A service launched this week that lets UK asset managers outsource trading is a natural, yet significant progression and will be vital for smaller buy-side firms to keep apace with technology and regulatory change, an executive leading the service believes.
BNP Paribas Securities Services can now execute orders directly from portfolio managers (PMs) of buy-side firms, removing the need for infrastructure or traders, through the Dealing Services solution, rolled out in the UK this week.
Carl James, who will oversee the business as managing director of BNP Paribas Dealing Services UK, cites the increased costs due to new trading rules and the need to upgrade technology more frequently as primary drivers behind the outsourcing trend.
"This outsourced trading desk will ideally appeal to smaller asset managers with three to five traders to outsource all of their dealing, or to buy-side firms about to install or update their dealing platform," James told theTRADEnews.com.
"They can save on the expense of doing this by outsourcing to Dealing Services with our up-to-date technology. Larger buy-side firms are likely to outsource a portion of their trading - either by geography or asset class, for example outsourcing their Asian trading to Dealing Services' HK desk," he said.
Trading services will be available for all asset classes via a global network if experienced dealing teams, but equities is expected to have the greatest uptake of the service, says James, due largely to market structure evolution of recent years.
Although incorporated into BNP Paribas Securities Services, the French bank's custodian arm, the Dealing Services team and infrastructure were previously part of FIN'AMS, an internal dealing unit that served a variety of fund managers within BNP Paribas Investment Partners. James was previously head of fixed income and FX at BNP Paribas Investment Partners.
The impact of MiFID in 2007 on equity market competition fundamentally shifted the needs of asset managers, and James believes similar trends are now well-established in bond trading.
"Equities trading has become increasingly complex with new regulation and technology increasing market fragmentation, while fixed income trading has undergone a similar fragmentation of liquidity since 2008, which has further stretched buy-side resources," he said.
The service, which is already available for Paris and Hong Kong-based asset managers, is broker neutral.
Orders generated by PMs are sent via FIX or over a web-based platform directly into Dealing Services' order management system (OMS). The OMS is programmed for each specific client to accommodate broker and benchmark preferences. PMs can also discuss their orders with the executing desk.
For buy-side firms, outsourcing of investment ands trading operations has traditionally been restricted to middle- and back-office processes on account of the need for a close working relationship between trader and PM to optimise the returns generated by investment ideas. In addition to measurable contributions to minimising trading costs, issues of relationship building and the value of adding 'colour' to the investment process by having an internal resource interacting with markets are among the barriers to outsourcing often cited by buy-side firms.
James, however, labels this latest step inevitable, reinforced by lower volumes of recent years and a plethora of impending regulation in Europe, such as MiFID II and the European market infrastructure regulation.