Schroders on European equities: Attention to detail is essential

Now with over £737 billion in assets under management across the Group, Annabel Smith sits down with the Schroders traders who are making equities pay from behind closed doors.

Schroders needs little introduction. The buy-side giant closed 2022 with over £737 billion in assets under management and kept its head above water last year despite weathering, alongside its peers, some of the most challenging conditions the markets have ever seen.

The institution – now well over a century old – was also named one of the best places to work in 2023 by Glassdoor. And after spending a morning with the equities trading desk, you can see why. High above the hustle and bustle of London Wall and nestled amongst the City’s infamous skyline sits a team of traders that seem genuinely fond of each other.

In the equities market, no two days are the same. The market could see an influx of orders or very few whatsoever. In Europe, this irregularity is worsened by daily liquidity that has been largely stagnant for the last five to six years in comparison with the US and Asian markets. Pair this with volatility caused by the pandemic and Russian invasion of Ukraine, fragmentation across just shy of 30 trading venues in Europe and now regulatory divergence between the UK and Europe post-Brexit and you have a perfect storm that just a handful of traders have the required skillset to truly do well in. 

For the Schroders team, all of these factors make a diverse trading team with a range of skillsets essential to survival, with attention to detail and concentration as the two most important characteristics in a trader. 

“Traders are plugged in for almost eight and a half hours a day for the longest trading session in the world. At the same time there’s an element of patience as markets are inefficient and prices can be volatile,” says head of the equities trading desk at Schroders, Guy Alcock, who took over the reins mid-pandemic in July 2020. 

Diversity of thought

There are six traders in total on the desk, including global head of the multi-asset trading team, Gregg Dalley. The traders are divided by sector in developed markets and then also specialise in emerging markets, a structure that mirrors that of sell-side institutions. They work in pairs – Gregg Dalley and Damon Burkett, Dan Trusler and Doug Fokuo, and Jay Hockey and ChiChi Wang, to ensure someone is always covering a specific area of the market. 

“Traders are split by sectors in European developed markets and split by country when it comes to emerging markets as these markets tend to have country specific nuances.  Outside of equities traders are split by specialist security types including futures, options, ETFs and programs,” adds Alcock. 

A key contributor to the team’s success is their range of perspectives and the toolkit this has given them to deal with a range of different scenarios. The team have arrived at the equities trading desk from a variety of backgrounds and have trading experience that ranges from months to decades. Damon Burkett is one example of this – starting his career at Schroders in settlements on the FX side, a valuable skillset in today’s market environment as traders try to navigate the macro environment globally and regulatory developments around T+1. He then moved over to FX trading and then finally, migrated to equities. 

“Having different mindsets has helped us to look at our trading processes in a different way,” says Alcock.

Trader-in-training ChiChi Wang has also not had the typical journey to the trading desk. Wang originally joined Schroders in 2013 during the upgrade of its order management system which was at the time Charles River. She then helped the team oversee its transition onto the Aladdin OMS platform in 2018 – an extensive process that took three years – taking the desk from multiple systems to one investment book of record.

Her potential during both the Charles River upgrade and Aladdin migration was spotted by global head of trading, Gregg Dalley, who saw first-hand the important role that expertise in process improvement and change technology could play on the desk. 

“Gregg was always very keen to have somebody in the team with a change and technology background, leveraging technology to improve processes,” says Wang. “I’m hoping that as I move through the other asset classes, I can leverage my day-to-day skills to improve efficiencies through technology and process changes.”

The augmented role of humans and technology 

Like its peers across the buy-side, technology has continued to play a bigger and bigger role in how the trading desk operates at Schroders. Traders are reducing clicks on low touch flow to focus their efforts on the alpha-generating high touch volumes. In the last decade, the European equities team’s split in value traded in terms of high touch/low touch has moved from 80-20 to around 50-50.

“This has evolved over the years as our assets under management have grown and the complexity of our workflows have increased,” says Alcock. “Given the attributes of our orders in Europe we execute 80% of our tickets low touch. By improving efficiencies and increasing automation it allows us to spend more time focussing on high touch/block liquidity that have the biggest impact as they can produce the greatest alpha whilst reducing trading cost. High touch will always play a large part in the lower end of the market cap scale because there just isn’t the functionality or the infrastructure to be able to trade those markets electronically via algos.”

The advancement of the team’s trading technology has meant that as the team has boiled down to an efficient team of six, Schroders’ assets under management have roughly doubled in the last 10 years.

“Since joining the desk as part of the Cazenove acquisition in 2013, the Schroders AUM has roughly doubled but the number of traders globally is lower than it was a few years ago,” says Jay Hockey. “The increased usage of algo wheels and better data around algo selection has enabled us to create scale without taking on extra traders, whilst additionally adding workflow efficiencies and automation.”

Not just any old algo wheel 

Overseen by Jay Hockey, Schroders’ algo wheel is not just any algo wheel. With the help of the firm’s head of electronic research, Schroders have created a proprietary model that both randomises broker selection and bases it off of performance to ensure two-pronged best execution. The wheel is overlaid with a quant model that sits in an API between the team’s OMS and the wheel itself. Before an order hits the wheel to select a randomised algorithm, the random forest model has also made a forecast based on nine trading variables as to which broker it thinks will offer the best execution based off historical data for that order.

“Industry wide use of algo wheels was borne out of taking the away bias on the individual trader and originally our use of algo wheel routers was designed in a similar way,” says Hockey. “By using a part randomised and part ‘rewarded’ routing logic we’re able to continually train the model and provide an extensive feedback loop to our trading partners. This post-trade learning enables banks to continually learn and understand where they fit into the feature space. In time this creates competition to improve performance thus aiding our ‘best outcome’ approach.”

This proprietary quant model has meant the desk at Schroders has been able to better rank brokers and subsequently reward more flow over time as the system has gathered data to base its decisions on. The system has doubled down on the team’s best execution efforts by reinforcing a feedback loop between brokers and the trading desk – brokers rewarded the most are the ones achieving the best results by working the closest with the team to cultivate what they are offering them through AB testing and communication. 

One page EMS

The key takeaway across all of the desk’s technology is that adaptability is key – the development process is never at a standstill. Communication and responsibility for their individual areas of expertise are key on this desk and their chosen execution management system (EMS) is no exception. Guided by Damon Burkett, the desk is consistently developing its Virtu Triton EMS.

“You should never stand still on anything. You should always be improving and developing. If you’re saving 30 seconds here, that’s 30 seconds you could be spending on something else, over the course of the day that adds up,” says Burkett. “The first thing we look at [when selecting an EMS] is speed to market. Making sure that we have an efficient trading process by routing our orders as quickly as possible by reducing the number of clicks.”

Perhaps most key to Burkett’s development ethos is simplicity of use – a key tool when dealing with the unpredictable and volatile equities markets. The system favours a one-page setup where all information can be accessed with minimal clicks.

“You want a trading system that has all the execution tools available but easy to use to minimise errors. We never know when we’re going to be busy. Some days there could be a pickup blotter full of overnight orders. You have to have very clearly defined trading procedures on how to handle large volumes of trades whether trading multiple program lists, individual blocks order or other security types,” explains Burkett.

Schroders’ EMS is also overlaid with their transaction cost analysis capabilities – something on the wishlist of many buy-side firms looking to advance their analytics capabilities. Previously a compliance tool, TCA is now a must-have in today’s best execution environment. 

“The industry has changed a lot over the years but for the better, everything is more streamlined, we have more responsibility and more pressure for sure,” says Burkett.

Looking to the future 

The Schroders trading desk is focused on its fund managers when looking to the future. As a dedicated fund management house, optimising the way the desk works with portfolio managers and within the wider Schroders organisation is a key focus for the team in the next few years, particularly around data and how they communicate it.

“Schroders are looking at ways of increasing liquidity direct to portfolio managers by matching flows versus watchlists that will allow us to consume a larger quantity of broker flows whilst improving efficiencies,” says Alcock.

The desk appears hyper aware that the best way to drive alpha for its fund managers while also driving down costs is by finding new ways of accessing liquidity. With markets unlikely to calm down and recession looming, this survival strategy might come in handy in the next 12 months.