Please describe your role and responsibilities within Vanguard today.
I started at Vanguard about 17 years ago answering telephones and gradually worked my way through the organisation. I also held a position as a financial planner advising clients about retirement plans. After completing my CFA level 1 exam, I realised I wanted to become a trader and moved from the retail side of the business to investment management, trading municipal bonds at the fixed income trading desk.
After trading fixed income for two years, I transitioned to our equity index group as trader and worked my way to the role of portfolio manager. Many of our portfolios traded international stocks, I had to spend a lot of time organizing our FX needs, which were seen as a necessary evil back then. As a PM, if you bought Japanese stock for your US$ denominated portfolio, you needed Yen to settle the trade. I started to focus on how we traded FX to see if there were better ways than trading them at the 4PM London Fix. We were already early adopters of equities algorithms and therefore had the confidence to be early adopters of FX trading algorithms. This meant that we could trade large orders in smaller increments.
Six years ago, we reviewed how Vanguard handles currency needs throughout the entire organisation and recommended that the firm consolidate the FX trading desk to take advantage of liquidity pockets - netting and aggregating where opportunities exist. This new process enabled the equities and fixed income portfolio managers to focus more of their time on investment decisions, which is what they do best. Subsequently, we created a team of FX traders that were experts in currency trading. This resulted in an optimised common approach for trading across the firm. For the last five years, I have been building and managing that FX trading desk. To attain 24-hour coverage of the FX market, we have traders in Melbourne Australia, London, and USA.
My role includes responsibility for all currency needs across the entire organisation and managing and developing staff in those three locations. We trade about 2.5 trillion U$ in currencies a year which means that we have the largest trading volume remit within Vanguard.
How do you see your dedicated FX trading function contributing to the overall investment process and client satisfaction for Vanguard?
From my background as an equity trader and portfolio manager, especially on the index side, I was very conscious about trading costs. FX was a natural extension of that process. We started analysing the costs and charges to hedge and execute and tried to identify if there were better ways. We found that the cost of trading currencies, especially if unwatched, could be extreme. The greatest benefit from establishing this desk is the added ability to monitor and control these costs. We have added tremendous value to our shareholders. Over the course of five years handling FX flow, we’ve saved our shareholders significant transaction costs. Just in netting flow alone, we have been able to avoid going to the market with 1 trillion US$. That netting process is in the best interest of our shareholders as it offsets flow with no market impact or transaction fees.
Do you see that the FX trading algorithms available for the buy side today are robust and consistently deliver better results?
The majority of our FX orders do not have an alpha objective. For example we may need Yen to settle a trade in Japanese stock, if that order is small relative to the size of the overall portfolio, we have the luxury of being more patient and passive with that order. Foreign exchange algorithms are perfectly aligned with our objectives, so we can chop a very large FX order into many smaller pieces and save on fees and market impact, the only risk being the opportunity cost from Yen going up or down. Over a longer period of time, that opportunity cost is randomised out and what you are left with are the explicit savings from using the algorithm.
Typically, we are on the passive side of the market and outperforming on arrival from Mid. From a transactions cost analysis (TCA) perspective, we look at the point at which we submit an order and how we performed against an arrival Mid price. Over time, we beat arrival Mid consistently on our trades. That performance measure is not even taking into account the alternative risk transfer price if a bank would have filled that order for us. This performance statement is purely against arrival Mid in the inter-dealer market and we are beating that. So, the algorithmic trading on FX has delivered massive value to our shareholders by being able to warehouse the risk ourselves. The way I view our flow is that we are a liquidity provider to the market and we should be compensated for the liquidity.
How do you foresee the trading technology landscape, with a few incumbent brands, shifting in the coming years? What will be the focus areas?
Something that has been talked about for a while is disintermediation, which is on the forefront of everybody’s mind. There are a lot of firms coming up with creative abilities to disintermediate banks on the trading side. Banks will still have a dominant value add in the FX market, particularly with their ability to offer credit, but I still think that we will see more utility-based buy-side to buy-side solutions with the objective to offset flows. Even in these instances, you will still need banks to provide credit while you will not need to pay to offset the risk. As an example, there is one firm looking at a peer-to-peer matching solution for swaps. They have tremendous potential to become a significant disruptor.
Once buy-side participants get comfortable with peer-to-peer matching, the floodgates will open. A significant amount of currency hedgers are hedging their positions and portfolios consistently throughout the year. It is not a business that is changing often and you are likely to remain on that same side of the trade each month. Knowing that 96% of my exposure for the following month is already offset by an opposite position is tremendously useful from an operational and liquidity standpoint. Likewise, the opposite way flow would have a high level of certainty that we are going to be there every month to hedge their positions. If peer-to-peer trading develops, it would be an incredible disruptor that would lower volatility and result in significant fee savings.
With a significant level of opaqueness and manual workload involved in trading FX derivatives today, what developments do you think are needed to take this market segment to the next level?
Peer-to-peer trading would create more transparency in the FX derivatives market if we had the opportunity to match FX swaps with likeminded peers in a transparent manner with a trusted participant group.
I also think there will be more innovation in using distributed ledgers like blockchain, for collateral movement. This could potentially eliminate counterparty exposure risk.
People have talked about TCA for a long time. There are now a few TCA vendors offering advanced solutions beyond post-trade analytics that also offer pre-trade analysis, which is helping traders to improve their execution. This is needed as we see consistent flash crashes and other disruptions in liquidity. When markets become more electronic the buy-side needs to know how to use these credibly. While the market is open 24 hours a day, it doesn’t mean that you can trade at any point in time. Analytic tools are instrumental in finding the ‘black holes’ so participants can avoid them. If they are trading within these time-periods, at least help them put the right limits so they don’t cause minor disruptions like we have seen in the last two years.
We noticed on social media that your colleagues named you an “inspirational leader” and that you are active in diversity and inclusion initiatives at Vanguard. Could you please elaborate on your drive and passion for leadership, diversity and inclusion?
Channelling a diverse and inclusive environment in the workplace is something I feel incredibly passionate about. At Vanguard, we have great programs and opportunities in place for our employees to foster and capitalize on diversity. For instance, I am actively involved in Vanguard’s Women Inspiring Leadership Success group. As a male representative, I offer a different perspective and help to address issues surrounding unconscious bias and the importance of male mentors and sponsors in the workplace. My FX trader, Alexcia Mazahreh, and I sponsored a “Diversity and Inclusion Lunch” where participants brought in food from their respective cultures. The food included a brief history write-up and the recipe. The event was widely attended. We learned a lot about our fellow co-workers and also experienced excellent food. We have another day planned for later this year.
Reflecting on leadership, I believe the two most critical components a good leader should encompass are empathy and authenticity. Leaders should be empathetic and put themselves in the shoes of their team members. Additionally, I am a big believer in being honest with my colleagues. A good leader should speak from an authentic perspective – it drives trust and respect among their team.
What diversity and inclusion activities have you been actively participating in?
The one activity that garnered a lot of attention recently was the “Take Your Daughter to Work Day” event I hosted. About three years ago, I took my 7-year-old daughter to the Vanguard trading desk, and as we asked her if this was something she wants to do when she gets older, she replied “No, this is a boy’s job.” I thought, “wow, this is a seven-year-old with this narrative,” and I wanted to find a way to change that story. I put a team together and we hosted the first “Take Your Daughter to Work Day” event and brought in 35 daughters of employees to the office. We were able to show younger girls that investment management and finance is a great career for them. We spoke to them about the job itself, finding a successful career, and highlighted the fact that many women have made a positive impact on our industry. In our third year now, we have had over 100 daughters attend the annual event and the feedback has been great. This is an effort to influence younger girls, as they begin thinking through career choices, and helping them realize this is a great career where they can be successful.
Our initial program has since evolved. We’re exploring bringing in underprivileged kids to our workplace to introduce the idea of working in investment management and finance. We are working on branding the day to encourage other investment firms to do something similar. Instead of making an impact with 100 children, maybe this initiative could reach thousands. It’s our hope that we continue to see the number of women and people of other backgrounds and experiences establish successful careers in our industry. It is proven fact that diversity adds value; diverse teams generate better business results. Additionally, diversity is an important characteristic from a talent perspective. Recruits want to work in a diverse and inclusive work environment, and it’s important that organizations take diversity seriously and exhibit how they foster such an environment.
What changes do you see are needed to make the buy-side trading desks a more inclusive and diverse work place?
A best practice our desk applies, and could be adopted on other trading desks, is keeping an open mind when it comes to talent. People of different backgrounds, experiences, and with different skillsets can offer so much value to a team. Desks should be open to people with varying perspectives and more “outside the box” talent. One way our group takes advantage of diversity of perspective and experience is by providing internship opportunities. By providing internships and a glimpse into a role at the desk, we’ve been able to give employees the chance to see if the role is ideal for them while taking advantage of the different skills they bring to the table. For example, we recently invited an intern from Human Resources onto the desk. She added such a unique viewpoint that we are trying to add her permanently.
Additionally, I—and Vanguard—recognize that we still have work to do when it comes to gender diversity in the investment management industry. I’m sure the same can be said for many other industry participants. At Vanguard, and in my division specifically, we’re working towards making the workplace a truly inclusive environment for all. This work comes in many different forms, from detailed trainings and exercises to team building events. We are committed to making the working environment attractive for all our crew.
Who is Andrew Maack outside of the workplace?
I am a father, husband, coach, brother, son, and now an MBA student at Wharton. I am also a business owner of a family golf course, which is a fun learning experience. Family is really important; I live close to my family and every Sunday we meet up to see each other; my mum, dad, brothers and sisters and the kids. It feels like 52 Christmas parties every year and it is a really nice experience. A Sunday dinner may also fall on a Monday, and it’s still called Sunday Dinner. The weekly Sunday dinner is engrained in my children and it is important to me.
I like to travel and work out.
Working out is my form of escape. Even if you can get 30 mins for yourself to forget about things and concentrate on a simple task, in a repetitive state, it helps to clear your mind.