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outsourced trading provider, the
fund that is most active and trades
the highest volumes within an
asset management firm foots the
bill. The bottom line is that it is the
fund that pays for the outsourced
trading service.
This fact may come as a surprise
to some, particularly in relation
to European regulations which
prohibit buy-side firms from
using funds to pay for a number of
internal costs. The impact of this
has seen the majority of operation-
al costs shift from the fund to the
management company. But buy-
side firms that have outsourced
trading and execution could hypo-
thetically remove in-house dealing
desks – along with the associated
“It’s imperative that outsourced
trading providers do not trade as
principal. 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.”
SIMON GODWIN, FUNDSMITH
costs – and pay for outsourced
trading out of commission that is in
the fund.
One might call this a ‘rebundling’,
or reverse of unbundling under
MiFID II, bringing about huge cost
savings for an asset manager. With
competitive rates offered at out-
sourced trading providers, and the
most active fund at an investment
firm paying for the service, it’s not
as dubious as it perhaps initially
sounds. Outsourcing advocates
point to a potential positive impact
for buy-side firms grappling with
54 // TheTrade // Summer 2019
increased costs under the regulatory burden.
“Prior to MiFID II, we had been relatively low cost
because we had low transaction volumes and our
research didn’t really cost that much given the trans-
actions we were doing, but moving to a new model
post-MiFID II we realised it would be a much bigger
cost to us, so we were looking for the most efficient
way of reducing our dealing costs,” Border to Coast’s
Lyons explains.
“We aren’t making a saving per se, we still have to
pay for execution and research, but under MiFID
II it’s more expensive for us to run the business. Al-
though we are paying more for research now than we
used to, I would say we are probably getting broader
coverage. But we avoided that additional cost by out-
sourcing our trading, rather than making a saving.”
Movement under MiFID
MiFID II has resulted in a downward trend for com-
missions and counterparty numbers are being slashed
at a time when buy-side firms need to see more
liquidity and more information to appease the best
execution mandate. Providers of outsourced trading
say that now even larger asset managers are turning
to them for assistance in navigating the new European
trading landscape, as well as a managing costs and
market access.
“Historically, larger funds have considered their
asset size as a reason not to use services like ours,
building out in-house desks. But now, funds are getting
much more pragmatic about the explicit and implied
cost of trading and firms are more open about their
internal priorities and how they allocate resources and
cost,” says CF Global’s Blackburn.
Scott Chace, co-founder and managing partner at CF
Global, says that the firm has seen a steady increase
in interest from prospective clients, with MiFID II
playing a key role in raising the standards for best
execution.
“It’s a difficult operating environment for both the
buy- and sell-side, where most institutions are looking
to reduce costs,” he explains. “There has been a lot of
focus on the research side of MiFID II since it came
into force, and we think taking further steps to ensure
best execution will become more important to regu-
lators as the cost of poor execution is effectively an
additional fee that the underlying client pays.”
Where outsourced trading providers are already
beginning to make headway, particularly with the
larger investment firms, is in the hybrid trading desk
model. Referred to by some providers as supplemen-