Asset managers are becoming more aware of how delegating some or all of their trading to an external partner can make their execution processes more efficient and cost-effective. Traditionally this front-office role has remained in-house but, as funds focus on best execution and direct scarce internal resources to other tasks, outsourced trading is becoming more common.
Trust plays a big part in selecting an external trading partner. Ensuring that a firms challenges are understood is vital to the selection, as the decision to cede control of such an important function isnt taken lightly. An experienced and independent partner that acts in a clients best interests offering professional service, robust systems and a high degree of accountability is the key to successfully making the transition to this new approach.
Theres no doubt that outsourced trading has gone mainstream. A recent survey of readers of Traders Magazine found that 28 percent work for firms that already rely on outsourced trading or are actively considering it. A separate report by consultants Opimas predicted that one in five investment managers with assets under management greater than $50 billion will outsource at least part of their trading by 2022.
Managers want to gain more support for existing trading desks, improve execution, control costs, comply with regulatory change or obtain help with special situations requiring focused expertise or complex trading tools and technology. So how can asset managers be assured that their external partners will do as good – or better – a job as they would do? Their predecessors in the market often relied on personal relationships and their own anecdotal experience, but no longer is that the case. Data and analytics have supplanted networking; trust must now be demonstrated with evidence of experience, performance and independence from real or potential conflicts of interest.
Outsourced trading desks should act as the clients own in-house trading desk, rather than as traditional brokers who may direct flow based on their own internal priorities. They need multiple, long-term counterparty relationships around the world, access to diverse markets across time zones and the ability to control information leakage. Professional processes, market abuse controls and the operational capacity to execute as efficiently as possible are all essential components.
How can a client verify trust? Take a deeper look at how their partner checks their own work and whether they are data-driven, can produce a trade audit file and indeed have at their disposal all the tools needed to make evidence-based assessments of their performance. After an audit, can they explain why they acted as they did and what improvements theyll make toward better execution next time?
Discretion is paramount to establishing trust. An outsourced partner positioned as the funds buyside tradercan protect against information leakage or exploitation by executing anonymously and not showing their hand to the market.
Outsourced trading desks also offer clients an independent outlook. They relieve pressure from potential conflicts of interest that regulators are seeking to prevent through MiFID II, the package of financial reforms which requires financial firms to divorce payment for research from payment for execution.
In the end, outsourced trading firms are partners with their clients. To build trust, they have to listen to them, remember that execution is a key factor and always act with discretion.
Scott Chace is CEO and Co-Founder (London) ofCF Global
