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For Asset Managers, Outsourcing Trading Was ‘Unthinkable’ — Until Now

Institutional investors are beginning to view outsourcing as a viable alternative to in-house trading desks, according to Greenwich Associates.

Even though many asset managers outsource non-investment functions, like fund accounting and administration, buy-side firms have so far largely kept trading operations in-house. That may be starting to change, according to a new report from Greenwich Associates.

In a survey of buy-side equity traders, the financial services research firm found that institutional investors are coming around to the idea of outsourcing their trading desks. Out of the 84 traders polled, 32 percent called outsourced trading desks a “good solution” for managing flow and achieving the best execution, up from 20 percent in last year’s survey.

Just 29 percent expressed the view that outsourcing trading was “only for small or new funds,” down from more than 45 percent last year.

“Competitive pressures and increasingly complex markets are driving many institutional investors to concentrate their attention and resources on the things they do best, while looking for opportunities to outsource ‘non-core’ activities,” Greenwich Associates said Thursday in a statement on the report. “This effort is causing some buy-side firms to contemplate a previously unthinkable option: outsourcing their trading desks.”

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According to Greenwich Associates, less than 10 percent of institutional investors currently outsource their trading desks. The firm’s survey found that international trading is the most commonly outsourced, followed by foreign exchange trading. None of the respondents reported outsourcing their more complex derivatives trading, according to the report.

This is despite the fact that 32 percent of respondents said their firms were set up “very well” to handle derivatives trading, versus the 71 percent who said the same about international trading. Shane Swanson, senior analyst at Greenwich and the report’s author, wrote that outsourcing international trading may have caught on first because “firms that are well versed in some regions may not be prepared to take on every challenge globally, and outsourced desks can fill in those gaps.”

While the survey focused on equity trading, Swanson noted that fixed-income trading could be another potential target for outsourcing, as the electronification of the corporate bond market and regulatory focus on U.S. Treasury trading have resulted in higher complexity.

“As more buy-side firms realize that they don’t have the resources to cover every aspect of execution, clearing, settlement, and regulation, more of these firms will consider whether it makes sense to outsource their trading desks and reallocate resources to their areas of expertise,” Swanson said in the statement from Greenwich.

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