(Bloomberg) -- It’s been a quiet secret on Wall Street for years now: A cohort of money managers are outsourcing the buying and selling of financial assets to the likes of Bank of New York Mellon Corp. in a bid to cut costs.
Yet it’s never really been clear how widespread this practice is. Now a Coalition Greenwich survey sheds light on how these traders are fast becoming the new power brokers in the industry.
Among 103 buy-side equity traders globally, 10% said they are paying commissions to outsourced trading platforms — a bigger penetration rate than expected.
Once resisted as a job killer, outsourced trading is now viewed as a complement to buy-side trading desks — and part of investment firms’ strategy to cut expenses and keep up with technological shifts.
With so many money managers willing to admit their adoption, the market for outsourced trading may have reached “a tipping point,” according to Jesse Forster, a senior analyst of market structure and technology at the financial analytics firm.
“It becomes more socially acceptable,” he said in an interview. “It only has room to grow.”
Originally a niche business catering to start-up funds, outsourced trading has proliferated as the buy side seeks to defend margins by cutting prices to compete with low-fee passive funds. The business got an additional boost during the pandemic lockdowns, when at-home traders were at risk of falling sick or losing regular access to market venues.
Unlike agency or prime broking, these players conduct relationships with the sell side on behalf of the client and offer more comprehensive services including monitoring exposures and providing market color. They maintain an extensive network of brokerages and high-speed technology — which can be expensive for smaller funds to maintain on their own — to ensure best execution.
Some smaller funds opt to outsource entirely. A cohort of larger managers may use such services to enhance their global operations, like buying and selling Asian stocks when their traders in New York are asleep.
By the tally of Coalition Greenwich, there are more than 40 firms claiming to offer the services. They range from big firms such as Northern Trust Corp. — which seek to capitalize on their connections with custodian customers to expand the business — to independent specialists like Tourmaline Partners LLC.
The growing list of choices may be headache for buy-side traders, according to Forster.
“It’s an omnivore’s dilemma,” he wrote in a recent blog. “Many options may look appealing, but it’s hard to know which one will truly satisfy their needs.”
--With assistance from Justina Lee.
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