There’s More To Outsourced Trading Than Cost Savings

Meraki was featured in AlphaWeek’s newsletter this week. Thank you Greg Winterton for the insightful discussion, it was a true pleasure to collaborate.

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In this interview, Benjamin Arnold, Founder & CEO of Meraki Global Advisors, discusses the considerations for hedge fund managers when selecting an outsourced trading provider.

Alpha Trading vs. Execution Trading:

Ben Arnold explains the difference between these two models. Execution trading is like being covered by a sell-side sales-trader, often leading to information leakage and single asset class execution. On the other hand, alpha trading involves a dedicated trader who integrates into the fund’s investment process, allowing for trading across asset classes and personalized services. Alpha traders have experience on both the buy and sell-side, leveraging technology and strong broker relationships for best execution.

Cost Savings:

Outsourced trading can offer significant cost savings by turning a fixed cost into a variable one. In-house traders and infrastructure can cost over $1 million, whereas outsourced trading allows funds to pay only for what they use, scaling as needed.

Compliance Benefits:

Compliance with regulations like MiFID II and SEC Rule 606 is critical for European and American funds. Outsourced trading providers often have processes in place for pre-trade analysis, strategy selection, and data collection to meet best execution requirements.

Mitigating Risks:

Hedge fund managers need to carefully evaluate providers to mitigate risks. They should examine the provider’s structure, separation of institutional and outsourced trading desks, and elimination of conflicts of interest. Transparency in order routing and execution is also crucial.

Control Over Traders:

Fund managers should know who is trading for them and have control over their orders. They should ensure that dedicated traders authorized by the fund are the only ones handling their assets.

Conflicts of Interest:

Managers should not be comfortable with conflicts of interest. Providers should be scrutinized to ensure they have genuinely eliminated conflicts and aligned their interests with the clients’.

Trends in Outsourced Trading:

Traditional broker dealers are entering the space, offering trading services to prime brokerage clients. More sophisticated funds may prefer conflict-free providers, while smaller managers may stick with bundled offerings. The trend also includes partnering with one-stop shops that offer a comprehensive solution, including middle-back office support and software services.

In summary, Ben Arnold emphasizes that not all outsourced trading firms are the same, and thorough due diligence is essential to finding a provider that aligns with a fund’s needs and interests.

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
Mary McAvey
VP of Business Development