrictions, and equivalences. Available Cash = Core Cash + Cash Credits - Cash Debits - max(MCCAR,Model Cash Target). In this example, Available Cash = Core Cash ($5,000) - MCCAR ($0) = $5,000.
  2. Using the Available Cash, generates buys based on the security that is farthest from the model Target. First, the system must calculate each security's Difference From Target amount by doing the following:
    • Calculates each security's $ Target (shown above).
    • Calculates each security's Difference From Target amount (Current $ Value - $ Target).

    In this example the Difference From Target dollars and percentages are:

    Symbol Difference From Target % Difference From Target $
    FB 0.714% $750
    ORCL 1.667% $1,750
    MSFT (-3.81%) ($4,000)
    INTC (-3.095%) ($3,250)
    CSCO (-0.238%) ($250)
    FCASH 4.762% $5,000

    The trade Actions are as follows:

    Symbol Action $ Value of Trade
    FB Zero Trade -
    ORCL Zero Trade -
    MSFT Buy $4,000
    INTC Buy $1,000
    CSCO Zero Trade -
    FCASH C -

  3. MSFT is the security that is farthest from its Target. The buy requires $4,000 to bring it back to its Target.

    Symbol Difference From Target % Difference From Target $
    FB 0.714% $750
    ORCL 1.667% $1,750
    MSFT 0% 0%
    INTC (-3.095%) ($3,250)
    CSCO (-0.238%) ($250)
    FCASH 0.952% $1,000

  4. Taking the remaining cash, the system moves to the security that is next farthest away from its model Target, which is INTC, and buys it up towards its Target using the remaining $1,000.

    Symbol Difference From Target % Difference From Target $
    FB 0.714% $750
    ORCL 1.667% $1,750
    MSFT 0% $0
    INTC (-2.143%) ($2,250)
    CSCO (-0.238%) ($250)
    FCASH 0% $0
  5. If funds are still available to be invested, the system moves to the security that is next farthest from its Target and begins buying it up to its Target. This process continues until all cash has been invested or all securities have been brought up to their targets. In this case, all funds are invested, so the rebalance is complete.

  6. Since all cash was invested and there are still securities that have not reached their targets, the rebalance would display the PART SUCCESS Status on the Rebalance Summary screen, along with the message "There is not enough cash available to buy all securities up to their targets. Partial results are available.". When the Status is PART SUCCESS, you may wish to remove these trades.

    Note
    The PART SUCCESS Status also displays on the Rebalance Summary screen if cash still remains after buying all securities in the models and bringing them to their targets. The message that displays in this case is "Excess cash left over. Partial results are available.".

    The final positions in the account after the rebalance is complete are:

    Symbol End $ End %
    FB $27,000 25.714%
    ORCL $28,000 26.667%
    MSFT $21,000 20%
    INTC $13,500 12.857%
    CSCO $15,500 14.762%
    FCASH $0 0%
    TOTAL $105,000 100%

    Note
    Any Cash left over due to rounding of sell trades remains in Cash.

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Generate Cash

Overview

The Generate Cash algorithm is designed to sell securities until all required cash is generated.

  1. The first step in the process is to adjust the model by the Cash to Generate (CTG) + MCCAR amount. As an example, if the CTG amount = 10% and MCCAR = 0%, all existing model Targets and Tolerance levels would need to be adjusted DOWN by 10%.

    Note
    See example below for additional information.

  2. The system first sells any security in the account that does not exist in the model and checks to see if the Cash to Generate amount is satisfied. If this is the case, the rebalance is complete. If this is not the case, the system does the following:

    • Computes how much cash would be generated by selling all above Target securities down to their Targets and compares that to the requested Cash to Generate amounts. If those amounts are equal, the trades are generated and the rebalance is complete.
    • If the requested Cash to Generate amount is greater than the computed proceeds of those sales, begins proportionally selling securities past their Targets down to their lower Tolerances. If sufficient cash can be generated, the rebalance completes successfully. If sufficient cash cannot be generated, the rebalance is marked as FAILED.

    • If the computed proceeds are greater than the requested Cash to Generate amount, uses a Rising Tide rebalance method. Rising Tide attempts to trade securities with differing distances from Target amounts in such a way that they reach their respective Targets at the same time in the process.

      Note
      See example below for additional information.

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Example

Your client wants to pay off an outstanding $10,000 loan and asks you to send a check to him from his account. His account is assigned to the Technology Stocks Model and contains the following positions:

Symbol Current % Difference From Target
FB 27% +2%
ORCL 31% +6%
MSFT 17% (-3%)
INTC 12% (-3%)
CSCO 13% (-2%)

The model contains the following securities:

Symbol Target % Minimum % Maximum %
FB 25% 22.5% 27.5%
ORCL 25% 22.5% 27.5%
MSFT 20% 18% 22%
INTC 15% 13.5% 16.5%
CSCO 15% 13.5% 16.5%

The system performs the following:

  1. First, the model must be adjusted by the Cash to Generate (CTG) + MCCAR factor, which is 10% in this example. The following is the adjusted model:

    Symbol Target % Minimum $ Maximum % Adjusted Target % Adjusted Min% Adjusted Max%
    FB 25% 22.5% 27.5% 22.5% 20.25% 24.75%
    ORCL 25% 22.5% 27.5% 22.5% 20.25% 24.75%
    MSFT 20% 18% 22% 18.0% 16.20% 19.80%
    INTC 15% 13.5% 16.5% 13.5% 12.15% 14.85%
    CSCO 15% 13.5% 16.5% 13.5% 12.15% 14.85%
    FCASH 10% 10% 10% 10.0% 10.00% 10.00%
  2. Sells any security in the account that does not exist in the model. In this example, all securities in the account also exist in the model, so no trades are generated in Step #1.

  3. Checks to see how much cash still is required after completing Step #1. If more cash is needed, the system computes how much cash would be generated if all above target securities were sold down to their targets and compares that to the remaining requested Cash to Generate amount. In this example, only two securities are above their Targets; they are FB and ORCL. By selling those securities down to their Targets, the system would generate a 13% cash position, which is greater than the requested 10%. Since the computed cash amount is greater than the requested Cash to Generate amount, the system employees the Rising Tide rebalance method.

    Symbol Current % Difference From Adjusted Target $ Difference
    FB 27% +4.5% $4,500
    ORCL 31% +8.5% $8,500
    MSFT 17% (-1%) -
    INTC 12% (-1.5%) -
    CSCO 13% (-0.5%) -
    FCASH 0% (-10.0%) -
  4. In this example the system needs to generate $10,000 in Cash but by selling all above Target securities, $13,000 would be generated. Cash to Generate < computed cash if all above Target securities are sold, so the system begins creating trades using Rising Tide.

  5. The farthest from Target security is sold down to the level of the next farthest from Target security. If more cash is required, the same two securities are sold down together to the level of the next farthest from Target security. This process continues until all required cash is generated or all securities reach their lower Tolerance levels. In this case, the following trades are created:

    Symbol Action Round 1 Trade Round 2 Trade Total $ of Trade
    FB Sell 0.0% 3.0% $3,000
    ORCL Sell 4.0% 3.0% $7,000
    MSFT Zero Trade 0.0% 0.0% $0
    INTC Zero Trade 0.0% 0.0% $0
    CSCO Zero Trade 0.0% 0.0% $0
    FCASH Zero Trade 0.0% 0.0% $0

  6. In this example, two trades are required.

    • Sells 114 shares of FB, which generates $3,000
    • Sells 182 shares of ORCL, which generates $7,000

    A total of $10,000 is generated and since the Cash to Generate = $10,000, the rebalance is complete.

    The ending positions in the account are as follows:

    Symbol $ Value % Value
    FB $24,000 24%
    ORCL $24,000 24%
    MSFT $17,000 17%
    INTC $12,000 12%
    CSCO $13,000 13%
    FCASH $10,000 10%
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Household

Note
Household rebalancing is an entitled function.

Overview

The household rebalance is designed to collectively minimize the drift of accounts from a specified model where accounts belong to a household. This process is carried out in a manner that ensures the market value of each individual account remains the same before and after the rebalance. The following steps are performed during the rebalance.

  1. Evaluate market value for each account by using the price data (previous day, real time, or delayed).
  2. Identify the account ratios in the household using their market values.
  3. Create a household portfolio by aggregating positions from all accounts. Each account's contribution toward the household is based on its market value ratio.
  4. Compare household weights of positions against model weights and identify the sells and buys, also known as drift.

  5. Generate orders by prioritizing trades using a combination of criteria. In simple nontaxable household rebalance, the trade prioritization is as follows:

    • Sell securities that are not part of the model (fully sold securities).
    • Generate a matching buy order for each sell order in the same account. Buy the securities in order of their drift from the model, beginning with the largest drift.
    • Next, sell securities that are farthest away from the model. First sell the security in an account that has the highest market value. If the entire position is sold in the account and the model target is not met, sell the security in account with the second highest market value.
    • Generate a matching buy for each sell in the same account. Buy the securities in order of their drift from model, beginning with the largest drift.
    • Continue generating orders until all securities meet their targets or until there are no more funds to allocate.
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Example

The household includes three accounts containing the following securities.

Account A

Symbol Shares Price ($) Market Value ($) Initial Pct. Wt. (%)
IBM 6,400 $125 $800,000 16%
MSFT 5,000 $40 $200,000 4%
GE 21,875 $32 $700,000 14%
HD 23,000 $100 $2,300,000 46%
GOOG 4,000 $250 $1,000,000 20%
Total $5,000,000 100%

Account B

Symbol Shares Price ($) Market Value ($) Initial Pct. Wt. (%)
IBM 2,400 $125 $300,000 10%
MSFT 35,000 $40 $1,400,000 46.667%
GE 15,625 $32 $500,000 16.667%
GOOG 3,200 $250 $800,000 26.667%
Total $3,000,000 100%

Account C

Symbol Shares Price ($) Market Value ($) Initial Pct. Wt. (%)
IBM 1,200 $125 $150,000 7.5%
MSFT 27,500 $40 $1,100,000 55%
GE 3,125 $32 $100,000 5%
GOOG 200 $250 $50,000 2.5%
AMAT 30,000 $20 $600,000 30%
Total $2,000,000 100%

The system performs the following:

  1. Using each account’s current value, calculates its market value ratio with respect to the household.

    Account Market Value ($) Market Value Ratio (%)
    Account A $5,000,000 50%
    Account B $3,000,000 30%
    Account C $2,000,000 20%
    Total $10,000,000

  2. For the aggregated household portfolio, positions from each account contribute based on the account’s market value ratio. The household portfolio receives 50% of its total weight from Account A, 30% from Account B, and 20% from Account C. The following are the pro-rated weights for each position.

    Account A

    Symbol Initial Pct. Wt. (%) Pro-Rated Pct. Wt. (%)
    IBM 16% 8%
    MSFT 4% 2%
    GE 14% 7%
    HD 46% 23%
    GOOG 20% 10%
    Total 100% 50%

    Account B

    Symbol Initial Pct. Wt. (%) Pro-Rated Pct. Wt. (%)
    IBM 10% 3%
    MSFT 46.667% 14%
    GE 16.667% 5%
    GOOG 26.667% 8%
    Total 100% 30%

    Account C

    Symbol Initial Pct. Wt. (%) Pro-Rated Pct. Wt. (%)
    IBM 7.5% 1.5%
    MSFT 55% 11%
    GE 5% 1%
    GOOG 2.5% 0.5%
    AMAT 30% 6%
    Total 100% 20%

  3. Aggregates positions from all accounts in the household portfolio.

    Symbol Shares Price ($) Market Value ($) Pro-Rated Pct. Wt. (%)
    IBM 10,000 $125 $1,250,000 12.5%
    MSFT 67,000 $40 $2,700,000 27%
    GE 40,625 $32 $1,300,000 13%
    HD 23,000 $100 $2,300,000 23%
    GOOG 7,400 $250 $1,850,000 18.5%
    AMAT 30,000 $20 $600,000 6%
    Total $10,000,000 100%

    The model contains the following securities:

    Symbol Target % Minimum % Maximum %
    IBM 20% 15% 25%
    MSFT 20% 15% 25%
    GE 20% 15% 25%
    HD 20% 15% 25%
    GOOG 20% 15% 25%

  4. Compares the household portfolio with the model to calculate drift.

    Symbol Pct.Wt.(%) Target % Difference Wt. (%)
    IBM 12.5% 20% (-7.5%)
    MSFT 27% 20% +7%
    GE 13% 20% (-7%)
    HD 23% 20% +3%
    GOOG 18.5% 20% (-1.5%)
    AMAT 6% 0% +6%

  5. Generates buy and sell orders to minimize the drift. The orders are prioritized as follows for this example:

    Pair No Sell Security Buy Security Change Wt. (%)
    1 AMAT - Account C IBM - Account C 6%
    2 MSFT - Account A IBM - Account A 1.5%
    3 MSFT - Account A GE - Account A 0.5%
    4 MSFT - Account B GE - Account B 5%
    5 HD - Account A GE - Account A 1.5%
    6 HD - Account A GOOG - Account A 1.5%
    • AMAT is sold from Account C since it is neither part of the model nor blocked by any restrictions. A matching buy in the same account is created for IBM since it is farthest from its model target. Although IBM's drift is 7.5%, it is only traded for 6% because AMAT on the selling side existed for 6%.
    • Next, MSFT is sold, since it has the highest drift at this point when compared with the other overweight securities. MSFT is sold in Account A since it is the one with the highest market value. IBM is bought, but this time in Account A. This pair is traded only for 1.5% after which IBM reaches its model target.
    • MSFT is sold since it is has not reached its target. GE is bought because of its drift magnitude. This pair is traded for 0.5% after which MSFT is depleted from Account A.
    • MSFT is sold, but this time from Account B since it has the greater market value when compared to Account C. GE is bought, but this time in Account B to match the account trade on the sell side. This pair is traded for 5% after which MSFT achieves its model target.
    • At this point, HD in the only overweight security and it is sold from Account A. GE is bought for another 1.5% after which it achieves its model target.
    • HD is sold for an additional 1.5% from Account A in order to achieve the model target and a matching buy of 1.5% for GOOG in Account A is also created since it is the last underweight security. At this point all securities meet their targets and the rebalance is complete.

The following are the final trade orders for each account.

Account Symbol Action Zero TradeInitial % Target % Trade % Proposed %
Account A $$$ Cash 0% 0% 0% 0%
Account A GE Zero Trade 7% 20% 0% 7%
Account A GE Buy 0% 20% 2% 2%
Account A GOOG Zero Trade 10% 20% 0% 10%
Account A GOOG Buy 0% 20% 1.5% 1.5%
Account A HD Sell 23% 20% 3% 20%
Account A IBM Zero Trade 8% 20% 0% 8%
Account A IBM Buy 0% 20% 1.5% 1.5%
Account A MSFT Sell 2% 20% 2% 0%
Account B $$$ Cash 0% 0% 0% 0%
Account B GE Zero Trade 5% 20% 0% 5%
Account B GE Buy 0% 20% 5% 5%
Account B GOOG Zero Trade 8% 20% 0% 8%
Account B IBM Zero Trade 3% 20% 0% 3%
Account B MSFT Sell 14% 20% 5% 9%
Account C $$$ Cash 0% 0% 0% 0%
Account C AMAT Sell 6% 0% 6% 0%
Account C GE Zero Trade 1% 20% 0% 1%
Account C GOOG Zero Trade 0.5% 20% 0% 0.5%
Account C IBM Zero Trade 1.5% 20% 0% 1.5%
Account C IBM Buy 0% 20% 6% 6%
Account C MSFT Zero Trade 11% 20% 0% 11%

Note
For buy trades, a Zero Trade order is generated for the existing lot and a new buy lot is suggested with the trade weight.

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