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Outsourced Trading Is Making The Buy-Side Trader’s Job Obsolete

Courtesy of ZeroHedge. View original post here.

For many asset managers having a trading desk simply isn’t worth it anymore (certainly those who are gating investors amid massive redemptions), according to Bloomberg. In fact, the buy-side trader looks as though it’s going to be the latest job du jour to be outsourced across the industry. The move comes as asset managers are struggling with the rising costs of salaries, data feeds, computers and requirements of keeping up with new regulations, like MiFID II.

This is where outsourced trading comes in: it used to be a niche business that was aimed only at start ups, but it is a business that is now seeing demand from larger firms as money managers everywhere attempt to cut costs.

Northern Trust Corporation, which is a custodian for $8 trillion in assets, is in talks with 40 potential new clients for its outsourced trading platform. Since 2017, it has already taken on 38 clients. At the same time, Bank of New York Mellon's corporation subsidiary says it’s tapping into more UK wealth managers that are seeking to offload trading. Jefferies, which has taken on more than 60 clients since entering the business in June, is expanding their offering into Europe and Asia.

Gary Paulin, London-based global head of Integrated Trading Solutions at Northern Trust Capital Markets said: “When faced with more margin pressure, what do you have to do? You have to look at your operating model. You have to address what fixed costs you can remove.”

Not all asset managers have trading desks to begin with. Smaller managers rely on outsourced teams and even their own fund managers to buy and sell securities. But it is now the larger players that are showing increasing interest in outsourcing this role.

The outsourced traders act as in-house trading desks but for a fraction of the money; instead of passing an order to traders at the desk next to theirs, or down the hall, fund managers will give it to an outsourced team – perhaps somewhere in New Delhi or Calcutta – for a fee. The outsourced traders offer market commentary and updates on existing positions, just like an in-house trader would.

Cue the front-running lawsuits…

Outsourcing is a way for asset managers to help defend their margins as they try to compete with the onslaught of no fee – and even negative fee – passive funds, which we recently discussed . The move could shrink the industry's dwindling pool of traders even further. According to Coalition Development Ltd., the largest banks have seen their front office equities head count drop in each of the last five years.

And trading itself has become more complex. Buying and selling global securities means having to navigate time zones and overseas regulation. In the EU, the MiFID II rules put into effect in early 2018 have also increased traders' regulatory burden.

“They’re forced to be a lot more forensic in terms of the execution quality they get from their brokers,” said Michael Horan, head of trading at Pershing. All of this has combined to act as a great tailwind for outsourced trading:

Opimas, a consultancy, estimates that a fifth of investment managers overseeing more than $50 billion will outsource at least parts of their trading by 2022. Whereas the service used to target newly launched funds, it’s increasingly common for asset managers overseeing more than $5 billion to tap that as well, according to Richard Johnson, vice president at consultant Greenwich Associates.

Now, the service that was once only used by newly launched funds is being used by those overseeing more than $5 billion.

Northern Trust is planning a promotional roadshow in the US later this year and Pershing has seen "significant" business growth since the implementation of the new European regulations, with the typical client being a UK wealth manager that only has 2 to 5 traders to begin with. 

According to Bloomberg, the largest source of growth is among asset managers overseeing $10 billion to $100 billion that are looking to supplement their own desks. Consultancy company Opimas estimates that each buy-side trader costs an asset manager at least $500,000 a year and can handle about $1.5 billion of annual stock trading volume. 

For funds with turnover below that, outsourcing makes sense. For larger funds, keeping your in-house team may have more perks.

Anish Puaar, European markets structure analyst at Rosenblatt Securities Inc. in London said: “Most larger buy-side firms will probably just want to keep control of their trading desk. A lot of the bigger firms will see the ability to understand today’s complex market structure as a differentiator.”

Horan from Pershing concluded: "The cost of running a trade desk is a very capital-intense business. There’ll be more of a move toward outsourced trading, but for the time being, the sweet spot is certainly the kind of mid-market-level."


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