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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.
TorreBlanc is a vendor neutral consultancy whose priority is always to advocate for our client needs first and foremost. For those who might be interested, we are open to a conversation to share insights and can help identify providers. At the end of the day, it's about getting our clients to a point where their operating model and technology stack provide the resilience and agility needed in today's competitive marketplace.
Mark Aguilera
CEO and Head of Advisory Practice
