In On Tour, Vol. 1, Tourmaline Partners shared our insights gleaned from visits with investment firms around the world, many of whom lean on us for supplemental support, the fastest-growing sector of our business.
Today, we share our thoughts and observations on what we have learned from helping firms navigate the recent disruption and why being independent matters.
In March and April 2020, our industry faced unprecedented spikes in volume and volatility. This was compounded by the fact that many key employees, in some cases entire firms, were working from home or disaster recovery (DR) sites. Few firms were left unaffected and Tourmaline Partners was no exception.
Our clients shared with us a number of similar frustrations and challenges. A few observations:
We received increased outreach and greater demand for color/information, both generally and on specific topics like trading in offshore markets for clients when they are asleep (during their non-market hours).
Many clients encountered capacity and bandwidth issues during periods of increased demand. Some clients were asked to “trade away”; that is, due to volumes, outages or other reasons, brokers had to send clients elsewhere at times. These challenges were exacerbated with hard-to-trade names. As these rare interruptions did occur, our robust toolkit allowed us to quickly move to alternative providers and venues on our clients’ behalf.
Many clients noted that Tourmaline provided a single point of contact and seamless global settlement. Always getting the plumbing right in a volatile, fast-moving market reduces risk, and several clients expressed how important this is to them. Leaning on Tourmaline as a single counterparty helped them to streamline operations and save time while expanding their reach.
Having a broad palette of electronic tools is imperative. Traders are far more reliant on electronic tools than blocks in a volatile market.
Even during these volatile trading days, many clients wanted to fund research budgets. Having the wherewithal to remunerate and track all research globally is important.
We noted a greater concern and sensitivity around trade (information) leakage.
Lastly, we have seen a newfound recognition and concern around business continuity plans (BCP) for future disruptions and/or periods of high volumes. Clients are now considering supplemental trading as an essential part of their BCP.
Many buy-side traders have come to the conclusion that a quality supplemental trading solution can be a valuable and differentiated resource, regardless of market conditions.
But what mattered most to our supplemental trading clients was Tourmaline’s ability to represent them in a pure buy-side capacity – facing the Street as a large client, with global reach and a robust path to liquidity via both high-touch and low-touch offerings. They did not want just another sell-side counterparty.
Importantly, Tourmaline’s ability to deliver an unconflicted buy-side trading product derives from our independent and agnostic structure. As we don’t compete with the sell side in any of their core businesses (research, banking or prime brokerage) and as we do not advertise or ‘shop’ liquidity, we operate exactly as a buy-side trader.
A pure-play or independent supplemental trading solution must mirror a buy-side trader’s approach. It should be a solution that replicates a buy-side trader’s role, is customized to their needs and expands their reach and resources.
Perhaps a good litmus test for determining a pure-play outsourced trading solution is to simply ask what happens to your order once it is placed with your outsourced or supplemental trading firm. Is the firm behaving as you would – facing the sell side with a plethora of choices? Or will your order be executed by a prime brokerage (PB) desk or internalized to a sister sell-side desk? What information barriers exist between businesses? Is your broker “covered” by the sell side the way you are? Will your order be shopped? What access is there to global block liquidity and how many electronic tools are available to your outsourced trader(s)? What is your broker’s global footprint – for both trading and operational support?
Ultimately, how a firm is positioned in the marketplace dictates the product they can deliver. Sell-side brokers, PBs and custodians all do many things well, but they cannot provide a pure-play, independent buy-side trading solution.
As supplemental trading becomes more common – among larger managers in particular – the requirement for sound corporate governance will drive demand for independent pure-play offerings. Larger managers and asset owners will demand transparency, evaluate resources and identify inherent conflicts of interest.
As markets and economies get back to normal, many lessons will be learned from how this particular disruption was managed – what tools and practices worked best. We expect that independent supplemental trading will be a key part of that conversation.
To learn more about supplemental trading or Tourmaline Partners generally, please reach out to us in the U.S, London or Sydney.
Tim O’Halloran is a Managing Director with Tourmaline Partners.