Generally, financial technology serves one of two sides of the Street—the buy side, and the sell side. In the middle of the two, however, are outsourced trading desks, those that require functionality that is usually available to broker-dealers while retaining portfolio management capabilities that are typically the purview of buy-side trading desks.
Given this unique position, outsourced trading desks can often be underserved by current offerings, leading firms to take multiple systems to bridge gaps in workflow and capabilities. Trading technology vendor LiquidityBook is aiming to fill that gap with its LBX Outsourced Trader product.
“On the one hand they are technically broker-dealers so have the regulatory and reporting requirements that go part and parcel with that,” says Sean Sullivan, chief revenue officer at LiquidityBook. “But on the other, they function like a buy-side desk, which means they need to be able to accept orders directly from client portfolio managers, have connectivity into their major execution counterparties, be able to handle middle- and back-office processes like settlement and commission management, et cetera.”
LBX Outsourced Trader offers a portfolio, order, and execution management system with full FIX functionality, delivered on a software-as-a-service (SaaS) basis, which has in-built connectivity to vendors, prime brokers, custodians and executing brokers.
The platform, he adds, is already in deployment with several firms, receiving flow from over 600 buy-side accounts and executing with over 200 broker-dealer counterparts.
“Nearly everyone who offers soup-to-nuts front-office platforms has built at least part of their suite through acquisition,” he says. “The downside to that approach from the client’s standpoint is that many of these component pieces are stitched together and are not actually integrated on the back end.”
Outsourced trading desks are used by buy-side firms for a range of reasons, ranging from temporary personnel shortage on a trading floor, through to operational concerns, where smaller shops may wish to focus on investment strategies, portfolio modeling and other areas that are usually seen as core competencies.
In addition, current pressures faced by asset managers mean that, often, outsourced solutions can be a more attractive prospect than retaining a battery of traders and around-the-clock coverage in-house, explains Jeff LeVeen, head of outsourced trading at JonesTrading, which has deployed LBX.
“One of the biggest benefits of outsourced trading to asset managers is the 24/6 access to our global coverage team,” he says. “Our team boasts many years of both sell-side and buy-side trading experience, which qualifies us to handle the various tasks expected from an outsourced trading team. Our clients rely on our team to handle all aspects of execution, middle office, commission management, stock loan, and research aggregation.”
LiquidityBook’s Sullivan adds that an increased need for product specialization, and to outsource where possible, is also driving moves toward outsourced trading desks.
As a result, for many fund managers, trading operations—once a sacrosanct, bread-and-butter area of the buy side and a true competitive differentiator—are now something that “makes sense to outsource, in order to get access to a much more experienced group of traders, as well as a broader universe of broker relationships” than a firm might otherwise be able to accomplish on its own.
Such practices are likely to only grow, given the pressures that asset managers are currently facing thanks to a shift from active management to passive investing, an increase in outflows and the subsequent pressure on fees that this has generated. Indeed, the stress is so severe that others have predicted asset management may find itself disrupted by unlikely entrants in the near future.
“I think the most obvious driver of our business growth would be the compressed fees emerging managers are seeing on their side of the business,” JonesTrading’s LeVeen says. “Even though launching funds have smaller budgets, they can see that the quality of service and execution from our outsourced trading desks is better than what they can replicate with a single internal trader.”
Focusing that budget on other areas of that business, he continues, is often “a better use of those dollars.”???
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