CASE STUDY Part 2: Outsourced Trading “Reasons to Outsource.”
This article was written by Martin Coughlan, CFA, CAIA. Martin has spent over twenty years working at asset management firms globally. In the second part of our series on Outsourced Trading, we will look at reasons why investment firms may wish to consider outsourced trading in the current environment. Investment managers need to optimize…
This article was written by Martin Coughlan, CFA, CAIA. Martin has spent over twenty years working at asset management firms globally.
In the second part of our series on Outsourced Trading, we will look at reasons why investment firms may wish to consider outsourced trading in the current environment.
Investment managers need to optimize their operations
As we discussed in our first paper, the macro environment for active management means that most investment firms need to better optimize their operations and focus their expenditures on core areas of the business. We would argue that the core areas for asset managers are where alpha is generated (the investment team), and where growth and client retention is the focus (the distribution team).
While some will think that outsourcing a trader may only reduce salary spend, there are other areas of potential cost savings including:
- Bloomberg terminals
- SWIFT licensing and transactions
- OMS licenses
- Market data feeds
- Office furniture and space
- Business continuity
- Future technology investment in trading
Question for CAPIS – do you provide third party Transaction Cost Analysis to your outsourced clients; are there any other things you do for your Outsourced Trading clients that would reduce a manager’s expenses? The answer here is yes. You could add TCA cost to the list of potential cost savings. No others come to mind to add to that list.
In addition, there are considerable time savings for investment firms no longer needing to manage the operational environment for the trading desk.
Trading has changed
Central to the discussion is a recognition that the role of a trader has changed over the years given the increasing fragmentation of liquidity and technological advances in the level and types of trading platforms. The role has also been impacted by the regulatory landscape and increased administrative demands being placed on traders.
In addition, equity markets, in particular, have become much more efficient and the evidence of alpha being created by trading inhouse versus outsourcing is not there in most cases anymore. I don’t disagree, can we cite any evidence here?
We find that most firms with a legacy trading desk have built in redundancies to ensure sufficient coverage on the desk during vacations, illness etc. We believe that firms that wish to retain an inhouse trading function could hire an outsourced firm to act as that back-up when required. This is one way in which firms can outsourced in a supplemental manner.
In addition, the Great Resignation phenomenon is something that we are seeing across all industries as more than three million people have left the workforce since the start of the pandemic. Investment firms are not immune to this. Should firms experience departures within their trading teams, it is often an opportune time to investigate outsourced trading rather than automatically seek to hire a replacement.
Many investment firms look to expand their product offerings either organically or inorganically. These expansions often result in the need for additional trading needs. A good example of this is when a manager focused on domestic equities decides to launch a non-U.S. equity strategy. Rather than look to add resources or have team members working “night shifts”, outsourced trading may be a logical avenue to cover non-U.S. trading needs. This is another example of where outsourced trading is viewed as supplemental to the firm’s existing trading desk.
After reading this, some of you will think of objections to the idea. In the next part of our series, we will examine the typical objections we hear, and more importantly, how they can be overcome.
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© 2022 Acclinate LLC. Paper commissioned by CAPIS
Acclinate’s founder is Martin Coughlan, CFA, CAIA. He spent over twenty years working at asset management firms globally. He has experience across the investment, distribution and operations functions. As a member of executive committees at three different asset managers, he is very much attuned to the challenges and opportunities that the buy-side faces. He has been involved in a number of outsourced trading implementations at investment firms that previously employed legacy trading desks.
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