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A Day in The Life of A Vanguard Trader

Traders Magazine Online News, March 20, 2018

John D'Antona Jr.

This Q&A appeared on on March 7, 2018

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.

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.

How 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.

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