To streamline or to outsource: the question facing trading desks in 2020
Updated: Feb 13
Margin pressure, regulation and an increasingly sophisticated investor base continue to provide challenging operating conditions for asset managers.
“Cost pressures across the industry are significant. From a buyside perspective, a lot of that is driven by the trend towards passive investing, where Index-ETFs have really set the lowest bar in terms of fees. If you couple that with the trend towards zero commission trading that you’re seeing in the US and the ongoing cost of compliance with regulatory changes, it’s an incredibly challenging environment making sell side services to buy side come under even more scrutiny” Ofir Gefen, Head of APAC at Itiviti told Fund Business.
While regulators across the globe continue to demand increased transparency, asset managers are under pressure to do more with less, a challenge that is particularly evident in the trading space, where traders are under pressure to demonstrate best execution and ideally improve profitability at a lower cost to the business.
This is causing somewhat of a bifurcation in the approach that firms are taking towards their trading functions.
On the one hand, many larger firms are grabbing the bull by the horns, investing in managed connectivity services and streamlining information flow and analytics between portfolio management and trading desks in order to maximise the value that an internalized approach can bring.
“Automation is a key theme, technology really is the answer to a lot of these challenges,” Gefen said. “There’s a lot of investment in managed connectivity to streamline data and compliance/risk management. The idea of the managed connectivity layer is that actually create one cohesive database that connects multiple EMSs or OMSs into a single platform, so you can manage your exposures in one place,” he said.
A recent FIS report flagged a trend to consolidate technology platforms and vendors in order to cultivate greater synergy across trading, risk management, finance and treasury. “One of the most significant transformations we will see when comparing yesterday’s front office to the future front office is the level of integration across these disciplines,” the report noted.
It found that dealing with fragmented technologies and legacy infrastructure inhibited buyside manager’s ability to be as effective as they might be. “Those who have a consolidated single front-to-back technology platform, with streamlined data and vendor expertise that they can leverage, are highly effective at trading and managing risk,” the report found.
However, on the other hand, a growing number of firms is also taking the opposite approach – outsourcing trading functions to cut costs and focus on investment management.
For some firms, using an outsourced trading desk is an opportunity to cover geographies that the internal desk does not currently trade, access parts of the liquidity spectrum out of the internal desk’s reach, or deal with difficult transactions.
Other firms opt to outsource their trading function in its entirety. Those are typically smaller firms for which trading isn’t part of the alpha signal or where the economics of paying for a trader don’t meet the gains from returns, however, some say it’s only a matter of time before a larger firm will take this approach.
“Firms are realising the need to automate or systematise their trading and trade flow processes. Alternatively they can outsource, which is a trend that is building momentum quickly,” Joe Kassel, former Global Head of Dealing, Exposure Management & Transitions at AMP Capital said. “At some point we will see a larger asset manager take the decision to outsource their trading to one of these outsourced trading providers and it will be interesting to see if that will mark a new stage in the consolidation of dealing desks,” Kassel said.
The question of how to efficiently position trading desks for the future is one that will be discussed in more detail at the 3rd Investment Implementation Summit at the ASX in Sydney on March 11th. For more information, visit the event website and agenda.