originally penned by Richey May
Lately, our alternative investment team has been fielding more questions about outsourced trading. What is it? How does it work? What are the latest trends? So we went to an expert, Mark Viani, Director, Institutional Sales at CAPIS, to answer your most frequently asked questions. Here are the highlights of our conversation.
What is outsourced trading and what types of funds would it most benefit?
Outsourced trading can be defined in several ways. For some firms, it’s the simple outsourcing of the trading execution function to an external broker rather than employing in-house traders. To others, it may mean co-sourcing, where the asset manager relies on an outside trading desk to aid in the execution function but still maintains an in-house trading desk.
Long gone are the days when only RIAs and hedge funds benefit from outsourcing their trading. Many firms find comfort in the depth, coverage and experience of their outsourced desk. And they no longer worry about desk coverage during vacations or illness, along with the sheer cost of staffing a trading desk.
Is outsourced trading a better fit for funds of a certain size, type or strategy? Can you provide a real-world example?
Any size firm can use the skills of an outsourced trading desk. Everyone from emerging managers to breakaway hedge funds, mid-sized firms to the largest of RIAs, will find many advantages in employing this strategy. RIAs sub-advising to wrap and custodial platforms also benefit in using outsourced trading solutions, such as combined outsourced and managed solutions technology.
What does it look like for a fund to have fully outsourced trading versus using it as a supplement? Can you give examples of where/how this works best? What functions are your clients still doing?
In a fully outsourced engagement, the outsourced trading desk handles all the functions of execution. From executing directly with the street to directing orders to brokers for research, the outsource desk handles the client’s commission wallet, acting as the buy side desk for the client.
A supplemental approach would typically include sending orders to the outsourced trading desk when the need arises — daily or periodically based on client capacity needs.
What trends are emerging in outsourced trading?
Given the upheaval of the pandemic and resulting labor shortages, we’re starting to see that all things that can be outsourced are now being considered, including:
- Combining Wrap and institutional orders in outsourced trades
- Increase in basket trading
- Use of middle and back-office outsourcing firms
Questions? We’re always here to help. Please contact Richey May Business Development Partner Stephen Vlasak to learn more about the services we provide to the Alternative Investments industry.
Serving institutional investors since 1977, CAPIS is an agency broker that offers global execution services and commission management solutions, pairing leading-edge trading technologies with an unparalleled dedication to superior client service. CAPIS helped pioneer the practice of providing commission management solutions to investment managers. Today, they are one of the only brokers to offer research credit on global equity trades as well as fixed income and options trading. CAPIS provides a 24-hour global trading desk that offers global equity, fixed income, derivatives, and portfolio trading services to help institutional investors meet all their trading mandates.