Outsourced trading continues to be on the rise, but the driver of demand has shifted from a cost-saving objective to a strategic decision, according to David Choate, Executive Director of Sales and Trading, COO at CAPIS.
While saving money is still common, the more in-depth conversations are about business continuity and compliance support, he said.
“Every time we turn around there’s a new compliance obligation or a regulatory requirement. And many of the smaller money managers can’t afford a transaction cost analysis system,” Choate told Traders Magazine.
Client commission arrangements (CCAs), commission sharing arrangements (CSAs) and execution analysis are all fundamental to any outsourced trading offering, he noted.
“While commission management services are not unique to outsourced trading, the broker-neutral posture and client-centric focus that often accompany this model can go a long way toward demonstrating best execution and compliance,” he said.
Outsourced trading can be so much more than a reshuffling of responsibilities – it can produce powerful efficiencies that greatly expand your firm’s capabilities and bandwidth, he said.
Nevertheless, some buy-side traders are concerned that they can lose their jobs, while others fear giving up control of their trading.
“Outsourced trading is not about firing your trading desk. It’s about understanding the other values that can be derived from a proper outsourced trading solution,” commented Choate.
Christopher Hurley, Sr. Vice President, Director of Institutional Sales and Outsourced Trading at CAPIS, noted that a lot of people find that term outsourcing to be threatening.
He stressed that buy-side traders should reconsider their perspective on outsourcing as it can mean a lot of different things and it can be used to supplement where the help is needed.
“It can be done very cost effectively and relatively quickly,” he said.
He added that while outsourced trading might not be for everyone, for buy-side firms – particularly RIAs and smaller investment managers, the benefits of outsourcing are often more pronounced.
The objective of the outsourced trading is to immediately get back up business continuity, Choate agreed.
“Suddenly you have got 17 traders at your disposal, you have got a 24 hour trading desk, as well as options and futures – all of these additional services and asset classes that you might wish you had,” he said.
“That’s a business strategy discussion, not a cost savings discussion,” he added.
Speaking on the key considerations for asset managers when selecting an outsourced trading desk, Hurley said that conflicts of interest would be the first thing he would be concerned about.
He added that another consideration would be their business continuity plan.
Hurley thinks that the value of outsourcing will only increase in the years to come: “It’s definitely growing and I think it’s going to continue.”
CAPIS is a compliance-driven institutional broker that focuses on high-touch global trade execution and commission management solutions.
The firm executed over 2.5 billion shares in 2023 (domestic equity), averaging 12.6 million shares per day, which represents approximately 75% of CAPIS’s overall revenue.
