Consider these findings from a recently published survey of 300 global asset managers from Northern Trust and WBR Insights that aims to assess trends in asset management: two of their top strategic priorities were enhancing quality and accuracy (73 per cent) and improving the investor experience (60 per cent).
And while cost considerations were a focus for half of Australian survey respondents, there is a growing realisation among managers that there are viable alternatives to increasing alpha beyond cost cutting.
Of the respondents to our global survey, Australian managers ranked among the highest for willingness to outsource their trading: nearly 40 per cent of Australia-based respondents who have not yet outsourced said they would consider outsourcing the trading function. This becomes even more crucial as managers continue to grapple with a difficult landscape and market change such as T+1 settlement.
By leveraging an end-to-end outsourced trading solution, managers can improve the quality of their trade execution through enhanced expertise, technology, analytics and governance.
Expertise that improves quality
In the intensifying battle for alpha, many managers are looking at different avenues for growth, as reflected in our survey. When asked in what asset classes managers in Australia plan to increase distribution, nearly 73 per cent identified digital assets, 64 per cent identified private equity, and 64 per cent identified real estate. But expanding into new asset classes often comes with a price: increased complexity. Managers may lack the market knowledge and access needed to enter new asset classes and markets, and they may not have the expertise in place to execute trades with the highest levels of effectiveness and efficiency. An outsourced provider offers global trading capability from multiple desks in multiple regions, staffed with wide-ranging expertise and skills that managers can tap into, including expertise in local/regional markets and across asset classes. For instance, for a firm entering markets in Asia for the first time, a global provider can offer expertise in local market trading and settlement to help with activities such as trade oversight and foreign exchange execution at a low variable cost. And a manager interested in expanding into digital assets will want to have the expertise and technology available to support the nuances of that asset class.
Technology comes with a price
Another key benefit of outsourcing is avoiding the need to build or maintain their own complicated technology stacks that support elements of the trade lifecycle. As managers expand, they will likely require sophisticated technology to execute increasingly complex trades. This is often unavailable to managers in-house or can be costly. Without help from global outsourcing or co-sourcing providers, it may be inaccessible to smaller or mid-size firms who struggle to compete with larger managers. Outsourced traders can offer expertise in efficient execution at optimal prices, leveraging advanced trading technology and algorithms. They may have access to advanced data analytics and visualisation tools that can illustrate past performance to improve decision making and artificial intelligence (AI) and machine learning capabilities that automatically sift through reams of market data to identify new opportunities.
Regulatory requirements and trade cost analysis
Given the widespread availability and precision of trade-related data today, managers should expect their counterparts to be able to fully support them with information crucial for their regulatory requirements, as well as being able to provide trade cost analysis. The results of both can make a meaningful difference when choosing providers. Managers should be able to expect open, mutually beneficial, data-based conversations about execution performance, choices of venue, choices of benchmark, slippage, information leakage and other key elements of broker performance. These can and should be much more sophisticated than simply “price achieved”.
Governance key to execution quality
Throughout each step of the trade lifecycle, managers rely on keen attention to detail to ensure they are staying compliant and effectively managing risk while avoiding pitfalls such as information leakages. In order to avoid making costly mistakes, managers require a robust risk management system framework that can keep up with them in real-time. Rather than resourcing this in-house, managers can effectively slot an outsourced provider into their existing operating model to assist with oversight, advisory, monitoring, surveillance and reporting activities. This allows them to focus on their core business activities to generate alpha and be able to scale effectively.
Outsourcing isn’t just about cost, it’s about quality
As our survey showed, as Australian managers evolve their operating models to match a changing market, they are increasingly widening their scope to include outsourcing various functions in the front office, such as the trading desk. While many managers may have consistently focused on cost in recent years, they are now turning their attention to outsourcing for its potential to increase the quality of their execution.
Robert Arnott, head of brokerage APAC, Northern Trust
