Large asset managers may hand-off some of their trading desks within 3 years and it could be a gold mine for custodian banks and prime brokers
- Large asset managers are increasingly following in their smaller peers' footsteps, looking to outsource trading operations to cut costs.
- New research from consultancy Opimas estimates 20% of managers with over $50 billion will outsource at least some of their operations by 2022.
- The trend is driving revenue growth 20-30% annually at outsourced trading desk providers such as CF Global Trading and Tourmaline Partners.
The asset management industry has faced a tough few months, as volatile markets pushed billions of capital out and demand for lower fees continued to eat into revenue.
Most small funds have long relied on bank custodians and prime brokers to run their trading operations, lacking the internal resources and trading volume to maintain a full team. Now, their larger peers are considering handing off at least some of their trading desks, according to consultancy Opimas. Foreign equities with traders operating in different time zones are the best candidates for outsourcing, as fees and flows continue to pressure the industry.
By 2022, 20% of asset managers with more than $50 billion under management will use a third party for some or all of their trading, Opimas chief executive officer Octavio Marenzi predicts. Less than 5% of large managers currently use an outsourcing model, he told Business Insider.
"This is a global trend that will continue to pick up momentum," he said, pointing to managers in Japan, France, and Switzerland, among other countries, that are thinking about using third parties or have already done so.
As this trend takes shape, it could mean revenue growth of as much as 30% annually for companies like CF Global and Tourmaline Partners that provide outsourced trading desk operations, the report says.
Marenzi estimates the cost to employ an internal trader and pay for proper tech systems can top $500,000 annually. That trader can handle about $1.5 billion worth of annual equities trading, so for strategies with smaller volume, it may make more sense for another company to handle these trades.
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The external trading groups are often part of investment banks, prime brokers, asset managers, and custodian banks, which typically charge a fee of five basis points per trade. However, the report said some managers are pushing for a subscription model, with fees independent of trading volume, or for caps on commissions after a certain level of trades.
"Larger funds can benefit from outsourcing trading for regions or asset classes where they trade on a limited basis, or where they need additional backup for overflow trading when their internal traders are overwhelmed with spikes in trading volumes," Marenzi wrote.
The research cited one example of a sizable firm that turned to a hybrid trading execution strategy. London-based Hermes Investment Management, which manages about $44 billion, started working with CF Global in 2012 for equities from emerging markets and non-Japan Asia, while retaining its own traders for other strategies.
Marenzi has also spoken with a number of large Japanese managers that are considering other companies for their US equities trading.
"The main consideration here is the operational expense of maintaining full-time traders for asset classes where the asset manager does not have sufficient scale," Marenzi wrote.
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