By Chris Jenkins, Managing Director, TORA
In recent years, across multiple industries, there has been a general trend towards outsourcing. The financial markets industry is no different, as is evidenced by the growth of ‘as-a-service’ offerings from technology vendors, across the front, middle and back office.
The global pandemic has only served to accelerate this trend. With access to established work and technology locations becoming more problematic and less accessible, and with staff increasingly working from home, companies have had to become more flexible and to rely more heavily on their technology vendors and partners to keep critical business processes running.
One area that has seen significant growth over the last couple of years is outsourced trading. Whereas middle and back-office functions have benefited from outsourcing for some time; recently more buy side firms have started to outsource some or all of their trading functions, as it has gained greater acceptance from investors and asset allocators. Even firms that continue to run their own trading desks are increasingly supplementing these with outsourced trading services, particularly when looking to scale quickly if entering new markets, or to provide additional cover and reach, for example.
Workflow integration
Regardless of whether firms decide to outsource all or just some of their trading, it is essential to deliver a seamless transition between their own trading activities, including their technology, and those of their outsourced trading provider.
Many outsourced trading firms, however, are compelled to use multiple different trading and OEMS platforms by necessity and typically, they would use one or more vendor systems. As clients of those technology vendors, they don’t have full control or ability to prioritize client requests, they are dependent on those 3rd parties for support. For instance, when implementing any complex workflows as well as any changes on the fly (new accounts, allocations, flagging strategies etc), the outsourcing provider must place such requests in the 3rd party vendor’s queue. This can seriously disrupt a firm’s workflow.
Efficient workflows are critically important in the front office. Most firms have pre-defined and well- established workflows, from order generation, through compliance checks, to order execution. When moving to an outsourced trading model, those workflows need to remain 100% integrated and uninterrupted.
So how can this be achieved?
Why technology matters
Firms should not need to modify their workflows when transitioning from internal to outsourced trading. Regardless of whether a firm is using OEMS on its internal trading desk or outsourcing its trading, their workflow doesn’t need to change, it is important that they have access to the same setup, the same compliance settings, and the same connectivity to all their brokers.
The salient point here is that the environment should be unchanged once the trading is outsourced. Firms can expand and contract as needed. This way, if firms are looking for extra capacity, (an outsourced trader can fill in for an hour, a day, a week, or longer) by just diverting their order flow to the outsourced vendor for trade execution when needed.
Additionally, any data or analytics that a firm wants to track from a TCA, liquidity, execution, or compliance perspective also needs to be100% the same; as if it was being run in house. Firms should have complete visibility, transparency, and safety checks throughout the entire process. None of those workflows need to be interrupted when leveraging outsourcing.
Outsourced trading can certainly offer several benefits to buy-side firms, but those advantages can only be fully realized if a) the firm’s existing tech stack is integrated with that of the outsourced trading provider in a completely seamless way, and b) the outsourced provider is in full control of the tech. If either of these two criteria are not met, the firm’s workflows may be compromised.
For companies who wish to leverage outsourced trading, whether they are just looking to test a new model, strategy, market, or region where they don’t have a lot of experience, outsourced trading provides a cost-effective solution and fully scalable Business Continuity Plan for real world disasters, backup sites or an extra pair of hands in volatile markets. Firms in growth mode can outsource additional flow when needed. And for smaller firms with just one or two traders, it can provide the necessary cover for holidays, sickness, and other gaps.
It can also reduce the fixed cost barriers to entry of hiring a new trader, getting that trader up to speed, and going through all the necessary HR, compliance, and due diligence checks.
In summary, for any firm looking to achieve more efficient and effective outsourced execution should look beyond just the trading and also consider the technology stack of the outsourcing partner.
