[ I N - D E P T H
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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O U T S O U R C E D
T R A D I N G ]
“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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