What Tourmaline Partners Is Hearing from the Marketplace as Demand for Outsourced and Supplemental Trading Heats Up
By Tim O’Halloran, Managing Director
The growth of outsourced trading has been remarkable to witness.
When Tourmaline Partners was founded more than a decade ago, our plan was to address a gap in the marketplace. A lot has happened in 10 years. Today, numerous industry studies highlight the increased demand for, effectiveness of and satisfaction with outsourced trading. We see these trends reflected in the expansion of our own business.
Much of this growth has come from large institutional asset managers with clients that include pension plans, municipalities, foundations, endowments and the like. A large portion of these managers approach us for “supplemental trading,” a term we coined to describe an outsourced trading relationship in which we augment a client’s in-house resources and expertise. This is a departure from the historical use case for outsourced trading: the emerging hedge fund at launch, with no internal trading resources. Today, all firms, and notably these larger players, demand an exceptionally high level of transparency and accountability. As a result, our clients and prospects’ due diligence has become, on average, far more involved.
Accordingly, today’s inquiries about our business focus on our corporate governance, infrastructure and workflow – how we are positioned to deliver best execution. We welcome these questions as an opportunity to differentiate our offering. The surge in demand for “outsourced trading” has led to many new entrants to the space, but if you look under the hood, many of these businesses – which include prime brokerages, custodians and other largely sell-side players – are offering something quite different from the independent, pure-play solution that Tourmaline delivers.
We’d like to share some of the most frequently asked questions about Tourmaline in hopes that they will offer a window into what matters to the buy side and provide a roadmap for managers who are considering outsourced or supplemental trading for the first time.
Question 1: Our clients put a premium on best execution. How will working with Tourmaline help us achieve it?
We believe that best execution is achieved through our infrastructure, expertise and scale. These key drivers are what enable us to provide unique and unparalleled access to liquidity and information to our clients.
Tourmaline is uniquely positioned as a buy-side trading desk and we are seen as a large institutional client by the sell side. Importantly, we are privately held and positioned to not compete with the sell side in their core businesses of research, banking and prime brokerage. This independence is critical to accessing liquidity, information and research.
Tourmaline’s team comprises more than 35 traders averaging over 15 years of experience, based in Stamford, London and Sydney. We trade in more than 50 markets, are covered by more than 400 sell-side brokers and employ more than 45 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.
Importantly, all Tourmaline employees have proven themselves as experts in their respective disciplines, whether it be trading, operations or compliance. The result is a degree of knowledge, professionalism and relationships that deliver a level of service and overall experience nearly impossible to duplicate and beyond what any single, standalone broker can provide on their own.
Our independence, expertise and scale deliver a best practices and best execution framework that can be leveraged by managers of all sizes to the benefit of their managed accounts.
Question 2: How does Tourmaline cover us and interact with the sell side? Describe your infrastructure and workflow.
Tourmaline is positioned and operates as a large buy-side trading business. Our workflows are akin to those of a multi-billion-dollar buy-side manager; thus, we are a large client to the sell side.
Our more than 35 senior traders engage the sell side electronically (low-touch) or by accessing sell-side block liquidity (high-touch). We do not own or operate our own algo suites, dark pools or ATSs. We manage all orders ourselves and decide how to best trade each order given its specific characteristics, circumstances and objectives. Ultimately, Tourmaline is a conduit to more than 400 third-party high-touch brokers and more than 45 electronic venues.
Tourmaline’s execution and order routing “playbook” is customized for each client. We seek to optimally match each client’s order objective(s) and trading behavior(s) to the appropriate liquidity pathway. Tourmaline works with each client to provide advice and/or color on the best trading venue options, and we will take direction from clients regarding which venues to preference or avoid.
Typically, our traders engage with either portfolio managers or the trading team at a client. Our experience means market color and intelligence are delivered through the lens of expert buy-side trading veterans directly to those authorized within our clients.
Our aggregate scale and pertinence with the sell side drives the information flow. Tourmaline maintains “institutional” relationships with our sell-side partners. We are not simply covered by a single sales trader at a typical bank or large broker-dealer. Instead, Tourmaline is covered by sales traders, sector traders, block traders, delta one desks, ECM desks and research salespeople. This is a highly unusual coverage model and can only be achieved with Tourmaline’s significant scale.
Tourmaline can deliver this workflow because we are structured to operate as would a buy-side trader –free of any conflict or bias with our market counterparties or our clients. Positioned as such, we never shop or advertise our clients’ order flow. Instead, we are recipients of this information from the sell side.
Our unique buy-side positioning enables us to provide anonymity (for asset managers and specialist funds who are acutely sensitive to trade information leakage) as well as manage commission wallets through a combination of CSAs, aggregation and attribution. We are in a position to operate exactly as would a buy-side trader in sourcing and paying for research pursuant to best execution and our clients’ budget and timing.
Another important component of our workflow is a deeply experienced global operations team. Our team leverages our technology and flexibility in operations processes to tailor the optimal customized workflow solutions to meet our clients’ global trading requirements, following the sun, 24 x 6. We own each transaction throughout the full lifecycle of the trade, from pre-trade compliance and TCA analysis through execution, reporting, pre-match and settlement. As a single counterparty, we reduce our clients’ risk and save them money.
Tourmaline’s infrastructure and scale create great pertinence with the sell side – to our clients’ benefit. In building Tourmaline over the past decade, it was not all highway to get to where we are. Thus, there is a large “moat,” as this business model and workflow cannot be replicated in the short term.
It is worth noting that many new players in the outsourced trading arena, such as custodians and prime brokers, simply cannot provide this kind of access to global liquidity, nor properly remunerate the sell side, as they are a part of the sell side. The right infrastructure and scale are a requirement to properly source liquidity and information flow. They are a must-have if you wish to support the trading of large, institutional managers. While engaging a custodian to streamline operations may help an advisor save money, it is likely to do so at the expense of best execution.
Question 3: I already have an in-house desk staffed by talented traders. What can you do for us that we can’t do already ourselves?
The fastest-growing part of Tourmaline’s business, and our largest total addressable market, is investment managers who have their own in-house traders or teams. These larger players are working with Tourmaline for a number of reasons, but primarily to expand (supplement) their reach to brokers and markets with whom they don’t interact directly.
It is worth noting the industry trends that are driving this change: a growth in passive management that is compressing margins, increased regulation and an increased use of data and analytics in both research and trading. Add in a fragmented liquidity landscape, a “juniorization” of talent, smaller broker lists and commission wallets down close to 50% in the past decade, and you have a perfect storm.
These factors certainly force managers to be mindful of costs, but there is also great demand for solutions that improve workflows and enhance trading alpha – hence the question about best execution.
We see today that the buy side has become increasingly more comfortable with engaging seasoned experts to enhance trading, as they have traditionally with both research and operations.
It helps that our clients can simply onboard Tourmaline as they would any new broker. Doing so opens a path to our network of more than 400 brokers and a team of experienced traders, positioned as a buy-side desk. This is a highly differentiated offering.
Once onboarded, Tourmaline becomes a flexible resource for an in-house trader to help source liquidity, color and information from brokers with whom they are not directly engaged. We can remunerate brokers by earmarking flow to them or fund a CSA. We can provide anonymity as needed. We can provide derivatives expertise. Clients can leverage our scale to trade offshore markets in real time, help with difficult-to-trade names, address bandwidth issues and have an immediate BCP, all at a variable cost without adding staff.
We believe that as outsourced and – perhaps more importantly – supplemental trading is becoming institutionalized, it will soon be viewed as best practice to have this resource at the ready, hence the spate of new competitors. But there will also be heightened demand for sound corporate governance and a conflict-free framework.
Tourmaline can augment a buy-side trader’s resources because our workflows are akin to theirs, we are positioned as they are and, in most cases, we have greater scale.
