KAT: Hello, I'm Kat Mann, head of PR and savings and investment specialist here at Nutmeg.
In this issue of Nutmeg Explores I'll be speaking to our head of trading, Jason Conan-Davies,
about Nutmeg's in-house trading experts, our approach to trading and how we use fractional
shares to help clients achieve their financial goals. Jason, some people might not know Nutmeg
has an in-house trading team. Can you tell us a little bit more about yourself and the team?
JASON: Hi Kat
So I'm Jason, head of trading here at Nutmeg. I've been with the Nutmeg team for nearly
4 years now, so have been around for a large part of Nutmeg's recent growth. There are 3
of us in the trading team at present: myself, a senior trader and a trader.
Our job is to execute trades and to get the best possible prices for our customer when
doing so. We currently only trade exchange traded funds [ETFs] here at Nutmeg. We work closely
with the investment team to develop strategies to execute trades. We also monitor the markets carefully
and share our insights with the investment team regularly. We focus on building strong relationships
with market participants including ETF providers and market counterparties. We trade with the
major investment banks and ETF specific market makers. We use our experience and knowledge
of the market to develop trading strategies that ensure we get the best execution we can for
customers.
KAT: Broadly speaking, there are two different ways to trade: 'over the counter' or 'on exchange'.
Can you briefly explain the difference, and how we trade at Nutmeg?
JASON: So, on exchange trading refers to trading activity of buyers and sellers on the secondary market
that takes place on a centralised exchange, for example, the London Stock Exchange. This
is generally the most visible source of ETF trading. However, in Europe, a lot of ETF
trading takes place off exchange in the form of 'over the counter' or 'OTC' trading.
This means there is more liquidity to be found OTC. Here at Nutmeg our primary choice is
to trade OTC as our typical trade is of a size where trading OTC delivers the best price we can get -
better prices than trading in other ways. In fact, when we trade OTC we actually benchmark our performance
of each trade by using the prices quoted on exchange via the exchange order book at the
exact millisecond we executed OTC. For context, in February this year alone,
we saved customers over £1 million in our execution vs the on exchange prices at the exact time we executed our trades.
However, If the trade is of a sufficient size we can still utilise some of liquidity being
offered on exchange on the secondary market order book. We can even access the
primary market ETF liquidity if the trade is of a sufficient size where we need even
greater amounts of liquidity. The key takeaway here is that we are very flexible in how we handle
each trade and there are many factors that influence our decisions on how to trade an
ETF. Factors such as the size of the ETF trade, the liquidity of the underlying stock or the
the type of ETF we're trading: whether it's a fixed income, equity or commodity based ETFs - all these things trade differently.
KAT: Nutmeg could outsource our trading to a third-party, so what are the benefits for Nutmeg clients
to having an in-house trading team? JASON: So, one of the primary benefits of completing
trades in-house is cost. If we were to outsource trading to a brokerage firm, for example, there would be
commissions that we would be charged. Here at Nutmeg, we charge no commission on trades.
The only associated cost with our trading are costs associated with spread.
As we only trade for Nutmeg customers, we can give each trade the required attention
and care that results in better execution. Whereas most brokerage firms have orders to
execute from multiple clients and therefore may adopt an approach that focuses on executing
a large number of trades as quickly as possible, we can focus on quality execution and tailor
our approach acutely for whatever the market conditions currently are or for the attributes of the
stocks we are trading. As our approach is unique, we have built
very strong relationships with market makers and counterparties. These counterparties understand
our objectives well and can position themselves to meet our demand which also results in better
execution. Our trading practices are held in a high esteem by these counterparties and
we regularly take part in ETF conference events hosted by these counterparties and the trading
platforms we use. Most counterparties use a tiering system that determines how well
they can price a counterparty they are trading with. We are a top tier counterparty for all
of our trading counter parties due to the sophisticated way we trade and our reputation with the industry.
This also results in better pricing. We were the first buyside counterparties for one of
the largest ETF market makers in Europe so we have have built up a strong reputation
over the years and have a lot of experience trading ETFs.
KAT: What does a typical trading day involve? JASON: We build individual trades for each customer.
For customers looking to invest, we create buy trades of ETFs that make up their portfolio.
For clients requests to withdraw we create sell trades. We aggregate these client trades
over a certain period: usually 2-3 working days. We typically trade 2 times a week and
on a trade day we can have up to two million of these client trades, which are automatically
built by our in-house trading blotter, which was built and maintained by our software engineers.
We are able to net trades internally, so we net customer buys and sells of any given
ETF on a trade day. This creates a single net trade of each ETF which we then go to market and
trade. We typically net about 25% of all client trades which improves efficiency
or our trading and reduces cost. The netting of trades also is also seen in a favourable light by our
counterparties and makes us an ideal counterparty to trade with as we are not always going to market
with multiple trades of the same asset in different directions in a short space of time.
KAT: Nutmeg was an early adopter of fractional trading, can you tell us what this is and
why it's important for clients? JASON: Fractional share trading essentially means
we're able to provide fully diversified portfolios for very small amounts of invested cash. We
can buy and sell as little as one pence in any ETF, as opposed to whole shares, some
of which can be expensive.
By offering fractional shares it means money can be invested more precisely for clients. It also
means we have more reasonable minimums. You can have a fully diverse portfolio whether
you invest £500 or £500,000. People think you need a lot of money to invest but fractional
trading means we can create trades for as little as
£10 even - as long as you have already met the minimum £500 threshold for your portfolio value.
KAT: Thanks Jason, and thank you for joining us. We'll be using the Nutmeg Explores series
to take a more detailed look at different themes, processes and investment topics. If
there's something you'd like us to cover, please contact us via social media or in the
comments section below. We look forward to seeing you again soon.