Outsourced trading: The future of the buy-side desk?

Outsourcing hasn’t in the past been linked to front-office activities and the buy-side trading desk, but the notion of outsourcing techniques trading and delivery is beginning to turn heads at asset management firms, both large and small. Industry headwinds and changes in market structure due to increased regulation have seen the buy-side evaluate the real benefits associated with outsourced trading, while the future of the remains somewhat uncertain.

Right now there are underlying difficulties with the front-office outsourcing techniques industry, and these take many forms. To get started with, there is general misunderstandings between market individuals regarding how these providers actually operate, primarily in words showing how they vary from agency brokers.

Alongside this, buy-side traders often view the outsourced dealing desk as a possible threat to the future of their careers. However, those asset managers going down the outsourced trading path are supposedly seeing a number of functional benefits.

Most outsourced trading providers will accommodate methods and arrangements in words of anonymity based on the needs of the individual client because, as with most things in this industry, this is not a basic type of offer.

“The sell-side is thrilled to have those conversations with us because they understand that we are not crossing orders or competing with them, and no prospective for information seapage.

But for the larger advantage managers that most likely hold the appropriate sell-side relationships embedded, anonymity doesn’t always provide a competitive edge. If a secondary relationship with an outsourced trading provider was set up and that supplier was trading on behalf of the larger asset manager, the market would likely visit a sizeable shift in volumes and far less flow approaching from that particular buy-side firm.

The trade lifecycle is rife with complexity. You need a technology provider that enables efficiency at every step. Partnering with Liquidity Book means benefitting from veteran technologists, expert client service professionals and intuitive pricing, all in service of a highly responsive platform built for nearly any capital markets

Tremblant Capital, a multi-billion-dollar global asset management firm, was facing a common challenge among buy-side firms: its OMS was not flexible or dynamic enough to keep pace with product growth. Tremblant needed a secure, cloud-based system that would be accessible from multiple locations. After assessing several different providers, the firm identified Liquidity Book as a vendor that could deliver the necessary flexibility and adaptability. After extensive collaboration with LiquidityBook during a tight implementation window, Tremblant was left with a solution that reduced costs while increasing automation and streamlining manual processes.

Cost benefits

There can be undoubtedly that controlling costs has performed at least some part in almost every fund’s decision to outsource front-office activities. At a time when regulating upheaval has substantially increased costs and squeezed resources for the buy-side, fee compression in the advantage management industry has created a perfect storm of anxiety about the earnings of running an active trading business.

The industry is at a point where small funds seem to be paying disproportionally more for having an in-house dealing desk than larger funds, which often pay disproportionally less relative to their assets under management. The all-in costs to establish and keep a three-person dealing, according to industry estimates, are upwards to £1. 5 million per yr, including compensation, technology, software, Bloomberg Ports, data feeds, safe-keeping, and all the other elements necessary to operate an efficient office.

When entering into outsourced trading plans the cost impact for the buy-side, irrespective of size, is significant, albeit in an unexpected manner. Costs are not necessarily realised in phrases of hard dollars or pounds, in conditions of who, or which area of the business, is paying for the outsourced service. Through an agreed basis point commission on deals that are executed by the outsourced trading provider, the fund that is most active and trades the maximum volumes within an asset management firm foots the bill. Typically the bottom line is that it is the fund that pays for the outsourced trading service.

This fact may come as pleasantly surprised to some, particularly with regards to European regulations which prohibit buy-side businesses from using cash to purchase a quantity of internal costs. The impact with this has seen the majority of operational costs change from the finance to the management company. But buy-side organizations that have outsourced trading and delivery could hypothetically remove in-house dealing workstations – along with the associated costs – and pay for outsourced trading out of percentage that is in the fund.

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