Outsourced Trading: Friend or Fad? Part I

Large buy-side firms typically have a trading desk covering each global region as part of a robust, multi-national, multi-asset trading operation. But what about those firms that do not have the resources to staff up globally? Historically, that void may have been filled by a Program Trading Desk (where a central point of contact could control all the orders) or there were standing orders given to overseas coverage. How might a smaller asset manager still enjoy the benefits of having locally based traders making decisions in real time, without having to employ the traders directly? What happens when staffing becomes more complex when market structure and regulatory changes, such MiFID II occur? Cue outsourced trading desks.

Outsourced desks are designed to function as an extension of the buy-side desk, or lack thereof. Traders on these outsourced desks act with the fiduciary responsibility of providing quality executions, service, and color to the funds they cover. They often offer access to a wider range of tools some buy-side firms need but do not have. Consequently, outsourced trading has been a growing segment in an otherwise waning business. This begs the questions—who offers outsourced trading, and why? 

It’s difficult to find a full list of providers, as this segment of the market is relatively undocumented. We also know that there are peripheral services, like mini prime, middle/back office help, administrative support, and tech aid that is offered in conjunction with trading operations that might cloud the creation of such a list.

So, who is using these outsourced desks today? There are plenty of answers to this, but let’s segment buy-side trading functions into a few groups:

·       In-House Desk - Buy-side traders manage orders, host technology, choose which brokers and tools to use for each order, build communications and relationships with brokers, house policies, procedures, and oversight of their order flow and trading strategy.   

·       Fully Outsourced - No trading desk, little technology to trading function and deep reliance on a single outsourced desk for all their trading needs.

·       Hybrid Model - Asset managers deploy an in-house desk while leveraging an outsourced desk to some degree. This is often to build a bench for a small desk and represent the asset manager in overseas markets where the asset manager does not have adequate trading technology, connections, relationships, or resident knowledge of how the markets trade. This is often a way to allow for rapid global expansion. 

Now that we know who is using them, next week we’ll take a look at why.


By Tim Nersten, Head of Liquidity Partnerships and Director of Equity Quantitative Services

Victoria Taylor