A View from the Front Lines of a Growing Business

Tim O’Halloran, Managing Director
Outset Global

For the past decade, we have shared our thoughts on the growth and institutionalization of the outsourced trading space. We’ve highlighted how the marketplace has evolved from a niche business, once the province of emerging hedge funds, to now include larger investment managers and asset owners, some of whom outsource, but many who simply seek to supplement their in-house trading resources.

We note that with greater acceptance and more of the buy-side engaged, there are now over forty organizations offering some form of outsourced and/or supplemental trading solution. While we have seen a few firms exit the space, and some consolidation, it is fair to say that the demand for outside trading expertise has fueled greater supply. With that, it can now be a daunting challenge for any investment manager to evaluate the right business model and mix of features from this pool of providers. The term outsourced trading has been loosely defined.

This is not a surprise to us. Now in our sixteenth year, my colleagues and I at Outset Global are often asked to help investment managers navigate this journey and better understand how to evaluate the right solution.

We believe that this begins with first understanding not only the distinct types of providers but how the business models offered by these providers differ. And knowing what questions to ask.

Industry consultants and research firms studying outsourced trading have bucketed the playing field into three broad types of firms – independent/pure-play firms, prime brokers, and custodians1. Within these categories, there are really only two business models – buy-side and sell-side. More simply put, a provider of outsourced and/or supplemental trading is either positioned as a buy-side trader, covered by the sell-side and receiving IOIs… or they are the sell-side.

Drilling down into this nuance matters greatly. Outset Global has grown organically, and we have taken great pains to clearly define our business model relative to other industry players. Highlighting our independent, buy-side approach has helped to shed light on our workflow and processes. Providing clarity, education, and a consultative posture is important when bringing a niche business to a larger, mainstream audience managing trillions of dollars.

This is certainly the case with outsourced and supplemental trading. We have found that providing thought leadership and dispelling myths has been integral in driving broad institutional awareness.

So, what have we seen? What is driving adoption?

As mentioned earlier, many hedge funds may choose not to have a trader at launch for economic reasons. This has been the case for 30+ years and is still standard practice.

However, we now see large, established managers engage us simply to supplement their in-house trading resources. In doing so, by adding one broker and a single FIX connection, we provide a path to liquidity, research, and market intelligence from over 300+ global brokers. This supplemental trading bucket is now our largest total addressable market.

The broader buy-side now recognizes that leaning on outside execution expertise is not outsourcing, per se. Investment managers and asset owners have welcomed outside research and technology expertise for decades. Yet, it was never deemed “outsourcing.” It has now become clear that engaging outside trading expertise is no different.

It is no longer a “leap-of-faith” or a C-Suite/Board decision for an investment manager to “outsource” trading. It is now a simple operational choice, often made by a trader, to leverage specific outside expertise and talent, when and where appropriate. And the proof is in the pudding…

We see institutional clients with AUM ranging from $50m – $100B+ engage us to:

  • Access offshore markets.
  • Expand reach to liquidity, market color & research.
  • Reduce information leakage (seek discretion / anonymity).
  • Leverage our expertise in derivatives, privates and advanced trading tools.
  • Trade small cap, illiquid, and closely held securities; and/or
  • Access additional bandwidth during periods of high volume or high volatility, BCP or staffing gaps.

Addressing these needs has fueled our global growth. We help clients to both drive trading alpha and manage expenses. And this is happening as our industry faces a juniorization of talent and increased automation.

It is worth reiterating that our growth derives from our independent, buy-side positioning and scale. These features have allowed us to not only be pertinent with the sell-side but also attract and retain seasoned capital markets and trading talent. This is paramount in a service business.

If you are going to replicate the role of a buy-side trader, you should be positioned as such. You should be able to 1) seek best execution from a broad swath of brokers through LT and HT channels, 2) shepherd timely news, color, research, and market intelligence to your client’s investment team and 3) manage their commission wallet to the street, on both a bundled and unbundled basis.

This means that you need to be a valued client of the sell-side and represent your clients to the sell-side in a mutually beneficial manner.

When positioned properly, a good trading solutions firm does not disintermediate the sell-side. They do not compete with them. This is core to our value proposition. Outset Global helps investment managers engage and remunerate brokers with whom they are not set up, and conversely, delivers valuable order flow to the sell-side from investment managers with whom they do not trade directly. This structure benefits both parties2.

In the coming months, we will opine further on the key ingredients needed to accomplish this – independence, scale, and expertise. We will share our thoughts and observations on what we see resonating with our clients in the U.S., EMEA and APAC, along with what factors we see driving industry demand for independent trading expertise.

As always, we welcome your input. To learn more about outsourced and/or supplemental trading, ask for our FAQs or to discuss this growing space, please reach out to us at info@outsetglobal.com.

1 Over the past decade outsourced trading has garnered attention in the form of industry studies, surveys and articles authored by Coalition Greenwich, AITE Research, Chartis-Research, Quinlan & Associates, Opimas and others. Much of this attention has served to define the playing field and highlight the different operating models within the industry.
2 We note that buy-side BD lists have contracted over many years. This is typically driven by an investment manager’s desire to keep their BD list tight, saving on administrative and compliance expenses. Alternatively, it may be a broker’s choice to not provide trading coverage (and bear the cost of a FIX line) to an investment manager who may use them infrequently or opportunistically. Not every client can meet a broker’s revenue and/or profitability hurdles. Additionally, while the use of CSAs has helped improve access to research, they have also served to shrink buy-side BD lists, and in doing so, severed (or never established) paths to natural liquidity, notably in smaller capitalization names.