Day in the Life of a Vanguard Trader

Have you ever wondered what it’s like to do the actual investing at one of the world’s largest investment firms?

To find out, we spoke with two principals in Vanguard Equity Investment Group. Mike Buek is head of U.S. trading and Gerry O’Reilly leads a team of index portfolio managers. They gave us an inside look at a day in the life of a Vanguard trader.

Our conversation has been edited for length and clarity.

Vanguard life of a trader

What is the role of a trader at Vanguard?

Mike Buek: Our trading desk acts as a combination portfolio manager and trader for Vanguard’s index funds. So we understand the entire investment process. We seek to minimize tracking error to the benchmark while at the same time minimizing the fund’s transaction costs.

We want an index fund to be 100% invested to its benchmark. We monitor any changes to each fund’s benchmark and match them in our trading.

Gerry O’Reilly: At the same time, our traders manage the trade-off between tracking error and impact. We employ proprietary trading strategies to try to minimize the impact our trading has on the overall market.

So if we have a large inflow to a fund on a given day, we have to decide whether we have market impact and still track the benchmark or if we can minimize impact by trading this inflow over multiple days. It’s important to look at each trade relative to the market so we can understand what the market can absorb.

Every trader on the desk employs strategies we’ve developed over the years. For example, we’re fans of using limit orders as a way to minimize impact.

Vanguard life of a traderHow do you prepare before the market opens in the morning?

Mike Buek: We typically come in around 7, 7:30. We check what the international desks in London and Melbourne have done so far. Then we go right to reconciling each fund to make sure we’re 100% invested. For example, we may have expected to receive $50 million on a given fund the previous day, so that’s what we invested. But then the next morning, it turns out the fund received $55 million. We need to get that $5 million invested as soon as possible. In this case, we’d invest in futures to get the fund fully invested because the market isn’t open yet.

Gerry O’Reilly: Each trader also has to sign off on each of their funds in the morning, saying they agree with each fund’s status. Someone from investment risk also signs off, as well as the desk supervisor. So there are three different sets of eyes looking at the funds each day, making sure the starting line makes sense.

Each fund, based on its size, has a certain tolerance. For example, Total Stock Market Index is an enormous fund. If it starts the day with $10 million in cash, that isn’t a huge deal proportionally. It’s not even a basis point. But $10 million cash in one of our smaller funds could be a huge deal. Our investment risk group monitors those tolerances.

Knowing that you have someone keeping an eye on the performance of the fund and the benchmark is a big source of comfort. As much as we’d like to try to eliminate any potential tracking error, it’s probably unrealistic to think it will always be that way. We closely monitor what little tracking error there is.

Mike Buek: We also look at the performance from yesterday. We’ll look at every fund’s performance versus its index. If there’s anything off, we want to know why. If there’s a reason we knew about and it makes sense that we outperformed by 3/10 of a basis point—and that’s how deep it gets, explaining fractions of a basis point—we investigate so we can adjust and get the fund tracking as close to perfect as we can.

Vanguard life of a trader

Mike Buek, Principal, Vanguard Equity Investment Group, U.S. Trading

How does the experience change throughout the day?

Gerry O’Reilly: Our data group gets notified of the index changes coming at that day’s close. Once you know an index change is coming, a fund tracking that index has to adjust.

On a given day, you could have 10 to 20 different corporate actions going on, such as a company issuing more shares. Each trader gets assigned a corporate action and takes point on that stock. They will figure out what each fund needs to do to ensure the index weights are correct.

Trading can get really busy when indexes add or remove names. Say, for example, XYZ Company has outgrown a small-cap index and is being added to a mid-cap index. We’d need to mirror that move in the funds tracking those indexes.

How does Vanguard manage the global nature of the market? What specific difficulties come up?

Mike Buek: When we go global, we’re passing trades to Vanguard’s European and Australian-Asian desks to execute. And they pass us trades to execute for their funds. The communication has to be good between the three desks so the traders executing each trade understand the objective.

That’s challenging because of the different hours, but with improved technology and our expanded team, we’re able to make sure our portfolio management is globally consistent.

Gerry O’Reilly: International trading can often involve more markets. In the U.S., we mainly deal with the NYSE and Nasdaq. In other regions, you might have 10, 15 different markets closing at different times with different rules. In Europe, you’re looking at “When’s Norway closing? What about Germany?” You have to make sure you get your orders down in time because if you miss it, you miss it.

The other obvious difference is currency. U.S. investors are giving us dollars, which we have to convert into local currency when we buy international stocks. So in addition to the equity trade, our teams need to address the currency piece in order to keep the cost of the trade to a minimum.

Vanguard life of a trader

Gerry O’Reilly, Principal, Vanguard Indexed Equity Portfolio Management

Without getting proprietary, what would you say sets Vanguard’s trading desk apart?

Gerry O’Reilly: At a high level, one of the things that differentiates our desk is the level of experience. Mike has 30 years at Vanguard, and most of that is on the trading desk. I’m at 25 years and almost 23 on the desk. I’d say the average tenure for our traders is probably 12 to 13 years.

On this desk, we have people who specialize in different areas. When we get information from the street from our brokers about what’s going on with a name, we can funnel that to the appropriate person to address that information.

You learn from experience. None of us are set in our ways. You have to be willing to change and learn from past experience.


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