As the outsourced trading movement continues to gain traction, an increasing number of respondents in The TRADE’s most recent survey reported they had migrated to a full outsourcing model rather than the hybrid approach of co-sourcing.
Despite co-sourcing – where trading desks outsource some of their activity in an asset class or timezone – being the topic du jour of outsourced trading in recent years, The TRADE’s most recent data suggests some may be converting that model to going all-in on the concept.
More is more?
The TRADE’s findings showed that the percentage of those opting for full outsourcing rose from 42% to 47% in the most recent survey findings (2024), while ‘co-sourcing’ dropped from 49% to 45%.
Speaking to The TRADE, Dean Gray, head of EMEA outsourced trading at Jefferies shared insight from the firm’s own experience: “To date, smaller and mid-sized managers tend to prefer a full outsourced model. However, we are also seeing a shift from our larger clients, who want to leverage a superior trading infrastructure for a particular asset class or regional capability, towards a broader coverage model.”
Read more – Outsourced trading: Easy to do, difficult to get right
The trend could mark the next frontier in outsourced trading as those who have dipped their toe into using a third-party have seen the benefits and therefore decide to take the full plunge.
“The TRADE’s finding of a shift from co-sourcing to full outsourcing is significant and supports what we have found to be true. Once clients try outsourced trading, they see the benefits and continue to expand their OT capabilities,” Dan Morgan, global head of portfolio solutions at State Street tells The TRADE.
There’s no doubt outsourced trading is picking up among the buy-side, with Liontrust Asset Management the most recent outfit to declare it is exploring outsourcing parts of its trading to BNY.
This announcement builds on news from December that Avanza Fonder had outsourced to Northern Trust, while UK-based asset manager Artemis also selected the same firm to provide outsourced trading services for its equities and derivatives activity, effective January 2025.
BNY itself won a major deal in March 2024 when it agreed to deliver Goldman Sachs Asset Management global trade execution services in EMEA, the US and APAC markets across fixed income, FX, derivatives and ETFs.
Speaking to The TRADE, Kevin O’Connor, global head of sales, portfolio solutions at State Street, said: “I’m not surprised by the TRADE’s findings. A survey conducted by State Street in 2024 [which included 300 institutional investors from around the world] revealed that the vast majority of firms already outsourcing were satisfied or very satisfied with their experience and planned to increase usage. So the TRADE’s finding really reinforces what our research shows and that’s very encouraging.”
The size of the pie is certainly growing, but our data suggests the percentage of those opting for fully outsourcing could be growing – something which goes against the narrative from many service providers over the past 24 months.
While some firms are starting out with the co-sourcing model, the percentage increase could be down to decision makers seeing the benefits of outsourced trading play out and therefore upgrading to a fully outsourced model over time.
State Street shared further insight, highlighting that when potential adopters were asked what was holding them back when it came to outsourcing trading, a common response was lack of understanding around the benefits.
“That makes our findings around the benefits of outsourced trading reported by current users even more important. It also makes the TRADE’s finding of a shift to full outsourcing a new, important consideration for potential users”.
Worth it?
Elsewhere, for the 2024 survey, the TRADE also further enhanced its methodology, and for the first time delved into exactly how much value outsourced trading clients believe these relationships hold once the cost of onboarding, operating and running of the relationship has been taken into account – ‘cost vs value’. Around 43% of respondents rated their providers as ‘excellent’ in this category.
Relatedly, the survey found that ‘pursuing growth while controlling cost’ was the second most popular contributing factor towards the decision to outsource, according to the asset managers and hedge funds.
Almost 40% highlighted it as the specific problem looking to be addressed through outsourcing, beaten only – understandably – by addressing operational (in)efficiency (73%).
As Chris Blackburn, head of UBS’ execution hub, EMEA, previously explained: “Existing trading desks of larger asset managers are increasingly using [the hub] to add particular capabilities or capacity where they determine that it does not make sense for them to build in-house.”
Could the grass be greener?
The survey also investigated how likely outsourced trading clients were to switch up their current set up – wherein a significant 55% confirmed that they had not considered a change of provider.
However, just under half merely declined from responding here – suggesting an equivocal inference of what’s potentially yet to come.
“If you look at the last couple of years, there has been an evolutionary rate of acceptance which has accelerated recently. It suggests that the concept of outsourcing or supplemental trading has become institutionalised,” explained Aaron Hantman, chief executive at Tourmaline, speaking to The TRADE last year.