By Liqueo Senior Consultant, Giray Takar.
Outsource dealing is becoming an increasingly attractive proposition. More service providers are entering the market to offer ‘Dealing as a service’ as a challenge to the existing operating model of Investment Managers having their own in-house dealing desk. Such a service can indeed supplement existing capacity in times of need or even reduce operational risk. In addition, it offers the potential for companies to reduce their operational costs and focus on their key business goals.
Investment Managers are continually exploring ways to further reduce costs and risk while minimising complexity within the business. In many cases, the outsourcing of operational processes, such as fund accounting, administration and client reporting, has been completed and attention is turning to other areas such as the middle-to-front-office processes.
Historically the Portfolio Manager (PM) was not only responsible for managing their portfolios but also had to carry out the execution of orders. With the regulatory drive to reduce risk and conflicts of interests, Investment Managers looked at enhancing internal operating models. An area of focus was the front office and initiatives like moving the dealing function away from the PM. Investment Managers adopted operating models such as the creation of distinct dealing desks by asset class and, further on from that, adopting a centralised dealing operation. Improvements in the marketplace have helped to further improve the dealing function - such as the move away from voice trading to electronic dealing. Electronic dealing has been enabled by technologies such as Order Management and Execution Management Systems that support electronic trading using FIX protocol and execution platforms (Tradeweb, Bloomberg, FXConnect etc.).
The outsourcing journey for Investment Managers is not over and there are areas of opportunity to further reduce costs and better manage risk in a very competitive marketplace. Investment Managers are looking to focus on areas of their business that differentiates themselves from their competition. One area where opportunities are available to reduce costs and risk is the internal dealing function.
An ever more demanding regulatory environment.
More complex asset classes which highlight capability gaps in product expertise and technology.
The ongoing investment needed in technology to keep pace with the complexity of asset classes.
The constant overhead cost of system upgrades to existing systems.
Increasing operational cost of running a dealing function like:
Running an internal dealing capability across asset classes.
Time zone coverage needed to cover market globally.
The potential need for a physical presence in time zones where dealing is needed.
Local market expertise.
There are operating models that offer investment managers a best fit for their requirements such as:
The outsourcer acts on a pure agency basis and the Investment Manager outsources 100% of their dealing capacity - and benefits from the provider’s larger broker network.
Certain asset classes are outsourced where there is a lack of internal expertise.
Outsourcing by geography to cover markets where the investment manager does not have a physical presence.
To offer additional capacity during peak periods of their trading cycle (month end, portfolio rebalancing etc).
Considering the service as a backup or even a business continuity solution.
Organisations will naturally have questions on the implementation timescales, aspects and hurdles that are needed to move to such a model. Implementation timescales can be as quick as a couple of weeks. A key element is agreeing the roles and responsibilities between the two parties and defining key metrics to ensure the service is being managed effectively (as all outsourced service agreements should stipulate). Lastly, the effective management of the implementation of process of outsourcing is key to the success.
Here at Liqueo we specialise in both Front Office and Data and have dedicated resources that can help define operating models of the future.
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