Outsourced Trading – The Next Wave of Recovery

Right now a large chunk of the world’s trading floors & offices sit empty. While the markets swing up and down as both retail and professional traders try to ascertain the continuing impact of the current pandemic, all of this is being done away from the trading floor, desk or office. 

On one hand, this helped minimise market disruption, and on the other hand, it caused long percolating questions on the value of physical trading spaces to bubble up to the surface. As governments move to tentatively ease lockdowns, the question for the people in charge of exchanges and trading floors is what exactly does the ‘new normal’ look like? 

Although we don’t see the physical trading floors disappearing completely, we do, however, expect to see a thinned out trading floors and rooms, where a select few specialists are on-site joined by primary staff based remotely and perhaps they will have more connections into full outsourced operations on a regular basis as opposed to just a contingency measure. 

This will be true throughout the industry from the football pitch-sized trading spaces of the world’s largest asset managers to the small rented offices of startup or boutique funds. Everyone is going to have to do with less or at least fewer people in the same physical space. 

Fuel to the fire

While the sight of eerily empty offices throughout the top financial cities of the world and hundreds of business page stories reporting on the crisis, what happened in March was an acceleration of an established trend. Trading is increasingly electronic. JPMorgan estimates that over four-fifths of global trading occurs on electronic venues. Better communications connectivity means even voice trading is location agnostic.

The overall market tilt from active to passive trading strategies, greater regulatory and reporting requirements (including best execution mandates) have continuously raised fee pressure. Which has meant that firms have been looking for ways to trim costs throughout trade operations. Reducing headcount and shifting to outsourced trading is an increasingly common way to control cost and build sustainability for mid-sized players and hedge funds.

The back-to-work agenda

Many financial firms are drawing up plans for leaner operations. Physical space for some firms will most likely shrink, starting with international giants and working down to speciality shops. Deutsche Bank boss Christian Sewing said that the past four weeks had prompted the German lender to consider cutting back real estate as fewer staff will be working full-time in the wake of the virus. In the front office however, a major concern was how to generate investment ideas, something that tends to be a collective process between a team of portfolio managers, traders and strategists. But even here, with necessity being the mother of invention, new workflows are beginning to emerge, and the question lies as to whether front office roles will move away from expensive flagship offices.

Any return to work is likely to occur in phases, with people entering the office being monitored for symptoms, and social distancing norms challenging the open-plan office concept. While this gives us a glimpse of normality, we are months or even years away from “business as usual”, and in the meanwhile, the trading environment remains rather disrupted.

Will outsourced trading become the new normal?

One of the more insidious parts of this coronavirus-derived disruption is its uncertainty. Post-pandemic plans worryingly might include periods of return and retreat from physical spaces. This is another reason why outsourced trading has become increasingly attractive throughout the pandemic. The ability to have instant access to a team of traders across the globe, extra pairs of hands without the long process of hiring, facilitate trades outside of primary jurisdictions. These factors along with no operational costs and building robust BCP are why more firms are looking more to outsourced trading. 

For outsourced traders, the way they interact with customers hasn’t changed much. That said, there are some shifts in how they execute for customers. Due to market volatility and large intraday swings, there has been some relaxation of limits orders being "soft" rather than strict limits, and more discretion given to the outsource trader to be opportunistic in execution.

Outsourced traders are effectively the eyes and ears of their clients, providing constant updates on portfolio related news and events.

One of the most significant lessons from the Coronavirus pandemic is the importance of business continuity. What firms need is plans that not just allow for the safety of employees, but the flexibility to continue operation no matter the external shock. For the vanguard who have already embraced outsourced trading, they are currently reaping the rewards that come with stability. Others will certainly follow.

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Chris Jenkins is Managing Director at Tora

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The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group