Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1999-10-14
2003-09-02
Poinvil, Frantzy (Department: 3628)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
Reexamination Certificate
active
06615188
ABSTRACT:
FIELD OF THE INVENTION
The present invention relates to a computer system for effecting securities trades in general and in particular a computer system wherein separate accounts for a plurality of holders are maintained and trades are aggregated over multiple holders prior to being submitted to a trading system or an exchange.
BACKGROUND OF THE INVENTION
In a typical retail securities trading operation, a broker holds the funds and securities of a number of account holders (“holders”) and maintains data for each account that tracks the balances for the holder's account and the transactions made by the holder. Examples of such systems can be found at full-service brokerages, discount brokerages and online trading brokerages. These brokerages differ mostly in the manner in which a holder effects a transaction. With a full-service brokerage, a holder might make a trading transaction (a “trade”) while on the telephone, and in consultation, with a broker. With a discount brokerage, the holder typically makes his or her own decisions as to trades and calls the discount brokerage with the trade information. With an online brokerage, the holder electronically connects to a computer operated by or for the broker and thus transfers the trade information.
Many existing brokers have several aspects of the above types of brokerage, such that one broker might be a full-service brokerage to some holders or for some trades but be a discount brokerage to other holders or for some trades. However, what is common among each of these brokerages is that they maintain separate accounts for holders. The cash, securities and other instruments owned by a holder at that brokerage are held by the brokerage, often in the name of the brokerage (i.e., “street name”) and are represented in the data stored about that holder in account files that are part of the data storage of a computer system operated by or for the brokerage.
Another common feature of existing brokerages is that, when a holder enters an order for a transaction, the transaction is executed by the broker in response to the order, depending on the terms of the order. For example, a holder might submit a buy order, a type of trade wherein the holder receives securities in exchange for cash, and the brokerage would submit a buy order on behalf of the brokerage. After the trade is consummated, the brokerage identifies the cost of the security and debits the holder's cash account accordingly, then updates the holder's balances to show the purchased securities. This process is known as trade execution.
With the increasing availability of online trading, many holders are demanding faster and faster trade execution. Some online brokerages even offer to waive their commission on a trade if the trade cannot be done within 60 seconds. A growing number of day traders, who buy and sell securities by the hour or minute, rarely holding securities overnight, have been requiring even faster transaction speeds, so that they can take advantage of momentary fluctuations in securities prices.
For many investors, such trading systems are unnecessary, as most financial advisors advise nonprofessional investors to enter and exit the market slowly. Also, for small investors with small amounts to invest, the costs associated with each transaction (commission, etc.) make it difficult to invest using such brokerage systems.
In response to the economics of trading and relative transaction costs, many unsophisticated and small investors place their investments in other vehicles, such as Direct Stock Purchase Plans (“DSPPs”) or Dividend Reinvestment Plans (“DRIPs”). With a DSPP or DRIP, an investor directly contacts a security issuer (a publicly traded corporation) and makes arrangements with the security issuer to obtain shares in that security issuer, with little or no commission. This benefits the corporation because it results in a wider base of stockholders. In addition, the corporation provides the investor with additional company stock that is purchased with the cash dividends paid by the corporation. Shares are issued either through original issuance or through open market purchases.
Dividend Reinvestment Plans are company sponsored stock plans that enable individuals to purchase shares of stock and/or reinvest dividends in additional shares of company stock for either no fees, or very low fees. The initial purchase of shares must occur through a third party such as a brokerage firm. There are approximately 1,300 DRIP plans available today primarily with Fortune 500 companies.
Direct Stock Purchase Plans are company sponsored stock plans that enable individuals to purchase shares of stock and reinvest dividends in additional company stock, but vary from DRIPs in that DSPPs allow investors to purchase the initial or additional shares directly through the company plan. There are approximately 400 companies that currently offer DSPPs today, primarily large or Fortune 500 companies. A DSPP is often considered a specific form of a DRIP.
First introduced in the mid-1960's, DRIPs did not gain wide spread popularity until the 1980's when corporations recognized them as a cost-effective method to raise capital at lower costs while building closer ties with customers by transforming them into shareholders. Today over 7 million individuals in the United States (representing 40 million accounts) employ DRIPs as part of their long-term investment strategies at over 1,300 companies including many large and Fortune 500 corporations.
DRIPs/DSPPs have several advantages over other investment vehicles, but still have disadvantages. For example, the advantages include:
Reasonable Minimum Investment: Investors can enroll in a DRIP with a smaller initial investment relative to full service, discount and online brokerages. For example, many plans only require the purchase of one to 10 shares or a cash investment as low as $50 to $250. Many online and full service brokerage accounts require an initial deposit of $1,000 to $2,500 or more to open an account. Therefore DRIPs offer an advantage to these high initial deposit requirements.
Investments can be made in dollar amounts (or other currency): Many DRIP plans allow investors to purchase stock in dollar amounts rather than in whole shares, enabling investors to purchase or sell fractional shares and budget for regularly scheduled investments. The only way to currently purchase fractional shares through any brokerage (or broker-dealer) is through their dividend reinvestment service, if they offer one, which only permits investors to have their cash dividends reinvested into additional shares. Some brokerage dividend reinvestment services do not allow purchases of fractional shares.
Reasonable Fees: Although many DRIPs require investors to purchase their initial shares from a brokerage firm to enroll in the plan, after enrolled, investors can purchase shares directly through the DRIP, usually with low or no brokerage commissions. However, these costs are on the rise as corporations are charging more to continue to service their accounts.
Long-Term Perspective: The nature of investing in DRIPs nearly “forces” individuals to purchase and hold stock, thereby adopting a long-term investment perspective through the regular purchase of shares over time to cumulate holdings in the designated corporation offering the plan.
Reinvestment of Dividends: DRIPs are a cost-effective method for investors to put cash dividends to better use by automatically reinvesting in additional shares rather than spending the money or holding it in a bank account. Reinvestment of dividends is also a non-taxable event under U.S. income tax rules with subsequent sale taxed at the corporate going rate while distribution of cost dividends creates a taxable incoming event.
Dollar Cost Averaging: DRIPs provide an excellent dollar-cost averaging investment strategy through regularly scheduled stock purchases over time. Rather than attempting to time purchases based on market conditions, often referred to as “trading”. DRIPs allow investors to bui
Breen Peter E.
Macleod Michael D.
Tudisco Geoffrey M.
Brown & Raysman Millstein Felder & Steiner LLP
Bui Thach H
Freedom Investments, Inc.
Poinvil Frantzy
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