Buy-Side Trading Q&A: Vanguard
Markets Media recently caught up with Mike Buek, Principal in the Vanguard Equity Index Group, about the firm’s equity index trading capabilities.
Vanguard won Best Buy-Side Equity Index Trading Desk at the 2018 Markets Choice Awards.
Who are the key people in the unit and what are their roles?
Vanguard’s Equity Index Group (EIG) takes a global, team-centric approach to fund management. EIG draws on the deep expertise and diverse perspectives of our global team, which enables Vanguard to deliver precise tracking to our benchmarks and competitive investment performance to our clients. Vanguard portfolio managers are also traders, which means they are involved in every step of the investment process. Additionally, we leverage our presence in multiple time zones to “extend the number of hours in a trading day” and use the local expertise of the group in each region. The team also conducts regular portfolio manager rotations that provide individuals with a broader range of experiences, builds a deeper bench with broad expertise, and eliminates key person risk.
Please describe the essence of Vanguard’s Index Trading business. What are the primary capabilities?
The Equity Index Group at Vanguard is responsible for overseeing and managing $3.7 trillion of our clients’ indexed assets. By maintaining the highest fiduciary and professional standards, the team works to ensure our funds are fully invested to their benchmarks at all times. Vanguard’s Equity Index Group employs proprietary trading strategies to minimize tracking error and fund transaction costs and market impact.
The team also works closely with our Risk Management Group to mitigate potential risks, create new tools to manage risk, and contribute to the development of new investment strategies.
What are some recently completed and/or ongoing initiatives?
Vanguard is committed to improving industry practices that promote the investment success of our investors. The Equity Index Group regularly participates in industry, market structure, and indexing consultations and committees across the globe. For example, we regularly consult with index providers to improve index methodology and construction.
How does the trading desk ultimately benefit end-user investors?
The Equity Index Group leverages its global expertise, carefully-honed proprietary trading strategies and precise benchmark tracking to maximize the funds’ total returns and pass those returns on to Vanguard’s clients. Additionally, the team works to champion improvements in the industry to benefit all investors.
What are the biggest challenges/opportunities in equity market structure currently?
Market participants should be looking for opportunities to improve the efficiency of emerging markets so they can better compete at the global level. While every market has its own unique challenges, we can use our broad learnings from developed markets to reduce transaction costs, establish solid infrastructure, streamline accounting standards / regulations, and improve corporate governance in emerging markets. This will enable investors to take advantage of growth opportunities while reducing the elevated risk currently associated with developing economies.
What do you see as the future of Equity Index Trading?
The market’s use of technology for equity index trading will continue to evolve. In addition to employing technology in traditional ways (execute trades, run reports, etc.), technology will play a larger role both in strategic decisions and automation. We’re already seeing this unfold. In December 2017, Vanguard announced it is leading an effort to simplify the index data transmission process. Automation of this process will enable investment managers to instantly distribute, receive, and process index data, which we believe will result in better benchmark tracking and significant cost savings. In the future you may also see portfolio managers and teams across the industry use AI and machine learning to enhance and develop trading strategies, manage large rebalances with minimal market impact, or further reduce tracking error through enhanced algorithms.
There is a need to standardise ESG data.
Solve Advisors says demand for data is growing as fixed income markets become more electronic.
The UK regulator said ETF primary markets are highly concentrated, particularly for fixed income.
System helps traders manage data agreements electronically.
Using machine learning in securities lending business enables greater pricing efficiency.