[ O P I N I O N
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O U T S O U R C E D
T R A D I N G ]
Another anonymous buy-side
head of trading responds to the
original editorial opinion:
I
n all honesty, outsourced trading desks seem to
have emerged from small, struggling brokers
who have added this service as a different income
stream as they are not very good at their main job of
being a broker.
Instead of competing against much better brokers,
due to the fact that they are not getting much brokerage
business from institutional asset management clients,
they seem to be trying to position themselves as
outsourced trading desks’ in order to get all of the flow
from a smaller number of asset managers rather than a
tiny amount of flow from many.
I actually see a value in outsourcing if you have
very low AUM (less than £500million-£1 billion) and
therefore can't get the broker coverage you need to find
the necessary liquidity, or if you are a simple, single
strategy fund which holds a small number of very liquid
stocks and doesn't trade enough to warrant your own
trading desk. That makes perfect sense and I have no
problem with it.
If they start going to CEOs, CIOs & COOs of large
multi-fund institutional asset managers, pitching an
offering which I am sure they would secretly admit is
far inferior to having their own trading desk, that is
when I do have a problem with it.
Furthermore, I would strenuously argue that the
negative implicit
trading costs (market
impact, spread)
will be multiples
of any explicit cost
(commission) savings
that an outsourced
trading desk are trying
to sell.
Explicit costs are always
dwarfed by implicit
trading costs, so that is
not just a theory plucked
out of thin air. In fact, I
don't see how reducing
explicit (commission) costs
could be a reason to switch
to an outsourced trading
desk at all. The lower you go
26 // TheTrade // Winter 2019
on commissions, the fewer liquidity
sources you can access and the lower
the quality of these sources. This
does not benefit the client and as the
custodians of our clients' financial
futures, this is not the direction that
the industry should be moving.
The opportunity cost of outsourced
trading desks not being able to find
liquidity versus buy-side desks who
specialise in finding institutional
blocks and trading in specialist markets
will also hurt funds' performance, as
they are not able to get their positions
on in the necessary time.
This will hit trading performance
of the underlying funds, which
will impact fund performance and
eventually lower fund AUM once
clients notice the under-performance.
Capturing alpha and performance for
portfolios through trading is even more
vital in an environment where yields
are at record lows and competition is
high.
An asset manager should be trying to
look for ways to positively differentiate
themselves from the competition.
Adding value and performance via a
smart and forward-thinking trading
desk of your own is an obvious place
to do so.