Note: An abridged version of this letter has been published on The TRADE. This is our response to an anonymous editorial that earlier appeared in that publication.
As the CEO of Tourmaline Partners, a leading player in what is known to many as the “outsourced trading” space, I would like to respond to the above-referenced editorial in The TRADE.
We believe that this anonymously-written article is a misrepresentation of what outsourced trading does, and what its benefits are, particularly for the buy side. The author seems unaware that outsourced trading serves a critical role for firms of all sizes, from the smaller funds and fund managers who otherwise can’t afford to be covered by the array of brokers necessary to enter – let alone compete in – today’s fragmented landscape for liquidity, to (more recently) the larger players who use us strategically to complement their existing sell-side relationships.
Far from the narrowly-focused vendors that the editorial seems to describe, Tourmaline Partners is a leading trading solutions firm providing outsourced, supplemental and customized trading services to asset managers of all sizes, since 2011. From our offices in Stamford, CT, London and Sydney, we deliver a buy-side execution offering in global equites, derivatives and ETFs, twenty-four hours a day and six days a week, on behalf of hedge funds, mutual funds, RIAs, family offices, sovereign wealth funds and asset owners. Our 300+ institutional clients range from emerging managers at launch to those with AUM over $100B.
While your anonymous writer suggests that outsourced trading desks are staffed by inexperienced sales traders, Tourmaline’s team comprises 30 traders averaging 15+ years of experience each, most of whom have enjoyed distinguished buy-side careers. At one point your author questions whether outsourced trading firms would know how to act in a market correction; the majority of our traders have worked through both the dot-com bubble and the 2008 financial crisis. We would put the experience, market knowledge and service-first orientation of our trading team up against any buy- or sell-side firm.
The thrust of the editorial is an assertion that outsourced trading is essentially a vehicle for asset managers to shift costs to funds. In reality, the benefits – in some cases the necessity – for a buy side firm to use outsourced trading services often have nothing to do with transaction costs. Our business is growing because we are responding to unique client needs stemming from big-picture, structural changes to the industry. This includes the need to solve complex workflow issues as well as address cost pressures. And it often includes access to expertise and markets that firms can’t obtain in any other way. In any case, our pricing is competitive and flexible, customized to each client and transparent to all. And clients have options in how they pay for our services; we can be paid by fund commissions and/or the management company directly.
We tailor our solutions for each client as well – they retain control and work with us to establish a trading ‘playbook’ to address their specific needs and goals. Outsourced trading empowers the buy side, it does not limit its reach or possibilities as the author suggests. On a daily basis, we help our clients to address execution bandwidth issues, expand their reach, provide access to offshore markets and ‘away’ brokers, and help protect or uncover trading alpha, all of which is tracked and measured. We can attribute business for research credit or help clients navigate the marketplace with discretion and anonymity. Our clients benefit from our scale, reach and unique positioning to the benefit of their managed accounts.
Unlike the conflicted service the author describes, Tourmaline is privately held and positioned to not compete with the sell-side in their core businesses of research, banking and prime brokerage. This independence and agnostic positioning, coupled with our buy-side approach, are the hallmarks of our business.
The article further suggests that the broker networks, technology and compliance features of outsourced trading firms are suboptimal. In fact, Tourmaline trades in 50 global markets, is covered by over 400 sell-side brokers and employs over 40+ algo suites – which allow us to access liquidity at all major exchanges, dark pools and other off-exchange trading venues globally – on behalf of our clients. Even the most sophisticated buy-side desks don’t have the relationships, staff or tools necessary to match this. Additionally, we provide complete transparency and accountability into the venues and execution counterparties.
We uniquely fund research through an in-house, proprietary commission management infrastructure including CSAs, CCAs, aggregation and attributed trading to meet sell-side research commitments. Our technology platform is comprised of proprietary tools for order entry, CRM data/analytics, commission management administration and reporting, and industry leading third-party solutions for order handling (OMS/EMS) and TCA.
In the end, perhaps the biggest misconception in the article is that “outsourced trading” is somehow the cause of a shift underway in the capital markets. As a regulated broker-dealer serving global markets, we are intimately aware of the structural changes impacting our industry on both on the buy and sell sides. And we are sensitive to the disruption that these changes – in the form of regulation, technological advancements in trading and research, reduced commission wallets and passive management, to name a few – have caused. Tourmaline’s outsourced and supplemental trading provide solutions to these problems and a way forward for investors, via a broad spectrum of products and services.
While our response here represents the view we see from Tourmaline, we have also spent a great deal of time educating the marketplace about outsourced trading more broadly. Our recent piece, “The Four Critical Questions to Ask Your Outsourced Trading Firm” offers a guide to help buy side firms to choose the right kind of partner that best meets their needs.
I hope your readers – and maybe even your anonymous author – will take the time to reach out to us directly so that we can share our thoughts further and perhaps help their organizations.
Kind regards.
Aaron Hantman
CEO, Tourmaline Partners
