Achieving the same (or better) outcomes as trading inhouse is undeniably difficult. Buy-side heads of trading at this year’s TradeTech Europe conference explained that while of course “there will be cases for outsourcing” there are certain aspects of the trading process which are inherently convoluted and thus difficult to execute.

“Our trading group are viewed as part of the investment process with interaction and culture aligned. That’s difficult to replicate using outsourced trading,” asserted the senior panellists.

It is for this reason that only the most dedicated providers are set to reap success. Speaking to The TRADE, Dean Gray, head of EMEA outsourced trading at Jefferies, explains: “It has been well documented that the past few years have seen a significant shift in the mindset, especially of the larger funds, towards the adoption of outsourced trading. As larger funds utilise the service, other groups such as sovereign wealth and platform providers are becoming increasingly involved.

“These groups have an inherent nature of complexity that require outsourced trading providers to heavily invest in human capital and technology to meet all of their requirements effectively.”

Despite a degree of caution being exercised by the buy-side, the fact that around 40-45 firms across the industry identify as utilising outsourcing trading in some capacity, is telling. And the number is climbing.

In tandem, 50 providers are now dedicated to handling the gamut of trading needs. This is a significant reality, and a true sign that the industry is changing irrevocably.

As Rebecca Crowe, managing director and chief operating officer, BNY Markets, previously told The TRADE, “Years ago, it was the middle-office who were contemplating outsourcing and people couldn’t even consider that you would allow somebody into your books and records in that way.”

Broadly, the providers are independent firms, prime brokerages, and custodians, all with their own pros and cons, unique approaches, and distinct strategies.

The frontrunners across this space are clear to see. The next step for key industry players is now more important than ever as the gap between market leaders and ‘the rest’ seemingly widens.

Cost must be balanced with effectiveness

When it comes to outsourcing trading, seeking offerings with clear value-add and a smooth operational set-up has been front of mind for firms.

Brendan Burke, Brown Brothers Harriman’s (BBH) managing director and head of Americas FX sales and business development tells The TRADE: “Managers need to be comfortable that execution via an outsourced platform is comparable to managing the process in-house. It is important to be clear in terms of identifying activities that are in and out of scope to consider outsourcing.”

However, though execution quality is of course front of mind, the cost saving aspect is becoming an ever-more important consideration for the industry as participants are increasingly forced to juggle mounting regulatory, technological and data-related burdens.

Fees are mounting and when it comes to business strategy, this factor is demonstrably taking precedence – but at what ‘cost’?

Aaron Hantman, chief executive of Tourmaline, agrees that, despite the pursuit for quality, the decision to outsource – specifically where to outsource – often comes down to economics, explaining that in some cases this can have negative repercussions.

“If firms can receive front, middle and back-office solutions packaged as one and have to sacrifice the trading quality to get those economics they often do it,” he explains.

This can in many ways be put down to the decision to outsource generally coming from the c-suite and other senior leadership individuals – a controversial reality which many in the market have openly criticised for being an approach which omits important insight from trading teams.

“In terms of who makes that decision [to outsource] of course it is down to the people who are motivated by, and tasked with, looking at overall operating model transformation and cost efficiency – which are generally COO’s and CFO’s,” said Crowe.

She added that even when it comes to how decisions are being made as to the structure of outsourced offerings, capital considerations are commonly at the fore, specifically cost efficiency and more variability with costs.

Of course, this is an understandable reality, given the current state of the market, however, potentially sacrificing trading quality in the pursuit of capital saving is a high price to pay. Advice about cutting off noses to spite faces comes to mind, but as Hantman tells The TRADE, many times this situation arises not through any nefarious means, but because of a certain degree of naivety.

“People truly do not understand in many cases just how badly trading could be compromised,” he says. “Those who make wholesale changes without understanding the impact at the trading level will soon have to reverse out of them a year or two later.”

As firms continue to place a growing degree of trust in these providers, this should theoretically work to foster effectivity.

“Like many managed services, a provider needs to have scale and be able to deliver a quality offering combining client service, technology and trading expertise. It can’t simply be shifting trading responsibility from a manager to the provider,” highlights Burke.

The buy-side agree and discussions at conferences across this calendar year have focused on the importance of alpha retention in this space.

As one TradeTech Europe buy-side panellist affirmed: “Understanding the clients and the markets you trade is essential. You need to think of the trading desk as the engine that drives the room. Those conversations around news flow and pricing are central. An active manager needs an active desk.”

However, the crux is that this is not so easily achieved by an outsourced trading provider. Across the outsourced trading space, the barrier to entry has historically been low, but the barrier to success arguably remains high.

As Gray explains, “as the industry has begun to mature, each offering is becoming more clearly defined. The reality is many are not prepared to make the significant investments required to maintain or grow their share of the market.” 

The important impact of changing market sentiment

Demonstrably, things are ramping up and outsourced trading providers are highly cognisant of the importance of keeping up with the pack in this high-stakes game.

However, importantly, various sources speaking to The TRADE have confirmed that a shift of market sentiment has contributed to the development of this space. What started as a foot in the door, has widened into a significant entryway, with market participants – who were at one time not just hesitant, but hostile – now tuning into the importance of embracing change.

A recent LSEG and Coalition Greenwich report from Q4 2023 highlighted exactly this uptick in views around outsourced trading, wherein 66% of buy-side respondents confirmed their belief that outsourced desks could provide them with better access to liquidity, while 63% highlighted improved execution quality and trade performance.

The responses included views from 45 buy-side equities market participants across the US and Europe, of which 28% expect their firms to ‘at least consider’ adding an outsourced provider over the next two years. One respondent specifically commented that “outsourced providers act as an extension to the trading desk and understand our trading goals”.

Hantman tells The TRADE: “Between 2017-2019, especially in the UK and Europe, there was a lot of pressure for traders to justify their worth, especially considering things like Mifid II unbundling. At that time, the last thing that a trader wanted to hear about was the wonderful attributes of outsourcing.

“If you look at the last couple years there has been an evolutionary rate of acceptance which has accelerated recently. It suggests that the concept of outsourcing or supplemental trading has become institutionalised.”

Traders, and portfolio managers, across the industry are seemingly eager to be part of these conversations – not just about the dawn of outsourcing but also when it comes to technological change across the market.

When it comes to those truly at the coalface of the trading processes, overlooking their acumen should be done at a firm’s own peril.

“We as an outsourced trading community are always going to come up against the ‘fear factor’. However, by not being present in the set-up of a new regime [buy-side traders] are missing opportunity to have a say and effectively create even greater job security with a hybrid approach,” asserts Hantman.

Across firms, senior executives appear to be increasingly taking this on board, attempting to find the perfect balance between saving costs and weighing the true, long-lasting impact of making those big moves.

The market is moving, keep up

Against the backdrop of the growth of the outsourced trading industry, the landscape is set to continue its evolution in marked ways.

Gray predicts two key developments, which are now beginning to emerge: “That growth would lead to new entrants and to more consolidation amongst providers. This would result in polarisation, with a few key players and a larger number of smaller specialists leading the growth.”

Recent times have seen swathes of bigger and bigger firms turning to outsourcing in one way or another, however The TRADE understands that some of the largest firms have been embracing this strategy for quite some time and big moves have already transpired.

Examples just from the last six months include UK-based investment management firm Waverton – which has £9.1 billion AUM – outsourcing some of its trading to Northern Trust Integrated Trading Solutions (ITS), Nordea outsourcing the portfolio management of its emerging market bond funds to Metlife Investment Management, Singapore-based investment manager New Silk Road outsourcing its trading to Northern Trust, and most recently Stifel and Marex unveiling a new outsourced trading partnership under a broker referral scheme.

From Tourmaline’s perspective, Hantman asserts that the firm has been trading for multiple trillion plus asset managers for years, though these are unwilling to be named publicly.

Similarly, Crowe confirmed to The TRADE earlier this year that BNY “absolutely” has large scale clients on its books already. BNY announced a partnership with Goldman Sachs Asset Management in March concerning global trade execution services in EMEA, the US and APAC markets across fixed income, FX, derivatives and ETFs.

Speaking to The TRADE about the FX space specifically, Burke shares that BBH has also seen continued interest from larger managers who have FX resources and technology in-house.

“Many of these mangers are multi-asset class who may manage FX related to fixed income in-house, then lean on a provider to solve for equity related FX, coverage of restricted markets, or for rules-based share class and portfolio hedging programs,” explains Burke.

In The TRADE’s inaugural Outsourced Trading survey, it was discovered that around 72% of clients had less than $5 billion in assets under management, 15% had between $5-10 million, 8% were in the $10-50 billion category while 2.5% were in $50-100 billion and another 2.5% in the $100 billion-plus range.

While historically, this has very much been a space taken up by smaller funds – some large funds are demonstrably turning, or have turned, to these solutions. So, with ever-larger players making real moves in the space, what’s next on the agenda?

“Many articles have reported that better execution and cost-effectiveness are the principal motivations behind outsourcing, but we have noted the ability to cover multiple regions and asset classes are just as important,” Gray tells The TRADE.

Looking ahead, he shares that he foresees the next phase to be towards key players investing significantly in their offerings, providing services in a wider range of asset class coverage, such as fixed income, and also, importantly, emphasises the potential for further consolidation in the market.

Speaking from the Jefferies viewpoint, he shares that “from a technology standpoint, the ability to not only access but develop your own proprietary trading software will continue to be important.”

In the same vein as Gray, Crowe also highlighted a trend of expansion into further asset classes, away from just equities: “Fixed income is probably the next most logical volume traded asset class in the market […] but there’s also a lot of further interest in derivatives and other instruments.”

In terms of consolidation, the market has seen a range of key moves in recent times as firms seek to further deepen relationships and widen their reach.

Earlier this year, State Street acquired CF Global, a significant development in the outsourced trading world, which allowed the firm to considerably expand its geographic reach. Just prior to this, commodities specialist Marex completed its acquisition of TD Cowen’s outsourced trading and prime brokerage business.

Both transactions, among others, could fairly be considered a net reduction in the community, however the synergistic approach has been widely hailed as the future as the industry continues to battle costs, keep up with increased global correlations, and maintain effective processes. The industry will therefore likely see consolidation continue. 

Evidently, the gap between the most successful players in the space and ‘everyone else’ is continuing to grow ever wider. As the market ramps up in terms of the size of key players, heavier expectations on providers, and the consistent battle to strike the best balance between costs and effective trading, outsourced trading strategies are set for continued and significant evolution. The future landscape looks set to be markedly different to what the market is seeing today.

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Tourmaline Partners hired three new seasoned financial markets executives as managing directors to help strengthen its global trading capabilities. With the additions of Simon Bradley, James Williams and James Kirk the firm is set to continue its expansion across Europe. Bradley will be responsible for building out Tourmaline’s equity derivatives franchise across Europe, while Williams will be responsible for covering clients on global cash equities execution, building on his two decades of experience in the area. Elsewhere, Kirk is set to oversee and enhance Tourmaline’s services in support of asset managers globally as part of his new role.

BlueCrest Capital Management’s new company, FX trading technology platform BlueX, has appointed Graham MacGregor as chief executive officer. MacGregor joins from the London Stock Exchange Group (LSEG), where he most recently served as chief executive of FX transactions. Elsewhere in his career, MacGregor was EMEA head of sales and relationship management and chief executive, FX MTF business at Refinitiv. Set to launch in the next few months, Blue X utilises BlueCrest developed technology and systems to offer a platform that is ‘inspired by traders, for traders’.

Kepler Cheuvreux Execution Services (KCx) appointed Seb Klatt as program trading (PT) sales trader. London-based Klatt is set to join from Jefferies on 1 October, having most recently served as senior vice president for 12 and a half years, working across PT and low touch.  Prior to this, he worked in an execution sales and account management role at Société Générale, and before that was VP of sales trading at Merril Lynch. 

Frédéric Benizri left TP ICAP to join financing, investment and risk management business CIC Market Solutions as a sales trader. His most recent role at the inter-dealer broker was as a cross asset sales trader, having spent seven years with the business. Benizri also previously worked in convertible bonds and equity derivatives flow sales at Citi for three and a half years, at the time based out of London. Prior to that, Paris-based Benizri worked for UBS, in a structured products sales role.

Legal & General Investment Management (LGIM) expanded its footprint across Asia with the opening of its new Singapore office, with the addition of new key appointments. Gerald Koh was appointed head of wholesale Asia (ex-Japan), a role he has held since 1 August. Elsewhere, Heston Goh joined the firm as sales director, South East Asia institutions, on 1 September.

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Amongst the new hires is Brett Fischer, who has joined from JP Morgan as managing director.

In his new role, Fischer will support Tourmaline Partners’ business development and strengthen existing relationship with clients, while based at the firm’s Stamford, Connecticut headquarters.

Fischer brings 25 years of institutional experience and deep relationships on both the buy- and sell-side to the firm, most recently overseeing JP Morgan’s Americas electronic equity sales team.

As part of that role, he advised leading hedge funds and assets managers on trade execution and trading technology strategy.

Before JP Morgan, Fischer served as head of ITG’s hedge fund sales team, a role which entailed counselling multiple hedge funds during both initial launch and their following stages of growth.

“We’re excited to welcome Brett to our team as we continue to respond to growing industry demand for outsourced trading services,” said Aaron Hantman, chief executive of Tourmaline.

“Brett’s leadership and his understanding of information and analytics on routing options make him a valuable resource for Tourmaline and our clients.  We’re confident his deep expertise in electronic trading will strengthen our industry-leading offering.”

Alongside Fischer’s appointment, Michael Maloney has been appointed as director of Tourmaline’s US operations team. Meanwhile, Lavan Guruparan has joined as associate director of the firm’s Asia-Pacific (APAC) operations team.

Maloney previously served as director at Apollo Global as well as director of operations at Covalis Capital.

Guruparan joins the firm from NAB Asset Management, most recently serving as a trade support analyst.

Maloney will be based at Tourmaline’s Stamford headquarters while Guruparan will be based at the firm’s office in Sydney, Australia.

“We’re very happy to have Michael and Lavan join our operations teams. As seasoned operations professionals, each brings a wealth of buy- and sell-side knowledge to Tourmaline and will further fuel our growth and expertise in this space,” said Dan Dispigna, chief operating officer at Tourmaline.

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Stephen Berte has been appointed managing director at the firm, tasked with deepening its connection with the buy- and sell-side community in Boston, Tourmaline confirmed.

Berte joins from Liquidnet where he has worked in sales for just over a year leading business development and relationship management. 

Previously, he spent 15 years in senior trading roles at Standard Life Investments, now Aberdeen Standard Investments, based in both the UK and US. His roles included global head of equity trading and head of investments execution for all asset classes before his departure in mid-2019.

“Stephen’s deep buy-side trading experience is emblematic of what sets our team apart from the competition and enables us to find unique solutions for our clients,” said Henry Higdon, Tourmaline’s head of global equity trading. “As demand continues to increase for our outsourced and supplemental trading services, it’s imperative that we employ professionals with the deepest knowledge across multiple regions and asset classes.”

The senior appointment at Tourmaline follows its recent majority investment from Boston-based private investment firm, Copley Equity Partners. Terms of the investment were not disclosed, but Tourmaline said the funds would be used to expand its presence globally and hire new talent.

In recent months, Tourmaline added it has made multiple new hires in Australia and the US after recently establishing an office in Dallas, Texas and adding senior staff in trading, operations and commission management to its headquarters in Connecticut.

“The role of the buy-side trader has become exceedingly intricate as technology advances and the globe shrinks, but also as regulations proliferate,” Berte commented on his appointment. “Tourmaline’s platform and the expertise of our team are helping asset managers in new and exciting ways.”

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Alex Goodman, Matt Sindell and Darren Mazzuca are the latest new hires to join Tourmaline. Goodman and Sindell have been appointed managing directors at the firm, while Mazzuca joins as director of operations.

Goodman was most recently head of US cash trading at Macquarie Capital, but previously worked at multiple hedge funds, including Hutchin Hill Capital and Davidson Kemper, in senior equity trading roles.

Similarly, Sindell joins Tourmaline after 13 years with Susquehanna International Group as a senior member of the equity and equity derivatives sales team. He has also held positions at Cathay Financial and Ladenburg Thalmann.

Mazzuca, Tourmaline’s new director of operations, has been global operations manager at Gabelli Asset Management for the past eight years. Prior to that, he spent more than a decade with BlackRock where he was vice president of portfolio analytics for client services.

“As everyone on the buy side knows, there is a huge amount of buzz around outsourced trading,” said Goodman in regard to his move. “Tourmaline is the recognised standard-bearer in the field, and I am excited to be moving into not only a growth industry, but the leader in that growth industry.”

The new hires at Tourmaline follow a majority investment in the firm from private investment firm Copley Equity Partners, which the outsourced trading desk said would be used to develop new technologies and expand into new geographies and asset classes to meet the increased demand for outsourced trading services.

Demand for outsourced trading has grown significantly, Tourmaline added, with the recent spikes in volumes and volatility due to the coronavirus pandemic accelerating the trend for funds looking to outsource all or part of their execution.

“Alex, Matt and Darren will play instrumental roles as we continue to expand our business and provide the fully independent, market-leading outsourced trading solutions our clients have come to expect,” said Aaron Hantman, CEO of Tourmaline. “We offer a true buy-side trading experience, and hires like these let our clients know that we speak their language, have sat in their seats and are equipped to meet their unique needs. We could not be more excited to have them aboard.”

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Tourmaline said it would use the investment to pursue new technologies and expand into new geographies and asset classes to meet increasing demand for outsourced trading services. Terms of the majority investment were not disclosed.

“We have followed Tourmaline closely for several years and have been impressed with their long-term vision and global expansion,” said Peter Trovato, managing partner at Copley Equity Partners. “Tourmaline has captured lightning in a bottle, as changes across the trading landscape – from MiFID II-driven unbundling, to liquidity fragmentation and cost pressures – have led the buy side to seek outsourced and supplemental trading solutions to gain efficiencies and improve trading performance.”

Established in 2011, Tourmaline provides more than 300 institutional investor clients, including hedge funds and asset managers, with outsourced trading services and is projected to trade $300 billion notionally in equites throughout this year.

Outsourced trading has surged in popularity with the buy-side in recent years amid increased pressure on margins, the rise of passive investing and regulatory requirements such as MiFID II. While buy-side traders see the trend as a potential threat to their roles, firms that have outsourced execution to a third-party have claimed to see significant cost benefits.

The recent coronavirus pandemic could also accelerate the shift towards outsourced trading, after several large custodian banks told The TRADE that demand for such services has surged amid the global crisis.

“Tourmaline’s unique business model has led to tremendous growth and has made them a recognised leader in outsourced trading. The extensive experience of its traders, and the tremendous amount of time and resources the founders have put into the company, have enabled Tourmaline to provide clients unprecedented help in sourcing liquidity, trading across regions, and achieving best execution and costs savings,” added Trovato.

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The former head of Thai equities at Citigroup, Joe Hodgkins, has joined outsourced trading services provider Tourmaline Partners as a senior trader.

He joins Tourmaline based in the firm’s Sydney office, and at a time of increased demand for outsourced trading in Asia Pacific as institutional investors look to partner with providers to reduce costs.

Hodgkins has 18 years’ experience in various buy- and sell-side senior trading roles, having previously served as regional head of trading at Janus Capital, overseeing execution in equities, derivatives and futures. Most recently, he was with Citigroup heading up the investment bank’s Thai equities business.

“Hiring industry veterans like Joe helps us meet the demand increasingly coming from large asset managers and is emblematic of our ongoing commitment to provide clients unparalleled service and expertise by bringing in talent with vast experience in all aspects of trading,” said Aaron Hantman, Tourmaline’s chief executive.
 
Tourmaline added that Hodgkins’ areas of expertise include electronic and program trading, block trading and transaction cost analysis (TCA), which buy-side firms often seek when selecting a provider of outsourced trading.

Buy-side traders have typically viewed the outsourced dealing desk as a potential threat to the future of their careers. Although, asset managers venturing down the outsourced trading path have seen some practical benefits. 

Hodgkins’ appointment at Tourmaline follows the hire of Lincoln Wong, who joined the outsourced trading provider as head of Asia Pacific operations, also based in the Sydney office. Wong was formerly with Pimco for ten years as head of operations in Australia. He also spent five years with State Street, overseeing fund accounting and custody operations.

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Rowley Aird has been appointed managing director for Europe at Tourmaline to support the firm’s growth in the region, which follows increased demand for front-office outsourcing services in the wake of best execution requirements and high costs of regulatory compliance.

Aird joins Tourmaline from CLSA, where he formerly oversaw the broker’s high- and low-touch business, including trading of equities in Asia on behalf of clients, as head of trading and execution services in Europe. He also oversaw the firm’s MiFID II best execution implementation.

“Tourmaline’s offerings provide so many benefits to the buy-side community – not just for smaller managers who may not have the resources to run their own trading desks, but also larger ones who may leverage our resources opportunistically, given time zone issues or the challenge of maintaining extensive broker lists,” Aird commented on his appointment.

Prior to CLSA, where he worked at for almost six years, Aird was based in Hong Kong and held various senior algorithmic trading and sales roles at major institutions such as Bloomberg, Liquidnet and UBS.

“Rowley’s deep skill set and years of experience as a senior trader make him an outstanding addition to our Europe team,” said Andrew Walton, head of European business at Tourmaline. “An increasing number of fund managers are realising that outsourced trading firms like Tourmaline can provide benefits of scale and global reach that would take major investments of time and money to replicate internally.”

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