Over the past decade, the trading landscape has transformed dramatically for market participants across all sectors and asset classes. For the buy side, continued electronification of trading has caused technology costs to rise considerably, and head counts on buy-side trading desks have contracted correspondingly. Although the largest banks and brokers have the operational scale and infrastructure needed to keep up with this pace of change, many on the buy side do not have the same resources at their disposal. At the same time, many buy-side firms are actively seeking access to liquidity in new markets or instruments (in order to grow or just to keep up with the competition), and that requires additional spending as well. Throw in additional regulatory pressures, such as the new trade reporting requirements for European firms under MiFID II, and it becomes clear that operational complexity and cost have become a significant burden for institutional investors.
Amid these challenges, one of the standout pain points is the sheer amount of work involved in running operations on the buy side, particularly as it relates to managing relationships with brokers. Liquidity fragmentation means it is now essential for firms to have relationships with a wide variety of brokers globally in order to diversify into new markets, instruments and regions, while also making it possible to participate in hard-to-trade names. But addressing one issue sometimes creates another; building and maintaining lengthy broker lists creates work of its own, from trade settlement to the complexities involved with managing such a wide network of counterparties. And if investors opt to keep their broker lists short, they are effectively limiting their access to invaluable sources of information and liquidity.
Now, many investors are finding that outsourced and supplemental trading are solutions that directly address these problems. Engaging a partner to help with trading functions is a strategic decision that is “more than the sum of its parts,” making the entire process of trading more efficient and thereby reducing operational risk and cost.
Streamlining while extending reach
The traditional bulge-brackets may still be the first port of call for many buy-side firms looking for help with overcoming the operational challenges inherent in trading today, but even the largest banks are struggling to transform their back-office operations in order to alleviate mounting cost pressures. Supplemental trading solutions allow the buy side to have the best of both worlds – greater reach and at less cost. By adding a single team of industry experts – the outsourced trading firm – an investment manager can radically streamline and create efficiencies in its existing trading operations. Far from reducing access or maneuverability, the outsourced trading firm can provide connections to a broader network of brokers and to greater liquidity than an individual firm could hope to on its own. This enables buy-side firms to efficiently yet substantially increase their reach.
And a supplemental trading solution doesn’t just make it easier for firms to maintain a large broker list in today’s environment, it also allows them to rapidly scale that list without any extra work on their part. Instead of struggling to add new brokers to address liquidity requirements, a firm can easily lean on an outsourced trading firm in a supplemental capacity to opportunistically reach key brokers without incurring the costs of onboarding them directly. In this way, outsourced trading providers not only help to improve their current trading reach but take them above and beyond existing capabilities without adding additional costs.
Removing the burden
Operationally, there is obvious value in interfacing with one firm as opposed to many. This instantly cuts down on the need to manage operations with multiple brokers. Tasks such as due diligence, account set-up, connectivity and subsequent changes all become easier. This is crucial as most buy-side firms have seen their operational staff reduced considerably, and it’s even more important for those firms that have these tasks performed by traders who could instead be focusing on their core job function.
How much alpha is lost to time spent working on logistics and “getting the plumbing to work” instead of trading? Beyond just making connections, buy-side firms can also benefit from their partners’ collective expertise in trading the global capital markets, arcane issues that arise from engaging with new markets (China, for example), or in trading new instruments such as swaps. And, with a quality supplemental trading solution, the relationship need not be an “all-or-nothing” proposition. Buy-side firms can source help for one area of their businesses, such as cross-border trading, while keeping other existing relationships in place and unaffected.
At Tourmaline, we provide fully customizable and unparalleled levels of outsourced or supplemental trading services. Our clients quickly realize the value of allowing us to assume some or all operational responsibility for the lifecycle of the trade on their behalf. But clients are also able to leverage our rigorous operational infrastructure and support systems to streamline those functions internally, significantly reducing operational risk, costs and complexity. This takes many forms, depending on the client and the region. Our European clients, for example, are freed from performing their trade reporting obligations, as the requirements under MiFID II can be fulfilled by us directly, removing many additional tasks.
Outsourced trading firms also fill a gap created by banks that have had to cut back on many back-office services, an unavoidable development for today’s capital market participants that could otherwise result in deteriorating levels of support. Because we do not compete with the sell side in any aspect of our business, we are instead viewed by the Street as a large buy-side trading desk. In our partnerships with clients, we can focus on more than just trade details, as we look at how we can further help improve their operations. This can be through reporting or technology, or through the provision of high-level services – for example, comprehensive in-house CSAs and/or aggregation, “attributing” trades to select research counterparties, or by leveraging our global operational expertise or pre- and post-trade TCA.
Ultimately, buy-side firms are finding that they cannot build their own world-class trading infrastructure without the right operational foundation in place. By leveraging the scale and expertise of a truly global provider such as Tourmaline, buy-side firms are finally able to address many of these cost pressures while also reducing risk and improving their ability to access liquidity in today’s complex and ever-changing markets.
“Challenges” are now becoming “opportunities,” as institutional investors leverage the global operational infrastructure and expertise of trading specialists, not only freeing up valuable resources but also gaining the additional benefit of a partner at their side with unrivalled market knowledge and reach.