US-headquartered financial services company Northern Trust is experiencing growing interest for its outsourced dealing services offered to financial market participants under its Capital Markets brand, according to Gary Paulin, global head of integrated trading solutions.
"We have started to see more interest from EMEA countries, particularly Sweden, Norway, the Netherlands and Switzerland," Paulin says in an interview with AMWatch.
In fact, Paulin describes outsourced trading operations "as a really fast-growing business given current market changes."
Northern Trust Capital Markets' integrated trading solutions unit adopted its first client in the fall of 2017, and its user base has since grown steadily to encompass 65 financial market firms. Over the past 18 months, however, this trend has accelerated significantly.
Paulin highlights that the pressure to reduce operational costs, changes in the regulatory environment and not least technological pressure are incentivizing more firms to adopt this strategy.
"These factors were already causing many firms to review their operations and separate core and non-core operations. Until recently, many firms didn't have an alternative to their dealing function even though some considered it a non-core part of their operations and as something that was not adding value."
The idea behind specialized trading desks is that they can buy and sell securities more cheaply and often more efficiently, given their scale. In short, this allows the fund managers to focus on their primary investment strategy tasks rather than secondary trading tasks.
"I think best practice is being formulated around the idea that a fund manager's role is to formulate strategy and a dealer's job is to implement that strategy," he says, and continues:
"I believe we're at an inflection point where outsourced dealing is moving from being a niche to more the norm."
What makes you say that?
"The number of users is growing all the time. We also get flow from our transition management business. This means that we're a big provider of liquidity when you combine those flows. Being cheaper is a function of scale," he says.
Another key driver of outsourcing is that it can improve business resilience, Paulin says. During the worst days on the market in March 2020, fund managers were battling for liquidity and were forced to liquidate positions they wouldn't have under normal circumstances.
A recent research report written by Fund Europe showed that almost three quarters of firms (73 percent) expect to increase the number of services they outsource to external partners over the next two years.
The survey also showed that managers will look to take advantage of the investments that large asset servicing companies have made in their operation models.
When asked what prevents fund managers from opting to outsource their buy-side trading, Paulin highlights that it's common for fund managers to fear that they will lose their connection to the market.
"However, we wouldn't want them to lose any of their relationships. The way we work and operate is that we seek to augment and enhance these relationships, instead of displacing them."
In 2018, a group of former bond traders at Nordea Investment Management founded the first Nordic-based provider of external trading called Sherpa Edge. This firm wanted to capitalize on the growing demand of fund managers wanting to outsource part of their trading operations.
Like Paulin, the CEO of Sherpa Edge Brett Chappell believed that some fund management companies were held back by fund managers being afraid to lose their touch with the market by having buy and sell orders performed externally.
"But in reality, an outsourced trading solution frees up their time to carry out investment decisions without having to spend time fishing for liquidity. That is the role of the execution desk. Some fund managers might not be able to see the rationale yet, but we believe this will change," Chappell told AMWatch.
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