One of the most common reasons to consider outsourced or supplemental trading is to extend your firm’s reach. Internationally domiciled firms looking to trade in the US offer a clear example of this value proposition.
For overseas firms, trading US markets efficiently, economically, and at scale is an important priority. Per the Treasury department, foreign holdings of US equities grew by over 12% between 2022 and 2023. This backs up anecdotal evidence that our markets are becoming increasingly important to the international buy-side community.
But thanks to the sheer logistical difficulties, these firms often face significant challenges in participating in our markets. Whether it’s managing local employees working unconventional hours or coordinating with overseas employees across time zones, the necessary personnel can be hard to manage and harder to retain. Even with the right team in place, accounting for all the trading, operational, technological, and compliance considerations can be a daunting task.
For all these reasons, overseas firms seeking to trade US securities represent a clear outsourced trading use case. Below, we will examine some of the principal benefits in more detail.
Trading Efficiencies from High to Low
Many buy-side firms are drawn to outsourced trading due to limited bandwidth and resources on their own side. These forces can be magnified when trading overseas.
For example, many overseas firms are connected to only a limited number of low-touch liquidity venues for US securities, restricting their reach and execution quality. For the venues they do connect with, they must select the right strategy for the job, monitor algo performance, and make real-time adjustments if the results are unfavorable. This is difficult to do on its own, but even more so from halfway around the world. Many of these managers are left to select a basic VWAP algo and check back the next morning. For all but the biggest mega-caps, this approach is almost certain to negatively impact performance.
Most outsourced trading providers can access dozens of low-touch liquidity venues. More than that, they have a keen sense of which venues work best for specific trades and market conditions, and they can carefully monitor for optimal performance over the course of the trading day.
The challenges are even more pronounced when it comes to high-touch trading. It takes years to build and nurture a robust network of high-touch relationships – and the sheer physical separation means it can be nearly impossible for overseas firms to do this in the US. An outsourced trading firm that is covered across the Street can offer great insight into where natural liquidity can be found, what analysts are seeing, and the like. Such a provider can serve as an internationally domiciled firm’s eyes and ears on the US market, saving them the enormous effort of recreating this counterparty ecosystem.
Operational Expertise
Trading itself is just one part of the value an outsourced trading firm can offer to an overseas manager. The right provider can also make sense of the many operational nuances involved with operating in one country and trading in another.
For example, while the US moved to a T+1 settlement cycle for equities earlier this year, many international markets still employ a T+2 cycle. It’s common that overseas firms will want to sell local names in order to buy US names, or vice versa – a seemingly simple transaction that now requires careful calibration. An outsourced trading firm can streamline this process by managing the timing discrepancies, ensuring that the client’s assets are transferred smoothly and on schedule.
Beyond settlement, an outsourced trading provider should be able to assist with myriad other instances of operational complexity. Having boots on the ground can make a big difference, especially for managers in less developed markets. With a third-party provider facing the Street, any trade breaks can be fully addressed before the disruption affects the client. This is especially important for overseas firms – time zone differences can make it difficult to efficiently address issues like commission discrepancies with counterparties.
Finally, an outsourced trading provider should be able to provide recommendations to make the trading experience as smooth as possible. Creating standard operating procedures for allocations, recommending core technology systems, and making sense of custodial relationships are just a few of the areas where this can make a difference. Typically, outsourced trading firms bring significant experience and a varied perspective from working with all sorts of clients, so they have a sense of the workflows and protocols that will work best for any given situation. Managers facing the unique challenge of trading overseas can benefit from this perspective; it’s just a matter of how much or how little to involve the provider.
Final Thought: Trust Is Essential
When engaging an outsourced trading firm, it’s important to make sure it is positioned as an agency-only provider. All relationships and decisions should be nonconflicted – if the provider operates a proprietary trading business or execution venue, there’s an inherent risk of competing incentives.
But identifying the right partner goes beyond assessing its business model. Whether entering US markets for the first time or reinforcing an existing presence, managing an overseas trading desk requires a higher level of trust. Supervision is more difficult, making reliability and diligence all the more important. The right outsourced trading provider should be able to offer a strong track record, a non-conflicted posture, and, if the results aren’t there, the ability to amicably part ways at will, presenting significant benefits over hiring a team.
If you’d like to learn more, we invite you to view our outsourced trading resources or reach out to start a conversation.
In Episode 70 of At the Forefront: Fintech Conversations, our own Chris Hurley, SVP and Director of Institutional Sales, joins Forefront Communications to discuss the transformative power of outsourced trading for internationally domiciled firms. Watch the episode HERE.
