There are a number of misconceptions about outsourced trading, and the best place to begin is with the term itself. The word ‘outsourced’ implies a complex project that replaces a trading desk. In reality, a large portion of the market is actually made up of established internal trading desks using such offerings to fill gaps in their own capabilities, or simply to add capacity so they can focus efforts on where they can add most value.
Whether it is stepping in to cover different time zones, trade alternate asset classes, extend broker networks or simply provide absence cover, third-party providers work alongside existing execution desks equipping their traders to do more with less.
The terminology used in the space can be interchangeable, but whether you call it supplemental execution, co-sourcing or a hybrid model, the primary objective is to help trading desks perform and deliver on targets at a time when there are increasing competing demands on heads of trading, constant cost pressures and evolving regulations.
UBS Execution Hub is in a unique position. Whilst they now service Hedge Funds and Asset Managers of all sizes, the original foundation of the business was built on managing execution for UBS Global Wealth Management, the leading and only truly global wealth manager*, and they have provided this type of buy side execution capability to external clients for over two decades. As a result, the sheer volumes that it executes with its broker network puts it automatically in the top tier for coverage.
On top of this, the unit has prioritised bolstering its buy-side DNA within the team, as Jonathan Slavin, head of Americas, UBS Execution Hub, explains.
“If you are going to rely on a partner firm for some part of your buy-side execution process, you need full confidence that the people performing that process have the knowledge and the experience to do so,” says Slavin. “We’ve predominantly hired extremely experienced hedge fund and institutional traders who have seen all the different parts of the cycle. This gives us the vantage point of buy-side execution staff who have experience managing both portfolio managers and getting the best out of a broker network.”
While there can be an assumption that outsourced trading – or the aforementioned supplemental approach – is targeted at smaller hedge funds who perhaps have assets under management which don’t yield a sufficient fee to justify having a dedicated execution desk, there is mounting evidence that larger clients are seeing the value of engaging in this model.
Asset managers and hedge funds in the $50 billion plus category are exploring the concept and looking for partners they can use to augment and improve their existing execution functions, while insurance companies, who typically have sophisticated trading functions, are also moving towards the trend.
This mindset shift among those larger firms is being accelerated by having a large investment bank operating in the space with other ancillary services that can be delivered, such as research, financing and capital consulting/ introduction. There is a growing importance in having a global provider with teams in place across all time zones, along with being truly multi-asset.
Chris Blackburn, head of EMEA, UBS Execution Hub observes “UBS Execution Hub has helped open up outsourced trading as an option for larger firms. Previously, the market was mainly populated by relatively smaller, often independent firms, with a few custodians and prime broking boutiques in the mix. What we are seeing is that a large, Tier 1 bulge bracket financial institution, stepping into the market, with our long history of specialising in buy side execution, and the well- established execution relationships that we have with both brokers and asset managers, has given comfort to a lot of – particularly larger – firms.”
With respect to onboarding, Blackburn dispels the myth that this requires a big project. “Most of our clients already have KYC in place with UBS so it typically takes just a few days to add Execution Hub coverage. Our record was within 24 hours.”
“We have very strong relationships with our broker networks,” he points out. “The scale of the flows that we execute with the street positions UBS Execution Hub as a significant client for our brokers and we are given a high level of service as a result. Whether this is access to IOIs, block crossing opportunities, principal pricing or market colour, we are looked after as a top-tier client. We think that is a differentiator for us because that higher level of service that we receive from our brokers can be reflected in turn with a higher level of service to our clients.”
The final misconception to dispel is the criticality of proximity between the execution staff and portfolio managers – a myth firmly busted during the pandemic. This, along with new provider entrants, regulation and the cost/fee pressures which the buy-side face, has made outsourced – or supplemental – trading a clearly beneficial move for many firms as the benefits of liquidity, data and technology outweigh the importance of being in the same physical location.
“On the benefits of data and technology, this is another area where UBS Execution Hub is differentiating through investment in a team of quants who have built an AI-driven, machine learning model that leverages UBS’s vast data set of both wealth management and asset management executions,” says Blackburn. “We make our model available to clients so they don’t need to duplicate this work.”
“Up until the pandemic there was very much the thought that you needed to have sight of the trader, be sitting next to them,” says Nicole Javellana, head of APAC, UBS Execution Hub. “But what we saw is execution desks able to function very effectively, even where there is some distance between the person giving the order and the person executing the order.”
“How we measure our success is if our clients regard us and treat us as an extension of their own team. The fact that we’re in a different building or indeed working for a different organisation doesn’t impact the high quality of execution provided.”
As the outsourced trading space has matured, so too are these misconceptions within the trading community fading away, sparking a new wave of interest among those who had not considered the service before.
*UBS data as of Q2 2023
