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market participants as to how
these providers actually oper-
ate, primarily in terms of how
they differ from agency brokers.
Alongside this, buy-side traders
often view the outsourced dealing
desk as a potential threat to the
future of their careers. However,
those asset managers venturing
down the outsourced trading path
are supposedly seeing a number of
practical benefits.
Outsourced trading providers
essentially act as a buy-side trading
desk, with very similar operat-
ing models in terms of how they
transact on behalf of clients. For
a typical arrangement in the UK,
“The sell-side is happy to have
those conversations with us because
they understand that we are not
crossing orders or competing with
them, and there is no potential for
information leakage.”
ANDREW WALTON, TOURMALINE TRADING
the buy-side client has a single
relationship with the outsourced
trading provider, while the pro-
vider has individual relationships
with the sell-side and trading
venues, meaning
that the client
is transacting
with the out-
sourced trading
desk and they are
the counterparty
risk. Ultimately, the
provider is standing
between the market and
the client.
Most outsourced trading
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providers will accommodate methods and arrange-
ments in terms of anonymity based on the needs of
the individual client because, as with most things in
this industry, this is not a one-size-fits-all type of deal.
There can also be differences according to region.
Some parts of Europe, for example, have adopted a
model known as RTO, or reception and transmission
of orders, which has proved to be popular in major
financial districts such as Paris.
With the RTO method, the outsourced trading pro-
vider deals in the name of the buy-side client, so the
counterparty risk remains between the institutional
investor and the broker. Focusing more on the typical
UK model, anonymity is an aspect that providers of
outsourced trading agree can bring huge benefits to
many funds.
“Standing between the buy- and sell-side means that
we can protect the end client by allowing them to re-
main anonymous, and conversations our clients would
have previously had with the sell-side are now han-
dled by us,” says Andrew Walton, head of European
business development at outsourced trading provider,
Tourmaline Trading.
“The sell-side is happy to have those conversations
with us because they understand that we are not
crossing orders or competing with them, and there is
no potential for information leakage. If we were to get
buy and sell orders in the same name from a bulk of
clients, we aren’t taking that away from the sell-side
table, we are taking it to their table.”
For smaller asset managers in particular, anonymity
created through a typical UK outsourced trading ar-
rangement could prove useful in terms of minimising
market impact, reducing information leakage and pre-
serving alpha. Such an arrangement also removes the
need to establish separate and individual relationships
with brokers, which can often be legally complex,
costly, and difficult to both attain and maintain due to
potentially lower business flowing from smaller funds.
But for the larger asset managers that most likely
have the appropriate sell-side relationships embedded,
anonymity doesn’t always provide a competitive edge.
If a secondary relationship with an outsourced trading
provider was established and that provider was trad-
ing on behalf of the larger asset manager, the market
would likely see a sizeable shift in volumes and far less
flow coming from that particular buy-side firm.
“CF Global has clients that want to trade anony-
mously, and others that want to be visible with their
counterparties,” says Steve Blackburn, partner at out-
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sourced trading provider, CF Global. “Anonymity can
be helpful for some funds, whilst there are benefits to
others of facing the street. It is a fluid situation that is
constantly evolving as the sell side continues to change
and as the market moves away from bundled commis-
sions. The final outcome remains to be seen, but we
are active in both types of workflow and the service
is bespoke. Each client can have their own default, or
change trade by trade, the flexibility is theirs."
Buy- or sell-side?
Larger asset managers or hedge funds might not
be as enthusiastic about outsourcing execution to a
third-party. Speaking at TradeTech Europe in April,
the head of trading at $975 billion asset management
firm Invesco, David Miller, told delegates during an
Oxford-style debate that, at this stage, his firm would
not consider outsourcing its execution processes.
Citing Invesco’s expertise and in-house capabilities,
Miller added that he doesn’t believe an outsourced
trading provider could execute better than his traders
can. “I would say some of the traders we have are
best-of-breed anyway,” he said. “We’ve got the experi-
ence, the technological back-up as well, we’ve got the
systems and the support, so, no, we wouldn’t consider
outsourcing our trading.”
Where the front-office outsourcing provider could
potentially add value for buy-side firms of all sizes is
sourcing liquidity and market access, and this is where
the difference between an outsourced trading desk
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“We’ve got the experience, the
technological back-up as well, we’ve
got the systems and the support,
so, no, we wouldn’t consider
outsourcing our trading.”
DAVID MILLER, INVESCO
and an agency broker emerges.
For example, if a UK-based asset
manager sent an order to an agency
broker for execution in Asia, that
order will only interact with the
flow that the agency broker sees
in Asia. An outsourced trading
provider, on the other hand, will
have access to broader parts of the
liquidity spectrum through various
relationships, including with the
agency broker.
“In most cases, we actually have
better access to the sell-side than
asset managers building those
relationships on their own because
of the sheer volume of our desks
globally,” says Daniel DiSpigna,
chief operating officer at Tourma-
line Trading. “We’re trading with
Issue 60 // TheTradeNews.com // 51