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Hayley’s
Comment
Is outsourced trading the future?
F
ront office outsourcing has
long-been a topic of interest for
our readers and significant pres-
sures for asset managers could see
this trend become the new norm for
trading desks. Research published
in February by consultancy Opimas
predicted that by 2020 around 20%
of investment managers with assets
under management greater than
$50 billion will outsource at least
some part of their trading desks (see
page 6 for the full story).
When I think of outsourcing, the
back-office, data or analytics usually
comes to mind, as buy-side firms
look to leverage expertise in areas
that may not be their forte. But the
notion of outsourcing front office or
trading functions, the key deliver-
able for asset managers seeking al-
pha, is a recurring and major theme
in research and surveys, on panel
sessions at industry conferences,
and even during general discussions
with market participants. The move
to outsourced trading is supposedly
being driven by several factors, but
arguably the most prominent reason
is cost pressures.
Operational costs for the buy-side
are on the rise and the past few
98 // TheTrade // Spring 2019
years have been tough on returns
for investment managers. Difficult
market conditions and the shift
towards passive investing have
prompted some to review their
trading capacities and look to
outsourced trading providers to
analyse where costs can be reduced.
Providers argue that an increasing
number of even larger buy-side
firms will move towards a hybrid
trading desk, combining an in-
house and outsourced dealing desk,
as the battle with costs continues to
dominate concerns.
But it isn’t just cost pressures
driving asset managers to outsource
front-office functions. In Europe,
MiFID II has placed greater scruti-
ny on execution performance, and
one outsourced trading provider
told me me that some investment
managers are exploring outsourcing
as a means of obtaining best exe-
cution. MiFID II raises the bar on
execution performance, so to speak,
and fragmentation in markets has
also increased demand for access
to liquidity for competitive pricing,
something which outsourced trad-
ing desks can supposedly provide.
At the InvestOps US conference
earlier this year, outsourcing was
a prominent topic of discussion
among delegates and speakers who
heavily debated the pros and cons
of the somewhat unusual strategy.
During one presentation, Northern
Trust’s director of strategy for asset
servicing, Marc Mallett, warned
that costs for asset managers are
continuing to rise, despite the
industry’s adoption of technology
and automation to bring those
costs down. He urged the buy-side
to consider that growth no longer
means profit, and some operating
models may not withstand a market
correction, recession or stall in
asset growth. Outsourcing, Mallett
added, is one of the most effective
ways of reducing costs. As pressures
remain and possibly increase over
the next few years, this year could
be a turning point for front office
outsourcing.
I'll be delving deeper into this
topic for the summer edition of The
TRADE magazine. More specifi-
cally, I'll be finding out exactly how
those supposed cost savings are
realised for asset managers heading
down the route of outsourced
trading.