Decades ago, global regulators mandated the segregation of duties, prompting investment managers to separate their trading desks—both organisationally and physically—and limit access to the trading floor. This shift not only reshaped front-office practices but also signalled a broader trend toward function separation across the industry.
Back-office outsourcing, which gained traction in the 1990s, serves as another example, as firms increasingly sought to standardise and commoditise operations. Since then, outsourced middle office functions have reached maturity, with major service providers extending their value propositions all the way to the secured door of the dealing desk, running everything post-trade. In contrast, outsourced trading has only recently gained serious traction, with firms increasingly focused on operational cost savings. A key driver of this shift is the continued reliance on significant human input at the dealing desk, due to historically underdeveloped core trading technology.
Market sentiment has changed significantly in the last five years with both fintechs and service providers coming to market with now-mature offerings for investment managers to outsource trading functions.
As with any outsourcing opportunity, there are recent casualties with lessons for the market and a wide variety of models and methods available. With the market for outsourced trading taking shape there are not only preconceptions to dispel about what’s on offer but also the cost-saving opportunities for small investment managers, alternative funds, and wealth managers to consider.
How Fintech Innovations are Transforming Trade Execution and Automating Deal Flows
Recent improvements in execution management technology, which ease counterparty participation and expand the range of instruments that can be executed electronically, have allowed for automating many aspects of dealing.
Start-ups are leveraging these advances to package their trading capabilities into full-service solutions that manage trade flows from order release through confirmation. Cloud infrastructure alleviates concerns about platform performance and transaction volumes, while standardised languages and workflows facilitate seamless trade communications, ensuring they are sent and understood externally, with exceptions queued and resolved as they occur.
However, these firms’ focus on technology platforms over professional services means investment managers must have a high degree of confidence in their order release mechanisms and ensure that scenarios requiring special instructions to the dealing desk are avoided.
Fintech solutions in the trading space seek to automate the most, forgive the expression, “automatable” deals and want speed and efficiency in execution. Though not entirely a play for cost savings by the manager, these providers’ offerings look for scale, which may limit customisation options.
Major Service Providers Are Entering the Outsourced Trading Market
At the other end of the market, large service providers are advancing into the outsourced trading space as a logical next step in their mission to support investment managers across all post-order release functions.
Having already invested in much of the electronic infrastructure, these firms are positioning themselves as providers of “institutional-grade” services, capable not only of handling operational volumes but also providing breadth and depth in expertise and human capital across instrument types. To be sure, the “human touch” is a major differentiator for these firms when compared to fintech competitors.
These providers also demonstrate a clear separation between their trading and capital markets business, pitching their outsourcing capability much in the same way as traditional players in the space; seeking to entrench a relationship that evolves and—they hope—expands into other functions. Notably, these providers’ ability to manage regulatory trade reporting stands out, addressing a significant, resource-intensive drain for many investment managers.
How Customised Trading Solutions Help Investment Managers Reduce Costs and Manage Risk
Investment management is consolidating through mergers while simultaneously fragmenting, as managers go out on their own or streamline product offerings to differentiate themselves.
For small and start-up investment managers, as well as alternative funds, leveraging third-party dealing expertise offers clear advantages: reduced upfront investment costs, a shift from fixed to variable cost structures, and mitigation of key person risk in a segment reliant on highly specialised, in-demand, and expensive talent. Similarly, a specialist manager of high-yield fixed income products could reap the benefits of a major institutional trading desk not only by avoiding start-up costs, but also by capitalising on existing know-how in the market.
Further, some sectors within the industry may find their own in-house dealing desks underutilised. An asset owner making large yet infrequent trades, or a wealth manager focused primarily on fund dealing with some auxiliary services such as quarterly hedging, may struggle to retain the interest or capacity of a highly qualified trading desk. In these instances, the outsourced trading provider can mobilise its own type of just-in-time delivery, deploying specialised resources that suit the requirements and trading patterns of all clients individually.
Outsourced trading is at a favourable inflection point, no longer an emerging concept but a viable, scalable solution. Early adopter concerns are being overtaken by clear signs of market maturity. As investment firms continue to define the elusive, “what does good look like?” in a service model, outsourced trading may just stand out as a logical next step. With an industry doubling down on core capabilities and looking to extract more value from external partners, the case for outsourced trading has become hard to ignore.
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