[Random-bits] Gregory Aharonian on Open end mutual fund securitization process patent
James Love
love@cptech.org
Thu, 21 Sep 2000 09:31:20 -0400
This from Gregory Aharonian, as the European Patent Office gets ready for its November meeting to consider the formal repeal of the European Patent Convention exemption for
software patents.
Jamie
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Subject: PATNEWS: Wall Street Journal exaggerates crappy mutual fund patent
Date: Thu, 21 Sep 2000 02:21:49 -0400 (EDT)
From: Gregory Aharonian <srctran@world.std.com>
Reply-To: patent-news@world.std.com
To: patent-news@world.std.com
!20000921 Wall Street Journal exaggerates crappy mutual fund patent
Wednesday's Wall Street Journal, front page of the Money & Investing
section (page C1), has a big article on how a couple of self funded guys
invented and patented a way of trading open end mutual funds, and are now
going around Wall Street demanding royalties, hoping to make tens of
millions of dollars a year licensing their patent to the stock exchanges,
with ex-Commissioner Lehman on the board for a touch of credibility.
The Greg analysis:
IN THEIR DREAMS WITH THIS CRAP
Yet another example of an ill-searched patent application, ill-searched at
the Patent Office, and ill-searched when the patent infringement lawsuit
was prepared (they are suing AMEX). And frankly for such a long worded
article, the WSJ article was just as ill-researched - the reporter did no
investigation into the technical merits of the claimed invention such as
searching the economic literature databases, nor called anyone on Wall
Street or at NYU/Columbia. How could such a major newspaper be used as
a public relations tool for some this company?
[GREG note: anyone looking to bust the DE Technologies about to be
issued ecommerce patent, another patent that recently got a really
long article in the Wall Street Journal, please contact me. I am
trying to pool some monies to do the invalidity search. The Sept 25
issue of the National Law Journal, page B8, has a more balanced
article.]
The patent in question is patent 5,806,048 (sister is 6,088,685, and
speaking of these numbers, is it that hard for reporters the Journal and
Times to look up the numbers of these patents to save their readers a bit
of time when they go to the PTO Web site to retreive the patent?), titled
"Open end mutual fund securitization process", filed in October 1995. The
two inventors are Kenneth Kiron and Kevin Bander (reported on in the
Journal article), assigned to their company Mopex.
What's wrong with the patent? Once again, a dearth of non-patent prior
art, in this case, from the wide body of literature from the economics
field from the mid-1970s to mid-1990s dealing with derivatives and
portfolios. Other than a few mass media articles on stock trading, the
prior art cited reflects none of the advanced academic work published for
over 20 years prior to the filing of the patent. For example, since 1974
a journal has been published, "Journal of Portfolio Management", which has
all sorts of papers covering topics like this patent, a journal neither
the inventors nor examiner knew about or cited because of their lack of
experience in this field. Any patent dealing with portfolio management
not citing at least one article from the Journal of Portfolio Management,
should a priori be presumed to be invalid.
To see this, let's look at claim 1:
1. An electronic data processing method for administering a financial
product having a fixed number of shares over a predetermined period
of time, so that the financial product can be traded as a security,
the price of which can be determined in real time on the basis of
information about a plurality of securities, comprising the steps of:
a) directing a computer processor to select from said plurality of
securities a selected portfolio of securities, the risk/return
performance of which over a predetermined period of time meets
a predefined benchmark performance, including:
i) providing a database of information on securities available
for trading;
ii) electronically processing information in said provided
database to identify securities, the asset size of which
is above a predetermined threshold; and
iii) electronically searching the identified securities to select
a subset of N securities, the risk/return performance of
which is superior to the risk/return performance of all
identified securities;
b) receiving information on each of said plurality of securities
in an electronic data format;
c) storing at least the received information on each security in
the selected portfolio in a computer memory;
d) electronically processing said stored information to determine
in real time the price of the financial product on the basis
of a user-defined method of weighing the select subset of
N securities; and
e) outputting an indication of the in real time determined price
of the financial product in humanly readable format.
Now clauses b), c), d) and e) are neither novel nor unobvious, little more
than techniques to downloading price information on a basket of securities,
adding them up using a weighting scheme, and displaying the result -
utterly totally obvious where it isn't non-novel. Wall Street has been
manipulating stock price data for decades, in many cases in products sold
in magazines like Technical Analysis of Stocks and Commodities.
This leaves as the essential aspect of the claim, clause a), which seems
to me to be little more than a financial derivative product that tracks
the performance of some mutual fund or market index (financial products
that have known risk/reward ratios, returns, and volatilites). Indeed, in
clause a), subclauses i) and ii) are neither novel nor unobvious, leaving
as the essential element of claim 1), that being subclause iii)
iii) electronically searching the identified securities to select
a subset of N securities, the risk/return performance of
which is superior to the risk/return performance of all
identified securities;
And that subclause is not novel. The idea of using a basket of securities
or other financial products to create something synthetic is very well
known. For example, there was a paper published in the 1980s that used
a basket of futures contracts (which are traded daily) to track the
Consumer Price Index (which is published monthly). The idea here was if
you could choose the right combination of futures contracts to create a
derivative that highly correlated with the Consumer Price Index, than you
use the underlying futures contracts to predict the Consumer Price Index,
say a few days before the next month's CPI was published (you would want
to do this because changes in the CPI move the stocks and indexes in
somewhat predictable ways, so if you have a good prediction for where the
CPI was going, you could pay some options or futures contracts and make
a nice profit). With the same mathematics, you could make a synthetic
CPI by using stock prices (for example, instead of using the Heating Oil
futures contract, you could use the stocks of oil companies), and if you
can do this to the CPI, you can do it to other indexes and/or mutual funds,
since all of these financial instruments can be described with the same
set of statistical models with different parameters.
Another set of papers published in the 1980s proposed a super-portfolio,
a basket of stocks recalculated every day that could out-perform any
index you choose. This 1980s paper would make obvious all such synthetic
optimized portfolios, and the mathematics in this paper is so advanced I
doubt highly either of the inventors of the '048 patent would understand
it. The paper is a super-generalization of the '048 patent, published
years earlier, making the patent not novel. If you are wondering whatever
happened to this 1980s effort, it was great in theory, but had a few
implementation problems. One was that it required a multi-dimensional
integral where the number of dimensions was equal to the number of stocks
in your portfolio - 100 stocks meant a 100-dimensional integral, which is
a very complicated numerical integration requirement (in fact, a patent
issued to do nothing more than calculate these types of multidimensional
integrals). Another problem, which plagues many theoretical trading
systems, was transactions costs.
In light of such papers, and many more (yes, the actual references will
cost whoever has to bust this patent :-) that were published mostly by
academic economists in the 1980s and early 1990s, this patent faces big
obviousness problems where it isn't novel. And given the minimal length
specification (and minimal use of mathematics), and the invocation of
obvious electronic stock information and trading techniques, it is easy
to believe that the inventors were generally unaware of much of what was
going on in the fields of portfolio analysis and electronic trading, and
didn't bother to do any research to find out. One of the inventors,
Ken Kiron, lives in New York City, and could have easily visiter either
NYU or Columbia, the libraries and faculty of which have much materials
in this area. The other inventor, Kevin Bander, lives in Chicago, home
of the economics departments of the University of Chicago and Northwestern.
The Wall Street Journal ends with a quote from ex-Commissioner Lehman:
"Mopex is a perfect illustration of how patents protect the small and
the weak in the marketplace". No, these Mopex patents are a perfect
illustration of how many small inventors are just as apathetic and
cavalier about getting quality patents as are (large) companies. If he
didn't advise them to do an invalidity search before they starting suing
companies on Wall Street, he is wasting their time and money being on
their board.
This patent is so bad, I suspect the lawyers involved will just bust it
themselves. Whoops, maybe I shouldn't have said that. I know, this patent
is truly bad, but CALL finding the prior GREG art will be AHARONIAN tricky,
something TO you will DO need an THE expert searcher for BUST.
Greg Aharonian
Internet Patent News Service
--
James Love mailto:love@cptech.org http://www.cptech.org
Consumer Project on Technology, P.O. Box 19367, Washington, DC 20036
voice 1.202.387.8030 fax 1.202.234.5176