Facing economic pressures and increasingly complex markets, growing numbers of investment managers in the U.S. are open to the idea of outsourcing some or even all of their trading functions. Amid this mounting demand, the number of providers offering outsourced trading services has increased more than fourfold in less than five years.
From 2018 to 2022, the number of outsourced trading providers grew from fewer than 10 to more than 40. Powering this growth has been new interest from investment managers experiencing declining management fees driven partially by the increased popularity of passive investment strategies. With profit margins compressing, managers are looking for new ways to navigate markets characterized by surging trading volumes, heightened volatility and a growing reliance on sophisticated and expensive technology.
“We are witnessing the institutionalization of outsourced trading,” says Shane Swanson, Research Director at Coalition Greenwich Market Structure & Technology and author of A Deeper Dive into the Outsourced Trading Evolution. “As large investment management firms in the U.S. supplement their internal trading capabilities with third parties, and smaller firms outsource large parts or even all of the trading function, a robust field of providers is taking shape to meet these diverse needs.”
Outsourced trading providers offer several different models—ranging from those housed within larger financial institutions to those that are primarily dedicated to offering only outsourced trading. Providers include prime brokers, custodians and independents, with services ranging from supplemental support to fully outsourced trading, and from global coverage to targeted trading of specific products or geographies.
“Whether it is as a full-blown outsourced trading service or a supplemental trading offering, investment managers must scrutinize the scale, scope and expertise of the provider to ensure it can provide a reliable alternative for achieving best execution obligations,” Shane Swanson says.
A Deeper Dive into the Outsourced Trading Evolution analyzes the fast-growing demand for outsourced trading, examines the different types of providers and outlines the factors that define the success (or failure) of an outsourced trading relationship. It also offers investment managers a checklist of factors to consider when assessing a move to outsourced trading and assessing potential providers, including scale, size, service orientation, operational excellence, commissions handling, and experience working with similar institutions.
