A new Greenwich Associates report, Outsourced Trading: Helping the Buy Side Improve Execution and Enhance Operational Efficiency investigates outsourced trading and the perception of U.S. institutional asset management and hedge fund professionals toward this growing industry.
Based on a research study conducted in August and September 2018, the report outlines a diversity of offerings from outsourced trading firms and identifies the reasons that buy-side market participants are adopting these services in growing numbers. Additionally, the study found high levels of satisfaction among those currently employing outsourced trading services, with 71% of respondents calling themselves “extremely satisfied” with their providers.
The report identifies key market developments that have led to the rise of outsourced trading firms, including heightened best execution requirements, increasing complexity and sophistication of trading tools and technology, market structure challenges, and shrinking commissions (68% of study participants reported that generating commissions for all brokers is the biggest challenge in managing their sell-side relationships). The top reasons clients of outsourced trading are satisfied include: the need for additional support for their own trading desks (47%), cost savings (33%) and improved execution performance (26%).
Twenty percent of investors named “special situations” as a reason for engaging outside help. Depending on the chosen outsourced trading firm, such expertise could include equity derivative/options trading (obviating the need to hire an options trader), exposure to international markets (without having to open a desk overseas or hire someone to work through the night), and help in overcoming regulatory or local market challenges. Asset managers can work with one or multiple outsourced trading providers, and can outsource some or all of their trading workflow.
“We’ve received substantial interest from the buy side in learning more about outsourced trading,” said Richard Johnson, Vice President of Greenwich Associates Market Structure and Technology and author of the report. “Historically, only smaller or emerging managers had used outsourced trading, but we spoke with some firms managing over $20B in assets that now employ these services, and for a variety of reasons. We say to institutional investors that have considered outsourcing previously: it’s time for another look, as the product on offer is really developing and addressing today’s challenges in engaging with the sell side.”
Greenwich Associates also outlined a game plan for firms considering which outsourced trading firm to hire, by looking carefully at the varied corporate structures, execution capabilities and research/CSA offerings available as the industry grows and diversifies to include a wider range of providers.