Daniel Dispigna, COO of client Tourmaline Partners, discusses how outsourced and supplemental trading solutions reduce operational risk and cost.
Operational complexity and cost have become a significant burden for institutional investors. Given the need for multiple broker relationships globally to access fragmented liquidity, one of the standout pain points is the sheer amount of work involved in managing these relationships. Engaging an outsourced trading firm, however, allows the buy side to have the best of both worlds – greater reach and at less cost.
Over the past decade, the trading landscape has transformed dramatically for market participants across all sectors and asset classes. For the buy side, continued electronification of trading has caused technology costs to rise considerably, and head counts on buy-side trading desks have contracted correspondingly. Although the largest banks and brokers have the operational scale and infrastructure needed to keep up with this pace of change, many on the buy side do not have the same resources at their disposal. At the same time, many buy-side firms are actively seeking access to liquidity in new markets or instruments (in order to grow or just to keep up with the competition), and that requires additional spending as well. Throw in additional regulatory pressures, such as the new trade reporting requirements for European firms under MiFID II, and it becomes clear that operational complexity and cost have become a significant burden for institutional investors.
Amid these challenges, one of the standout pain points is the sheer amount of work involved in running operations on the buy side, particularly as it relates to managing relationships with brokers. Liquidity fragmentation means it is now essential for firms to have relationships with a wide variety of brokers globally in order to diversify into new markets, instruments and regions, while also making it possible to participate in hard-to-trade names. But addressing one issue sometimes creates another; building and maintaining lengthy broker lists creates work of its own, from trade settlement to the complexities involved with managing such a wide network of counterparties. And if investors opt to keep their broker lists short, they are effectively limiting their access to invaluable sources of information and liquidity.
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