Insight

It’s Time to Outsource Your Trading Desk

Apr 28, 2022

As a wealth manager, you know that maintaining an internal trading desk comes with certain costs. You’re paying a significant salary and bonus, as well as technology costs for the trader(s) to do their job. There are also hidden costs, like risk associated with concentrating the role to a single person or small group, along with other operational risks supporting trading and settlements.

If you’ve never compared those costs with the costs of outsourcing your trade desk, it’s time to explore that option. 

Firms that have outsourced trading have found that it adds no additional costs. If done correctly, it can provide a net savings, which can be passed on to a firm’s underlying clients.  Beyond cost, investment managers gain other benefits from outsourcing their trading desk. 

For example, trade settlement processes can be overly complex when multi-custodial firms execute block trades with several counterparties. Hiring an outsourced trade partner simplifies this process by clearing through a single executing broker (the outsourced desk).  This provides simplification of settlements and can be a major lift to operational overhead.

Another benefit is with the management of research budgets and “soft dollar” programs. Firms operating their own trading desks commonly engage in some type of soft dollar commission structure to help pay for valuable research and investment tools, like Bloomberg terminals. Management of such programs can be both manual and tedious. However, the good news is that outsourced trading desks can handle this on a firm’s behalf. Offering tools like dashboards to review and approve invoices and actively manage the bundled research budget, costs can be better optimized and result in savings to clients in the form of lower commissions. 

Finally, an outsourced trading desk can effectively be an extension of your team, as it typically executes trades “as agent” on your behalf.  Additionally, your outsourced trading team expands your access to liquidity, as it discreetly implements your investment decisions to prevent information leakage. Best execution is the goal.  You’re improving your odds with an experienced partner. 

At this point, you’re probably feeling like there’s a catch. After all, it takes time to transition away from an internal trading desk. Not really. Once you select the right partner, integration shouldn’t be overly complex. Most providers can integrate with your existing technology, and you still have the flexibility to use your own order management system (OMS). Other than establishing a FIX connection with your partner, it’s not that difficult. Working with your partner to define the operational process from order to execution, and your initial implementation could be completed within a few weeks. 

In our work in the industry, we’re seeing a trend toward outsourced trading. Given the benefits, it’s easy to understand why firms are making this decision. Outsourcing works when there is no need to reinvent the wheel for a particular function. We’ve found that wealth management firms who have switched from internal to outsourced desks are happy with their decision. It’s time for you to take a look.

Ready to explore outsource trading desk options? Get in touch and we can take you through the process.

Latest Insights