Outsourced trading demand is increasing as investment firms look to reduce costs, satisfy regulatory demands and expand into different markets. For those offering this service, it is an opportunity to gain extra revenue leveraging their existing platforms.A new paper from Capco, ‘Outsourced Trading: Who, What & Why Now?’, examines why a growing number of firms are looking to use or provide outsourced trading as a service. Typically, smaller hedge funds and investment managers outsource trading to a brokerage firm, but there are indications many of the largest organisations may begin outsourcing some or all their trading within the next few years.
The paper, co-authored by Anthony Bennett, UK prime brokerage lead at Capco, examines key emerging trends, market offerings and providers, and gives ten important takeaways:
1. As technology, transparency and service convenience increases, outsourcing is becoming more widely adopted to support core hedge fund strategies (not just smaller funds).
2. Revenue estimates vary, but indicate greater moves to outsourced trading could generate substantial additional income for providers.
3. For an established prime broker, it makes sense to offer outsourced trading only if core hedge funds request it.
4. Established players could look to grow revenue from their existing client base as more services are used and volumes increase.
5. For those offering outsourced trading, there is an opportunity to cross sell other products to investment managers, eg OTC products, financing, etc.
6. As outsourced trading matures, scale and credibility grows, larger hedge funds, especially with working from home being the norm, could start to outsource more middle office functions.
7. Shifting key activities such as trading and operations and even research is a mind-set change.
8. While advantages such as cost reduction and a move away from fixed costs are clear, advantages such as anonymity, capacity, liquidity and access to niche markets (that wouldn’t justify a full-time headcount) may continue to attract larger funds.
9. Providing the outsourced trading service would not be a trivial investment for firms. With a need to establish ‘Chinese walls’ between certain business units, updated policies and procedures as well as IT change will be required.
10. Firms interested in migrating to an outsourced trading model may need help shifting their traditional middle/back office functions to the offering firms, which may require additional resourcing to make happen.
