SHARING THE LOAD.

Paul Walker-Duncalf and Richard Lilley, Joint Managing Partners of Linear Outsourced Trading Ltd, explain the merits of a fully outsourced solution.

Is the empowerment of the buyside a new development?

From a trading perspective, the buyside has been empowered for some time. Most medium to large managers have a sophisticated array of proprietorial or broker-provided tools to aid execution. Those firms are also unbundled and have discretion to execute with a firm or in a venue to provide best execution rather than in order to pay for other services. Many smaller managers are not yet unbundled and so may not yet be empowered with the same discretion. That will change as we move towards the implementation of MiFID II.

What is the advantage of opting for a fully outsourced solution?

Where portfolio managers deal for themselves, the advantages of outsourced trading are improved quality of execution provided by experienced dealers, compliance with regulations and allowing portfolio managers to concentrate on adding alpha rather than being distracted by execution.

For those investment managers with a trading desk, outsourcing removes the cost of running the desk and replaces it with a variable one, as charges are only incurred when trading commissions are paid.

Traders in many buyside firms are not located with portfolio managers and, as trading has become increasingly electronic and commoditised, it doesn’t matter if it is remotely located.

The inevitable rise in electronic trading has meant that trading skills are being lost and in-house trading is not adding the value to justify the cost.

Any manager outsourcing should see the Linear Outsourced Trading desk as an extension of their own firm, offering a bespoke service and the level of contact they would expect with in-house dealers.

What is the profile of your client base?

Our business is most likely to appeal to smaller and medium sized asset managers which cannot afford the capital outlay and ongoing running costs of a trading desk.

Which activities are buyside firms most likely to outsource?

Many investment management functions other than front office have been outsourced. As asset managers attempt to control costs in a period of challenged performance and lower earnings, they are searching for other areas of cost reduction, including trading. Many portfolio managers perceive thatthe research service they receive from brokers will deteriorate if they outsource trading. With changes to the pricing of research and the unbundling of execution and research commissions being fully implemented across Europe under MiFID II, this concern should no longer be valid.

Where do the cost efficiencies of outsourcing lie?

The fully loaded cost of a buyside trader is independently estimated at £300k. In challenging times, this is a cost many asset managers simply cannot afford. Outsourcing transfers everything to a variable cost.

How do you see the outsourcing market developing?

We are seeing interest from clients in the outsourcing model and Linear has everything in place from trading, mid and back office and CSA capabilities to meet client demand.

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