In the last several years, there has been a significant increase in asset managers looking to outsource certain activities, like operational & settlement related FX, and rules based hedging programs, according to Brendan Burke, Managing Director, Head of Americas FX Sales & Business Development at Brown Brothers Harriman & Co. (BBH).
Drivers behind these decisions to outsource are managers looking at their overall operating model and deciding which functions generate alpha, and which areas could represent uncompensated risk, he said.
“For the global investor, FX is increasingly seen as an operational step in the investment process,” he said.
“More recently, we are seeing this perspective expand across other areas traditionally seen as part of the front office- like equity trading,” Burke told Traders Magazine.
However, whether it is foreign exchange or equity trading, the key is that these services are not one size fits all, and managers need flexibility and customization in their operating model, not an all or nothing proposition, he added.
Market demand for outsourced trading is expected to grow 45% to $1.7 billion in revenue in 2023, according to a report by Opimas.
Burke said that depending on the manager, outsourced trading solutions may potentially offer improved execution outcomes, increased market access, and deeper multi-venue liquidity.
“Additionally, they can be used to supplement in-house trading desks by removing the distraction of lower value or lower risk trading activity,” he noted.
Time zone coverage, BCP (business continuity plan) planning and global coverage are some of the main reasons why managers outsource parts or all of their trading, according to Burke.
“When talking about trading, the discussion quickly becomes a conversation around resource utilization, and “de-risking” in the operating model,” he said.
Within FX, managers can outsource parts of their desk, whether it’s settlement related FX, certain restricted & emerging markets, or rules based hedging, Burke commented.
“We have also seen a growing number of our asset manager clients looking to outsource equity trading in certain asset classes, like small cap EM equities, for example,” he said.
“The key is operational flexibility and seamless connectivity so that the asset manager can ensure quality execution, with full transparency and oversight of all their trading activity,” he added.
Supplementing in-house capabilities or fully outsourcing lets asset managers reduce risk and improving efficiency and work on a global scale without having to add headcount or desks – all while gaining additional access to liquidity and market intelligence, Burke said.
The key to increasing efficiency is resource utilization for asset managers, he commented.
“We have asset manager clients based in the NY area, who staff a desk from early in the NY trading day to the end of the NY trading day,” he added.
“By outsourcing operational FX and components of their equity trading to specialist providers, no only can they deliver similar outcomes to managing an internal trading desk, but they gain expertise by working with partners who become an extension of the asset manager’s trading & operations team, helping to optimize their overall operating model,” he said.
“Most outsource providers offer flexibility to adapt to the asset manager’s ever-changing needs and ability to tailor workflows to those needs to improve overall operational efficiency,” he added.
On October 1, BBH has expanded its Connectors program, a cohort of specialist third-party fintech and service providers, by adding Tourmaline Partners’ execution services.
Through Tourmaline’s inclusion as a BBH Connector, asset managers can combine their usage of Tourmaline’s trading solutions with BBH’s technology, data services, and FX trading solutions, helping to create their “optimal operating model”.
