In the recent past, asset managers were reluctant to outsource services from trading providers. However, this has changed quickly, with more asset management preferring to outsource all trading services. This shift has resulted in broad discussions among experts on what the causes might be. Below is an overview of the reasons why asset management firms outsource to trading providers.
The Cost Burden
In recent times, active asset management yields have not matched the expectations of investors. With most management ventures underperforming, more firms have had to rethink their operational structures. Many of these firms have resorted to outsourcing the trade desk operations as a means of reducing expenses. This action has proved to be temporarily convenient as they can now focus on other activities, with the outsourced firms taking care of trading.
Additionally, many smaller management firms view outsourcing as an opportunity for better services and growth. The reasoning behind this is that when a smaller management firm outsources to a large trading provider, it gains access to specialists that the firm wouldn’t have the ability to pay on a full employment basis. Outsourced trading solutions are vital to growth for these smaller asset management startups.
The Burden of Complying with Regulations
Government regulations are among the significant factors that resulted in the shift of asset management firms into outsourcing trading services. Most regulations cost management firms a great deal by forcing them to regularly upgrade their systems and make additional hires for the sake of legal compliance. To escape such costs, most management firms have resulted in outsourcing trading operations which shifts the responsibility of compliance to trading providers.
Hardware concerns are also a significant reason for this shift. Trading technologies are expensive and require regular upgrading. With the industry facing turmoil, most asset management firms view this cost as unnecessary.
Additionally, medium management firms can conduct better trading when they outsource from large trading firms that can afford recent and expensive technologies. It offers an opportunity for the growth of medium firms.
New Market and Future Growth
Entering new markets and future growth is always a concern of every business. Most management firms, especially smaller ones, view outsourcing as a way of entering into new markets. They consider the numerous resources of large trading firms that might market their assets to new clients.
According to traders like Jones Trading, management firms that accept third-party trading are likely to grow exponentially. A recent study by Tabb Group projected that almost half of outsourcing firms expect growth in their revenues of 50% to 100%.
In conclusion, outsourcing trading services seems like the trend for most asset management firms. Although it still has its challenges, it appears to be continuously growing in popularity. The reasons for this shift are numerous, with every firm looking to benefit.