Outsourced Dealing: New Horizons

With increasing numbers of established providers now offering an outsourced dealing service, investment managers can be confident in considering this as an effective alternative, or a complementary service, to support internal dealing teams. Here, we speak to Thomas Castiel, Head of Dealing Services at BNP Paribas Securities Services, about this growing trend

What is outsourced dealing?

Outsourced dealing is the use of a third party to place and process orders in the market with brokers/counterparties and trading venues. It can provide an alternative or extension to an in-house dealing function, offering the experience and infrastructure needed to achieve effective execution on behalf of its clients (see box, ‘What outsourced dealing providers can offer to investment managers’).

What about in-house dealing? Does that still exist?

Historically, investment managers had responsibility for the execution of orders, which they did by making a telephone call to a broker who then executed the order in the market.

As firms grew, technology improved and market infrastructure became more complex, leading to the introduction of order management systems (OMS) and a centralised dealing function. The dealers had responsibility for routing orders to brokers or other execution venues with the goal of obtaining best execution as defined by their firm’s execution policy.

In recent times, the dealing role has evolved and become more sophisticated as new trading methods and venues have appeared. Notably, it has become less administrative and more specialist. However, not all in-house dealing teams have the capability to deal with the new world.

Aren’t there some concerns about outsourced dealing?

You’re right. The market for outsourced dealing has been slow to develop. In the past, some of the concerns had been around a lack of confidence in providers, a misunderstanding of the services on offer and a lack of visible flagship clients to encourage interest and uptake.

More recently, we surveyed 30 investment managers across Europe about this issue in association with Sionic – a global financial services consulting firm. Our research shows that two factors are of particular concern today. The first relates to dealers being remote from investment managers, leading to a delay in communication between the two and a loss of control of the dealing process on the part of investment managers. The second relates to a reduction in market awareness by not having direct access to brokers.

However, outsourcing of services has moved up the value chain from repeatable, commoditised services to more complex and bespoke business processes based on high levels of knowledge and expertise.

So, who is using outsourced dealing?

Initial adopters were hedge funds and start-ups, followed by asset owners who wanted to free their managers from execution without creating an internal dealing function. We now see investment managers looking to supplement their existing dealing operation with support in different regions. Interest and uptake are on the rise, especially among larger investment managers as the number of service providers is growing. More widely recognised outsourced service providers have fully-established offerings, which bring greater confidence.

How can outsourced dealing benefit my clients?

Asset owners historically have not prioritised the costs of execution, implicit or explicit. However, all parts of the investment process are being reviewed to ensure clients get value for money from their investment managers due to increased fee pressures. Outsourced dealing is likely to be seen positively, especially if some of the cost savings are passed on in the reduction of fees.

How do I know which outsourcing provider is right for me?

The services offered by providers vary considerably in terms of asset class support, geographical presence, service models and payment methods. When selecting a provider, it is important to identify your key requirements for outsourcing, then shortlist and select a provider accordingly.

We asked our participants what their top three factors would be when looking for an outsourced service provider. Two thirds of our participants answered that proven capability and experience to improve execution outcomes was a priority. This was closely followed by regulatory support in the form of Transaction Cost Analysis and regulatory reporting and, third, by cost saving.

This article is based on Outsourcing: a new dawn for dealing desks? – a white paper authored by Thomas Castiel of BNP Paribas Securities Services and Clare Vincent-Silk of Sionic – https://www.sionicglobal.com/ . To access the white paper, visit here.