Time to Outsource Buy-Side Dealers?

I recently saw that AXA Investment Managers is now offering trading services to small asset managers who lack the scale to provide this in-house. This is a logical step in the operational configuration of many asset management firms and something I have been surprised has not become more common in recent years. Given the growing cost of maintaining a buy-side dealing operation, I would have expected many firms to consider to what degree this function brings competitive advantage to their brand. In this age of electronic trading and improving best execution matrices, for many liquid asset classes, dealing internally must be showing diminishing rates of return for many firms.

I also believe that the increasing pressure to separate research from dealing commissions and the need to have more transparent fees around this service will, in time, encourage more firms to consider outsourcing some or all elements of their dealing function. Increasingly the cost and value of the dealing function will need to become more apparent to the end client, and some firms (particularly passive managers) will need to carefully consider if this is really part of their core competence. I do not foresee that this shift will be restricted to the smaller players either. As the industry starts to view some elements of dealing as more of a commodity, they will look for greater shared cost of ownership across the peer group.

Perhaps, as with other areas of outsourcing in our sector, one of the constraints here is the lack of credible providers and proven operating models. As the industry increasingly polarises, however, with the big global players offering range, scale and reach and the boutiques bringing specialism and focus, it is surely inevitable that the buy-side dealing desk will become either a niche function aimed at a narrow asset range or will need to be large enough to provide scale of returns.

You have to ask, if you were starting an asset management firm today, would you create your own dealing function, and if so for all asset classes? To my mind, the answer is no longer obvious.