As asset managers and hedge funds weigh the price and complexity of running an internal dealing desk, many on the buy side have shifted for an outsourced trading desk.
Outsourced trading has emerged as a chance for institutional investors globally to accomplish efficiency-driven growth in a cost constrained environment. With this solution, clients gain access to a flexible and comprehensive platform supported by well-developed infrastructure and experienced markets professionals.
LBX Outsourced Trader provides a wide a wide array of key capacities to customize a solution that meets your exact needs – forget about, no less.
Drivers of Change
Institutional investors continue steadily to endure increased financial, regulatory and operational pressures during a protracted low-yield environment. In response to this trend, many asset owners are exploring internalization of a portion of traditionally delegated investment management with the
aim of bettering returns for plan participants. Meanwhile, investment managers are seeking efficiencies to adhere to regulation also to keep up with technological advances, all while fees have been compressed
by competition, upstream cost pressure and a structural shift into
While the concept of outsourcing the different parts of the investment process is well established in the middle and back office, today’s market environment has motivated the investment community to
consider front-office trade execution outsourcing as a way to deliver efficiencies, expand product offerings and enhance business continuity programs.
The trend has been growing over the last decade, but it accelerated through the pandemic when the surge in volatility put stress on asset managers. “Cost benefits, operational efficiencies and access to trading expertise have pushed investors to outsourced trading.. With traders working at home, the pandemic also proved they didn’t have to physically sit next to the other person on an interior trading desk to communicate.
As trading is a scale business, outsourced trading vendors with larger trading procedures plus more flow simply have an advantage in the market. More trading flow allows for more access to liquidity, better pricing, and increased usage of primary market offerings.
LiquidityBook’s highly flexible platform, fueled by cloud-native technology and a modular approach, and expert support team were key factors in Tourmaline’s process.
Meanwhile, sell-side firms, agency brokers, and independents have setup outsourced trading desk offerings to service the needs of asset managers and hedge funds.
With the demand for increased efficiency and payment pressure from low-cost passive index strategies, in recent years, outsourced trading desks have gained traction with small and mid-sized asset managers.
If the implementation of a trade doesn’t generate alpha, then the operational overhead of having an internal trading desk, with the logistics of backup and technology might not exactly seem sensible.
Among the benefits are the economies-of-scale that may be achieved because the capability is set up to act as an inhouse execution desk for multiple buy sides.. As the outsourced desk is not providing exchange connectivity or traditional services such as a prime broker, such as financing or securities lending, it’s acting like an insourced execution desk.
But there are pros and cons to outsourcing the trading function. On the main one hand, the buy-side firm can obtain access to a wider network of banks and brokers. Actually, “the outsourced dealing desk provides access to liquidity, analytic tools, algorithms, or the know-how to trade markets in other regions, that smaller buy-side organizations may not have the ability to achieve alone,
While some buy-siders may look at outsourcing their total trading capability, others are going for a hybrid approach.
“An Outsourced Trader desk comes in convenient when you don’t have a worldwide trading desk, so the orders running overseas are being executed in different markets and time zones – where you don’t have the liquidity access, capacity or the economics to create your own trading desk,” said Enstedt.
Addressing “Suboptimal Trading Practices”
Outsourced trading is also a response to other headwinds that the buy side is facing in conditions of sub-optimal trading practices and internal inefficiencies that lead to “economic waste,” according to recent research by Quinlan & Associates.
When evaluating efficiency of the trading desk, the buy side must consider both explicit and implicit cost factors, notes the study report “Optimization, Outsourcing, and the Reinvention of the Buy Side Trading Desk.”
It’s expensive to support the trading desk – there are explicit costs for traders’ salaries, Bloomberg terminals, market data, order-and-execution-management systems, PCs, and subscriptions to analytics, news, and consulting fees. But what’s having a far more significant impact will be the implicit (opportunity) costs of lost performance due to maintaining “sub-optimal trading operations,” in line with the research report.
Inefficient trading practices are triggering buy-side trading desks globally to reduce about 1.2-2.7% in fund performance because of their end asset owner clients, estimates the report. That is due to too little of technological proficiency, poor selection of execution method, and the widespread absence of internal/external partnerships.
For example, not using electronic communication networks (ECNs) for equities trading, or not using obtain quote (RFQ) for fixed-income, or block desks for illiquid or block crossing, may cause 200-300 bps per account worth of implicit opportunity cost, estimates the report.
Selecting an inappropriate algo or deploying a strategy in a less liquid equity or algo that relies on “consistent participation” rather than applying a far more intelligent strategy that reacts to available liquidity, can alone cost 30-50 bps per account in aggregate, unobtained fund performance in an average year, said the report. Another way to overlook fund performance is failing woefully to use “systemized workflows for liquid/semi-illiquid execution.”
Automation & STP: Sell-Side OMS
When onboarding new clients, the outsourced desk provider shouldn’t need to redesign the processes or do comprehensive work to support the nuances of any new relationship.. They are also seeking flexibility in how their technology can accommodate customization with configuration changes, rather than design-level changes, he said.
In conditions of order-routing, outsourced trading desks want to reduce the quantity of manual intervention for client orders. They also want to auto-route as much as possible to avoid growing the number of traders on the desk linearly with increasing order flow.
UBS Execution Hub
Given its significant resources, scale, and trading capabilities, UBS Execution Hub will differentiate its offering from other outsourced trading businesses.