The business practice of outsourcing has long been associated with efficiency. However, when it comes to the trading of financial assets, outsourcing has not played a major role. Now that may be changing.
As institutional investors focus on growth and product innovation in a competitive marketplace, they are expanding into new asset classes and geographies, all while keeping up with regulatory and technological developments. A growing number are outsourcing their trading needs to facilitate that expansion and innovation while still prioritising efficiencies.
It’s not just small institutional investors who are turning to outsourced trading solutions. Large institutional investors too are increasingly looking for a trading services partner who can meet their rapidly changing needs.
How is outsourced trading being used as a lever for growth?
In today’s competitive environment, firms are thinking long and hard about what really differentiates them in the market place, what contributes towards client alpha outcomes, what drives growth, and are allocating their talent and resources accordingly.
For many, that could mean greater resources focused on stock selection, managing local and international distribution channels or expanding the range of client solutions. It could also mean less investment in trading and administrative functions as clients move into new markets and asset classes where they potentially lack internal expertise. Outsourcing trading allows firms to leverage another institution’s investments in people and technology, and shift internal resources to support their competitive advantage and overall growth strategy.
What’s more, growing financial innovation is a key trend in the industry. As a result, firms seek exposure to new assets, new regions, and at the same time need to be flexible and nimble to take advantage of market shifts. Outsourced trading can expand a firm’s capabilities and help them adapt quickly to changing market conditions.
For example, a domestically focused investor in the United States, United Kingdom or Australia may wish to gain exposure and execute securities in an emerging market such as South Korea. This market is restricted and access to local market participants is essential to source liquidity and execute trades. Institutional investors can then leverage a global financial institution for its access to liquidity and experience in markets like South Korea.
Liquidity is also a priority in today’s uncertain market environment and outsourced trading can provide extensive access to markets, counterparties and liquidity venues. For example, when trading small- and mid-cap stocks, we often see clients wanting to trade securities where the order quantity represents hundreds of percent of average daily volume. In these circumstances, accessing block liquidity from a range of specialists as well as large investment banks can be essential to successful execution outcomes.
Finally, outsourced trading provides access to essential partners, which can help in changing regulatory environments. For example, with the T+1 transition in the US and Canada scheduled for May 28, 2024, the shortened settlement cycle has implications for trade allocations/settlement, foreign exchange (FX) settlements, securities lending, liquidity management and more. Outsourced trading with local operational teams and automated FX programs can help with the new settlement cycles and associated impacts.
Additionally, partnerships also facilitate tech adoption, a key competitive advantage in today’s market place. For example, customers of State Street have leveraged outsourced trading as part of a wider technology and outsourcing arrangement to enable access to the front-, middle- and back-office, and utilised State Street Alpha® for straight-through processing and full trade lifecycle support.
Today, outsourced trading is having a moment as institutional investor interest grows and, that momentum is likely to continue in the future. Given the major trends facing the industry — technological adoption and growing financial innovation — outsourcing seems like a no-regret move for many institutional investors as they take advantage of more collaboration and partnerships to focus on their primary objective of maximising investment returns.