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Asset Servicing | May 29, 2024

Outsourced Trading Isn’t Just a Cost Play, It’s a Quality Play

In today’s economic landscape, asset managers are increasingly focused on driving quality to attract and retain assets. Consider these findings from a recently published survey of 300 global asset managers from Northern Trust and WBR Insights that aims to assess trends in asset management: managers identified their top strategic priorities in the next two years as enhancing quality and accuracy (72%), followed closely by their desire to improve the investor experience (70%).  

While cost considerations were a focus for 46% of survey respondents, there is a growing realization amongst managers that there are viable alternatives to increasing alpha beyond cost cutting. This has brought the idea of partial or full trade outsourcing deeper into the front office. Traditionally, outsourced trading has been seen as a way to control costs. Given the caliber and range of providers in the market, if cost control is a manager's main goal with outsourcing, their focus may be too narrow. Today, outsourcing is often seen as much a way to improve the quality of operations as it is a way to reduce costs.

The use of outsourcing providers in the back-office space continues to grow and evolve, but outsourcing front office capabilities is also something that more firms are now prepared to consider. This would include outsourced trade execution and currency management. This becomes even more crucial as managers continue to grapple with a difficult landscape and market change such as T+1 settlement. By leveraging an end-to-end outsourced trading solution, managers can improve the quality of their trade execution through enhanced expertise, technology, analytics and governance.

Expertise That Increases Quality Levels

In the intensifying battle for alpha, many managers are looking at different avenues for growth, as reflected in our survey. When asked in what asset classes managers plan to increase distribution, 71% identified infrastructure, 54% identified digital assets and 49% said real estate. But expanding into new asset classes often comes with a price: increased complexity. Managers may lack the market knowledge and access needed to enter new asset classes and markets, and they may not have the expertise in place to execute trades with the highest levels of effectiveness and efficiency. An outsourced provider will usually offer global trading capability from multiple desks in multiple regions, staffed with wide-ranging expertise and skills that managers can tap into, including expertise in local/regional markets and numerous exchanges across asset classes.  For instance, for a firm entering markets in the APAC region for the first time, a global provider can offer expertise in local market trading and settlement to help with activities such as trade oversight and foreign exchange execution at a low variable cost.

Technology Comes with A Price

Another key benefit of outsourcing is avoiding the need to build or retire their own complicated technology stacks that support elements of the trade lifecycle.  As managers expand, they will likely require sophisticated technology to execute increasingly complex trades. This is often unavailable to managers in-house, and costly to do. Without help from global outsourcing or co-sourcing providers, it may be inaccessible to smaller or mid-size firms who struggle to compete with larger managers. However, providers can offer expertise in executing trades efficiently and at optimal prices, leveraging advanced trading technology and execution algorithms. Providers often have access to advanced data analytics and visualization tools that can illustrate past performance to improve decision-making, and artificial intelligence (AI) and machine learning capabilities that automatically sift through reams of market data to identify new opportunities. Another benefit of working with a provider is the built-in ‘tech support.’ They will typically handle technology issues, upgrades, and maintenance, creating a more seamless trading experience.

Best Execution and Trade Cost Analysis

Given the widespread availability and precision of trade-related data, managers should expect their counterparts to be able to fully support them in explaining Best Execution regulatory requirements and trade cost analysis. The results of both can make a meaningful difference when choosing providers. Managers should be able to expect open, mutually beneficial, data-based conversations about execution performance, choices of venue, choices of benchmark, slippage, information leakage and other key elements of broker performance. These can and should be much more sophisticated than simply ‘price achieved’.

Governance Key to Execution Quality

Throughout each step of the trade lifecycle, managers rely on keen attention to detail to ensure they’re staying compliant and effectively managing risk while avoiding pitfalls such as information leakages. In order to avoid making costly mistakes, managers require a robust risk management system framework that can keep up with them in real-time. Rather than resourcing this in-house, managers can effectively slot an outsourced provider into their existing operating model to assist with oversight, advisory, monitoring, surveillance and reporting activities. This allows managers to focus on their core business activities that are needed to generate alpha and scale effectively. 

Outsourcing Isn’t Just About Cost, It’s About Quality

Many managers are evolving their operating models to match a changing market, and they are increasingly widening their scope to include outsourcing various functions in the front office, such as the trading desk. Nearly 30% of the respondents to our survey who have not yet outsourced identified trading as a function they would outsource. While managers have consistently focused on cost in recent years, they are now turning their attention to outsourcing for its potential to increase the quality of their execution. 

Meet The Experts

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    Navigate to Stephanie Farrell

    Stephanie Farrell

    Head of Integrated Trading Solutions, Americas

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    Navigate to Amy Thorne

    Amy Thorne

    Head of Integrated Trading Solutions, EMEA

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    Navigate to Robert Arnott

    Robert Arnott

    Head of Brokerage, APAC

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