With the holidays upon us and requests for various Pinterest inspired cookies piling up in my household once again, I’m reminded of a blog that I wrote during the holidays three years ago: The Middle Office Test Kitchen. For those that didn’t read it (or can’t remember back 3 years), I mentioned a trend that we should expect to see an uptick in – service provider expansion of services into the front office.
Front office services have been a growing trend for service providers in the last few years. Between acquisitions of front office platforms by middle and back office providers, “Front Office Services” groups popping up at service providers and new services being launched, it’s an exciting time for an area that historically has been managed internally on vendor technology and even spreadsheets.
One area of particular interest that seems to be popping up most recently in conversations with the service provider community is the concept of outsourced trade execution. With a la carte or unbundled commission schedules becoming more commonplace as a result of MiFid II reporting requirements, some service providers are seizing the opportunity to commoditize a function that has historically been a differentiator, and not an inexpensive one.
Between the cost of procuring, implementing and maintaining trading technology, and hiring and keeping talent on trading desks, an outsourced trade execution function may be appealing to those looking to decrease costs of operations and simplify their operating model. Some service providers are even offering this service bundled with trade matching and settlement which offers further cost reduction for investment managers.
While I wouldn’t expect to see outsourcing of the “secret sauce” embraced by any front office, clever service providers are offering a simple solution that realistically could be incorporated into front office operating models without disruption to the investment process. Some asset managers are already taking advantage of this service, with service providers reporting many wins and strong pipelines. Time will tell if the service is fully baked enough to become mainstream but if the history of outsourcing tells us anything, this is a trend we will likely see get more traction in 2019 and beyond.