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Investor Insights

Outsourced Trading Solutions

for Better Performance

Alpha

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Patricia HudsonGlobal Head of Thought

Leadership

Nadine ChakarHead of Global Markets

Tony Bisegna, CFAGlobal Head of Multi-Asset

Class Trading and Research

Dan MorganHead of Institutional

Equity Sales and Trading

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THE STATE STREET DIFFERENCE IN TRADING

Deep Practitioner Experience

Agency-Only Trading

Leading* Technology and Data Intelligence

Transition Management

Liquidity, Scale and Transparency

Front-to-Back Technology Platform

Capital Market Insights

Multi-Asset Coverage

Best Execution and Reporting

* Market leadership claim is based on Euromoney annual survey 2019 describing State Street as the “industry leader in foreign exchange services”; and P&L Readers’ Choice Award, June 2019, describing BestX as “Best FX Platform for Asset Managers”.

At a time when asset managers and asset owners are under growing pressure to reduce their costs of operations, the benefits of outsourced trading are becoming more compelling for investors of all sizes. But as Nadine Chakar points out, outsourcing trading is about delegating, not abdicating, control. “Our clients are the architects and we are the engineers: they design what they want

and we execute on it as an extension of their teams, bringing our 30 years of practitioner experience, best-of-breed technology and access to scale and liquidity.” Patricia Hudson, sat down with Nadine and her trading business leaders, Tony Bisegna and Dan Morgan, to discuss increased interest in outsourced trading and what a successful collaboration requires.

OUTSOURCED TRADING SOLUTIONS FOR BETTER PERFORMANCE ALPHA

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Patricia Hudson: Outsourced trading has been around for a while; why the intense interest now?

Nadine Chakar: Both asset managers and asset owners are facing existential cost pressures, so they need to be laser-focused on the areas where they can truly add value for clients as well as where it makes sense to cut costs. Outsourced trading allows them to reduce costs, focus on their core portfolio construction mission and get access to the scale and liquidity of a larger trading operation.

It’s clear that every asset manager has a big technological debt to pay down as well as a very complex regulatory environment to deal with. Historically managers wanted to hold on to trading, because they believed they could add alpha. But with markets more efficient today, many of them are seeking to add alpha in different ways. As a result, they are actively weighing up the pros and cons of keeping trading in-house versus outsourcing, or co-sourcing, their trading.

Tony Bisegna: It’s important to keep in mind that there is a spectrum of outsourced trading solutions tailored

to a client’s needs. For some clients, outsourcing will be applied only to certain asset classes or types of trades; for others, it will involve assuming all of their trading operations. In some cases, clients are looking for short-term augmentation of staff during critical times. We work closely with our clients to understand exactly what they are trying to achieve and how we can best help.

Dan Morgan: Another key driver of interest is that asset owners are increasingly taking investment management back in house. Yet many of them don’t have adequate investment management infrastructure or experience with that infrastructure. So outsourced trading allows asset owners to focus on the investment process rather than implementation.

Advances in electronic trading are also having an effect. Outsourced trading is a way for small and medium- sized managers to get access to otherwise unavailable counterparties through an outsourced trading partner with the necessary depth and breadth of infrastructure.

“Our clients are the architects and we are the engineers: they design what they want and we execute on it as an extension of their teams, bringing our 30 years of practitioner experience, best-of-breed technology and access to scale and liquidity.”

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One of our biggest competitive advantages is the counterparty line-up we offer. We spent the past 30 years constructing a network of more than 100 liquidity sources around the world. That is in contrast to many agency brokers who tend to limit their counterparties and actually use their own order routes and technology versus being agnostic with respect to liquidity.

Patricia Hudson: What makes an outsourced trading solution successful?

Nadine Chakar: Obviously it starts with deep practitioner expertise. We’ve touched upon the importance of liquidity sources and scale. I would add to that full transparency and the non-conflicted nature of our agency- only trading model. We are not trading our own book or trying to front-run other trades. And the fact that we can combine our trading capabilities with transition management is a really important benefit.

But given where the industry is headed, I would say perhaps the biggest contributor to the success of our

outsourced trading model is the technology that our clients can access without having to build it or pay for it themselves. Think about it: how many asset managers or asset owners out there can afford to have two or three different order management systems? We provide that technology, without our clients having to invest vast amounts of money to replicate the infrastructure that makes so much sense from a cost and process efficiency standpoint.

Especially with the integration of Charles River’s front-office capabilities into our middle-office and back-office services, we now have all the elements of a complete front-to-back technology platform that allows us to look at the entire lifecycle of a trade, not just the trade itself. So we are able to combine this state-of-the-art technology with 30 years’ experience as a broker dealer.

For asset manager and asset owners, the real attraction of our outsourced trading model is that we are so data- centric. We deeply understand the differences in asset class data quality between an exchange-traded market

“We are not trading our own book or trying to front-run other trades. And the fact that we can combine our trading capabilities with transition management is a really important benefit.”

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and what you get from an over-the-counter (OTC) market. So as more investors attempt to leverage insights from their trading data, we are able to capture it, normalize it, and ingest it back into the platform. We can give that data a voice in order to provide actionable intelligence.

Tony Bisegna: Because the platform is open architecture, it lends itself well to upgrades in technology and new applications. For example, we have recently transformed our FX Connect platform with the addition of a new FX data and analytics tool through our acquisition of BestX, which is widely considered the industry leader in FX transaction cost analysis (TCA), both pre-trade and post-trade. The BestX approach to data intelligence is to normalize trading data in a way that is true to the particular characteristics of the asset class. Both the transformational data visualization and functionality that BestX originally developed for FX markets are being extended to create state-of-the-art TCA for equity and fixed income as well on our platform.

Dan Morgan: Outsourced trading is a natural extension of what State Street has been doing for years. We started with outsourced accounting services, then created middle-office outsourcing in the mid-2000s. Now we’ve moved to outsourced services for the front office. With our front-to-back servicing platform, we can offer the entire trade lifecycle from execution to middle and back offices.

One of the chief goals of our portfolio transition management business is to take the operational and execution burden from our clients. That is what we mean by looking at the entire lifecycle of a trade: what is my workflow and what are the downstream implications of a trade? We aim to simplify our clients’ workflow and to develop an implementation approach that will save them time and money.

With asset managers, it can be something as simple as a workflow enhancement, such as the ability to send a SWIFT message directly to a custodian. Often that can be a more complicated process in which the

“The biggest contributor to the success of our outsourced trading model is the state-of-the-art technology that our clients can access without having to build it or pay for it themselves.”

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client executes with a broker, the broker confirms back to them, and the onus is on the investment manager to send the trades to the custodian. Adding that SWIFT message to our broker dealer workflow saves both time and effort.

Trading is something we do every day, and it’s an area where we can add value in terms of project management, economies of scale in trading, and reporting. And we seek to be as transparent as possible with clients about how we act as an extension of their staff and as a conduit to liquidity sources.

Nadine Chakar: Everything we’ve built is with that buy-side client in mind. For example, we know that portfolio managers like to get a steady stream of market color and analysis, so we have established research groups to provide those capital market insights.

Tony Bisegna: I also want to reinforce the distinctive depth and breadth of our expertise. As Dan said, we do this every day. And that is why we are good at it. It’s like a highly specialized surgeon who does that same operation

hundreds of times a year. That’s the doctor you want to go to. Our outsourced trading is essentially providing what our Global Markets traders do day in and day out, with the speed and scale that small or medium-sized firms are unlikely to achieve by themselves.

Patricia Hudson: So what does the future of outsourced trading look like?

Dan Morgan: We certainly expect we will see more asset managers and asset owners adopt some form of outsourced or co-sourced trading. There is definitely going to be an expansion of outsourcing multi-asset class trading as opposed to just equities, which dominate the space at the moment. We also expect a broadening of the types of clients who will avail themselves of this model. For example, insurance companies are seriously considering the advantages of outsourced trading as they face the same cost and operational streamlining issues as asset managers. It is also very likely that more asset owners will outsource their trading as they insource more of their assets.

“We do this every day; that is why we are good at it.”

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Nadine Chakar: I agree that as active managers seek to add value, they will focus on multi-asset solutions that are more complicated and more expensive to manage. They will need help with trading derivatives or structured products. Even those managers who increase their use of algorithms and automated trading will still have a need for the scale that we provide.

So I expect outsourced trading will continue to be a growing part of our business. The game-changer for us is our front-to-back strategy and our commitment to helping clients better leverage their own data and access leading analytics as they seek to improve their overall performance

in a much more challenging business and market environment. We were ahead of the game in anticipating where the industry was heading, consistent with State Street’s history. State Street has been able to write the first draft of every chapter of this industry, starting with mutual funds, then on to ERISA pension plans, back-office outsourcing, and then we moved into the middle office. Now with the Charles River integration into a complete front-to-back platform, we have changed the industry again. Trading solutions are just one of the ways we will be able to help our clients achieve better performance alpha as data and technology continue to transform our industry.

“Trading solutions are just one of the ways we will be able to help our clients achieve better performance alpha as data and technology continue to transform our industry.”

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http://www.statestreet.com

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