Exchange dealing: it’s not what you do, it’s the way you do it

5 min read 12 Jun 20

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It’s not surprising that due diligence questions often focus on what a platform does or doesn’t do. And there’s no doubt this can be a good initial filter for platform suitability. But, when it comes to exchange dealing, the devil’s in the detail.

There are many platforms that can tick the exchange dealing box on paper. But the more pertinent, and often un-asked question is, ‘how do you do your exchange dealing?’ This shines a light on the key difference between platforms and that is, their dealing capability (or lack of).

 Having your own exchange dealing function means you trade intraday (i.e. continuously during market hours). If you don’t have this in-house and outsource it, it typically means you trade at a single point during the day. I’d argue that this could dilute a proposition as you lose some of the essence of the products you’re trading if you only do it once a day.

Intraday dealing – a case in point

The first thing to stress, is it’s not about timing the market. It’s about having choice and flexibility. And when you combine this with experienced humans acting in a client’s best interest, it’s also about having control over outcomes.

Market volatility throws this into sharp focus

Take March 12 2020 as an example. That day we saw one of the biggest drops in the FTSE 100 on a single day for a long time.

The market opened at 5876 and almost immediately dropped by around 2%. At lunchtime, U.S. markets start trading and it dropped another 4-5%. The decline continued until closing at the end of the afternoon.

So, if an adviser or DFM – or indeed a client – decided they wanted to sell first thing, the trade would happen almost straight away through the M&G Wealth Platform. In this example, the client would be down around 3% or maybe less.

If they made that same decision on another platform that outsources and trades once a day, the order may not have been executed until mid-late afternoon, by which point the FSTE was down around another 7%.

So, the client has potentially seen a 10% drop in the value of their investments, the majority of which happened after they wanted to sell. Or looking at it another way, that could be nearly two years’ growth. That could have a material impact on someone’s retirement or other financial objectives.

The human touch – execution quality and working the deal

Of course, acting straight away, isn’t always going to be an advantage and that’s where experience and judgement come in. As well as a strong culture of doing the right thing for clients.

If we put ourselves in the shoes of our trading desk dealers for a moment; they’re constantly monitoring their market information screens.

If we take that same day in March and a fairly standard asset – like an iShares ETF dollar corporate bond – as the dealers watched it being traded they would have seen a significant spread between the buy and sell price. In this instance, the spread was 181 basis points.

They’d use their judgement in a situation like this and avoid trading when there’s such a wide spread. It generally implies that the market’s pricing mechanism isn't quite working and it’s in the client’s best interests to wait until things have stabilised.

Their next step would be to look at our RSP & RFQ systems which poll various market makers for live quotes. Because M&G Wealth Platform controls its own dealing, the traders are free to work with a range of market makers.

Again, for our example stock, our traders would have seen some very different prices from different market makers. In fact, they could have bought the stock for their client at 97 basis points cheaper or sold it at 36 basis points higher.

The so-what for all this, is where a platform uses an outsourced, automated dealing process, this kind of added-value, human judgement is lost. Or at least out of their line of sight.

What does this client benefit equate to?

Of course, it’s easy to pick individual examples like this that show client benefit. But the true test of value is to look at trends over the longer term.

If we look from March 2019 to March 2020, our dealing desk processed 465 000 client orders and achieved an average bid/offer price improvement of 14.9 basis points for each client – which equates to a price improvement overall of £1.8m.

Or looking at it another way, over a 30-year investment period for our average value client portfolio investing wholly in ETIs, the savings would cover around 116% of all platform charges. The platform would effectively be free.

This rewards long term investing behaviour, which is consistent with the long term nature of adviser/client relationships. It’s important to bear in mind if you’re tempted by the promise of single digit basis point reductions in platform charges.

Some other benefits of ETI trading capability

  • Other options easily traded on the M&G Wealth Platform include:
  • Access to Gilts and investment grade corporate bonds as an alternative to cash or lower risk building blocks in income portfolios
  • Exchange traded structured products
  • Smoothed income through Investment Trusts, as the Board can retain distributions to smooth out fluctuations in the future (this can be  particularly useful for a CRP* that includes a natural income approach)
  • AIM shares – a number of DFMs manage IHT portfolios on the M&G Wealth Platform, providing a cost effective alternative to packaged AIM IHT products

This flexibility and choice can support sophisticated and bespoke investment propositions on the platform and includes satisfying the rising demand for ethical and sustainable portfolios. And of course, demand for lower cost solutions.

And with M&G Wealth Platform's all-in pricing structure, there’s no additional trading cost: a resounding win-win for clients. It removes a performance drag on portfolios and a soft bias against ETIs. Advisers or DFMs can manage portfolios as they intended, rather than worrying about the cost implications.

*M&G Wealth has published benchmarking research into adviser centralised retirement propositions, including investment approaches. Download your free copy of the report here.