Two heads of trading desk invited to speak on stage at TradeTech 2024 were posed with a bombshell question at the end of their panel – whether or not outsourcing the trading desk achieves the same outcomes as keeping trading inhouse.
One speaker – who confirmed their firm’s trading desk setup and flow lends itself more to high touch trading – focused their answer on alpha retention.
Noted earlier in the discussion, this speaker highlighted the trading desk’s role within a wider financial organisation as a retainer of alpha, highlighting the importance of this in the overall investment process.
“The trading desk used to be a cog in the machine as opposed to the engine itself,” they said. “When assessing the desk, it would be a case of being congratulated on achieving minimal errors. I want that to move forward and show how much alpha we’re retaining.”
When asked if outsourcing the trading desk could achieve similar or better outcomes, the panellist in question’s answer was clear cut: “There’s the element of alpha retention. Understanding the clients and the markets you trade is essential. You need to think of the trading desk as the engine that drives the room. Those conversations around news flow and pricing are central. An active manager needs an active desk.”
The head of trading made the argument for potential levels of “co-sourcing” on the desk, however, noting workflows that leverage experience from external sources in order to achieve scale.
The other panellist – also a buy-side head of trading – corroborated this view.
“There will be cases for outsourcing,” they said. “Our trading group are viewed as part of the investment process with interaction and culture aligned. That’s difficult to replicate using outsourced trading.”
Said panellist stressed the importance of longevity and relationships on the desk – something harder to achieve when outsourcing trading to an external source.
“If you’ve got people in and out it’s dislodging,” they explained.
Alongside the question of outsourcing, the pair were asked their thoughts on other developments seen on the trading desk in recent years. Among said trends were increased automation and the potential for asset classes to overlap and learn from one another.
One panellist noted the usefulness of understanding fixed income workflows in order to navigate changing liquidity patterns in the equities markets.
The growing bilateral segment in Europe has proved a central topic of discussion for day one of TradeTech 2024. Many panellists across this morning’s market structure and liquidity panels noted the trend with varying levels of caution and interest, with many suggesting regulators should focus more on these areas of trading going forward.
For one speaker on today’s panel, fixed income workflows lend themselves well to achieving success in this new environment.
“Utilisation of balance sheet and doing more with fewer counterparties – the over the counter (OTC) market can help with navigating this as these markets have been doing this for a number of years,” they said.