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Equity Valuation and Portfolio Management by Harry M. Markowitz, Frank J. Fabozzi

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MULTI-ACCOUNT OPTIMIZATION

Portfolio managers who handle multiple accounts face an important practical issue. When individual clients' portfolios are managed, portfolio managers incorporate their clients' preferences and constraints. However, on any given trading day, the necessary trades for multiple diverse accounts are pooled and executed simultaneously. Moreover, typically trades may not be crossed, that is, it is not simply permissible to transfer an asset that should be sold on behalf of one client into the account of another client for whom the asset should be bought.23 The trades should be executed in the market. Thus, each client's trades implicitly impact the results for the other clients: The market impact of the combined trades may be such that the benefits sought for individual accounts through trading are lost due to increased overall transaction costs. A robust multi-account management process should ensure accurate accounting and fair distribution of transaction costs among the individual accounts.

One possibility to handle the effect of trading in multiple accounts is to use an iterative process, in which at each iteration the market impact of the trades in previous iterations is taken into account.24 More precisely, single clients' accounts are optimized as usual, and once the optimal allocations are obtained, the portfolio manager aggregates the trades and computes the actual marginal transaction costs based on the aggregate level of trading. The portfolio manager ...

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