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In this issue of Nutmeg Explores our head of trading, Jason Conan-Davies, explains how we trade, the benefits for Nutmeg clients of our in-house trading team and how we use our fractional ETF trading facility to make the process efficient and low cost for clients.  

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? 

I’m Jason, head of trading here at Nutmeg. I’ve been with the Nutmeg team for nearly four years now, so have been around for a large part of Nutmeg’s recent growth. There are three of us in the trading team at present: a senior trader and a trader, alongside myself. 

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 here at Nutmeg. We work closely with the investment team in developing strategies to execute and we monitor the markets carefully and share our insights with the investment team. We also 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 good execution for our customers. 

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? 

“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 in Europe.  

However, a lot more ETF trading in Europe takes place off exchange in the form of over-the-counter (OTC) trading, meaning there is more liquidity when trading OTC.  

Here at Nutmeg our primary choice is to trade OTC as our typical trade is of a size where trading OTC delivers better prices than trading any other way. In fact, when we trade OTC, we benchmark our performance of each trade by using the prices quoted on exchange via the exchange order book at the exact millisecond we executed off exchange. For context, in February this year, we saved customers over £1million in our execution vs the on-exchange price at the time of trade (Source: Nutmeg data as at 28 February 2021). 

However, if the trade is of a sufficient size, we can still use some of the liquidity being offered on the secondary market orderbook on exchange as well. We can even access the primary market ETF liquidity if the trade is of a sufficient size where we need even greater access to liquidity.   

The key takeaway 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 of the ETF and the type of ETF – fixed income, equity or commodity-based ETFs trade differently. 

Nutmeg could outsource our trading to a third-party, so what are the benefits for Nutmeg clients to having an in-house trading team? 

So, one of the primary benefits of completing trading in house is cost. If we were to outsource trading to a brokerage firm, 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 spread costs. 

As we only trade for Nutmeg clients, 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 for whatever the current market conditions are or for the attributes of the stocks we are trading. 

As our approach is unique, we have built up 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 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 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 built up a strong reputation over the years and have a lot of experience trading ETFs.  

What does a typical trading day involve? 

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 who request to withdraw, we create sell trades. We aggregate these client trades over a certain period: usually two to three working days. We typically trade two 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 is 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 trade on the market. We typically net around 25% of client trades which improves efficiency or our trading. This netting of trades is also seen in a favourable light by our counterparties and makes us an ideal counterparty to trade with, as we are not going to market with multiple trades of the same asset in different directions in a short space of time.

Nutmeg was an early adopter of fractional trading; can you tell us what this is and why it’s important for clients? 

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 client money can be invested more precisely. It also means we have more reasonable minimums. You can have a fully diversified 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 an entire portfolio for payments as little as £10 (as long as you have already met the minimum £500 threshold for portfolio value).  

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.