In this week’s Buy-Side Perspective, GREGG DALLEY, global head of trading at Schroders, gives us a unique insight into his firm’s approach to trading new traders – and explains why the changing relationship between the buy and sell-side (and the evolving responsibilities that come with advancing technology and improved execution) make proper preparation absolutely crucial.
When we were deciding on the topic for this article a number of suggestions were discussed to be part of the series, and all of them were interesting in one way or another. Some were more glamorous – AI or automation and technology for example are much more in vogue but I chose this topic, education and training of new traders, because although it might not appear to be the most glamorous, I do believe it is one of the most important. It is a topic we have discussed in the Investment Association buy-side committee meetings over the last few years, when we have tried to address market etiquette and what is, and is not, acceptable behaviour by market participants and how as a group of practitioners we can influence behavioural standards.
Every generation, regardless of the industry they operate in, has experienced unparalleled changes in technology, regulation and working environment over the last 25 years. Trading has probably experienced this more than any other area within the investment industry over that period. The market has evolved from having to trade on the stock exchange floor, to working from home and executing orders electronically using algorithms, accessing dark pools and crossing networks. The buy-side has moved from paper tickets and timestamps 25 years ago to an explosion of technological advancement including Order Management Systems and Execution Management Systems. We now have millisecond fill data, fragmentation of liquidity and auto routing execution logic to name a few. But the biggest shift in the buy-side has been taking control of the execution directly, dramatically changing our relationship with the sell side.
We have come a long way in a very short space of time, our responsibilities and roles have changed dramatically, so how do we prepare our new traders for this? How should we approach this and how do you get the balance right between development, exposure and risk? We are focusing here on the trading development plan, the core mandatory training around data protection, money laundering, inclusion and diversity, compliance, financial crime, consumer duty and market abuse etc., are all covered by our Schroders group wide training model and provide an excellent base.
When I started, one of the senior UK traders had previously worked on the stock exchange floor and pressed the importance of Dictum Meum Pactum, displayed on the stock exchange coat of arms and the importance of etiquette and tradition. I was also given a copy of ‘Reminiscences of a Stock Operator’ and taught the importance of reading the tape. These are things that I will always remember and be grateful for, and we try to embed this into our next generation of traders. But now we also have to appreciate that we need far more in-depth training and education to understand the technology involved in the trading process, the complexities of market structure, the more complicated products and to appreciate the differences in global capital markets compared to even five years ago. So how do we approach it?
The first thing we always say to new traders is that it is our responsibility to keep you safe, and if a mistake did occur early on then it would be our issue and not the individuals concerned. It is our job to educate them and provide the training and psychological tools you need for the role. We break this down into four main categories: Technical, Psychological, Practical and Social or Relationships. We assess the new trader so we understand their natural or current core strengths and assess where we need to strengthen.
The new trader will be given a mentor on the desk who will be responsible, along with the head of the desk, for mapping out the training plan and documenting the progress for transparency and used for signoff at the end of the process. Sometimes this can be more than one person but again it depends on the individual We will always try and tailor this to the individual but the main point is that they are happy to confide and be open with their mentor.
Technical development will involve the mechanics of the markets, regulation and intricacies of different products. Understanding the instruments and their individual characteristics, the workflows, how the price discovery process is established for each one, and finally the TCA and analytics tools used to measure the outcomes. This is done over time and will involve interaction with internal areas, markets structure experts, sell side participants and 3rd party application providers.
Psychological development is constantly evolving and we never stop learning, but here we explain why we make decisions given the information we have at our disposal. Understanding why we make that decision at a particular point in time and being able to explain our investment philosophy and rationale for each decision. We also focus on behavioural biases and try to be self reflective on personality traits and other areas that contribute to our decision making. The Liquidnet programme for buy-side participants is a good resource for this and covers topics like the six thinking hats and learning to “speak to the listening”; tailoring your approach to the audience you have at any given time.
Practical development is where we learn how to use all of the tools at our disposal, this will mean spending time with third party platform providers as well as on the desk training. For example understanding how to use our OMS, understanding the trading blotter on the EMS, understanding how QTRMASTER works and the philosophy behind it.
Finally, we look at developing their social and relationship building skills to promote productive and open relationships with our internal PM teams and other internal areas such as IT and compliance. It is also vital to build relationships with our coverage on the sell side and increasingly now with exchanges /venues and third party data and platform vendors. It is vital to build productive working relationships and trust with the people you interact with each day. Schroders’ core values of excellence, innovation, teamwork, passion and integrity are imbedded in our traders objectives every year and something we are always focused on.
We constantly monitor and discuss the pace of progression with the individual and get feedback about their levels of confidence and where they feel they need additional training and exposure for all traders. This is also discussed with the desk and the mentor who is looking after the training plan. We then adapt and tailor the training accordingly until all of the parties feel comfortable.
We are incredibly lucky to work in an industry that allows us to utilise state of the art technology, machine learning techniques and AI applications to help us process data and make decisions that are hopefully quicker, faster and better. But we have to balance this by respecting the history and tradition of our industry to make sure that the technology revolution that has taken place is embraced, but we do so in a way that is in keeping with tradition, and respect the history and heritage of the markets we operate in.
Important Information: The views and opinions contained herein are those of Gregg Dalley, Global Head of Trading, Schroders and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.
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