Outsourced trading is on the rise for the buy side as managers look for more liquidity, research and market intelligence, according to recent research from Coalition Greenwich.
In a study of 103 buy-side equity traders worldwide, 10% had paid trading commissions to outsourced trading platforms over the past year. The majority (7%) reported spending up to US$3 million on the service, with the remainder paying more.
This practice, which the buy side has long baulked at, is becoming more adopted as firms seek to access sell-side research, market intelligence and liquidity that is not available internally or through existing sell-side providers.
However, some outsourced trading providers opposed being categorised as execution brokers. One participant argued that they would not compromise sell-side relationships by disintermediating brokers. Another stated that they act as a “lever” to the investment team, “[empowering] them [and] providing a path to information and liquidity”.
A primary concern around outsourced trading is trading discretion, with study participants suggesting that only in-house traders can ensure this thanks to their continuous contact with portfolio managers. Relationship management is valued as a key tool here.
The outsourced trading space is currently flooded with options, the report notes, adding that many platforms will struggle to gain traction and build sell-side relationships. Those taking part in the survey emphasised the need for talent as well as a healthy technology budget.
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