Unbundling research requirements are at the heart of the move to scale back the rules, with other changes including a suspension of best execution reporting requirements.

The requirements targeted under the package are rules that have already been highlighted by market participants under the MiFID II review as being not fit for purpose or too burdensome. 

“These amendments refer to a number of requirements that were already identified (during the MiFID/MiFIR public consultation) as being overly burdensome or hindering the development of European markets,” the Commission said. “The current crisis makes it even more important to alleviate unnecessary burdens and provide opportunities to nascent markets.”

Under the changes, the Commission has proposed that asset managers be exempt from unbundling when paying for research on small- and mid-cap companies and in fixed income, including rates, credit and loan research. Small- and mid-cap issuers will be defined as having a market capitalisation of less than €1 billion, calculated over a 12-month period.

The Commission said the move to reduce research requirements in Europe will serve to increase research coverage of small- and mid-caps and for bonds.

MiFID II’s rules on research payments requiring have been controversial since they were introduced in 2018, and regulators hold conflicting views on the impact unbundling has had on the institutional research marketplace. Critics of the rules have argued that unbundling has had limited impact on transparency, reduced research coverage and quality, and dented liquidity in certain stocks.

Elsewhere, the European Commission’s recovery package includes a temporary suspension of best execution reporting. An amendment will be made to remove the requirements to publish the best execution reports until 2022. The Commission noted that 70% of respondents to the MiFID II review consultation who gave input on best execution indicated that the reports are not useful. Production of the reports is also costly and time consuming. 

The European Securities and Markets Authority (ESMA) confirmed in April that best execution RTS 27 and RTS 28 reporting requirements would be eased as firms adapted to the impact of the coronavirus pandemic. A review will also be undertaken in 2021 to decide how best execution reporting should be adapted or if they should be removed completely.

The recovery package also included amendments to the energy derivatives market in a bid to boost euro-denominated trading, and to allow companies to cover their risks. There will also be exemptions to cost and charges disclosure rules, which aim to free up resources for firms dealing with fallout from the coronavirus pandemic.  

“One way of doing so is to help businesses raise capital on public markets,” European Commission executive vice president, Valdis Dombrovskis, commented on the package. “Today’s targeted amendments will make it easier for our businesses to get the funding they need and to invest in our economy. Capital markets are vital to the recovery, because public financing alone will not be enough to get our economies back on track.”

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The FCA has said it will collaborate with the City of London Corporation to develop and launch a digital testing environment to provide firms with data sets for testing and validation of technology services.

“Innovation is a powerful driver of effective competition and can help to accelerate the development of new solutions to emerging challenges,” said FCA interim chief executive Christopher Woolard. “Building on our existing work supporting innovation in the market, we are now helping to establish a platform to tackle the challenges that will face the financial services sector in the recovery from Covid-19.”

The pilot will initially support larger financial firms and start-ups by providing expertise and relevant data in areas such as detecting fraud and scams, supporting vulnerable clients, and improving access to finance for small and medium enterprises impacted by the crisis.

The FCA has previously launched similar sandbox initiatives to support FinTech and innovation in financial services, including a regulatory sandbox and TechSprint programme. Sandboxes aim to provide firms with a safe environment to test products and services within the market.

“The UK has long been a world leader in fintech, fuelled by our innovative spirit, our creative energy, and our regulatory approach. That has borne fruit during this difficult period, during which we’ve seen accelerated demand for digitisation,” said City of London Corporation policy chair Catherine McGuiness.

“The City of London Corporation is committed to working alongside the FCA to build the digital sandbox and ensuring that the financial services sector fulfils its potential as a vital part of our future economic success.”

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Matthew Larson joins Jefferies as CFO and will replace Teresa Gendron, who was put in the role temporarily following the death of Peg Broadbent in March due to complications with coronavirus.

Prior to his new role at Jeffries, Larson held various senior roles at Barclays including CFO of Barclays Americas and CFO of Barclays Global Markets. He previously worked at Goldman Sachs as a managing director within the bank’s finance division.

“We are very pleased that Matt will soon become Jefferies Group’s CFO,” said Jefferies CEO, Rich Handler, and chairman of the executive committee, Brain Friedman, in a joint statement. “Matt’s experience and skills make him well qualified to be our CFO and to oversee our corporate support functions. We want to thank Teri for the tremendous support she has given Jefferies Group as its interim CFO.”

Jefferies confirmed in a statement in late March that it’s chief financial officer, Broadbent, had passed away following coronavirus complications. He had been with the investment bank since 2007 as executive vice president and chief financial officer. In June, Jefferies said it had raised over $9 million for charities dealing with the impact of coronavirus following the death of Broadbent.

“We could not be prouder of our entire Jefferies family for raising $9.25 million and are greatly appreciative of the incredible partnership our clients have shown us in supporting our fight against Covid-19,” Jefferies said at the time.

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New hedge fund launches plummeted to a near-record low not seen since the global financial crisis as liquidations surged in the first quarter this year.

According to new figures from Hedge Fund Research (HFR), the number of new hedge funds launched in the first quarter this year stood at just 84, the lowest quarterly estimate since the fourth quarter in 2008.

At the same time, hedge fund liquidations increased to an estimated 304 in the first quarter, the highest number since 2015 and a 50% increase compared to the previous quarter. The estimated figures of launches to liquidations make the first quarter of 2020 the seventh consecutive quarter in which liquidations outpaced launches.

“New fund launches fell to historic lows in 1Q20 as the coronavirus pandemic drove steep losses across global financial markets, despite strong outperformance of the HFRI throughout the pandemic volatility,” said the president at Hedge Fund Research Kenneth Heinz.

“While the launch environment to begin 2020 has been extremely challenging as a direct result of the drop in investor risk tolerance, institutional allocators which had reduced, eliminated, or failed to implement hedge funds or other risk-reducing alternative allocations were subjected to higher levels of portfolio volatility.”  

Performance dispersion also expanded during the period with the average performance of those ranked top and bottom dropping throughout COVID-19 volatility and disruption. The top-ranking HFRI 500 constituents gained 15.5% in the first quarter this year, while those at the bottom fell by just over 40%, resulting in a dispersion of 56.2%.

The drop recorded in the first quarter of 2020 is only slightly lower than the previous quarter four of 2019 when an estimated 89 hedge funds were launched. Launches for the full year of 2019 were estimated to be 480.

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Buy-side traders in the US have named the brokers they were most satisfied with as the global coronavirus pandemic gripped equity markets in March.

A survey of US buy-side traders conducted by Greenwich Associates several weeks later in April found that despite the widespread shift to remote working, a significant 80% of respondents were satisfied with brokers’ performance.

Of those buy-side traders, 50% said they were ‘highly satisfied’ with brokers’ performance, despite issue being raised about settlement processes, according to Greenwich. The traders were asked to consider equity brokers’ performance in providing liquidity, hedging solutions and market insights at the height of the volatility.

Jefferies, Morgan Stanley, Goldman Sachs, JP Morgan, Citi and Bank of America Securities were listed as the ‘standout dealers’, considered most helpful in navigating the market turmoil caused by coronavirus. Outside of the larger institutions, Greenwich said that Instinet, JonesTrading, RBC Capital Markets and Virtu Financial, also stood out for execution support among clients.

More than 50 brokers were named as being particularly helpful during the period, which John Feng, author of the research and managing director for markets at Greenwich Associates, said highlights the need for the sell-side to continue investing in technology amid increased competition.  

“The sheer number reflects the fiercely competitive nature of the equities business and is a reminder that gains can be transient and firms that have performed well in the short term will need to continually invest and adapt to maintain their edge,” said Feng. “One outcome is not in doubt: The crisis has underscored the need for all firms large and small to continue to invest in technology, both in execution and in workflow.”

Earlier this month, Greenwich revealed via a separate study that buy-side traders in Europe ranked JP Morgan as the ‘standout dealer’ for fixed income in the region during the coronavirus pandemic market volatility. JP Morgan topped the overall league for European fixed income across G10 rates and G10 credit, while Goldman Sachs and Citi ranked second and third respectively.

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The European Securities and Markets Authority (ESMA) confirmed that Austria, Belgium, France, Greece and Spain will not renew the bans on short selling, which expire on 18 May, and Italy will lift its own restrictions early, before they are due to expire on 18 June.

“Since the implementation of the ban, the Authority has observed a progressive normalisation,” said France’s Autorité des Marchés Financiers (AMF) in a statement. “Markets have partly reduced their losses, trading volumes and volatility have returned to levels that are still high compared to mid-February, however this reflects market participants’ uncertainties in the current context.”

Multiple European financial authorities moved to temporarily curb short selling in March as the pandemic gripped markets, despite concerns from exchange groups and investment firms that the bans would in fact be detrimental and disruptive to markets.

Just last week, a group of trade associations representing Europe’s hedge funds and principal trading firms, including AIMA and FIA EPTA, urged the restrictions be lifted as they have failed to curb volatility, damaged markets and undermined investors.

“Banning short selling significantly degrades market liquidity and price formation while increasing trading costs and volatility,” the groups said in a letter to France’s AMF. “Over the longer term, the bans risk undermining confidence in key European financial markets and hampering the goal of the Capital Markets Union (CMU), something that will be vital to European recovery from the profound economic shock caused by COVID-19.”

As the short selling bans in Europe were imposed in March, ESMA also demanded more information from hedge funds betting against stocks, by lowering the threshold at which investors must report to national regulators on short selling positions. The authority said this measure remains in place until 16 June, and can be renewed if necessary.

Short selling is a bet that the price of a stock will fall, and is considered a risky but lucrative trading strategy mostly applied by hedge funds. Short sellers borrow shares and immediately sell them, betting the price will fall before they buy back the shares and return them to the lender, pocketing the margin.

In 2008 during the global financial crisis, regulators globally made similar moves to ban short selling of stocks, due to fears the trading strategy would exacerbate the steep drop in stock prices.

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The free services offered by BTIG will run for up to six months and will apply to institutions designated as dedicated charitable funds, state and union pension funds, medical and educational endowments as well as emergency services benefit programs.

“All of us have been humbled by the response effort and sacrifice of our first responders, healthcare workers and those in our communities fighting COVID-19,” said Scott Kovalik, chief executive and co-founder of BTIG. “At BTIG, our employees have been eager to find ways to give back and aid the recovery. While we do not produce goods we can donate, we do have expertise and services we can provide free of charge to benefit the heroes of this global pandemic.”

A number of institutions across the sector have made contributions to the global recovery effort in recent months, including funds for food banks, front-line workers, and charities related to relief projects.

Interactive Brokers committed $5 Million of aid to assist efforts, provide food and support those impacted by the ongoing coronavirus pandemic in the US. London-based market maker XTX Markets committed £20 million to three charities battling the coronavirus pandemic, while BlackRock donated $50 million to coronavirus relief efforts globally.

“The human and economic impact of COVID-19 is devastating and every one of us at BTIG is personally and professionally vested in doing what we can to support responders and the recovery efforts,” added Kovalik.

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At the same time, non-essential travel bans were enforced across the industry, exchanges were forced to shut trading floors and shift to electronic trading, short selling activities across Europe were massively curbed, and doomsday predictions of an impending global recession had already hit headlines. It has been dramatic, to say the least. 

It goes without saying that traders have been adapting to working and trading remotely in the current environment. As countries mandate employees work from home due to the COVID-19 pandemic, traders have set up remotely while trying to continue to perform their roles and duties as normal.

But the definition of normal has changed with trading floors closed, systems and technology tested and communication no longer occurring in-person. Early discussions with buy-side traders suggest that working from home is not ideal and more high-touch trading activity is taking place, as is often the case in times of market stress. 

“To be honest, working from home has been miserable. But in terms of the set up for remote trading, the process so far has been quite smooth. The technology is so good these days,” says a UK-based buy-side head of trading speaking to The TRADE on condition of anonymity. “We’ve seen more high-touch trading as traders seek certainty and security in having an extra pair of eyes. As traders gain more confidence in the remote setup, I expect that will revert back to low-touch.”

Massive change

A recent study from Refinitiv, which surveyed 400 of its FX trading clients globally, found that 80% of banks in Europe have opted to have staff split their working time between home and a separate office or backup site. Refinitiv explained that this highlights the ‘still somewhat dominant dependency of sell-side staff on trading desks and trading floors’ to ensure connectivity, compliance and efficiency of execution that is needed to perform their order-taking and execution roles. 

Business continuity plans may never have stretched as far to encompass a global remote working environment, along with subsequent market turbulence and a full technology carryover for employees. For teams used to information sharing in a live format, particularly in markets that do not trade electronically as much as others do, the remote working environment could hamper now dispersed desks.

“For those who work in a dealing room or a trading floor, working from home is a massive change,” says one European buy-side head of trading who spoke to The TRADE on condition of anonymity. “The use of a laptop PC is particularly challenging when you trade multi-asset order flow in a multi-platform environment. This challenge has been exacerbated by highly volatile markets. All our team is adapting and learning, and it is becoming more flexible under pressure, for example by using much more telephone than before or by improving and customising the order management system’s layout on smaller screens.”

A report from consultancy Aite Group, which outlined the challenges and opportunities caused by COVID-19 pandemic, depicted front-office or trading tasks as more challenging to perform at home, adding that a higher degree of trade breaks and compliance challenges are possible if functions are somehow excluded or reduced in coverage.

Matt Simon, author of the report at Aite Group, explains that for traditional asset management firms, workflow of idea creation to trade implementation is often the result of a group interactive effort. Front-office staff must have regular meetings with both internal investment professionals and external companies and trading counterparts to guarantee optimal results. 

Simon warns however, that replicating any of these tasks in a virtual-only environment reduces the number of interactions, and will most likely negatively influence human decisions that would be a part of the overall decision-making process. 

Some asset managers have been quick-off-the-mark in terms of planning to ensure that traders can continue working from home without disruption, which was carried out rather smoothly. As Simon alludes, communication is key to this process.  Matthew McLoughlin, head of trading at Liontrust Asset Management, says his trading desk has been able to operate as normal. Echoing the thoughts of the European buy-side trading head on the increasing importance of picking up the phone, McLoughlin adds that in the current environment, execution is now taking longer. 

“There has been more communication as I was very keen that we keep communication channels open and ensure there are no misunderstandings between teams or individuals,” McLoughlin tells The TRADE. “That being said, I have seen a large switch from phone to instant messaging across the market over the past few weeks, which has worked very well. Email traffic has increased too, but I have encouraged my team and others to pick up the phone if ever something needs clarifying as it just makes life easier and quicker.

“I have felt that despite everyone’s hard work, interactions on trades can take longer to happen, particularly on the more high-touch side of the business in both equities and credit. With people working from home, it just takes longer for a salesperson to speak to their trader and then feed that to a client on the other side and for all of that information to then eventually flow back to me. It hasn’t prevented us from doing business, and those partnerships that we enjoyed before are still there and still fruitful, but it just takes that little bit longer to do business on occasion.”

Increased costs 

Not only is execution taking longer, it is also more expensive. According to a study from the brokerage and analytics division at Virtu Financial, following a spike in volatility and wider spreads in March, trading costs as captured by its ‘Global Peer Universe’ spiked significantly, with every region seeing a large increase in the first quarter this year. 

Virtu found that US trading costs surged 42% in the first quarter compared to the quarter prior, with March costs increasing to a high of -63.7 bps. At the same time, trading costs in the UK surged 76% during the period, 55.2% in Europe – excluding the UK, and 78% in Asia Pacific – excluding Japan.

Ben Springett, head of European electronic and program trading at Jefferies, tells The TRADE that the shift to remote working combined with unprecedented levels of market volatility has driven a number of changes to the trading landscape, including in costs of trading. 

During the most volatile periods, data from Jefferies shows a rise in the cost of execution by more than three times, despite an explosion of liquidity. Spreads more than tripled while volatility more than quintupled, and liquidity at the touch was down by a third, suggesting a reduction in market maker activity. Springett categorises the challenges with remote working into being infrastructure-related, and the other behavioural. 

“Home working for traders was a rarity in the City prior to this, and as such, a huge amount of hardware was required to be sent to peoples’ houses to ensure they had remote access to trading capabilities and telephone,” Springett explains. 

“Once the physical capability is in place people need to adapt their working practices to ensure that they can be as effective in a geographically fragmented organisation. Person-to-person directed communication is straightforward, but a significant value of trading floors comes from being immersed in conversations going on around oneself. It is the benefit of information being gleaned from these, as well as the ability to contribute to them, that is much harder to re-create at home.”

As the Aite Group report highlights, when putting together business continuity plans, few asset managers and banks ever dreamed of the implications of portfolio management or trade and trade-support scenarios all having to be done from a home office. Simon adds that given the volume of orders, messaging and trading, firms are clearly more error prone and risk vulnerable. 

Echoing Springett’s concerns around the loss of vital information that could be used for investment and trading is John Ashworth, CEO of trading software provider Caplin. He explains that while this is less relevant due to the electronification of markets, the repercussions in the near-future could see the industry adopt a ‘new normal’ in remote working and trading. 

“In days gone by, when trading rooms were noisy places, there was a huge amount of subliminal information contained in background noise that individual traders would absorb to inform trading decisions,” Ashworth explains. 

“That effect is minimal nowadays since there’s so much electronic trading, but is still felt to some extent and will be missed amongst the very largest global banks and some super-regionals. My personal belief is that this enforced ‘new normal’ will lead to a dramatic change in the way managers manage, and how people view remote working.”

Complacency is not an option

But rules and regulations are still as important for traders working remotely as when they were in the office. UK market participants have been urged by regulators to continue capturing records and data as firms moved staff to alternative sites or working arrangements. Compliance technology provider Cappitech has warned on the risks and importance of maintaining regulatory obligations as traders are working from home.  

“Working from home has become the most common approach for firms to mitigate the spread of the virus in their offices,” Cappitech said. “Although working from home is an option, it does have its pitfalls. Most financial regulators include telephone and electronic messaging record requirements. As such, companies need to confirm that remote work options include methods to comply with existing regulatory standards… The reality is that even the most prepared firms will have gaps in their contingency plans. One way to spot regulatory functions that aren’t being completed or that will need to be fixed in the future are through control tools.”

Regulators have provided various temporary relief measures globally for reporting and auditing, but they have been clear that the environment should be established by the trader or support staff as a means of ignoring ethical practise and securities rules. EU authorities have delayed best execution reporting requirements in Europe, while uncleared margin rules (UMR) and the Securities Financing Transactions Regulation (SFTR) have all been postponed as firms focus on handling the new business environment. 

“Getting complacent is not an option. If you haven’t been monitoring and reporting on your activity you will be in trouble,” Matt Smith, CEO of compliance and data analytics provider SteelEye, tells The TRADE. 

“Regulatory reporting and crucially, market abuse monitoring, still needs to be done, especially during this time. In fact, financial crime is more likely during uncertain times and we are seeing some very strange behaviour and non-standard trading patterns in the market. To combat this, the regulators have been very clear about the fact that firms are still firmly ‘on the hook’.”

This in-depth feature was produced for the preview edition of the TRADETech Daily, which can be viewed in full here.

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In a statement, the US Securities and Exchange Commission (SEC) said it has issued two orders to introduce a phased reporting timeline, including certain exemptions for small broker-dealers.

Broker-dealers were due to submit reports for equities to the FINRA Order Audit Trail System on 20 April, but this was initially delayed until May by the SEC last month due to the coronavirus. The most recent delay has now extended the reporting deadline to 22 June.

Similarly, options reporting has been pushed back to 20 July. Full equities and options reporting for all broker-dealers will now take place on 13 December 2021, with complete customer and account reporting required from 11 July 2022.

The SEC was forced to delay the initial timeline for reporting last month due to disruption caused by the global pandemic, as the regulator issued a ‘no-action’ letter relating to CAT reporting to allow firms to focus on navigating the ongoing crisis.

The US CAT project has been in development for several years, after the SEC gave the green light for the project in 2012. It will act as the central repository for the regulator to track orders, and the brokers handling those orders, throughout the transaction lifecycle, including cancellations, modifications and executions, for listed-equities and options.

The single data trail will also allow authorities to spot potentially manipulative activity and determine the cause of major incidents, such as flash crashes. The CAT officially went live for broker-dealer reporting on 13 April, as the CAT operating committee described the launch as an important milestone.

“Today marks an important milestone as we have opened the system to receive data in the production system from broker-dealers that have been certified for reporting,” the CAT operating committee said earlier this month. “Although broker-dealers have additional time before they will need to comply with their reporting obligations, we continue to move full-speed ahead, and firms that are ready can begin live reporting.”

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Speaking with The TRADE, a handful of service providers including Northern Trust, State Street and BNP Paribas have pointed to an uptick in demand for outsourced trading and dealing that began before the crisis and has now accelerated during. 

The case for outsourcing trading has strengthened in recent years as notable benefits have come to the fore in an environment that has seen a shift from active to passive management, increased regulations and squeezed margins for asset managers facing pressure over their fees and costs.

Subsequently, custodians have joined a range of other independent firms in setting up outsourced trading desks. The move shows a diversification in their offerings as securities services providers have been forced to evolve from relying solely on custody-related offerings to thrive.

“Where we’ve seen a surge of interest – which has accelerated during the pandemic – is clients trending towards different ways of outsourcing their trading,” said Nadine Chakar, executive vice president and head of State Street Global Markets.  “This could be from moving into new asset classes or trading strategies. Outsourcing their trading gives them access to new markets, asset classes, network of brokers. You get 24/7 coverage, every single asset class under the sun.

“Over the past year we’ve seen trading that originally was held by fund houses who thought they could make a difference trading – as that was their secret sauce – slowly but surely, with the markets becoming more efficient and transparent, they finding that’s not the case.”

Things will continue to ramp up

With the back- and middle-office traditionally outsourced, the evolution of front-office outsourcing is aimed at helping asset managers of all shapes and sizes source liquidity and market access, and the largest of custodians also give economies of scale.

These large institutions have a presence throughout the world and have been able to offer dedicated front-office services by asset class or region to asset managers that don’t necessarily want to outsource the entire desk.

For smaller asset managers in particular, anonymity created through a typical outsourced trading arrangement could prove useful in terms of minimising market impact, reducing information leakage and preserving alpha. Such an arrangement also removes the need to establish separate and individual relationships with brokers, which can often be legally complex, costly, and difficult to both attain and maintain due to potentially lower business flowing from smaller funds.

“Over the past month in particular, we have seen a strong uptick in demand from asset managers and asset owners, who are faced with increased volumes and resiliency issues linked to the COVID-19 crisis and are thinking now might be the time to look at outsourcing solutions,” said Thomas Castiel, head of dealing services at BNP Paribas Securities Services.

Northern Trust launched its front-office outsourcing service for asset owners and asset managers in October 2018 as the custodian signalled its front-office intentions. At the time, this seemed like a trailblazing move and extended the definition of what outsourcing meant to custodians. 

Of the 50-plus clients it has, almost 20% came in the first quarter of this year, Pete Cherecwich, president of corporate and institutional services at Northern Trust, explained to The TRADE. 

“This is because organisations have outsourced middle-office, administration, now what about the trading desk?” he added. “What I think is going to happen is people are going to look at the outsourcers [during the pandemic], and say you’ve passed the test, you’ve continued trading and done well during this’. In fact, they realise we’re doubling down on investments in terms of making sure that our clients have the network.” 

“Things got pretty nasty in the market in terms of market values, so managers are going to be under the gun from a profitability standpoint, they are going to lose a lot of revenue. I believe that will continue and we will see a ramp up, there’s no question in my mind about this.”

 Size doesn’t matter

The decision on whether to outsource or not can often depend on the size and situation of the asset manager. It’s more likely that smaller asset managers will outsource given their own capabilities and networks weighed up against a large custodian operation. 

The all-in costs to establish and maintain a three-person dealing desk, according to industry estimates, are up to £1.5 million per year, including compensation, technology, software, Bloomberg Terminals, data feeds, storage, and all the other elements required to operate an efficient desk.

In addition, The TRADE recently wrote that industry estimates predict that by 2022 at least 20% of investment managers with assets under management more than $50 billion will outsource some portion of their trading operations. 

“Some clients have said they want to outsource their whole trading desk to us, others just want to use us as a counterpart,” added Cherecwich. “They might be fine executing Australian equities, but they don’t like people staying up at night to executive US equities so want to outsource stuff that’s on the other side of the world. The problems are different: it could be staffing around the world, it could systems, resiliency and it could just be that someone doesn’t feel it’s a core competency and they’re not getting alpha so they want to give it to someone that will continue to invest in this. That’s what happened to fund accounting, and even custody.”

One example of this has been Hermes Investment Management, now known as Federated Hermes, a UK-based asset manager with $575 billion in assets under management, which has long-been an outspoken advocate for the hybrid trading desk model after entering into an agreement with CF Global to form a desk focused on emerging market and non-Japan Asia equities.

According to Federated Hermes, the decision to outsource was taken primarily for the investment teams trading outside of UK times zones. Equity transactions related to Asian and emerging markets portfolios are executed by CF Global and all other transactions are dealt with by Federated Hermes’ in-house dealing team.

Despite the benefits of the outsourced desk being clear to smaller managers, Federated Hermes is a case of a larger investment manager adopting the concept, something BNP Paribas’ Castiel is also seeing.

“In addition to hedge funds and boutique asset managers, which were early adopters, we now see larger investment managers looking to outsource their dealing operations to support their development across regions and asset classes with a cost-effective solution.”

Third wave of outsourcing

Outsourced trading has been described by Northern Trust as the “third wave” of outsourcing which will not only include the trading desks of buy-side firms but all front-office functions, such as foreign exchange and transition management.

European asset managers have been significantly impacted by MiFID II in recent years, while the shift from active to passive management also adds to the case for an outsourced desk. Meanwhile, costs for North American asset managers have increased by an average of 5% per-year, and 6% in the last 12 months, according to McKinsey. Figures from Morningstar and Mercer also predict a 35% fall in active management revenues by 2023.

A subsequent report from Northern Trust also forecast potential cost savings of 25% from outsourced trading among asset managers and asset owners, which can be achieved through reduced headcount and reduced technology, transaction and regulatory costs.

Much like any outsourcing trend, the removal of the trading desk within an asset manager can lead to lost jobs, which has caused controversy around the concept of delegating front-office duties. Trading desks are full of highly-skilled, and often competitive, teams who have built up reputations over decades of performance.

Speaking at TradeTech Europe in April 2019, the head of trading at $975 billion asset management firm Invesco, told delegates during an Oxford-style debate that, at this stage, his firm would not consider outsourcing its execution processes as he didn’t believe an outsourced trading provider could execute better than his traders can. “I would say some of the traders we have are best-of-breed anyway,” he said. “We’ve got the experience, the technological back-up as well, we’ve got the systems and the support, so, no, we wouldn’t consider outsourcing our trading.” 

For custodians, outsourced trading is a relatively new service, but one that both Cherecwich and Chakar believe has stood up to the task during recent market volatility, and subsequently there could be an additional surge of business once the crisis is over, in addition to the aforementioned boost during.

“The biggest testimony on our ability to operate is what we’re going through right now,” said State Street’s Chakar. “Whether it’s trade outsourcing, doing a secondary check on NAVs, the whole front-to-back outsourcing, honestly our approach is that no ask is small enough or big enough. We step up when it matters. That’s what you want from your global custodian, we are the fortress of safety.”

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