Some money managers and hedge funds are looking to outsource their trading desks as the coronavirus pandemic continues to shine a spotlight on costs, business continuity plans and the unexpected success of a decentralized workforce.
Outsourced trading has two main functions for buy-side investors, sources said. "First, it allows them to reduce fixed costs by converting head count to a scalable resource that can be dialed up or down" — something that came into its own during the pandemic, said Chris Jenkins, managing director at TORA Trading Services Ltd., who splits his time between Jersey, Hong Kong and San Francisco.
Firms can also increase their capabilities, such as trading new asset classes or strategies, or expand into new geographies and across time zones.
TORA's outsourced trading division saw revenues increase 87% in 2020, and the firm had to hire additional traders to keep up with demand.
Other providers reported upticks in interest and business, including Northern Trust Capital Markets, which brought on its three largest clients during the pandemic, according to Gary Paulin, global head of integrated trading solutions in London; and Meraki Global Advisors LLC, based in Park City, Utah.
Liquidnet Holdings Inc., a buy-side trading and liquidity platform, focuses on direct relationships with its buy-side members but also counts outsourced traders as clients, with "a growing business from them," said Mark Pumfrey, London-based global head of equities. "There is a lot of regulation you have as a hedge fund or small asset manager, and you may (decide to) hand over responsibility (for trading) to someone else."
However, Mr. Pumfrey and other sources highlighted that outsourcing trading will not be a panacea for all firms, whether they want to cut costs or reduce regulatory burdens or not. The key is whether trading gives a manager an "edge" in its investment process, he said.
While efficiency and cost may be drivers for outsourcing, "if the function (of trading in-house) improves the ability of the organization to capture alpha and lower market impact then its value will far outweigh the cost of the trading desk. This is why outsourced trading is still such a small part of the market," Mr. Pumfrey said.
Data are scarce, but 17% of 300 heads of investment operations at money management firms surveyed by WBR Insights and Northern Trust in the first quarter of 2020 said they had already outsourced trading. Respondents were from the Asia-Pacific region; Europe, the Middle East and Africa; and North America, with assets of between $10 billion and $500 billion.
Northern Trust, which has 65 outsourced trading clients, agreed there is an important distinction for firms that choose to outsource and those that keep it in-house.
"The question for (those considering it) is do they get value from the activity of dealing? If you don't … or you can't discern or evidence value, it is by definition a cost, and there may be cheaper and better ways to expense that cost," Mr. Paulin said.
The provider has seen a "notable uptick" in outsourcing, although things were already accelerating.