Forefront Communications

TabbFORUM: Outsourced Trading: Why Specialist Providers Need Specialist Technology

Tourmaline

Alexandra Hamer

Alexandra Hamer

In this thought leadership piece, LiquidityBook‘s Sean Sullivan discusses the distinctive technology needs of outsourced trading.

Outsourced trading historically has been a solution for smaller fund managers that lacked the resources to run their own trading desks. Thanks to a host of factors, however, many larger managers have begun to leverage this established practice in a new way. While these drivers are well understood, however, the distinctive technology needs of outsourced trading firms often aren’t discussed.

For those who follow buy-side trends, the rapid rise of outsourced trading – enlisting an outside provider to take on some or all of a firm’s trading activities – has been one of the most fascinating developments in recent memory. While the model has been around for some time, it historically has been a solution for smaller fund managers, many of which lacked the resources to run their own trading desks. Thanks to a host of factors, many larger managers have begun to leverage this established practice in a new way.

The biggest driver, unsurprisingly, is cost. Between the top-down pressure active managers are facing from passive investing and the rising pressure to invest in the latest technology, fund managers often feel their shrinking budgets are being stretched in a million different directions. In addition, MiFID II and other regulations have imposed new best execution requirements, making it more expensive than ever to remain compliant. These forces have added up to an increasing number of buy-side firms deciding that a specialist provider of execution services is the best way to navigate a shifting landscape.

How prevalent is it? A study conducted by research consultancy Opimas predicted that by 2020, 20% of buy-side firms with more than $50 billion AUM will outsource some portion of their trading operations. Far from a niche solution for fledgling funds, some of the biggest names in the business are starting to come around. Ryan Larson, Head of U.S. Equity Trading at RBC Global Asset Management, summed it up well at last December’s Equities Leaders Summit in Miami: “Given all the mounting costs and complexities around reporting and best execution, outsourcing all or parts of trading may increasingly makes sense for some firms in the industry,” he said.

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