Outsourced Trading: Choosing a Fully Integrated Buyside Model Versus A Traditional Brokerage
The investment industry refers to outsourced trading as a trading relationship in which the investment manager gives its portfolio order to broker-dealer counterparties to execute on their behalf. What gets lost in this casual understanding is the inherent conflicts of interest that may exist when giving their counterparty these orders with respect to best execution, payment for order flow, and information leakage. The industry has warped the true meaning of outsourced trading into a homogenous term making it easy to confuse broking with outsourced trading, as both involve the handling of orders for further trading/execution and anonymity for moving orders.
Key differences exist between a fully integrated buyside outsourced trading desk and a traditional wrapped brokerage service offered by multi-service providers. In a fully integrated outsourced trading desk relationship, the trader serves as a partner, engaging in trading communication, understanding and communicating information to investment managers to further the investment thesis, and ensuring multiple venues and algorithmic infrastructure are in place to facilitate best execution. Unlike services from large broker-dealers, there is no payment for order flow, no internal crossing of order flow, no principal order book, and no incentive outside of getting the best execution for the buyside client. In addition, the end client can be linked to the commission wallet, which can help access the deal calendar and brokerage research resources. Trust is a critical component of this partnership, as the portfolio managers must have confidence in the provider’s ability to act on its behalf, handle trades in specific ways, and align its interests with those of the fund.
Understanding Brokering: Traditional Broker Services
In its traditional sense, broking refers to the intermediation services brokers provide in facilitating trades between buyers and sellers. Brokers act as intermediaries, executing orders on behalf of clients and earning commissions or fees in return. These services typically include trade execution, market research, access to liquidity, and limited ancillary functions. They can also refer to payment for order flow, which is an ancillary financial benefit a broker can earn from their customer’s order flow.
Unveiling Outsourced Trading: Redefining the Approach and Investment Manager Considerations
Outsourced trading represents a paradigm shift from traditional broking arrangements. It involves delegating trading operations to specialized firms that offer a comprehensive suite of services beyond execution. Outsourced trading providers provide expertise, technology, and operational efficiency, acting as strategic partners rather than traditional brokers.
- Outsourced trading enables the investment manager to earn credit for commissions from executing brokers and to properly allocate its commission wallet across the street, which can help on the deal calendar.
- It allows for transparency during block trading and bid-wanted situations so the broker can price large trades with tighter spreads.
- Outsourced trading allows the trader to act as a true extension of the investment process and to become fully integrated into risk and trading conversations at the individual stock level as well as at the portfolio level.
For a client seeking access to a specialized broker they don’t currently work with, it’s not as simple as picking up the phone and placing a trade. There are onboarding procedures that need to be followed, including KYC (know your customer), AML (anti-money laundering), connectivity, and contractual matters. However, due to the nature of their business, an outsourced trading provider is better equipped to gain access to that specialist broker.
The Benefits of Outsourced Trading Over Broker Services
Outsourced trading offers numerous advantages that set it apart from traditional broker services:
Enhanced Efficiency
Outsourced trading firms provide a holistic solution encompassing trade execution, risk management, compliance, and technology integration. This streamlined approach optimizes operational efficiency and allows asset managers (“AMs”) to focus on core competencies.
Cost-effectiveness
By outsourcing trading operations, investment managers can minimize the need for substantial investments in trading infrastructure, technology, and talent acquisition. Outsourced trading providers offer scalable solutions, enabling asset managers to expand their trading capabilities without incurring significant fixed costs.
Access to Expertise and Technology
Outsourced trading firms bring specialized knowledge, market insights, and advanced technology platforms to the table. This empowers asset managers’ investment management team(s) with real-time data, advanced analytics, and cutting-edge tools, facilitating informed decision-making.
Risk Management and Compliance
Outsourced trading providers specialize in navigating complex regulatory frameworks and employ robust risk management systems. They work to ensure compliance with regulatory requirements, transaction reporting, and best execution practices reducing institutional risk exposure.
Types of Outsourced Trading Firms
Outsourced trading firms can be categorized based on their areas of specialization:
Full-Service Providers
These firms offer end-to-end trading solutions, encompassing trade execution, risk management, compliance, technology integration, and post-trade support.
We at Meraki Global Advisors, a prominent outsourced trading firm, are known for our comprehensive global range of services. With a deep understanding of global markets, Meraki provides tailored solutions for equities, fixed income, foreign exchange, derivatives, and all other asset classes. Our expertise extends beyond execution, encompassing risk management, compliance, technology integration, and strategic guidance, making us an ideal partner for investment management teams seeking efficient and scalable trading solutions.
Specialized Providers
These firms focus on specific asset classes, trading strategies, or geographic regions. They offer targeted expertise and tailored solutions to cater to the unique needs of asset managers operating in those domains.
Expands the Fund’s Expertise and Widens its Reach
Outsourced trading represents a departure from traditional broking arrangements, offering asset managers a range of benefits beyond execution. A diverse outsourced firm can provide geographical expertise, asset-type expertise, or both to existing trading desks looking for specialization or funds looking for a fully outsourced model.
A diverse outsourced firm should feel as comfortable trading US equities as it does trading CDS or Asian OTC derivatives while understanding the market limitations and requirements to execute these instruments in each location. In turn, delivering knowledge and experience to the fund manager allows them to capitalize on certain investment opportunities or understand liquidity constraints, reducing valuable time spent researching ideas that are not applicable to their liquidity constraints.
As the demand for outsourced trading increases, Meraki continues to expand and meet the needs of our clients to help them achieve their goals. In just four years, we have expanded globally from our US headquarters and team with best-in-class global multi-asset buyside traders and middle-back-office support. We have also proudly maintained an industry-low client-to-trader ratio critical to providing a truly integrated relationship and premium service. We recognize that outsourcing may be a significant change for some funds; we are eager to speak with any managers interested in learning more about the advantages of outsourced trading and the suite of services provided by Meraki Global Advisors.
About Meraki Global Advisors
Meraki Global Advisors was founded with a rebellious determination to deliver truly conflict-free services to asset managers. Headquartered in Park City, Utah with offices in New York and Hong Kong, Meraki provides outsourced global multi-asset trading, leverage management, and capital introduction services to the asset management industry. Meraki Global Advisors LLC is a FINRA member and SEC Registered. Meraki Global Advisors (HK) Ltd is licensed and regulated by the Securities & Futures Commission of Hong Kong.
For more information, visit the Meraki Global Advisors website and LinkedIn page
Contact:
Mary McAvey
VP of Business Development
(646) 666-7041
mm@mga-us.com
