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In this edition of Nutmeg Explores, our Head of Trading, Jason Conan-Davies, discusses our trading process, the benefits of having an in-house trading team, and how we utilize our fractional ETF trading capabilities to make the process efficient and cost-effective for our clients.
What Does Nutmeg’s In-House Trading Team Do?
I’m Jason, the Head of Trading at Nutmeg, and I’ve been part of the team for nearly four years, witnessing much of Nutmeg’s recent growth. Currently, our trading team consists of three members: a senior trader, a trader, and myself.
Our primary role is to execute trades and secure the best prices for our customers. At Nutmeg, we focus exclusively on trading exchange-traded funds (ETFs). We collaborate closely with our investment team to develop effective execution strategies, monitor market conditions, and share insights. We also prioritize maintaining strong relationships with market participants, including ETF providers and market makers, which enables us to secure better executions based on our experience and market knowledge.
How Does Nutmeg Trade: OTC vs. On-Exchange?
There are two primary trading methods: over-the-counter (OTC) and on-exchange. “On exchange” trading occurs within a centralized marketplace, such as the London Stock Exchange, and is typically the most visible form of ETF trading in Europe.
However, a significant portion of ETF trading in Europe happens OTC, offering more liquidity. At Nutmeg, we generally prefer to trade OTC since our typical trade size allows us to achieve better prices through this method.
To benchmark our performance, we compare our OTC execution prices with those quoted on the exchange at the exact moment the trade is executed. For instance, in February of this year, Nutmeg saved clients over £1 million compared to on-exchange prices at the time of trade (Source: Nutmeg data as of 28 February 2021).
If a trade is substantial, we can also access liquidity from the secondary market order books and, if necessary, tap into primary market liquidity. Our flexibility allows us to adapt our trading approach based on various factors, including trade size, ETF type, and the liquidity of the underlying stocks.
Benefits of an In-House Trading Team
A major advantage of handling trading in-house is cost efficiency. Outsourcing trading to a brokerage would incur commissions, while Nutmeg charges no commissions; the only costs associated with trading are spread costs.
Since our trading solely serves Nutmeg clients, we can provide personalized attention and ensure better execution quality. In contrast, brokerage firms handle orders for multiple clients and may prioritize speed over execution quality. We focus on high-quality execution tailored to current market conditions.
Our unique approach has fostered strong relationships with market makers and counterparties, allowing us to better meet our trading demands. We enjoy a top-tier reputation among these counterparties due to our sophisticated trading methods, enhancing our pricing.
What Does a Typical Trading Day Look Like?
Every trading day, we create individual trades for our clients. For those looking to invest, we generate buy trades for ETFs that form their portfolios. When clients request withdrawals, we create sell trades. We generally aggregate these trades over two to three working days and typically trade twice a week, handling up to two million trades automatically generated by our in-house trading system.
We net client trades, combining purchases and sales of the same ETF into a single net trade, which we then execute in the market. This process enhances efficiency, and the netting is viewed favorably by counterparties, as we avoid flooding the market with multiple contradictory trades in a short timeframe.
The Importance of Fractional Trading
Nutmeg was an early adopter of fractional trading, which allows us to create fully diversified portfolios even for smaller investments. Clients can buy and sell as little as one penny in an ETF, versus needing whole shares, which can be costly.
Fractional trading enables precise investment of client funds, lowering minimum investment thresholds. Whether you invest £500 or £500,000, you can achieve a diversified portfolio. This approach debunks the myth that substantial capital is necessary for investing; we can create portfolios for as little as £10 (assuming the minimum portfolio value of £500 is met).
Risk Warning
As with all investments, your capital is at risk. The value of your Nutmeg portfolio can go up or down, and you may receive less than your initial investment. Past performance is not a reliable indicator of future results.
Let me know if you need any further adjustments or additional information!