Is there a misconception brewing within the industry?
There is a misconception that any executing broker can call themselves an outsourced trading “OT” provider. Firms may market their services as being OT, but are often merely offering an agency trading desk to capture commissions for services offered. This service can only be delivered with the proper infrustructure and coverage model in place, with the ability to route orders in a way that fits the fund’s needs. Differentiating the service offerings is becoming very critical for managers.
In addition to trading, the service delivers a robust coverage model with robust communication with the client about their portfolios, portfolio holdings, sector and market news. The service also delivers operational and technological responsibilities, which reduce a fund’s pre- and post-trade lift as well as the ability to manage the client’s OMS. It also provides clients with a robust set of reporting capabilities and client service from a settlement perspective.
What are some lesser-known details that your approach to outsourced trading is solving for?
Cost efficiency
The OT function allows managers to leverage the economies of scale that we have built over the last decade – multi-asset class trading infrastructure, technology, and personnel across multiple trading time zones.
Anonymity and attribution
A proper OT model allows for complete anonymity of client orders, and is able to get funds the commisison attribution for the trades they want executed with the brokers providing them services. This is especially true for funds who may be large owners of names (e.g. activist) who appreciate that they can enter or exit names without the brokerage community knowing that they are active in the name.
Access to brokers and liquidity
With connectivity to hundreds of global brokers and liquidity venues, access to liquidity can be maximised, clients piggyback the benefit of all this market and liquidity access that they would not have themselves, simply because no one fund typically sets up as many liquidity venues or broker relationships that an outsourced trading provider does.
Working inside a client OMS
An outsourced firm should offer the ability to manage the client OMS, which includes staging orders, handling pre-trade checks, monitoring all positions, routing to various brokers, consolidating trade files and managing the end of day process.
Transparency and LP adoption
The evolving expectations of asset owners and investors are influencing the adoption of outsourced trading. Transparency, best execution, and fiduciary responsibility are now paramount concerns. We are equipped to meet these demands and can provide detailed reporting and analytics that demonstrate compliance with best execution standards. This level of transparency not only satisfies regulatory requirements but also builds trust with investors, enhancing the overall attractiveness of outsourced trading solutions.
Trade cost analysis
It is especially important for funds to receive a transaction cost analysis (TCA) report at a minimum once a quarter, run by a third party. This is a fund’s scorecard for execution performance.
Minimising potential conflict
JonesTrading is an agency-only business. OT providers with proprietary trading desks, internal dark pools, self-clearing broker dealers, internal securities lending desks, and fundamental research offerings all could create potential conflict of interest for the manager. Knowing that your OT provider is never trading “against you” is peace of mind for most managers.
Reduced counterparties and FIX lines
A robust OT provider has built connectivity to hundreds of brokers and venues. The fewer brokers that a fund faces for clearing, the better from a workflow and post-trade perspective. It also helps to minimise counterparty risk concerns for the GP’s and LP’s during their due diligence process. Outsourced trading also consolidates the settlement process and mitigates operational strain by leveraging the back- and middle-office team to take on those functions.
Commission management and reporting portal
OT helps fund managers budget brokers and ensure the right types of orders are going to those brokers, including the prime brokers. Jones has built a proprietary OT portal that provides clients with a depth of information on trading activity, counterparties, commission wallet and best execution. OT providers are also able to function as a soft dollar aggregator.
What are the benefits of also having a prime brokerage offering?
While many of our OT and PB clients do not overlap, we have found that having a PB offering available can often become a very valuable benefit to the fund manager who is reviewing OT providers. By providing custody and prime brokerage services, the client can gain tremendous amounts of scale from an operational, support, and commercial perspective.
As PBs have increasing revenue expectations from their clients, the hiring of a separate OT firm can sometimes present an issue for funds who may be looking to separate the two functions. We have the ability to look at the client and deliver a complete solution, if needed. The OT client also opens the door to other firm resources that are typically accessed via the PBs such as capital introductions. Coversely, our PB clients get access to a true OT desk for execution support.
