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Another anonymous outsourced
trading provider responds to the
original editorial opinion:
I
am surprised that the author suggests that
outsourced trading is going to be a cost to the
investor in funds, rather than a cost borne by the
management company. This is surely a matter for the
asset management firm to handle, as are any costs they
incur. The buy-side managed to incorporate research
fees brought on by MiFID II, so I am sure they can
manage outsource trading fees. As an outsourced
trading provider, we intend to work on a flat-fee basis
that can be applied however the asset manager sees fit.
The author gives an example showing how an
outsourced desk may undercut the execution rates
of an internal trading desk by working on reduced
margins, but with poorer execution. This is a basic
way of looking at it. The outsourced trading desk is, of
course, looking to make a profit but by offering to save
the asset manager the significant cost of maintaining a
trading desk, that asset manager should in turn be able
to pay a fee that both saves them money and ensures
high quality execution.
I hear the ‘market correction’ argument often, and
my response is always the same and there is never
any argument. Whether the outsourced trading firm
is handling multiple trades or the asset managers are
handling each of those trades, it is going to happen
anyway. But surely it can be better managed by one
firm with extensive market insights before going to
the market as several different firms all fighting each
other in the street? Provided the execution is high-
quality, the outsourced trading firm can do a better
job.
Again, like the market correction argument,
handling errors will be there whether they are
O U T S O U R C E D
T R A D I N G ]
made by an outsourced trading
desk or internal trading desk.
There are, of course, strict rules
about compensating funds for
trading errors, and processes
for establishing the why, where
and what caused the error, and
how to stop it from happening
again. These would be part of
the contract when appointing an
outsourced trading firm.
When the author highlights
that it is not possible to outsource
the obligation to demonstrate
there is a process in achieving
best execution, I would say it is
indeed possible. As best execution
is possible to demonstrate, this
is subjective and relies upon the
traders’ skills.
An outsourced trading firm with
a robust best execution and trade
order priority policy in place,
which has experienced traders
on the desk, can achieve the best
result for all clients. Especially as
they have no axes, no affiliation to
any fund and are not compensated
by the person sending the order,
which is exactly in line with what
MiFID II is trying to achieve.
Issue 62 // TheTradeNews.com // 27