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Outsourced trading gains prominence amid market volatility

3 minute read

While outsourced trading emerged as a defensive play for resource-conscious funds, the number one benefit reported by 1 in 2 current users is improved efficiency, new research has revealed.

New research has revealed an emerging move towards outsourced trading – a trend born post-financial crisis within mostly smaller hedge funds but one that flourished during the pandemic with the shift to hybrid work.

Namely, while asset managers once found the notion of remote work impossible, the value placed on face-to-face communication diminished fast with the onset of the pandemic, leading to a broader acceptance of outsourcing parts of the trading desk.

In more recent years, the trend has gained momentum with increased market volatility, rising regulation and costs, fee pressures, and the war on talent.

Today, State Street Corporation sees outsourced trading as an emerging strategy for financial institutions seeking to optimise their trading operations by outsourcing all or parts of the execution process.

State Street has provided clients with outsourced trading solutions since 2010 across the Americas, the Asia-Pacific, and the Middle East.

The firm last year announced the acquisition of CF Global Trading, a deal which saw it extend its ability to provide services to clients in the UK and the EU where State Street said outsourced trading is maturing the fastest.

Currently, State Street has trading desks in Boston, New York, Toronto, London, Lisbon, Hong Kong, and Sydney.

In its latest research paper, titled The outsourced trading advantage, based on a survey of 300 institutional investors from around the world, State Street has presented a strong case for outsourced trading.

According to the firm’s data, current users of outsourced trading report benefits such as increased efficiencies, reduced costs, and improved investment performance.

Among these early adopters, satisfaction is very high with 79 per cent noting they are either “satisfied” or “very satisfied”. This rises to 83 per cent in EMEA and 81 per cent among very large funds (those with AUM over $50 billion).

However, despite reporting that outsourced trading is increasing in prevalence among a select proportion of the market, State Street also found that barriers to adoption exist.

These include concerns around the cost effectiveness (61 per cent), loss of control over trading activities (56 per cent), and a lack of understanding about the benefits of outsourced trading (56 per cent).

State Street admitted that current adoption rates of outsourced trading are “relatively modest”, however, according to its findings, eight of the 10 current users intend to add more asset classes in the next five years.

Regarding asset class outsourcing, the firm found that fixed income is the most outsourced asset class among its 300 survey respondents with nearly half engaging an external desk, followed by foreign equities, derivatives, and domestic equities.

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.