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We recently had the opportunity to participate on an internal panel for a large global bank to discuss driving front office transformation to attain workflow efficiencies. In this specific arena, outsourced trading has become a trending lever and has attracted asset managers with larger AUMs in recent years. In our conversations with clients, it is apparent that it's becoming hard for them to ignore the potential that outsourced trading has to offer. If nothing else, the curiosity is there for several reasons we discussed in our 2025 AWM Industry Trends: the front office is under pressure to innovate from a product strategy perspective and this is causing managers to rethink old conventions and focus on core competencies.
In the past two decades, there has been a distinct separation between portfolio management and trading roles. Managers have aimed to streamline execution and consolidate desks on the equity side for operational efficiency, risk management, and economic purposes. Additionally, regulatory pressures have enforced the separation of duties influenced by regional regimes. With the industry's shift towards passive management, the need for active strategy portfolio managers to trade their own stocks has diminished. Market on Close orders now require broker selection and volume management rather than negotiation. Consequently, trading has become an increasingly independent function in the alpha creation value chain, initially for equities and more recently for fixed income. This independence allows boards to evaluate trading from a different perspective. Moreover, many smaller firms are transitioning trading from the revenue-generating side of the ledger to an expense category, with traders reporting to heads of operations.
It is also worth noting that providers have expanded their service offering in recent years. Alongside global reach, some also provide fixed income, dark pools, and derivatives, thus enhancing the a la carte menu for money managers.
Outsourced trading isn't suitable for every manager. Larger firms often benefit from global flow and institutional relationships to boost buying power. In fixed income, traders and PMs collaborate on new issues or hedging strategies, making integrated teams crucial for value creation and risk mitigation. Factors like internal workflows, strategies, AUM, traded asset classes, and geographic markets determine the added value of in-house execution.
Outsourced trading offers several advantages that can be appealing to investment managers. As a rule of thumb, smaller managers are more likely to outsource their entire desk while mid-size managers may only outsource a component. We have seen this trend in both the NA and in EMEA.
Possible advantages include:
1) Add an Execution Provider to Reach New Markets: Managers aiming to diversify risk by entering new asset classes or geographies can benefit from the experience and reach of an outsourced trading partner. For instance, an equity manager adding fixed income assets can gain bond market expertise and liquidity from a provider. Similarly, a North American manager with an APAC portfolio can use local knowledge from outsourced trading to enhance trading capabilities and speed up market entry. In this additive scenario, the rest of the execution stays where it is, internally.
2) Performance Enhancements: Outsourced trading can make the buying power typically only available to a large global manager, accessible to smaller managers. Higher buying power could improve execution quality through asset class and regional market expertise and open access to a wider range of liquidity sources and a broader sell-side dealer network. This can set those with small trade volumes on equal footing with larger players.
3) Cost Optimization: By outsourcing trading, in some cases, managers can reduce costs associated with licensed software, human capital, regulatory, and operational costs. This includes paying for highly skilled full-time employees year-round, as opposed to paying on a "per-transaction basis", which can be more cost-effective, especially for low-volume funds. Certain geographies do make it tough to find the specialized talent to trade complex asset classes. Also, depending on the outsourced provider, certain operational and regulatory components can also be handed over.
It should be mentioned that just like outsourcing the middle-office, outsourced trading can also include the transfer of personnel from the money manager to the service provider. In the right scenarios, delegated execution provides investment managers with the opportunity to reduce time to market, optimize costs, and potentially enhance performance by leveraging the expertise and resources of specialized providers.
Why is outsourced trading relevant now?
In November 2024, I had the pleasure of presenting at InvestOps Connect. One of the key themes that resonated with the audience was that external macroeconomic factors are forcing investment managers to focus on core competencies, thus they are looking for cost optimization opportunities. Part of this discussion has increased interest in evaluating exiting ownership of three specific areas by moving to outsourcing: Trading, Middle-Office, and Data. While these trends have been evolving over the past several years, the recent market volatility has applied further pressure for managers to double down and accelerate their plans to refocus on what they do best, generate alpha and retain clients.
We will address the outsourcing of middle-office and data in future posts. The key takeaway here is that providers now have a more mature service offering to meet an increasing and more complex service demand.
"...macroeconomic factors are forcing investment managers to focus on core competencies, thus they are looking for cost optimization opportunities. Part of this discussion has increased interest in evaluating exiting ownership of three specific areas by moving to outsourcing: Trading, Middle-Office, and Data."
This service got its start with fiduciaries who manage regional and global market mandates anywhere from $500M to $100B USD in AUM, with the density of clients in the lower billions. Patterns suggest this is shifting upwards with larger firms who are willing to consider modular outsourcing for specific asset classes or regions. Hedge funds, particularly those with overworked traders, are also continue to show interest. In addition to hedge funds, we see broad range of clients that have moved over including OCIO, wealth and institutional managers. However, it is unlikely that asset managers with a trillion USD in AUM will join the outsourced trading trend anytime soon.
TorreBlanc does maintain a list of the dominant players and we have relationships with many of them. We will not disclose specifics but here are some amalgamated metric examples from various providers.
TorreBlanc recommends the provider search start with some high-level considerations prior to engaging on the details of a provider's service offering. Alignment on values between client and provider will help establish a long-term partnership, rather than looking at this as a vendor relationship.
When selecting a vendor or service provider, TorreBlanc advises our clients to select shoes that are a little bigger than what they need now, to keep an eye on future growth. All COOs have had the front office drop an urgent request to win over a client mandate at the very last minute. By carefully evaluating these factors, investment managers can select an outsourced service provider that aligns with their needs and enhances their overall performance.
The closure of UBS' Execution Hub, which primarily focused on hedge funds, is perceived as an isolated event due to resource allocation within the bank and the broader integration of last year's merger with Credit Suisse. All indicators suggest that this event is specific to UBS and not reflective of the industry.
As mentioned in Trader's Magazine, private trading rooms are customized liquidity pools hosted within Alternative Trading Systems (ATSs). They are exclusive venues where only selected participants—such as broker-dealers, market makers, and institutional traders—can interact and trade. These rooms can be structured in various ways, such as member-to-member or member-to-multiple-member formats.
Smaller broker-dealers are highlighted as potential beneficiaries of private rooms, which may include outsourced trading desks that serve multiple clients. Private rooms act as a bridge to multiple venues, which could be attractive to outsourced providers seeking efficiency and scale without heavy investment in connectivity. So while the article doesn't directly state that outsourced trading providers use private rooms, it strongly implies that firms with limited infrastructure—like many outsourced trading desks—could find them useful.
Reach out to us! We are happy to brainstorm with you on next steps and discuss initiating the provider selection process. We can also share the implications to your organization from a personnel and oversight perspective. There is also lots of ground to cover with respect to trading such as restricted-brokers, compliance, post-trade processing, and TCA. We can help you outline all of your concerns in a structured manner so that your organization is able to make an informed decision with confidence.
In conclusion, we hope this article has been informative and as always, we look forward to a continued dialog with you on this topic.
Mark Aguilera
CEO and Head of Advisory Practice
