Five Reasons for Asset Managers to Consider Outsourced Trading

Five Reasons for Asset Managers to Consider Outsourced Trading

In asset management, as in any other business, firms decide which of their competencies are core and which are ancillary activities that could be outsourced to firms that have demonstrated these activities are their core competencies.  Here are five reasons why outsourced trading increasingly is one of them:

Cost

A trading desk can be expensive. Under ideal conditions of high liquidity and low volatility, a small, no-frills operation working in a single time zone may still have one or two traders and require systems to connect to markets, gather information and route orders. All this investment over a small asset base has a heavy impact on margins. Firms also need to devote resources to trade monitoring and other regulatory compliance obligations. And for funds that invest in multiple time zones, and in markets in the developing world, which can be thinner and require more human contact, these costs can be even higher.

While cost matters, conversations with funds about how an external trading partner can help often extend to other topics.

Independence / Non-conflicted

Relationships across markets and an ability to trade in its own name allows an outsourced trading firm to deal discreetly, keeping information about clients and their order sizes private so the market can’t see them coming. This tends to deliver better outcomes than many asset managers are likely to achieve through their own efforts.  That extends to market intelligence, too, as an independent firm acting as the fund’s buyside trading desk will normally receive more IOIs and richer commentary than the fund will see on its own.

Another point to consider is that an independent buyside trading firm is not obligated to route orders through designated brokers. This helps avoid conflicts of interest and supports best execution, allowing the firm to use its knowledge of real-time conditions in the marketplace to execute an order through whichever means are likely to produce the most positive outcome.  This could be through a combination of several small deals and block trades, or made electronically or through the multiple dark pools a well-connected firm can access.

Operational support

Funds want executions to go smoothly, every single time, and funds know the support of a proactive, decisive operations team can be just as important as the initial fill. Experienced operations staff at nimble outsourced trading firms are active alongside traders in client communication channels to resolve issues promptly. The external team can embed in the fund’s operational process, even accessing the tech stack where relevant. It also provides a single contact for settlement and reconciliation, which greatly simplifies communication between the fund and back-office staff at multiple brokers. This means a fund with an external trading partner can play an oversight role and leave the bulk of the operational process to the firm providing trading services.

Market reach and experience

Some asset managers that stand to gain from outsourced trading are concerned about loss of oversight over this aspect of their business. In particular, they may fear losing touch with the market. With an extensive network of relationships with market participants, an independent outsourced trading firm is likely to have a wider, deeper reach into markets around the world and the liquidity they offer, than any one individual player. Even the larger firms may derive competitive advantages by using a specialist firm to supplement their trading in certain locations or markets. This knowledge and expertise can help to mitigate risk, particularly counterparty and operational risk, or to avoid “fat finger” events.

 Trading in all market scenarios

 When markets become volatile, the other side of a trade may be hard to find and bid-ask spreads widen. It also becomes more likely that there will be failed trades that must be corrected or that fines might be issued if they’re not. Under such conditions, it is prudent to have a plan for all eventualities and having the support of an external trading partner in the most volatile and illiquid markets is a sensible part of that plan. This can create favourable knock-on effects, such as greater flexibility for managers that run concentrated portfolios and/or trade frequently. Knowing that more liquidity is likely to be available through a partner with an extensive network may provide leeway for funds running up against position limits.

For information about CF Global’s range of supplementary and fully outsourced execution and operational services, feel free to contact us at info@cfglobal.com