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more than 350 brokers in the world
now. We use broker electronic
trading tools and access high-touch
desks and so we are considered an
algorithmic client as well as a cash
desk client.
“When you put that altogether,
that is effectively one massive buy-
side desk because we are acting in
that capacity, far greater than most
trading desks. We use our econo-
mies of scale to access liquidity on
the street, and for a fund to get that
kind of access to a bulge bracket
there’s usually a large price tag
attached. The large banks aren’t
going to reveal their flow to anyone
for free and commission budgets
can be unclear because funds won’t
know until they get access to the
liquidity they need.”
Some providers are indeed
registered as agency brokers,
mostly those that are part of larger
institutions offering other financial
services such as investment bank-
ing, custody or prime broking. But
ultimately, the outsourced trading
desks are acting as buy-side trading
desks, not agency brokers, and
they are deeply embedded in the
workflow of the asset management
client.
There has been reluctance
from European sell-side firms to
embrace outsourced trading desks
due to this misunderstanding, with
many brokers identifying out-
sourcers as competitors offering
similar services on an agency basis,
but this perception is shifting. Ulti-
mately, and providers continue the
battle to clarify this, the outsourced
trading desk represents the fund
managers rather than competing
for sell-side business.
Giving up control
There is an element of fear when
considering outsourcing front of-
fice activities, referred to by some
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funds as ‘giving up control’, that it could potentially
leave them in the dark in terms of market insights.
Heads of desks, and even portfolio managers, are
intrinsically linked to the execution element of asset
management. Execution is a key part of the business
for most firms, from dealing right through the trade
lifecycle to settlement, so carving out that piece and
handing it to another firm can initially seem troubling.
Border to Coast is a UK asset manager established
by local authorities to manage pension funds as part
of the move towards the pooling public sector pension
schemes. It chose to outsource its dealing after con-
templating the monetary resources needed to establish
a trading desk in-house and determined that the out-
sourced model was operationally more efficient for the
firm. This is a typical case for many long-only funds
that already outsource execution to a provider, but for
Border to Coast, taking a step back from the execution
and relying on an outsourced trading provider certain-
ly left some members of the team with concerns.
“The portfolio managers were worried they would
lose market flavour by not being as close to it,” ex-
plains Mark Lyons, head of equities and alternatives
at Border to Coast. “But now they say they haven’t
lost anything, and in fact, they probably have more
market insight than they previously had. I imagine this
is because they were sourcing insights from various
individual brokers, but having outsourced our trading,
they are getting the information from one central
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counterparty that is seeing the wider market and feed-
ing that back to us.”
For other asset managers, it’s the lingering potential
for conflicts of interest that dominate concerns when
handing flow to a provider. UK equity fund Fundsmith
was seeking expertise in execution and access to li-
quidity pools when it outsourced its dealing following
its launch in 2010 to a well-known, although no longer
operational, provider.
Similar to Border to Coast, Fundsmith opted to
outsource its execution having considered the costs of
running an internal dealing desk. But Simon Godwin,
partner and chief financial officer at Fundsmith, says
that when the firm engaged with outsourced trading,
removing any potential conflicts of interest was of
paramount importance.
“It’s imperative that outsourced trading providers
do not trade as principal,” Godwin says. “They need
to have clarity of strategy, and I think that’s why some
prime brokers will struggle to get into this space
because they will have to leave trading in principal
behind. You have legal agreements in place and tonnes
of oversight, but for me, it’s about telling me that you
are a house that is never buying as principal, never
unknowingly on the other side of a trade from me.”
Cost benefits
There can be no doubt that managing costs has played
at least some part in almost every fund’s decision to
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“The portfolio managers were
worried they would lose market
flavour by not being as close to it.
But now they say they haven’t lost
anything, and in fact, they probably
have more market insight than they
previously had.”
MARK LYONS, BORDER TO COAST
outsource front-office activities. At
a time when regulatory upheaval
has substantially increased costs
and squeezed resources for the
buy-side, fee compression in the
asset management industry has
created a perfect storm of unease
about the profitability of running
an active trading business.
The industry is at a point where
small funds seem to pay dispro-
portionally more for having an
in-house dealing desk than larger
funds, which in turn pay dispro-
portionally less relative to their
assets under management. The
all-in costs to establish and main-
tain a three-person dealing desk,
according to industry estimates,
are up to £1.5 million per year,
including compensation, technolo-
gy, software, Bloomberg Terminals,
data feeds, storage, and all the
other elements required to operate
an efficient desk.
When entering into outsourced
trading arrangements the cost
impact for the buy-side, regardless
of size, is significant, albeit in an
unexpected manner. Costs are
not necessarily realised in terms
of hard dollars or pounds, but
in terms of who, or which part
of the business, is paying for the
outsourced service. Through an
agreed basis point commission on
trades that are executed by the
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