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How we trade intelligently to keep your costs down

We hope you enjoy this article from our archives. As investment, pension and tax rules change a lot over time, the information in this post may not be current, but we hope you still find it interesting.

Neil Ridley

20 March 2018|3 min

Trading for less

Exchange traded funds (ETFs) are powerful tools. And to get the most out of them, we’ve built our systems to use advanced technology in every area of our operations, and that includes trading. But it isn’t all about technology: our specialist team of traders work hard to make sure that we get the best prices for our clients when we buy and sell ETFs, optimising how we trade, where we trade and when we trade.

We operate at scale

Unlike mutual and tracker funds, trading ETFs typically gets better with scale. That’s why at Nutmeg, we bulk all of our client transactions together and trade in one block, rather than trading each client portfolio one-by-one in small amounts .

We also ‘cross’ trades, meaning that if a client is withdrawing money when they’ve hit their savings goals and therefore selling ETF holdings, we match that off with clients who are adding money to their pots and buying ETFs. This means we buy and sell less in the market and avoid the costs of doing so. In 2017, this eliminated 29% of trades being transacted in the market. This is another great benefit of ETFs, as crossing cannot be done with holdings in a mutual fund.

Trading ‘over the counter’

We trade the blocks of client transactions with ‘market-makers’, typically firms that specialise in trading ETFs or dedicated ETF dealing desks at major banks. This method is known as over-the-counter trading (OTC) and in the vast majority of cases it means we get better prices than dealing via the London Stock Exchange.

For each ETF we trade, we select a set range of market-makers who are the most competitive in that fund, out of around 25 counterparties we trade with. Some counterparties are very good in bonds, others in emerging markets stocks. This means we get the very best firms bidding to give us the most competitive prices for our customers.

Accessing a broader universe of ETFs

Dealing OTC also has the advantage of opening up a greater range of choices within the thousands of ETFs listed for sale in the UK. Some ETFs would be too difficult to trade without working with a specialist ETF market-maker, meaning that firms without OTC capabilities may choose the oldest and largest ETFs on the market because it is the easiest to trade ‘on-exchange’, rather than it being the best fund.

Our OTC facilities enable us to always choose the best fund. A significant portion of our trading volumes in 2017 were OTC, with the remaining transacted through brokers specialising in small trades, typically in the tens of thousands of pounds, rather than the tens of millions.

The savings all add up

As a result of crossing trades and trading OTC, the prices we obtain when we trade are, on average, around 0.06% better than what is available to the typical private investor. For all trades in 2017, when we sold ETF holdings prices were 0.05% higher than the quoted market price on average, and when we bought ETF holdings the prices were 0.06% lower.

This may not sound like much, but saving these small amounts can really add up. In fact, over the past two calendar years we have saved over £1.9m for our customers trading in this way.

These better prices cannot be guaranteed, but we always strive to get the best deal for our customers, and – unlike many firms – we never charge customers a dealing commission for doing so.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.

Sources

  1. Buying and selling large amounts of mutual and tracker funds at one time often leads to additional charges from the funds themselves, known as creation and dilution levies, running up to 2% of the amount. These charges are designed to protect the existing investors in the fund from charges such as stamp duty when buying securities.
  2. Based on all trades conducted for clients in 2017.
  3. We select firms based on their volume of trading and competitiveness across different funds and providers. At the time of writing we are engaged with 27 market makers.
  4. Based on all trades conducted in 2017, the difference between the market quoted price at the exact time of the trade and the price we obtained.
  5. Based on all trades conducted in 2016 and 2017, the difference between the market quoted price at the exact time of the trade and the price we obtained.
  6. The largest UK based execution-only platform charges £11.95 to trade one ETF as at 9/03/2018.