Thanks to a wide range of cost and operational pressures, buy-side firms of all descriptions have embraced outsourced trading. By leaning on these specialist providers, funds can achieve more comprehensive geographic or asset class coverage, maintain anonymity, increase sell-side access and more.
Recently, LiquidityBook COO Sayant Chatterjee took the stage at the 89th Annual STA Market Structure Conference to moderate a panel on this fast-growing industry segment, featuring senior executives from three leading providers: CAPIS, Tourmaline Partners and UBS. The panel discussed a wide range of topics, including key drivers, contrasting business models and the overall evolution of the space.
“Outsourced trading began for economic reasons — newly launched hedge funds didn’t want to pay for a trade desk,” said Tim O’Halloran, Managing Director at Tourmaline. “Now it’s less ‘outsourced trading’ and more ‘supplemental trading.’ The drivers now are workflow improvement and alpha.”
This surge in demand has given rise to a host of new entrants to the outsourced trading space, while many more established players have significantly scaled their business – and that means we at LiquidityBook are answering more questions about the unique technology needs of outsourced trading providers than ever before.
Outsourced trading firms occupy a unique position in the market. Most providers trade back-to-back, accepting orders from their buy-side clients as a broker and trading with the sell side under their own name. However, while execution may occur under the outsourced trading firm’s own name, it still needs to attribute trades so that individual clients receive research credit with the broker in question. In other words, outsourced trading firms need the trading workflow of a sell-side OEMS with the visibility of a buy-side OEMS.
These attribution capabilities are vital – so vital, in fact, that most outsourced trading firms rely on buy-side systems to manage their trading, despite the fact that they are regulated and operate as brokers. But buy-side systems do not include essential sell-side compliance tools (CAT, OATS, Rule 605/606), nor do they account for the commission-centric P&L that defines business success for sell-side firms. On the other hand, sell-side platforms are fundamentally day systems, so they lack key buy-side trading concepts such as start-of-day positions, book management, rebalancing or AUM tracking, as well as specialized compliance needs (40 Act, UCITS, concentration risk). With this complex convergence of needs, it’s not hard to see why systems that focus purely on one side of the Street are not a fit for modern outsourced trading operations.
That’s where we come in. LBX Outsourced Trader has everything these firms need to efficiently transact with both sides of the Street. We are the only OEMS provider that offers both buy- and sell-side capabilities via a single code base, enabling us to aggregate core functionality and deliver a hyper-targeted solution designed specifically for outsourced trading firms. It’s a level of versatility that can only otherwise be replicated by leaning on multiple technology providers – and we deliver it through a single system that’s ready to go out of the box and accessible via a single login.
Without a system that covers the totality of their needs, many outsourced trading firms are stuck relying on proprietary code and customizations to incumbent platforms to pick up the slack. We’ve worked with clients that were manually entering their client-side commissions on every individual trade because they didn’t match the single global default – their buy-side system simply didn’t offer the needed customization. Workarounds like these are expensive, risky and antithetical to straight-through processing – not to mention difficult to maintain amid an ever-shifting regulatory landscape.
With these complexities, it’s no surprise that LBX Outsourced Trader has displaced both buy- and sell-side systems, even at firms with longstanding and ongoing relationships with another vendor to manage their cash brokerage.
That’s the basic story – but it’s not all. The robust functionality and unmatched flexibility of LiquidityBook power not just the core outsourced trading workflow, but also a range of next-generation capabilities that will define the next chapter of this growth story.
For example, for outsourced trading firms, the trader is the product, so profits are directly tied to the number of clients that can be serviced. That means throughput is king, even more so than for other desks. At LiquidityBook, we focus heavily on providing the most automated trading experience on the market with the fewest manual overrides – achieving a deep level of integration with clients’ rules and front ends – to halt rejects before they happen, which keeps manual overhead to an absolute minimum.
This level of flexibility is the key prerequisite for a host of outsourced trading innovations. That includes transitioning from inefficient manual interventions to ongoing connectivity with the buy-side client’s OMS, as well as smart order routing, reflecting client allocation rules, ensuring visibility or anonymity and more. We’ll delve into these developments in a future article, but the point is that these are some of the areas that outsourced trading firms will need to accelerate and differentiate to be successful – and that LiquidityBook is the only provider that enables them all.
All that said, it’s no wonder that leading outsourced trading providers like CAPIS, Tourmaline and JonesTrading rely on us to enable their outsourced trading workflows. Read more about our work with Tourmaline here.
We pride ourselves on delivering uniquely powerful and flexible trade management solutions – and our solutions for the rapidly evolving outsourced trading space are among our most powerful illustrations of this. Interested in learning more? Drop us a line.