Re: A message to the buy-side on outsourced trading

Outsourced trading provider Tourmaline responds to the buy-side head trader who recently penned a stark warning on the rise of front-office outsourcing.

We at Tourmaline Partners believe that this anonymously-written article is a misrepresentation of what outsourced trading does, and what its benefits are, particularly for the buy-side. The author seems unaware that outsourced trading serves a critical role for firms of all sizes, from the smaller funds and fund managers who otherwise can’t afford to be covered by the array of brokers necessary to enter – let alone compete in – today’s fragmented landscape for liquidity, to (more recently) the larger players who use outsourced trading strategically to complement their existing sell-side relationships.

Far from the narrowly-focused vendors that the editorial seems to describe, Tourmaline Partners is a trading solutions firm providing outsourced, supplemental and customised trading services to asset managers of all sizes, since 2011. While the anonymous writer suggests that outsourced trading desks are staffed by inexperienced sales traders, Tourmaline’s team comprises 30 traders averaging 15+ years of experience each, most of whom have enjoyed distinguished buy-side careers. At one point the author questions whether outsourced trading firms would know how to act in a market correction; the majority of our traders have worked through both the dot-com bubble and the 2008 financial crisis. We would put the experience, market knowledge and service-first orientation of our trading team up against any buy- or sell-side firm. 

The thrust of the editorial is an assertion that outsourced trading is essentially a vehicle for asset managers to shift costs to funds. In reality, the benefits – in some cases the necessity – for a buy-side firm to use outsourced trading services often have nothing to do with transaction costs. We are responding to unique client needs stemming from big-picture, structural changes to the industry, including the need to solve complex workflow issues as well as address cost pressures. And it often includes access to expertise and markets that firms can’t obtain in any other way. In any case, our pricing is competitive and flexible to each client and transparent to all. We can be paid for by fund commissions and/or the management company directly.

Outsourced trading empowers the buy-side, it does not limit its reach or possibilities as the author suggests. We help our clients to address execution bandwidth issues, expand their reach, provide access to offshore markets and ‘away’ brokers, and help protect or uncover trading alpha, all of which is tracked and measured. We can attribute business for research credit or help clients navigate the marketplace with discretion and anonymity. We can’t speak for the competition, but unlike the conflicted service the author describes, Tourmaline is privately held and positioned to not compete with the sell-side in their core businesses of research, banking and prime brokerage.

The article further suggests that the broker networks, technology and compliance features of outsourced trading firms are suboptimal. That’s certainly not the case at our firm, where we trade in 50 global markets, are covered by over 400 sell-side brokers and employ over 40+ algo suites – which allow us to access liquidity at all major exchanges, dark pools and other off-exchange trading venues globally – on behalf of our clients. 

In the end, perhaps the biggest misconception in the article is that “outsourced trading” is somehow the cause of a shift underway in the capital markets. As a regulated broker-dealer serving global markets, we are intimately aware of the structural changes impacting our industry on both on the buy- and sell-sides. And we are sensitive to the disruption that these changes – in the form of regulation, technological advancements in trading and research, reduced commission wallets and passive management, to name a few – have caused. Our outsourced and supplemental trading provide solutions to these problems and a way forward for investors, via a spectrum of products and services that touch on every facet of trading, from order entry to commission management, from TCA to CRM data/analytics, and more.

I hope The TRADE readers – and maybe even the anonymous author – will take the time to reach out to us directly so that we can share our thoughts further and perhaps help their organisations. 

Aaron Hantman, CEO, Tourmaline Partners

Further responses to the anonymous buy-side article on outsourced trading will also be published in the next issue of The TRADE magazine.