State Street: Asset Managers Are Misinformed About Outsourced Trading

Costs and control are big worries that aren’t warranted.


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More professional investors should outsource their trading and State Street says now it has the research to prove it.

Last year, State Street interviewed dozens of asset managers about outsourced trading (which State Street offers) and those interactions fueled what it already suspected, that many more firms would benefit from trusting their execution to a third party. But State Street wanted proof, so it surveyed 300 institutional investors in January and published a follow-up report Wednesday.

The results were clear: The vast majority of asset managers that already outsource part or all of their trading are satisfied with the benefits. The asset managers that aren’t outsourcing trading are likely to benefit, too, but they are misinformed about the practice and choose not to do it.

“We need more education in the industry,” Dan Morgan, a senior managing director and the global head of Portfolio Solutions at State Street, told Institutional Investor.

Out of the asset managers surveyed, 241 already outsource some or all of their trading and 79 percent of them said they were either “satisfied” or “very satisfied” with it. The percentage satisfied are even higher for managers based in Europe, the Middle East and Africa (83 percent) and those with funds that have more than $50 billion in assets (81 percent). The high satisfaction levels can be attributed to a few things: 55 percent said their trading was more efficient, 33 percent said it helped them reduce costs, and more than 80 percent reported improved performance of some kind. Seventy percent also reported improved risk management after outsourcing their trading.

Eight in 10 firms that outsource their trading do so for only one or two asset classes. But the majority said they plan to expand their outsourcing to others in the coming years, according to State Street’s survey. None of the respondents outsourcing said they planned to reduce the practice in the coming five years.


“Our hypothesis was that [satisfaction] was going to be a high number just based on our client base and our experience in the marketplace with users. But I think it’s fantastic to get that confirmed in the data,” Morgan said.

The findings are going to be a powerful tool during the second half of this year, when State Street expects to continue growing its business, Morgan said.

Out of the potential outsourcers surveyed, 61 percent were concerned about cost effectiveness, 56 percent were worried about a loss of control, and 56 admitted that they didn’t understand what the benefits were.

The overall perception is that in-house trading saves costs and is more effective but the report suggests that is not the case for most asset managers. They aren’t giving up the control they think they are either. Almost every outsourced trading relationship is customized in at least some way, Morgan explained.

Most of the survey respondents that are outsourcing have also only done it from zero to four years. Adoption is at a very early stage.

“There’s still a ton of runway,” Morgan said. “From my perspective, that’s an extremely bullish signal for the industry and I was extremely pleased to see those results. But it’s also clear from the potential users, which is about 20 percent of the dataset, that there truly is an education opportunity…to really evangelize the distinct benefits that we see, and the survey respondents confirmed, in the data.”