View From a Buy-Side Trading Head
With Marija Janchovski, Head of Equities Trading – Asia Pacific, Vanguard Australia
Briefly describe your professional background and current role/responsibilities?
I am the Head Trader of Vanguard’s Asia-Pacific (APAC) Equities desk, based in Melbourne, Australia. For the past 18 months I have been managing our team of Traders, Index Analysts and ETF Specialists.
Vanguard has a Pass the Trade (PTT) model, where regardless of where a fund or ETF is domiciled, the corresponding trade is passed to the regional trading desk (US, UK, or Australia) for execution. Our team is responsible for executing equities and futures on behalf of Vanguard funds across the globe, in 14 markets in the APAC region.
My role as a team leader is to help Vanguard achieve consistent, high quality equity investment and trading outcomes for our clients. Our philosophy is that the leader doesn’t make the business; the leader builds the people and the team, and then the team builds the business.
My primary goal is maintaining the high caliber of our talent and ensuring each member of the team is set up for success. That can mean anything from setting up ambitious but realistic goals that are aligned with our strategic priorities, liaising with partnering teams to remove obstacles, coaching for career development, or even delivering a tough message. I genuinely care about my team members and value the amazing diversity of talent they bring to the team. Our days are very busy, but I try to set up an environment where we collaborate, learn, and improve while we trade.
My other main goal is to maintain relationships with our global clients and the Street (brokers, exchanges, working groups, index providers). Vanguard is an important component of that ecosystem and we owe it to our clients to be a responsible participant.
Prior to this role, I worked in global investments data and analytics. My educational background is probably not typical of an Equities trader – I studied Political Science, International Development, and Economics. Coming from a developing country, I have always been very interested in world events and emerging and developed financial markets. My original career goal was to work for the World Bank or the IMF, but a combination of graduating right before the GFC and the allure of New York as the center of finance changed my plans. My main drivers haven’t changed though – the curiosity for markets and data, as well as wanting to have a sense of positive impact in what I am doing. I really think I have the best job I could have asked for – trading some of the world’s most exciting markets and leading a highly qualified team for an organization whose mission is completely aligned to clients’ investment success.
What is the profile of the APAC equities trading desk that you oversee?
Buy-side; global and local; best-ex driven; technology enabled; and TCA focused.
Through PTT and common technology as an enabler, Trading and Portfolio Management are intertwined in the investment process. We aggregate where possible – when more than one index portfolio has an order in a given stock, we trade them together as ‘one Vanguard’. This allows us to control cost in both explicit (through lower commissions) and implicit way (controlled execution and impact). We want to get as close as possible to the point of execution, which means self-trading most of our flow. We use sophisticated electronic algorithms and also monitor for block liquidity where it makes sense. We have a rigorous TCA framework for evaluating best-ex.
Our rigorous TCA framework forms the heart of our trading. We monitor the results of our execution, analyse them and use the learnings to experiment in risk-controlled ways. We monitor the impact on costs every step of the way. The data-driven feedback loop allows us to continuously improve our results and get the right balance between cost and tracking error.
How have you moved the trading desk forward since taking over in April 2021?
The desk was already highly functioning, so there was no need for substantive changes. Our long-term focus extends beyond our funds, to our strategy and people. Changes in people’s functions and focus areas are focused on career development that add value to the particular person and overall team. Changes to focus areas and execution strategies are similarly long-term and investments-results driven. We focus on collaboration and continuous operational improvements rather than star traders or PMs.
In addition to technology and processes, we also need a team with diverse ideas, which come from diversity of thought, skill, and background. If a new person is joining the team, what are they adding that we don’t already have? Even if they have that original idea, do they feel safe giving it a go? I want to encourage my team to raise questions, challenge, and try new approaches.
What are your primary challenges / “pain points” as a buy-side trader?
Indexing sounds simple, but in reality it can be complex and require a lot of work to execute well. Benchmark indices are calculated without the friction of transaction costs and liquidity. Thus, we are constantly seeking balance between executing closely to the benchmark price to minimize tracking error and minimizing market impact.
The EM nature of many APAC markets can also be challenging. In terms of market cap, APAC is around 20% of global indices and about 75% of emerging markets., While there have been significant improvements, EMs still have higher cost of dealing compared to DMs, less developed systems, changeable regulatory environments, lower liquidity, higher spreads, suboptimal close auctions and less block size opportunities. We often can’t trade them electronically, and need to consider information leakage, FX, and how our completion level will impact the exposure of the fund we are trading for.
What current initiatives are you working on to improve trading efficiency and performance?
We have been using algo wheels for several years now and are continuously evolving in that space, which involves a lot of TCA research and collaboration with our brokers. Futures execution and TCA is a space we are delving deeper into. We trade significant amounts in rebalance events, so that is also an area where saving even a basis point delivers value to our clients.
With the many markets we cover, there are also a number of initiatives championed by local industry bodies ranging from settlement cycles to auctions to general best practices.
How has the volatility and overall down market of 2022 impacted your trading desk? How have you had to adjust?
The overall market continues to experience relatively high volatility and is in negative territory against a deteriorating economic backdrop globally. Our approach to clients hasn’t changed – remaining invested in a diversified manner, avoiding locking in losses by selling in downturns, and focussing on the long-term.
This corresponds to how we trade. No jittery reactions to news – we sell when there are cash outflows, buy when there are inflows. Vanguard globally has continued to see positive cash flows.
How does the trend toward passive investing impact your trading desk, and how do you trade flows passively?
Passive investing is a strategy that tracks an index, often a market-weighted one. Assets are held for the long term (i.e. buy and hold) and there is minimal turnover (no attempt to profit from short-term market fluctuations).
Using our PTT approach, we take trades for the APAC region and aggregate them where possible depending on the benchmark. We trade mostly electronically, having full visibility of the fund, the risk of a particular name to that fund, the reason for the trade. Trading more “passively” can mean stretching a trade throughout the day or longer to avoid impact, but the incomplete portion also exposes the fund to risk. Our risk and TCA frameworks help us find the balance between trading urgency and cost.
How are you expanding/enhancing your use of trading algorithms including algo wheels?
We started using algo wheels several years ago. Today we trade through the wheel a very large percentage of what we call “wheel-eligible” flow, meaning we systematically look at order factors such as market, liquidity, reason for the trade, etc. For example, a 2-days-to-trade order, or a rebalance, or an EM market that doesn’t trade much electronically, won’t be wheel-eligible.
Having a large proportion of our trades executed in a highly automated manner delivers efficiencies in several ways.
First, automating trade execution gives traders more time to dedicate to value-added activities – finding blocks, trading in high-cost markets, reviewing strategy, secondary offerings analysis, further automation, deepening the knowledge into investment methodology, etc.
Second, the performance results from the wheels are stringently analysed, the brokers are reshuffled, the algos are tweaked, more granular changes are made, and our performance is further improved. Significant cost reductions have been delivered to our clients due to our algo wheel usage.
What is the state of the art in Transaction Cost Analysis?
Transaction costs are a drag on fund value, and our core philosophy that if you cannot measure transaction costs, you can’t manage them either. Visualising our trading costs has helped us identify trends, where we can trade more slowly, more quickly, tweak strategies. It has allowed us to unearth more value from the talent on the brokers’ side as well, by giving us the comfort of data to evaluate their innovation efforts on an objective and free of bias basis.
What is the future of buy-side trading (broadly speaking and/or specific to your trading desk)?
My view is that Trading is an integral part of the investment process, highly automated (including block liquidity where appropriate, and stepping on the shoulders of data analytics and TCA. The percentage of automation will likely increase, but it will be crucial to find the right balance from a risk and performance perspective. How many clicks away should execution be? Not too many, but there is a value in human traders and their ideas, oversight, understanding of market structure, grasping regulatory changes, making decisions in critical moments.