Busting the Myths of Outsourced Trade Service

Over the past few years, trading firms and asset managers of all forms and sizes have begun using Outsourced Trade Service, which was once a specialized service. However, some still view outsourcing as something only recession-era businesses do or as something only smaller asset managers and trading businesses should consider. However, as with other outsourcing developments, that prejudice has been disproven over time. In their pursuit of more alpha, asset managers who have adopted the term ‘Outsourced Trade Service’ have found efficiency, flexibility, and transparency to be the norm.

1. Myth: Money savings are the only concern. 

Reality: While it’s true that an Outsourced Trade Service can result in significant cost savings, the additional scale, business resilience, expertise, and value-added services that come with outsourced trading are just as important. 

Asset managers can set themselves up for future growth by outsourcing a non-core function, which will help them prepare for the future, increase efficiency, and boost profits. Trade finance document automation, Settlement management, automatic base currency conversion, trade cost analytics, and commission management are some additional services that one can easily integrate. 

While outsourcing trading can help companies save money immediately, it can also set them up for future success. When framed in this way, it demonstrates optimism about the future and the commitment of businesses to achieving it.

2. Myth: It’s only for small asset management organizations. 

Reality: An Outsourced Trade Service makes sense for small or start-up asset managers but also benefits well-established organizations. 

Asset management is changing quickly. ETFs and passive management are everywhere. 

Younger generations avoid investment advisors and mutual funds. Regulation evolves quickly. The global epidemic proved that portfolio managers and traders need not be co-located. 

Asset managers of all sizes are rethinking their operations to find an ideal future state. The trading desk is under review. Does the trading desk add alpha? Does this function raise money? Are trading desks full? For many, it’s challenging to declare in-house export documentation services are vital and to prove they generate alpha. Hyper-scale asset servicers often handle these tasks better than in-house. Trading is a scale business; therefore, what will yield the best results? 

3. Myth: Jobs will be lost. 

Reality: Many asset managers believe they derive little benefit from trading, while they do from the dealers. 

Talent is being re-tooled, not displaced. Head of trading may find their functions redundant and become head of trading oversight. We believe regulators and asset managers/owners will view this positively from a control and risk/profit/loss viewpoint. Who better to fill this role than a pro? A document preparation software in place will change the face of the trading documentation with so much added ease that the firms will be free to seek bigger things. 

4. Myth: Relationships and connectivity are lost. 

 

Reality: 1+2=3. When combined with the Outsourced Trade Service provider’s bigger set of relationships and trading volume, the asset manager’s relationships and connectedness improve. 

Some asset managers worry about losing years of contacts, know-how, and competence in trading specific markets or instruments, which could hurt client outcomes. Many outsourcing companies are aware of this and strive to show clients that they improve their connections, not replace them. 

Clients leverage global teams of skilled traders, many with buy-side experience, with well-established relationships. Trade Cost Analysis (“TCA”) measures trading performance, providing comfort.

5. Myth: The transition won’t be disruptive. 

Reality: With the proper transition plan, Outsourced Trade Service is manageable. 

A provider’s implementation process must support a long-term outsourced trading relationship. The implementation should begin with a rigorous discovery phase to understand the present trading touchpoints across all sections of the asset management firm, including investment choice, compliance and risk, trade routing, reporting, and settlement. 

Outsourced Trade Service providers should design the relationship’s future state and service components. It can ensure a smooth transfer from a heritage desk to an outsourced trading service, minimizing client investment process disruption. 

Closing Words-

Work-from-home protocols have debunked the apparent need for proximity between the portfolio manager and trader. Outsourced Trade Service was once considered a defensive, reactionary technique. 

Still, attention has switched to its additional benefits, such as aiding risk management, streamlining processes, boosting governance, and improving operational and technological resilience. Many asset managers consider outsourced trading as a proactive, future-focused option. 

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