The Buy-Side Trader Is Getting Outsourced in Coronavirus Crisis

(Bloomberg) -- A once-in-century disruption to securities trading is intensifying a revolution in how some investment firms conduct business.

With at-home traders navigating the wildest market swings in history, more money managers are tapping outsourcing companies to buy and sell financial assets on their behalf. With their employees at risk of falling sick or losing regular access to market venues, the buy side in lockdown is turning to a booming industry that's drawing big-gun entrants including State Street Corp., AllianceBernstein Holding LP and Wells Fargo & Co.

In so doing, the largest providers are reporting a surge in revenues as transaction volumes jump and new clients sign up.

Outsourced traders essentially act as a middleman between the buy side and sell side in handling trading flows. Some outsourced trading divisions are run inside bigger financial services firms, like Jefferies Financial Group Inc., while others operate as small, standalone shops. Their pitch to asset managers: Ensuring best execution with an extensive network of brokerages and high-speed technology, which can be expensive for smaller funds to maintain on their own.

“We've seen folks add our outsourced trading team just to be able to say that they have systems in place and a set-up in place should their traders get sick with Covid,” said Bobby Croswell, head of U.S. outsourced trading at Cowen Inc. The firm's outsourcing revenue more than doubled in the first quarter compared with the same period in 2019.

As the pandemic unleashes unprecedented operational risks, asset managers are joining peers who have flocked to these services in recent years to keep up with new technologies and to cut costs -- while liquidity gets ever-more fragmented.

Among the more established names, Outset Global LLP says its client list has grown 45% in the year through April. Tora Trading Services Ltd. says sales increased 105% in the first three months of the year from the prior period, as existing clients expanded usage and new ones signed on. Tourmaline Partners LLC, an outsourcing firm based in Stamford, Connecticut, just clinched a majority investment from a private equity firm that will help expansion plans.

While some smaller funds opt to outsource entirely, many larger managers use such services to supplement their own operations, like buying and selling Asian stocks when their traders in New York are asleep.

Unlike agency or prime broking, outsourced players conduct relationships with the sell side on behalf of the client and offer more comprehensive services including monitoring exposures and providing market color.

“It does appear there has been increased interest in outsourced trading,” said Shane Swanson, an analyst at consultancy Greenwich Associates. “That does go hand-in-hand with the explosion in technology we've seen across the past 10, 15 years -- in particular in how that has been utilized as part of this response to the Covid crisis.”

He calls the recent turmoil a “proof of concept” for outsourcing for a host of new managers.

In a sign of the growing demand, larger financial firms including Cantor Fitzgerald LP and Jefferies have expanded their industry offerings over the past year.

Octavio Marenzi, co-founder of consultancy Opimas, suspects that the boom will ease as the buy side adapts to working from home, but the long-term pressure to cut costs is still in favor of the business. Opimas has estimated that a fifth of investment managers overseeing more than $50 billion will outsource at least parts of their trading by 2022.

“Global equity trading is a bit like a melting ice cube; it's structurally challenged and will remain that way,” said Raymond McCabe, the London-based founder of Outset Global. “To have your own trader depending on what size you are or how you trade is, for some, a luxury.”