If you follow buy-side trends, you’re likely aware of the rise of outsourced trading. Once seen as an all-or-nothing solution for smaller or startup funds only, many large asset managers are now leveraging the practice in previously unseen ways, and thanks to a variety of cost benefits, as well as workflow and technology advantages, it looks to be here to stay.
One firm that is enabling this shift is Tourmaline Partners, which provides tailor-made trading solutions to buy-side shops of all sizes. Based in Stamford, and with offices in London and Sydney, Tourmaline engages with over 400 brokers across the globe, helping clients to access unparalleled liquidity and market intelligence.
Founded in 2011, Tourmaline provides outsourced, supplemental and customized trading solutions to asset managers of all sizes. Clients range from emerging managers at launch to those with AUM over $100B. Tourmaline provides execution of global equities, derivatives and ETFs, along with a wide variety of trade support services – international swap aggregation, streamlined clearing and settlement, TCA reporting – as well as a robust commission management solution.
On December 4, Tourmaline will appear at the Equities Leaders Summit in Miami, where CEO Aaron Hantman will participate on a panel exploring the buy side’s growing relationship with outsourced trading and technology. The topics on the agenda are ones that have played out in buy-side boardrooms worldwide: what are the benefits and drawbacks of this emerging strategy, why has there been a surge of interest, and how do the various models differ?
“With all the attention outsourced trading has attracted in recent months, we’re often asked a very simple question: why now?” said Hantman. “The simple answer is that structural change has impacted both the buy and sell sides in recent years, and it’s causing firms to think more critically about workflow, technology and costs. Ultimately, the reasons that our clients outsource are as diverse as the clients themselves.”
One of these changes is MiFID II and its new requirements relating to best execution. By working with an outsourced trading firm, asset managers can expand their reach to the sell side, as maintaining coverage by a wide variety of brokers requires large expenditures of time and resources. A third-party provider is likely to have pre-existing relationships with a large number of sell-side firms and liquidity providers; as mentioned above, Tourmaline connects with more than 400 of these counterparties. In addition, the mounting cost of trading technology means it is more expensive than ever to trade with scale and sophistication, and an outsourced trading firm can ease this burden.
There’s also the matter of rising outflows and falling fees. With all of these pressures, buy-side budgets have been hit hard in recent years. Decision makers have been reviewing their expenditures with a more critical eye and farming out non-essential operations, or leaning on experts to help manage costs – and more and more, trading fits that description.
Tourmaline helps the buy side meet these challenges as a pure-play provider of outsourced trading solutions. Well over half of its employees are traders, many of whom have spent a decade or more on buy-side trading desks. The firm delivers a true buy-side trading experience in both an independent and agnostic manner. These key features are a primary differentiator in a space that has attracted many recent entrants, according to Hantman. Unlike many of its competitors, Tourmaline does not compete with the sell side in their core businesses of research, investment banking or prime brokerage. A recent report from Tabb Group predicted that governance structure — that is, the question of an outsourced trading firm’s true independence — will become an increasingly important consideration as the industry continues to grow.
“One of the main reasons for outsourcing is to gain efficiencies in working with the sell side, so if an outsourced trading provider also has a sell-side offering, funds must be diligent in considering whether there may be a conflict of interest,” said Hantman. “Does this firm have any preferred trading venues or routes? Does their structure limit access to liquidity? We offer fully agnostic trading solutions. The asset management space is complex enough, so when we offer our clients a buy-side trading experience, we want to make sure that’s exactly what they get.”
With all the buzz it has received this year, outsourced trading is no longer the buy side’s best-kept secret. In a recent report, Opimas Research identified outsourced trading as one of the “bright spots in the capital markets, with fees and trading volumes of providers growing in excess of 20% per year, a trend that is expected to continue in the coming years.” All three of Tourmaline’s offices (Stamford, London, Sydney) have brought on significant senior hires in the last 18 months to accommodate continued growth and client demand.
“Clients use us to supplement their own efforts and solve for pain points in a cost effective and compliant manner. This can include addressing liquidity or bandwidth issues, trading offshore markets or expanding their reach to the street, to name a few,” said Tim O’Halloran, Managing Director at Tourmaline. “It is certainly clear that our efforts to educate the buy side about our differentiated approach have been well received – we project continued growth in 2020. Over the longer term, it’s not that big a reach to see that leaning on experts may soon be considered best practice and an important part of a holistic framework to seek best execution.”