The evolving buy-side trading desk

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The rapidly changing economic and market conditions of recent months has asset managers large and small increasingly looking to quickly develop and deploy new trading ideas, including venturing into unfamiliar asset classes and geographies, while driving operational efficiencies.

With the global economic environment very much uncertain and markets remaining volatile, managers have realised that more of the same won’t do.

But grasping new opportunities often requires changes to a fund’s business model, which can include collaborating with an outsourced trading partner for expertise, experience, global reach, deep liquidity and cutting-edge technology.

Any residual uncertainty around the value of outsourcing trading is fading. Instead, awareness is growing that it leads to operational efficiencies and provides the means for funds to quickly diversify their strategies.

One leading provider of outsourced trading is global investment bank TD Cowen. It has a two-decade track record in the field, traders in markets across the globe, an extensive broker network, and a reputation for a high-touch, “white glove” service to clients.

For a start-up fund, handing over trading to an outside provider may be a relatively easy decision.  Selecting the right provider enables managers to have access to an existing technology stack and a highly experienced team, with strong relationships with brokers and Liquidity Providers across multiple asset classes and geographies.

Longer-established funds with an existing trading desk, however, may just require supplementary help when they need it. An outsourced trading provider can be a partner that enhances, rather than replaces, their existing buy-side desk.

Either way, imagine a world in which asset managers can quickly lock in trading expertise in areas lacking in the in-house team. Whether it’s to trade in an unfamiliar asset class, increase geographic reach and coverage, handle unusually large order flow, or cover a gap in staffing, supplemental outsourced trading may be the answer. Think of it as “trading-as-a-service” – an on-demand, ready-when-you-are, buy-side trading desk.

Here are six good reasons why asset managers should join the outsourced trading wave:

1. Access expertise

By outsourcing, fund managers bring in expertise, gain access to markets, and benefit from deeper liquidity, often for a fraction of the cost of adding headcount. They can also exploit cutting-edge trading technology and leverage front- and back-office functions, courtesy of the outsourcing provider. The benefits extend beyond the trading desk.

Depending on what is outsourced, safeguarding trading to an external provider can also reduce the need to maintain and manage broker relationships. TD Cowen, for example, has some 200 liquidity providers, more than most buy-side firms.

2. Strengthen buy-side desks

Buy-side traders have sometimes seen outsourced trading as a threat rather than a mutually beneficial partnership. With supplemental outsourced trading, the provider’s traders work with the in-house desk to help extend their reach and achieve their goals.

Sometimes, calling in supplemental trading support allows an in-house desk to focus on its core areas of expertise.

Think of an Asian fund contemplating trading UK government bonds. The time-zone is inconvenient and in-house knowledge of the market may be sparse. The provider with global reach can execute the gilts trade while the buy-side firm’s traders look after their core markets. Each party does what it does best.

3. Fastest way to scale up

Using an outsourced trader allows fund managers to execute new investment strategies, trade in new asset classes, make the most of a fleeting opportunity, and take control of their trading needs in a much faster timeframe.

What would typically take many months to facilitate, and historically been unviable due to cost and resourcing issues, can become a reality in a couple of weeks or even sooner. That is the promise of an outsourced trading provider. It enables the perfect balance of access to expertise, capacity, reach, coverage, back-up and other services when needed, on demand.

Outsourced trading providers such as TD Cowen can also deliver other services, such as settlement, portfolio reconciliation, trade cost analysis and corporate access.

4. Market structure changes are ramping up costs

Regulations such as Europe’s MiFID II regime have put trading costs in the spotlight and have prompted some buy-side firms to outsource trading. Instead of the fund needing the resources to guarantee best execution, they can leave it to the outsourced provider.

Given its size and market experience, the provider is likely to command better pricing and have access to greater liquidity than its clients.

Using a trading provider can also reduce other regulatory costs. Funds seeking to trade in unfamiliar geographies can save themselves the cost of licences and the burden of reporting requirements.

5. Have as much, or as little, control as you like

A frequent argument against outsourced trading is the perceived loss of control of a function that should be kept in-house, in particular the risk of losing contact with the market. Under a flexible outsourced trading partnership, the client can maintain existing relationships or hand over the reins to the outsourced trading provider, or a combination of both.

The reality is that the client will gain greater access to market information and flow thanks to the provider’s reach, wider broker network and access to deeper liquidity. Most small and medium-sized clients are unlikely to be covered by the bulge-bracket banks or see flows usually seen by only the largest funds. Partnering with the right outsourced trading provider changes all that.

It’s worth remembering that managers do not outsource fiduciary responsibility for the running of the fund. The best providers will work closely with the client to integrate with the fund’s workflow but, in the end, they take direction from the client.

6. TD Cowen is here to help

Its comprehensive solution offers execution in markets across the world by experienced traders, integration with clients’ trading technology and pre-and post-trade support; and its flexibility in delivering outsourced trading as a full or supplemental service have made it a trusted partner on many asset managers’ outsourcing journey.

So, whether it’s gaining expertise, accessing cutting-edge technology, trading in new asset classes or regions, seeking enhanced liquidity or freeing up in-house traders to cover a fund’s core assets, outsourcing trading could be key to opening new opportunities for growth.

The top 10 strategic reasons to use outsourced trading services

  1. Add trading expertise in an operationally efficient way
  2. Scale quickly, efficiently and cost effectively compared to building/adding capabilities in-house
  3. Extend trading reach to new asset classes or geographies,  freeing up the in-house desk to cover the fund’s core assets
  4. Access deeper liquidity
  5. Benefit from a more extensive broker list
  6. Ensure compliance with best execution and other regulations
  7. Handle large orders or sensitive trades anonymously
  8. Access the provider’s cutting-edge trading technology
  9. Benefit from pre- and post-trade services
  10.  Plug temporary, seasonal or permanent staffing shortages
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