For a typical arrangement in the UK, the buy-side client has a single relationship with the outsourced trading provider, while the provider has individual relationships with the sell-side and trading venues, meaning that the client is transacting with the outsourced trading desk and they are the counterparty risk. Ultimately, the provider is standing between the market and the client.

Most outsourced trading providers will accommodate methods and arrangements in terms of anonymity based on the needs of the individual client because, as with most things in this industry, this is not a one-size-fits-all type of deal. There can also be differences according to region. Some parts of Europe, for example, have adopted a model known as RTO, or reception and transmission of orders, which has proved to be popular in major financial districts such as Paris.

With the RTO method, the outsourced trading provider deals in the name of the buy-side client, so the counterparty risk remains between the institutional investor and the broker. Focusing more on the typical UK model, anonymity is an aspect that providers of outsourced trading agree can bring huge benefits to many funds. For smaller asset managers in particular, anonymity created through a typical UK outsourced trading arrangement could prove useful in terms of minimising market impact, reducing information leakage and preserving alpha.

Such an arrangement also removes the need to establish separate and individual relationships with brokers, which can often be legally complex, costly, and difficult to both attain and maintain due to potentially lower business flowing from smaller funds. If a secondary relationship with an outsourced trading provider was established and that provider was trading on behalf of the larger asset manager, the market would likely see a sizeable shift in volumes and far less flow coming from that particular buy-side firm.

It is a fluid situation that is constantly evolving as the sell side continues to change and as the market moves away from bundled commissions. The final outcome remains to be seen, but we are active in both types of workflow and the service is bespoke. Each client can have their own default, or change trade by trade, the flexibility is theirs.

Larger asset managers or hedge funds might not be as enthusiastic about outsourcing execution to a third-party. Where the front-office outsourcing provider could potentially add value for buy-side firms of all sizes is sourcing liquidity and market access, and this is where the difference between an outsourced trading desk and an agency broker emerges. For example, if a UK-based asset manager sent an order to an agency broker for execution in Asia, that order will only interact with the flow that the agency broker sees in Asia.

An outsourced trading provider, on the other hand, will have access to broader parts of the liquidity spectrum through various relationships, including with the agency broker. We use broker electronic trading tools and access high-touch desks and so we are considered an algorithmic client as well as a cash desk client.

Some providers are indeed registered as agency brokers, mostly those that are part of larger institutions offering other financial services such as investment banking, custody or prime broking. But ultimately, the outsourced trading desks are acting as buy-side trading desks, not agency brokers, and they are deeply embedded in the workflow of the asset management client. There has been reluctance from European sell-side firms to embrace outsourced trading desks due to this misunderstanding, with many brokers identifying outsourcers as competitors offering similar services on an agency basis, but this perception is shifting.

Ultimately, and providers continue the battle to clarify this, the outsourced trading desk represents the fund managers rather than competing for sell-side business. Heads of desks, and even portfolio managers, are intrinsically linked to the execution element of asset management.

Execution is a key part of the business for most firms, from dealing right through the trade lifecycle to settlement, so carving out that piece and handing it to another firm can initially seem troubling. Border to Coast is a UK asset manager established by local authorities to manage pension funds as part of the move towards the pooling public sector pension schemes. It chose to outsource its dealing after contemplating the monetary resources needed to establish a trading desk in-house and determined that the outsourced model was operationally more efficient for the firm.

This is a typical case for many long-only funds that already outsource execution to a provider, but for Border to Coast, taking a step back from the execution and relying on an outsourced trading provider certainly left some members of the team with concerns. I imagine this is because they were sourcing insights from various individual brokers, but having outsourced our trading, they are getting the information from one central counterparty that is seeing the wider market and feeding that back to us.

UK equity fund Fundsmith was seeking expertise in execution and access to liquidity pools when it outsourced its dealing following its launch in to a well-known, although no longer operational, provider. Similar to Border to Coast, Fundsmith opted to outsource its execution having considered the costs of running an internal dealing desk. Our fall Digital Digest examines how recent crypto market volatility may be spurring investor interest, advancing regulatory efforts, and accelerating innovation in this space.

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If you are a serious forex trader institutional or retail who wants to make good use of your capital, then you may agree time to market and cost of forex execution are critical challenges. There is no doubt that the learning curve in forex trading is steep especially when you are starting from the position of a complete novice.

This is why forex trading outsourcing could be the magic that you need to succeed as a forex trader. But what really is forex trading outsourcing, and why do you need it? Outsourcing, in the basic sense of the term, refers to the practice of ceding certain core operations of an organization to third parties.

For an individual, outsourcing entails nominating someone else or an entity to execute forex trading decisions on your behalf. Proponents of forex trading outsourcing say it enables traders to get the best returns by allocating resources to the best players in the market. Outsourcing takes on different forms where it might involve ceding complete decision-making power to the third party or allocating just bits of the decision-making process.

Outsourcing comes with important advantages, although this is not to say it does not have downsides. It means even as you weigh the benefits, you will be doing yourself and your money great justice if you considered the worst-case scenarios. But what exactly should you consider when outsourcing forex trading? A Harvard research discovered that outsourcing creates an enabling environment for elasticity and flexibility. Organizations that outsource are able to focus on the aspects of their operations that they are really good at without compromising the entire production chain.

In a sense, forex trading outsourcing works in a similar manner, where you cede some activities to firms that have the best expertise and equipment to deliver great results. But how do you determine the outsourcing firm that will meet your desired results? Because the outsourcing firm will be your fiduciary, it will make all the critical forex execution decisions for you. Ceding such power to a third party implies having trust in its ability to make the right decisions.

There is no better way to find out this capability than evaluating the historic forex trading of the outsourcing firm. Historic data is a treasure trove of insights on the quality of the decisions the firm makes, and whether the transaction costs incurred are justifiable. The best outsourcing firm has a great record in terms of returns and it keeps losses at a minimum. Outsourcing firms have an array of fees they charge clients usually based on the quality of service provided. Preferably, an outsourcing firm should have low processing fees.

Also, such a firm does not include hidden fees that will eat into your returns. The main motivation you outsource forex trading is to use the best strategies available and the best platforms to earn better returns.

Naturally, therefore, you will consider how the outsourcing firm does its trades to ascertain where it stands among the competition.

In other words, the best outsourcing firm uses the best platforms, as well as deploying market-beating strategies. Forex trade outsourcing could go awfully wrong if you fell into the jaws of swindlers prowling in the dark creases of the market. Legislations such as Markets in Financial Instruments Directive MiFID enacted by the European Union help to deter swindlers from succeeding. Specifically, MiFID obligates financial markets players such as forex outsourcing firms to disclose information that supports their legitimacy, meaning that as an investor, you are protected when you choose to outsource forex trading.

Outsourcing firms are also subject to anti-money laundering AML and know your customer KYC regulations. This is because the firms are structured as investment managers. But the application of the regulations could differ especially when a firm is acting more like a fiduciary than an agent.

Oftentimes, the regulations are stricter on agents than they are on fiduciaries. Instances of conflict of interest in outsourced providers could cost the clients dearly.

Luckily, most forex trading currently takes place electronically, meaning clients have easy access to execution data which they can compare with market data to smoke out any hint of conflict of interest. This means the client — which is you, the outsourcing party — should always take time to review the data in great detail to try and spot any events that might seem unexpected.

Furthermore, clients can manage conflict of interest by seeking to understand the ownership structure of the outsourcing firm. The knowledge helps especially in determining how the firm generates revenue. Save my name, email, and website in this browser for the next time I comment. RELATED ARTICLES MORE FROM AUTHOR. Investing in Gold—How to Do It Correctly in Forex Indicators: The Weighted Moving Average.

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With a full-service outsourced trading desk, a fund manager can reduce fixed costs, improve execution, and leverage technology without upgrading internal systems. Download — Thought Piece Decoding Outsourced Trading Taking a closer look at the predominant models for outsourced trading and discussing key considerations for asset managers working to identify the optimal choice. Flexibility to work with all OMS Platforms i. Outsourcing comes with important advantages, although this is not to say it does not have downsides. Jeff is frequently pursued by media and trade organizations as a thought leader in Outsourced Trading. Ceding such power to a third party implies having trust in its ability to make the right decisions. Orders are seamlessly executed, immediately even if there are business interruptions.

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