Tailor-made trading desks: How the buy side is embracing an outsourcing model

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Financial Markets Insights by The Realization Group, sponsored by Cowen and supported by the Outsourcing Influencers Community.

The arguments for outsourced trading desk solutions have received plenty of attention in the financial industry in recent months. Improved execution, extra asset class or geographical coverage, additional sources of liquidity and increased operational flexibility are among the many benefits that asset managers have reported. All of this buzz in turn is prompting a new wave of financial firms around the world to consider the possibility of adopting outsourced or co-sourced trading desk solutions.

But misconceptions about the nature of trading desk outsourcing still abound. To bring clarity to a topic that still generates its share of confusion, The Realization Group, supported by the Outsourcing Influencers Community, hosted a webinar with a panel of industry experts. They came from a range of backgrounds, but the common denominator was that each panel member had direct experience in one way or another with the practice of trading desk outsourcing. Together, they addressed some of the most frequent, and most pressing, questions that firms have raised.

Chris Elliott, prime brokerage and outsourced trading sales at Cowen, Daemon Bear, chief executive officer at Anderson Bern Capital Management, Labib Mahfouz, executive director at financial technology group Enfusion, and David Berney, principal consultant at Ergo Consultancy, took part in the discussion, which was moderated by Clive Posselt of The Realization Group.

Below are some of the highlights from a wide-ranging discussion, in which the panel tackled questions such as how the outsourced trading model has evolved, what is involved in adopting an outsourced trading model, what are the opportunities, is outsourced trading right for everyone, and what needs to be considered when making a decision.

Addition, not substitution

“There can be many different reasons why,” added Cowen’s Chris Elliott. He told the webinar it could be new asset classes, overflow execution from an existing desk, or a desire to focus on other parts of the trading process such as idea generation rather than execution. “Most of the prospects that we’ve spoken to recently, or the majority of them, are looking to supplement what they have already,” he said.

It’s all about alpha

For Labib Mahfouz of Enfusion, one of the strongest arguments for outsourcing comes down to focus. He noted how many portfolio managers and CIOs have come from banks and are used to the idea of having large teams around them. But as competition and the pressure to perform have intensified, it can be important to keep one’s sights trained on what generates alpha. “People need to focus on what they’re good at,” he said.

Mahfouz added that technological advances had made the transition to an outsourced or co-sourced solution much easier, quicker and more streamlined than before.

A variety of candidates

Another misconception that came up in the discussion was that only certain types of firms are good candidates for outsourcing. “There’s no one size fits all, and there’s no one size fits any type of fund,” Berney of Ergo said.

Daemon Bear of Anderson Bern Capital Management noted that many people assumed size was the key criterion driving the question of adoption. But he argued that what really mattered was the detail within investment strategies. “I believe the relevance of outsourcing a trading model is driven by the investment strategy, the investment manager or investment owner.”

Be clear about goals

Bear at Anderson Bern had advice for firms intrigued by the prospect of adding to their capabilities by teaming up with a provider: Be sure to know what the endgame is. “You need to determine an outline, a roadmap, before you start,” he said. Of course, the roadmap can be tweaked, but being clear about objectives is critical.

The webinar was held to coincide with an in-depth Financial Markets Insight report by The Realization Group, which looks at the forces that are prompting so many firms to embrace outsourced trading and the practical considerations for asset managers who embarking down this path.

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