Tech Talk: Tourmaline Partners — HFM Technology

Tim O’Halloran, Managing Director at Tourmaline Partners, answers questions on the global impact of MiFID II and the rapid growth of outsourced trading in this interview with HFM Technology.

HFM Technology: One year after Mifid II came into force, how has the legislation impacted outsourcing trading in hedge funds? Particularly with European names, has it increased awareness of the strategy and driven more players to it?

Tim O’Halloran: Mifid II has certainly piqued interest in outsourced trading, particularly in Europe. The bifurcation of execution and research has forced investment managers to think more critically about the brokers with whom they trade, how they acquire research, and what it means to seek best execution.

In the US, even in the absence of new regulation, global managers and other managers of scale have started to explore full unbundling and supplemental trading, largely due to Mifid II’s global impact and pressure from asset owners and other industry stakeholders. The disruptive power of Mifid II transcends borders, and with it, the benefits of outsourced trading are becoming increasingly clear.

HFM: Can you build a sketch of the average hedge fund player who is now considering or adopting outsourced trading? Who are they and what are their typical needs?

TOH: In general, hedge funds at launch will typically embrace outsourced trading. As these funds are usually small, it rarely makes sense for them to have a dedicated, in-house trader.

The compliance and TCA pressures are enormous, and partnering with an experienced outsourced trading firm is often the best way to remain viable in an industry populated by legacy players with deep pockets. That said, many established hedge funds and more traditional investment managers are now looking at outsourcing from a supplemental perspective. There are many reasons for this, but regulation, changes in technology, and reduced commission flow have been the key drivers.

These factors have also impacted the sell side, as many brokers now think more critically about how to allocate both research and trading coverage resources. For buy-side firms affected by this shift, outsourcing some or all of their trading activities is often an ideal solution.

HFM: What has been the evolution in Tourmaline’s own hedge fund client base? Who in the industry do you service today?

TOH: We work with an incredible variety of clients: hedge funds at launch, established managers, family offices, activists, sovereign wealth funds, and others. As we’ve grown, we’ve seen a particular increase in clients with larger AuMs, many of whom are looking to expand their reach, improve trading performance and create cost efficiencies in light of new regulations and market forces.

HFM: Could you detail the technology set-up at Tourmaline? What platforms – proprietary or otherwise – do you use for each function?

TOH: We employ a combination of third-party platforms and proprietary technology. We use LiquidityBook for our OMS, Bloomberg for our EMS, and Trade Informatics for TCA. We use over forty algo suites, and connect to dark pools and ATSs from a variety of sell-side brokers. We have also developed a number of proprietary tools to supplement our trading resources, including an order entry tool, a CRM/data analytics platform, CCA and CSA reporting technology and more.

HFM: Are you tapping into AI or any other innovations at any stage of the process?

TOH: The majority of tools we build for our proprietary software are not driven by AI, but in terms of trading and accessing the markets, the number of AI-driven tools we use has increased significantly. We expect this shift to continue as the technology becomes more advanced.

HFM: Given that you take care of trading for hedge funds, where do you source your own professionals for that very function and what profiles are you after?

TOH: As we have added clients over the years, we have grown our team opportunistically and organically. We’re up to about 40 people, all of them seasoned experts in what they do. In terms of trading talent, almost all of our staff have between 15 and 20 years of experience each, and lately the majority of those hires have been buy-side veterans.

Tim O’Halloran is a Managing Director at Tourmaline.