NEWS UPDATE
B U Y- S I D E
Cost pressures could see 20% of
buy-side outsource trading desks
by 2020
Research from Opimas predicts greater focus on outsourced trading as asset man-
agers struggle with rising operational costs.
F
ront office outsourcing is expected to surge over the
next couple of years, as asset managers struggle to
keep on top of regulatory and cost pressures according to
new research.
A study carried out by consultancy Opimas on the
outsourcing trend predicted that by 2020, around 20% of
investment managers with assets under management
greater than $50 billion will outsource at least some
portion of their trading desks.
The shift towards passive investing, more difficult mar-
ket conditions and increased regulatory burdens associ-
ated with the introduction of MiFID II in Europe, have put
strain on operating costs for the buy-side. These factors
have prompted an increasing number of buy-side firms to
review their trading functions and consider outsourcing
all or part of their trading desks.
“The basic rationale for outsourcing revolves around
6 // TheTrade // Spring 2019
reduced operational costs and improved execution quality.
In practice we have found that the reduction in operation-
al cost is far more important than execution quality,” the
report stated. “While improvements in execution quality
in the range of 15-20 basis points have been demonstrat-
ed, this is typically only for very small funds that do not
have the necessary scale to deploy highly professional
traders and systems. Execution quality improvements for
larger trading operations are very limited, if discernible
at all.”
Hermes Investment Management entered into an
agreement with outsourced trading provider CF Global
in 2012 to create an outsource trading desk focused on
equities from emerging markets and non-Japan Asia.
Hermes took a ‘hybrid’ approach to outsourcing, meaning
it combined its in-house centralised dealing desk with an
outsourced dealing desk.
Opimas concluded that it expects to see more asset
managers of this scale move towards a hybrid trading
model in the future. As a result, providers of outsourced
trading services are seeing their activities grow rapidly
and revenues for some are anticipated to increase at
rates of 20% to 30% annually.
“The future for outsourced trading desks looks bright
and, in coming years, we expect an increasing number of
even large asset managers will move to at least hybrid
trading desks, with some portion of their trading activ-
ities outsourced. This will typically be for asset classes
where the fund managers have insufficient scale to
justify the cost of full-time traders. Most frequently, this
will involve foreign equities in different time zones, where
staffing becomes problematic,” the research concluded.