India Market Changes Effective January 2023

/in , /by

On January 27, 2023, India’s exchanges completed the phased monthly transition from a T+2 to a T+1 settlement cycle for all top-listed securities, which includes shares, exchange-traded funds (ETFs), real estate investment trusts (REITs), infrastructure investment trusts (InvITs), sovereign gold bond (SGB), government bonds, and corporate bonds trading in the equity segment. While most large stock markets, like in the US, Europe, and Japan, still follow a T+2 settlement cycle, India will join China in shortening its settlement cycle. Chinese stocks on the exchange markets settle T+0 for securities and T+1 for cash.

The settlement cycle transition is expected to benefit investors by working to increase market liquidity while reducing settlement risk. A shortened cycle not only reduces settlement time but also reduces and frees up the capital required to collateralize that risk. While this has halved the settlement time for equities in India, it has presented its own set of challenges for Asset Managers (AMs) without a presence in the Asian region. Meraki will examine how this new rule, with just over a half year in existence, has affected AMs in their trading workloads and increased time spent by their staff.

Complications for Asset Managers Operating in Distant Time Zones

The impact of the shift to T+1 will not be uniform across all firms. Smaller firms, in particular, may face greater difficulties due to the disparities in the size and locations of their teams. With reduced settlement times, these firms may experience an increase in settlement fails, as their teams may struggle to keep up with the faster pace of trade settlement during irregular business hours. Furthermore, smaller firms often rely on legacy batch overnight systems that may not be equipped to handle the increased volumes that will come with T+1. Therefore implementing new systems capable of managing the higher transaction volumes will be necessary, leading to additional operational infrastructure (headcount and IT) costs for these firms.

At the crux of the change is the trade confirmation timeline and FX/funding needs. The change in pay-in/pay-out timings simply means that timelines are now reduced by one day. Previously, stocks were settled by approximately 2pm IST on T+2; now, they settle at 2pm on T+1, and all other settlement related timelines will move forward similarly. Please see the indicative timelines below:

Indicative Timelines : Indian Stock Markets Shift To T+1 Settlement Cycle

Confirmation of trades by custodians must be done on T-day before 7:30p IST (previously 1:00p on T+1), and the confirmation of trades takes place only after the trade is matched and the FX/funds are in place. With a T-day timeline, clients must now give the FX and matching instructions either pre-trade or during the day. This is typically done by generating a trade and currency file to the custodian after the close in order to generate proper FX amounts and allow for trade matching on the execution side. Because the INR is restricted, only the custodians can trade FX on behalf of the client.

Execution and Settlement Complications

On the execution side, traders may need to stop trading before the close or prefund their onshore accounts. Prefunding onshore accounts in INR opens the asset managers to FX risk that they otherwise would not have taken in order to deliver INR on time for funding their trades. Additionally, the AMs need to invest further in headcount or find current employees willing to work live Indian hours to solve settlement and funding issues on a T+0 basis in order to abide by new exchange rules.

Outside of the explicit operational costs, there is a considerable risk of burnout, trading and operations team fatigue, and other issues that arise from live trading and operational needs for a market that has the last and latest opening time of every major APAC regional market and also closes a full 12 hours after Australia opens for trading in the region. The typical workarounds utilized include handing India off by the Asia teams to the European teams when they arrive in the morning, or if there is not a dedicated live trader or trading team and operations team for each region, the Asia time zoned teams stop trading the India markets early. Some traders working both shifts even take a nap for a few hours and wake up to finalize the T+0 matching process. All these scenarios can lead to operational problems, poor trading execution, missed liquidity, and possible errors that can potentially prove costly. In addition, trader burnout and high rates of employee turnover may be common with this trading arrangement.

How Meraki Can Help

Given India’s nuanced nature, our expertise in all aspects of trading, settlement, and funding in India is unmatched, and we have the local resources and knowledge to expeditiously solve problems as they may arise. Meraki’s Founder and Managing Partner, Benjamin Arnold, traded for BNP Paribas and Goldman Sachs on the ground in India for four years and then another two years from Hong Kong. Meraki’s Head of APAC Trading, now based in Hong Kong, lived and traded in India for two years for a global investment bank.

Additionally, our unique outsourced trading agreements with our clients allow us to execute on behalf of the investment manager and/or fund(s). In contrast, our primary competitors cannot do so as effectively, placing us in a differentiated and superior position during communications with sell side trading desks, custodians, banks, and investment managers. Meraki Global Advisors’ seamless business structure allows the investment manager to save explicit costs on personnel and IT, as well as mitigating concerns of burnout and quality of life that arise from India’s unique and new trading requirements and distant time zone.

Please contact Mary McAvay at mm@mga-us.com to discuss how Meraki can work closely with you to help solve your Indian trading issues.

Outsourced Trading: Choosing a Fully Integrated Buyside Model Versus A Traditional Brokerage

/in , /by

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

Is Your Outsourced Trading Provider Global?

/in , /by

The Benefits of Having a Local Presence in the Asia-Pacific Region

For asset management firms based outside the APAC region, trading APAC markets is a challenging mosaic of regulatory, operational, and tactical matters. In such an environment, entrusting asian orders to brokers overnight and expecting the best execution outcomes has been proven to be inconsistent at best.

Building and staffing an in-house off-hours trading desk or an entire regional office has historically been the solution, but the associated costs are often prohibitively high. As a result, many firms have chosen to engage with an outsourced trading provider to optimize performance.

Due to the fragmented and competitive nature of trading in Asia, firms must take extra care to ensure goodness-of-fit with an outsourced trading provider. It would be beneficial to ask the following questions while assessing your outsourced trading provider: Is the provider truly positioned to succeed in the challenging Asian markets? Will the provider be a trustworthy partner and experienced guide in complicated conditions? 

In our experience, successful trading in Asia demands three core capabilities: (1) Careful management of order flow; (2) Deep, localized knowledge and (3) Well-established relationships. Here we explore several characteristics of Asian markets and illustrate how these core capabilities build a foundation for success.

Less liquidity for block trades

Sourcing liquidity presents different challenges in Asia than in the US and Europe. In Asia, most names are less liquid, and many countries lack dark pools – making block trades particularly challenging. 

On-the-ground experience is essential when navigating difficult liquidity landscapes. Firms engaging with outsourced trading providers should ensure their assigned traders are well versed in the idiosyncrasies of each country where securities are being actively traded, including facilitation risk options and regulations. Equally important, are close relationships with sell-side connections and local brokers for both color and liquidity. Traders with deep relationships will benefit from timely updates on blocks as well as impactful news and flows – an advantage that carries significant value.

Additionally, traders must pay special consideration to information sharing, judiciously choosing how much information is shared and with whom. While certain block desks are consistent performers, there is always risk of leakage, which can be very impactful in most Asian markets.

More volatility driven by governance and event risk

Careful management and trading of order flow is important in all markets – but even more so in Asia, where governance and event risk can be significantly more common and corrosive, driving intraday price swings that often dwarf those seen in the US and Europe. As such, the trust required to handle order flow in the most appropriate manner is higher in Asia than developed markets. If a trader simply inputs orders into an algorithm with little care or attention, the results in Asia are likely to be sub-optimal.

Diverse market structures and regulations

Given that Asia lacks a single regulatory framework – in the way MiFIDII provides structure in Europe, for example – traders are faced with a diverse array of market structure dynamics. Without the operational expertise, ever-changing regulations can prove to be complicated.

When confronting this challenge, local knowledge and relationships are of the utmost importance. To ensure timely notification of regulatory changes and potential impacts, firms should identify a trading partner who is entrenched in the local markets and connected with the street and various levels of people within relevant organizations. A broker who may be insufficiently familiar with market structures and regulations can create a range of problems, including issues with entry and exit of positions and trade settlement.

Greater retail participation

Retail participation is generally much higher in Asia than developed markets. The Chinese equity market, for example, is largely dominated by retail investors: More than 70% of turnover originates from retail participants, relative to approximately 15% to 20% in the US. 

In markets with size-able retail participation, news reported in the local language can impact markets before it reaches primary information streams, such as Bloomberg and Reuters. This is particularly true in China, Hong Kong, Japan, and South Korea. Additionally, local blogs and news sharing apps can generate huge retail interest, as does the morning hard-copy news in China.

This dynamic creates additional opportunities and risks for offshore institutional investors. Given the profound impact retail trading can have on short-term price momentum in Asian markets – for both single names and indexes – traders must be able to provide real-time explanations and interpretations of themes which have captured the attention of a given retail audience. Such capabilities stem from deep, localized knowledge and a broad network of relationships.

Improve your APAC trading with Meraki Global Advisors

The Meraki team has the expertise and access required to trade every asset class worldwide, including all markets in Asia. Our senior leaders draw on extensive experience in the region:

Donald Lee, Head of Asia Pacific and Head of Meraki Global Advisors (HK) Ltd – Don has over 27 years of experience in Asia Pacific institutional equities split between Seoul and Hong Kong. Before joining Meraki, Don held senior management positions in the APAC -wide cash equities and client executions businesses of Credit Suisse and Deutsche Bank based out of Hong Kong.

Jeffrey Ho, Managing Director of Meraki Global Advisors (HK) Ltd – Jeffrey has over 25 years of buy-side experience trading global markets in Europe and Asia. Before joining Meraki, Jeffrey was a trader at Tora Outsourced Trading, Segantii Capital Management, and prior spent 15 years at Deutsche Bank (DB) in Hong Kong where he was a Director and Senior Trader. 

Benjamin Arnold, Founder and Managing Partner – Ben previously worked as Executive Director on the equity and equity derivatives sales-trading desk at Goldman Sachs in Hong Kong and Mumbai, India with a primary focus on large non-ECM block trading. Before joining Goldman Sachs, Ben was a Vice President on the equity and equity derivatives sales-trading desk at BNP Paribas in Mumbai.

EJ Stockley, Partner and Global Head of Trading – EJ previously worked as a trader at First State Investments in the UK and Singapore, gaining global multi-asset trading experience in Pan-Asian, EMEA, and Americas markets.

Simon Kelt, Head of APAC Trading – Simon has over 15 years’ experience trading global markets in both Europe and Asia. He spent the last 10 years in Asia across Hong Kong and India, most recently at HSBC trading Asian equities with a focus on greater China market coverage where he helped develop and build out the business.

How Meraki Global Advisors can help

As a value-added service to our outsourced trading clients, we help managers create a strategic marketing strategy and increase their firm’s awareness among a unique set of investors and allocators. Our experienced team provides start-up advisory services, identifies actionable ways to improve decks and pitches, and creates prospective allocator lists for select introductions. Our services are suited for a diverse range of clients, extending from traditional long-short emerging managers in the very early stages to managers running a multi-strategy platform and existing multi-billion-dollar funds trading globally across asset classes.

As the premier global multi-asset outsourced trading firm, we take pride in putting our clients’ interests first. Built on a foundation of confidentiality, our unique conflict-free model empowers funds to garner optimal access to liquidity.

Contact us to learn more about Meraki Global Advisors’ outsourced trading capabilities and capital introduction services.

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

Institutionalizing Family Offices through Outsourced Trading

/in , /by
Download PDF

Family offices designed to invest and grow the net worth of ultra-wealthy families have grown in number, size, and sophistication. This has been driven by shifting economic and market forces, alongside families’ increasing desire for flexibility and control. By sharpening their due diligence, expertise, and ability to isolate the right combination of idea, team and asset allocation – many family offices have emerged as institutionalized players. These modern offices have established themselves as sophisticated investors in today’s public and private market ecosystem.

Many institutionalized family offices pursue an intensive approach supported by best-in-class service providers. Critical and complex functions—such as portfolio and risk management—are frequently outsourced to experts to attain first-in-class service. Here we examine how outsourced trading can deliver a greater level of institutionalization to family offices, which can be both cost-effective and value generative. With an understanding that each family office has unique and specialized needs, we explore various trading desk models and analyze key points when seeking to maximize the value from traders.

The opportunity to optimize trading

While many family offices have large exposures to real estate and external alternative managers, they also have exposure to yield products in the form of corporate and government bonds, FX, equities, and ETFs. Services supporting these traditional asset classes often fall short when compared to the sophisticated infrastructure family offices have grown accustomed to accessing via their alternative manager investments.

Trading family office assets is one such service with significant runway for optimization. Customarily, family offices have traded their bonds and equity holdings through private banking relationships. Trading through a private bank, however, is expensive and constricted. This approach limits liquidity sources and typically does not utilize professional highly experienced multi-asset traders.

One possible solution: Create an internal trading desk

To address the shortcomings of trading through a private bank, some of the largest single-family offices have built internal trading desks. While this solution provides a key benefit—superior execution—it requires large capital outlays to operate a single-family office, let alone the considerable costs for recruiting a team of top talent to work solely for one family. This strategy also incurs high costs to maintain the systems required to run a trading desk, not to mention the additional operational risks that follow. It is no surprise then that only a small percentage of families set up their own family office.

For most family offices, the value proposition of an internal trading desk is sub-optimal due to likely operational redundancies—most commonly, periods of inactivity during which no trading takes place. Without an immediate value additive task or project to fill the gap when traders have down time, the operational burden and fixed costs of an internal trading desk make it an ineffective solution. Furthermore, internal family office trading teams are often undersized, so execution quality suffers during busy and volatile days.

A more efficient solution: Partner with an outsourced trading provider

Family offices that partner with an outsourced trading provider garner the same—and in most cases, superior—institutional-quality execution generated by an internal trading desk but accomplished at a more efficient cost. Outsourced trading services empower family offices to cost-effectively achieve execution results in line with the high quality of service they have come to expect in the other areas of their business.

Family offices can choose from a range of models to secure the most compelling value proposition. In a variable cost model, for example, a fee is charged per trade. Family offices can also opt to pay a fixed monthly fee for all services rendered. The decision is often based on the number of trades and additional services a given firm requires.

Maximizing the advantages of outsourced trading

When considering an outsourced trading provider, family offices can maximize the potential advantage by partnering with a firm positioned to deliver on key objectives, such as:

  • Alignment – Maximum transparency, objectivity and alignment are vital to family offices. As such, it is important to identify an outsourced trading provider that always puts the interests of the family office first and commits to complete alignment with family policies. Family offices should examine how the outsourced trading provider earns money—including rebates, credits and funds earned by favoring certain relationships—and seek to understand the driving forces behind the firm’s overall business model.

    At Meraki Global Advisors, our services are conflict-free. We are only paid by our clients for execution; we receive no other revenue streams.
  • Confidentiality – Discretion and confidentiality are paramount. Family offices should examine an outsourced trading provider’s approach to confidentiality from multiple angles, including the number of clients covered by their trader(s) and legal protections in place. It is also important to understand the extent to which orders are visible as trades flow through the outsourced trading partner’s system.

    Meraki’s processes have been engineered to create an environment of ultra-confidentiality. They are tried and tested by $1+ billion hedge funds that place a similarly strong emphasis on confidentiality as family offices. Furthermore, our targeted client-to-trader ratio is 3:1.
  • Risk Management – IT security and infrastructure are other operational components of data security that family offices should consider. Cyber risk, improper trade authorizations, data breaches, and fraud are all relevant to maintaining proper risk management. Ensuring your outsourced trading provider has a sound risk management framework with proven effective internal controls is paramount.

    Meraki conducts audits of its information and security measures to ensure the protection of all sensitive data. Additionally, Meraki has established Cyber Security Policies, which are periodically updated to mitigate risks.
  • Experience – When family offices can rely on experienced traders, they feel confident that a trusted team member is dedicated to helping the office navigate both calm and choppy waters. The ability to lean on a trader’s experience-driven insight into complex situations and during moments of market volatility creates tangible value for the family office. We are experienced in trading global cross-asset. This means we can help family offices build or reduce stakes in companies through equity and/or derivatives trading and help put on hedge trades.

    Meraki’s team brings decades of industry experience from top hedge funds, family offices, traditional asset managers, and the world’s preeminent investment banks. With global visibility and acumen across every asset class, we are uniquely positioned to assess cross-product relationships and provide insights into the strength of potential or real market movements.

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

Is Your Firm Receiving Optimal Value From Your Outsourced Trading Provider?

/in , /by

Outsourced trading firms capitalize on demand for an alternative solution to in-house trading desks. What began as a niche business is now a more crowded field attracting a growing number of players with various operating models, fueled by the asset management industry ’s constant quest to create efficiencies. In such an environment – as in any competitive service industry – each outsourced trading provider ’s value proposition becomes increasingly critical. As asset managers re-examine their business models and investment strategies in this complex environment, they do well to ask the key question: What level of service and firm structure will deliver optimal value for our firm and investors?

In outsourced trading, a provider ’s chosen operating structure heavily impacts its value proposition. Here we look at two different outsourced trading models and explore their respective value propositions. We close by sharing our views on the future of outsourced trading.

Agency broker model: an asset manager’s favorite sales-trading desk 

The agency broker ’s outsourced trading offering is indistinguishable from the traditional sales-trading model of introducing broker-dealers. The agency broker maintains the relationships with the sell side and creates a hub and spoke network for its outsourced trading clients – the model’s key value proposition. Clients benefit from access to a wider broker network without the need to onboard with any sell-side brokers directly. Under this model, smaller managers are provided access to resources they may not ordinarily be entitled to, albeit likely at the expense of larger clients. 

The agency broker model delivers a broad broker network for liquidity access, but other structural characteristics of this model can arguably subvert value for clients, or, at the very least, diminish the overall value proposition:

  • High client-to-trader ratio – Executives at agency broker-dealers often position their firms for profitability by having traders cover many clients, typically 20 or more. It is no secret that high client-to-trader ratios detract from the quality of coverage. Managers – especially as new clients – must question where their fund will land within the coverage trader ’s priorities. When significant market events and dislocations occur, trading volumes spike and trader capacity decreases markedly, resulting in execution control issues and response delays. Traders cannot guarantee they will prioritize orders chronologically, let alone give assurance they will be in a strong position to help managers navigate the event and achieve the best possible outcomes. Lastly, high client-to-trader ratios curtail a trader ’s capacity to genuinely understand and cope with an asset manager’s requirements and fully integrate with its investment team.
  • Non-directed order flow – In a traditional agency broker model, the outsourced desk can trade with a limitless number of broker dealers, alternative trading systems or exchanges. Clients considering this model should be keenly aware that the majority of sell-side firms are unable to credit them with commission attribution when the outsourced trade faces the street, resulting in a loss of valuable firepower with page 1 their PBs and preferred brokers. A top selling point for the firms offering this model is their large broker network, advertising it leads to greater liquidity access. However, SEC 606 reports filed by agency brokers reveal that, on average, greater than 50% of non-directed orders received from clients are executed through venues where it appears to be financially beneficial. In other words, the majority of non-directed order flow is either internalized, executed with clearing brokers to meet minimum revenue requirements, or, worse, routed to PFOF firms.

Authorized trader model: an unconflicted extension of an asset manager

In this model, outsourced trading providers trade solely with the asset manager ’s execution counterparties as their authorized agent (trader). This model truly embraces the ethos of what an outsourced trading firm should do: operate as an unconflicted extension of the asset manager and its investment team—a quality that represents the model’s core value proposition. 

The structural characteristics of the authorized trader model further clarify its value proposition: 

  • Low client-to-trader ratio – Because of the intricacies involved, the authorized trader model simply does not allow for one trader to cover more than a handful of clients effectively. In this model, the outsourced provider is positioned to deliver bespoke, high touch, white glove service whereby the trader adds value as if he or she were the client ’s internal trader.
  • Clients maintain direct relationships with their executing brokers – The fund name remains the focal point for resource providers. There is no intermediation of a fund’s relationship with its brokers and resource partners: All trades are booked directly into the fund’s account and all commissions and/or spreads paid to the sell-side are from the fund. For risk management and resource tracking purposes, the sell side increasingly prefers to know exactly who the end client is. Maintaining this direct relationship under the authorized trader model is the only way asset managers can be confident they will be able to access the full suite of sell-side services, including ECM access, research, block trades, and analytical tools.

Looking Ahead

At Meraki Global Advisors, we believe the future of outsourced trading is bright, particularly for providers delivering value through an authorized trader model. This belief drove us to pioneer the pure buy-side model. Our clients have witnessed firsthand that the most productive level of service is achieved when outsourced traders become deeply familiar with their portfolios and operate within a true partnership model. Furthermore, the value derived from conflict-free trade executions directly with a client ’s counterparties is significant and unmatched. 

That said, we recognize asset managers are not homogenous; where one finds value, others may not. Some may not have the operational capacity to set up their own broker network and others may not require street resources, focusing instead on the low-execution costs. Perhaps a manager has just left a large established firm to launch a new fund – he or she may choose an agency broker to keep costs low while building a track record. 

Other managers require comprehensive services and experienced traders to meet their complex and/or global trading needs. For these managers, a bespoke offering capable of trading every market and all asset classes will deliver the most compelling value proposition. As a new fund gains traction, the manager can now focus on establishing a distinguished identity with the street. The manager may also be focused on capturing the competitive advantages created by an expert trader entrenched in the fund’s investment processes, such as identifying and/or hedging key portfolio factors. Authorized traders with visibility into a manager ’s investment process can also monitor the alpha and beta contributions to portfolio names to establish a sense for crowding. This assessment can be an invaluable tool, specifically for sizing positions correctly around uncertain catalysts. These are just two of the many differentiated services Meraki delivers to clients on a daily basis. 

As asset managers evaluate a growing field of outsourced trading providers, they would be well served by establishing a clear understanding of the value propositions on offer for optimal value. 

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

Decoding Outsourced Trading

/in , /by

All outsourced trading services are not alike.

In the broadest sense, outsourced trading replaces some or all of the functions of an internal buy-side trading desk with a third-party provider—but as this fast-growing industry continues to establish itself as a critical part of the asset management landscape, it becomes increasingly important to differentiate between the various service offerings within the space. Here we take a closer look at three predominant models for outsourced trading, assess the strengths and weaknesses of each, and discuss several key considerations for asset managers working to identify the optimal choice.

3 types of outsourced trading service models

Services can be separated into three models, defined by their core characteristics.

1. Prime Brokerage / Custodian Model

To enhance their prime brokerage and custodial services in an increasingly competitive environment, custodians and smaller investment banks are offering outsourced trading. The buy-side client has a single relationship with the provider. The execution broker housed inside the provider, a.k.a “outsourced trading desk”, executes trades for the client and passes the execution to their settlement and clearing group. The clients are provided with research, corporate access and other services. The outsourced desk may also have relationships with other sell-side firms for execution, meaning the client is transacting with the provider. Ultimately, the outsourced service provider is the executing broker and stands between the client and other sell-side firms.

Strengths

  • Lower explicit execution costs. 
  • Outsourced trading commissions are bundled as revenue for prime services

Weaknesses

  • Limited execution capability and expertise across asset classes and geographies. 
  • Limited integration with investment teams’ idea generation and portfolio management process. 
  • Entire desk may see orders, not just assigned trader and backup. 
  • Model may create incentive misalignments based on parent organization priorities. 
  • Outsourced desk may be in close proximity to institutional sales trading desks. 
  • Intermediates a fund’s relationship with its brokers and resource partners. 
  • Traditional broker dealers often treat this model as competition. 
  • Non-directed order flow may be mishandled, e.g., internalized or routed to payment for order flow (PFOF) parties.

WHAT’S DRIVING THE GROWTH?

Asset managers are facing compounding pressures, including ever-increasing costs associated with operating a fund. To find ways to stay profitable and drive efficient growth, managers have significantly reduced the size of their trading desks in the last 20 years, replacing traders with software. Even so, desks and their systems are still expensive. At the same time, increasingly complex and fragmented markets alongside regulatory and compliance challenges are driving the need for more software and expert traders. These issues only make creating alpha harder, especially for small funds. With many asset managers struggling to justify a million-dollar desk, outsourcing has become a compelling strategy, delivering superior trading services in a cost effective way. In addition to lowering costs overall, outsourced trading creates the opportunity for asset managers to turn a fixed cost into a variable cost.

2. Traditional Agency Model

Strengths

  • Hub and spoke model provides clients easy access to a wide broker network.
  • Client does not need to be onboarded directly with other broker dealers.
  • Outsourced desk may be able to provide written research reports from its broker relationships

Weaknesses

  • Limited execution capability and expertise across asset classes and geographies.
  • Trading desk may be serving a large number of clients.
  • Limited integration with investment teams’ idea generation and portfolio management process.
  • Intermediates a fund’s relationship with its valued brokers and resource partners.
  • Client’s traditional broker dealers often treat these providers as quasi-competition.
  • Non-directed order flow may be mishandled, e.g., internalized or routed to PFOF parties.

3. Pure Buy-Side Model

Providers act solely as the authorized traders for asset management clients. This structure allows the outsourced desk to be a truly independent, conflict-free extension of the client’s investment team, thereby operating in a pure buy-side capacity. In contrast to the models above, the provider does not have a clearing arrangement, conduct traditional brokerage activities, nor have any competing lines of business with clients’ broker-dealers. Clients settle all of their trades directly with their sell-side counterparty which ensures all trades are booked into the funds account and all commissions and/or spreads paid to the sell-side are from the fund. Meraki has pioneered the pure buy-side model, a unique offering which is more akin to “cosourcing” than traditional “outsourcing.”

Strengths

  • Ability to trade any asset class including global equities, credit, FX, rates, structured products, commodities, and derivatives. Funds are matched with seasoned traders according to their specialization
  • Client maintains direct relationships with their executing brokers and the fund name remains the focal point for resource providers.
  • Low client to trader ratio ensures a bespoke high touch service. Traders monitor portfolios, understand themes important to the manager, and provide him or her with opportunistic flows and market color.
  • Full access to capital markets teams, stock loan desks, IOIs, and buy-side only liquidity pools.
  • Complete integration with both the investment and middle office teams. Traders accept orders in shares, $, or % of AUM and can facilitate settlement of securities and cash management.

Weaknesses

  • Limited execution capability and expertise across asset classes and geographies.

Key considerations when selecting an outsourced trading firm

Building upon an understanding of the different outsourced trading service models, asset managers should ask themselves:

1. Which firm offers the greatest value for our needs? 

Some funds are looking for high-touch, experienced trading; others are focused on growing their broker network. Another way to approach this is to ask, which model would your desk most closely resemble if cost weren’t a consideration? Start by establishing core values—from here, it’s easier to weigh the advantages and disadvantages of the outsourced trading models

2. What am I giving up by narrowing down the offerings to a single focus?

If the sum of the lost values is greater than the value of the single focus, then you may want to reconsider your focus. If, for example, you choose the prime brokerage model, are you limiting your resources and creating concentration risk? If you chose the agency model, are you limiting the products you can trade, forfeiting credit for your commission dollars, or receiving subpar execution? And if you chose the pure buy-side offering, do you have the ability and willingness to set up prime brokers, ISDAs and execution accounts with your preferred counterparties?

Important issues around privacy and conflicts of interests 

At its core, the concept of outsourced trading works best when the service provider is structured so that conflicts of interest are removed, and trust is nurtured between both parties. Funds should complete thorough due diligence into a firm’s policies and procedures to detect potential conflicts of interest and identify mitigating measures.

The most important due diligence items include:

  • Firm Structure – Is outsourced trading the sole source of revenue for the business or is it part of a larger company? What is the ownership structure? What does FINRA BrokerCheck show about the firm’s registrations, lines of business, and ownership? 
  • Handling of order flow – Can the outsourced desk use my fund’s information or order flow to their firm’s benefit and my detriment? Do the firm’s SEC 606 reports reveal that a majority of non-directed orders are routed to Payment for Order Flow (PFOF) parties? 
  • Information leakage – How many people have access to my trading information? How many of my peers does my coverage speak with? What is the client to trader ratio? To what extent is the institutional desk separated from the outsourced trading desk?

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

Launching A Hedge Fund: How Emerging Managers Can Thrive In Their Capital Raising Efforts

/in , /by

Download PDF

Meraki Thought Piece

Alternative funds have faced a unique set of challenges since the onset of the Covid-19 pandemic, but few have been more prevalent than capital raising – especially for emerging managers. In this thought piece, we explore the fundamental changes and ways managers can thrive in their capital raising efforts over the next 12 months.

Pandemic pushes allocators to stick with what they know

In 2020, the hedge fund community posted one of its best years for absolute and relative returns. This strong performance in combination with a drastic reduction of in-person meetings has led many capital allocators to adopt a “safe harbor” approach, maintaining steady or increased allocations to existing managers. The hesitancy to consider new funds for their portfolio – particularly emerging managers or unproven investment strategies – is driven in part by the heavy weight placed on traditional face-to-face meetings with prospective managers. The lack of conferences and limitations on travel, which strongly curtail opportunities for in-person due diligence meetings, have also made it problematic for emerging managers to simply access investors. 

As a result, many allocators now have overweight exposure to existing managers and large platforms – imbalances which can potentially impact their diversification profiles and hinder the number of distinct alpha streams within their alternatives portfolios. 

From the fund perspective, some established managers and platforms are benefiting from the disrupted capital-raising process. On the other hand, funds with a launch on the horizon are being challenged by longer raise cycles. Raising capital has always been an uphill climb and, unfortunately, doing so during a pandemic is the same climb at a higher altitude.

Here to stay: New digital platforms and communication mediums

The market has adopted new technologies and communication tools which will continue to be part of the capital introduction process as we emerge from the pandemic. As industry participants look to maintain efficiency gains and manage the uneven path toward a resumption of office work, expect these pandemic-inspired developments to endure:

  • Digital Platforms – Several prime brokers and third-party marketing firms have set up digital platforms to connect funds and allocators, creating “digital clearinghouses.”
  • Video Communications – Virtual meetings are the norm, particularly for international funds and US-based allocators who cannot travel due to lengthy quarantine requirements. Virtual meeting fatigue is as real as in-person meeting fatigue, one must tread carefully.

Five ways managers can thrive in their capital raising efforts

To successfully navigate the transformed capital-raising process, managers would be well served by a renewed focus on the following five areas:

  • Scale or fail – Delaying launch shows a lack of confidence, launch with the capital you have, start building a track record, and then speak with allocators. First year costs for a typical long/short fund are $1MM, primarily earmarked for salaries to assemble a core team that balances investment, operational, and marketing expertise. The remainder used for outsourced partners and technology. Be ruthless in deciding what is needed, as opposed to desired, to build a great foundation through strategic planning, budgeting, capital raising, and legal considerations. 
  • High-quality deck and pitch – Allocators are inundated with marketing decks. Help them cut through the noise with a succinct deck that clearly articulates the strategy through carefully considered design and written content. The pitch should be honed to suit the strategy and target allocator. To generate the greatest impact, dedicate more of the pitch to the story and less to the deck review. 
  • Strategic networking – By working early and often to build strong relationships with the right allocators, managers can draw on a foundation of trust at appropriate times during the fundraising cycle. 
  • Thoughtful social media efforts – Managers can make the most of the current communications landscape by using social media to connect with allocators via LinkedIn, Twitter, and other platforms. The positive effect of staying in front of key contacts when in-person meetings aren’t an option is further boosted by sharing, commenting on, or otherwise engaging with the connection’s relevant content. 
  • Leveraging valuable advisors – By tapping into a select group of experts and advisors, such as third-party marketing firms, prime brokers, CIOs at friendly funds, and former buyside executives-funds can learn how to best position their offering under the current landscape.

How Meraki Global Advisors can help in your capital raising efforts

As a value-added service to our outsourced trading clients, we help managers create a strategic marketing strategy and increase their firm’s awareness among a unique set of investors and allocators. Our experienced team provides start-up advisory services, identifies actionable ways to improve decks and pitches, and creates prospective allocator lists for select introductions. Our services are suited for a diverse range of clients, extending from traditional long-short emerging managers in the very early stages to managers running a multi-strategy platform and existing multi-billion-dollar funds trading globally across asset classes. 

As the premier global multi-asset outsourced trading firm, we take pride in putting our clients’ interests first. Built on a foundation of confidentiality, our unique conflict-free model empowers funds to garner optimal access to liquidity. 

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

Outsourced Trading Is Gaining Ground in Fixed Income Markets

/in , /by
Download PDF

Meraki Thought Piece

Outsourced trading first developed in the equity markets as a solution for small and emerging managers. Today, managers of all sizes regularly capture the benefits of outsourced equity trading— and momentum is now spreading to fixed income markets, driven by changes in investor mindset and evolutions in market structure. 

As a premier outsourced trading firm and one of the first to offer a flexible partnership model for fixed income trading, we have a unique perspective into how these developments are unfolding on the ground. Here we discuss six catalysts for the rapid adoption of outsourced fixed income trading and explore how these factors are supporting a strong runway for future growth. 

1. Shifting mindsets around remote work – After spending 18+ months working remotely due to COVID-19, investment teams have demonstrated that portfolio managers, traders, and research analysts are just as effective managing assets while working remotely as they are working together in the same office. They’ve successfully collaborated and navigated volatile markets— all from home. 

As investment teams have become confident working in this new organizational structure, the temporary alternative has given way to a more permanent solution. Managers now recognize they can achieve tight-knit team integration without physical proximity—an important realization that transforms outsourced trading into a viable option.

2. A growing need for geographic diversification – From a business continuity perspective, CIOs and COOs are increasingly recognizing the value of diversifying the geographic locations of their trading desks. COVID-19 has played an important role in this development, having laid bare the health risks of the traditional open trading floor. In addition, the Texas power crisis in February 2021 pushed firm leaders to accept that geographic diversification means more than having satellite offices around a major city. In reality, it should mean having functional offices across the country, or even beyond. Managers are identifying outsourced trading as a key part of the solution, thanks to its ability to provide a simple and inexpensive means to gain geographic diversification and mitigate business risks. 

3. A higher bar for fixed income traders – Today, the role of a pure execution fixed income trader is largely obsolete. Traders must add value to a manager ’s investment process, driven by an ability to provide critical market intelligence in a global multi-asset environment where information flows quickly. The continued electronification of fixed income markets is an important reason why the bar for traders has been pushed higher. As the fixed income world moves way from its historical roots as a predominantly OTC market, traders are required to be proficient users of flexible trading protocols and electronic trading tools. Electronification also allows fixed page 1 income managers to automate certain workflows. As a result, the trader ’s implementation of the manager ’s investment decision plays a more critical role than ever before in fund performance enhancement and consistency as well as genuine alpha generation. 

In this context, asset managers and their clients are capturing significant benefits by leveraging an outsourced trading partner and optimizing trading workflows. Meraki Global Advisors’ outsourced trading solution offers investment managers access to traders who are committed to delivering the high degree of intensity and focus that today ’s market demands as well as proven expertise in the latest fixed income trading platforms.

4. Rising operating costs – In recent years, growth in operating costs has been a driving force behind industry consolidation. When these ballooning costs are combined with fee compression, firms looking to remain independent must identify ways to optimize efficiencies and reduce unnecessary expenses. Outsourcing many operational functions, including trading, is one way to generate these sought-after efficiencies. Outsourced trading turns what is a typically a fixed cost into a variable one: Managers don’t pay for periods of inactivity during which no trading takes place. 

5. Increasing awareness around the benefits of specialization – In a highly competitive marketplace, small- to medium-size firms are seeking ways to secure the benefits of specialization that are typically only available to larger competitors with sufficient scale. In most cases, firms must reach a critical size before individual contributors can stop wearing multiple hats and people can be hired for specialized roles. Outsourced trading empowers portfolio managers and research analysts to stop executing trades and focus solely on their core competencies. Small teams can thereby achieve a depth of knowledge and skill on par with the specialization previously reserved only for larger firms.

6. Greater difficulty accessing liquidity – In our view, this is the most critical factor driving the growth of outsourced fixed income trading. Over the last five years, large broker-dealers and investment banks have fixated on technology implementations, expense cuts, and revenue growth—all made possible by focusing primarily on their largest institutional investor clients. Often, the small- and medium-size investment firms are allotted junior sales coverage and receive limited access to market information and trading desk axes compared to their larger peers. 

In this environment, outsourced fixed income trading offers an attractive solution, allowing small- and medium-size firms to benefit from the expertise and relationships of their dedicated senior trader at the outsourced trading firm. At Meraki Global Advisors, for example, our traders have more than 15 years of buy- and sell-side experience and have cultivated strong relationships with the dealer community.

In sum, a powerful combination of forces is paving the way for widespread adoption of outsourced trading in fixed income markets. Given all its advantages, we fully expect to see outsourced trading become a larger part of the asset management ecosystem in the years to come. 

Meraki Global Advisors is a leading outsourced trading firm that delivers global multi-asset trading, leverage management, and capital introduction services to a sophisticated and diversified client base that includes hedge funds, traditional asset managers, family offices, corporates, and private equity firms. Independent and unconflicted, we help our partners manage complex strategies across the globe and in every asset class by fully integrating into their investment processes. Recognized as the buyside desk of our clients’ investment teams, we trade a range of fixed income asset classes for our clients, including but not limited to HY, distressed, bank loans, IG, EM, CDS, CP, rates, swaptions, and ETFs with their valued street counterparties.

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