A Distributed Method for Cooperative Transaction Cost Mitigation

Paper: arXiv 2603.07881

Authors: Nikhil Devanathan, Logan Bell, Dylan Rueter, Stephen Boyd

Abstract

Funds at large portfolio management firms may consist of many portfolio managers (PMs), each managing a portion of the fund and optimizing a distinct objective. Although the PMs determine their trades independently, the trade lists may be netted and executed by the firm. These net trades may be sufficiently large to impact the market prices, so the PMs may realize prices on their trades that are different from the observed midpoint price of the assets before execution. These transaction costs generally reduce the returns of a portfolio over time. We propose a simple protocol, based on methods from distributed convex optimization, by which a firm can communicate estimated transaction costs to its PMs, and the PMs can potentially revise their trades to realize reduced transaction costs. This protocol does not require the PMs to disclose their method of determining trades to the firm or to each other, nor does it require the PMs to communicate their trade lists with each other. As the number of adjustment rounds grows, the trades converge to the ones that are optimal for the firm. As a practical matter we observe that even just a few rounds of adjustment lead to substantial savings for the firm and the PMs.

Complexity vs Empirical Score

• Math Complexity: 7.5/10
• Empirical Rigor: 3.5/10
• Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper provides a rigorous mathematical adaptation of ADMM to solve a multi-PM transaction cost coordination problem while preserving strategy privacy. However, the provided excerpt focuses primarily on theoretical derivation and distributed optimization design rather than empirical backtesting on historical market data.

Research Flowchart

  flowchart TD
    A["Research Goal: Mitigate market impact transaction costs in multi-PM funds without disclosing strategies"] --> B["Inputs: Individual PM Trade Lists & Firm Transaction Cost Model"]
    B --> C["Central Firm Nets Trades & Computes Estimated Marginal Transaction Costs"]
    C --> D["Iterative Protocol: Firm Broadcasts Cost Estimates; PMs Adjust Trades via Convex Optimization"]
    D --> E["Outcomes: Rapid Convergence to Firm-Optimal Trades & Substantial Cost Savings in Few Rounds"]

Cited References (21)

1. Distributed Optimization and Statistical Learning via the Alternating Direction Method of Multipliers (2010)
2. Large-Scale Convex Optimization: Algorithms & Analyses via Monotone Operators (2022) — link
3. A Simple Method for Predicting Covariance Matrices of Financial Returns (2023) — link
4. Convex Optimization (2004) — link
5. Markowitz Portfolio Construction at Seventy — → 2401.05080
6. Dealing with complex transaction costs in portfolio management (2019) — link
7. OPTIMAL PORTFOLIO MANAGEMENT WITH FIXED TRANSACTION COSTS (1995) — link
8. Portfolio management with transaction costs (1997) — link

1 of 21 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.