COVID-19 has prompted investment managers of all sizes to undertake a comprehensive review of their operating models. Market volatility, extreme margin pressure, technological complexity and business resiliency had all been at the forefront of their thinking way ahead of the pandemic, but the virus outbreak caused them to accelerate this process.

The outsourcing trend is not new but now more prominent than ever. A recent survey conducted by Northern Trust of 300 heads of investment operations from global asset management firms, with assets ranging from USD10 billion to USD500 billion, reveals just how quickly operating models are shifting.

When asked to express their thoughts on outsourced trading, 85% of respondents said that they were already outsourcing, or were interested in doing so. The reasons to use outsourced services are many but here are some examples of how outsourced trading can future-proof operations and enhance operational efficiency.

Business resiliency

The pandemic has highlighted the inadequacies of traditional business continuity plans with their big backup trading floors that have remained largely unused during the pandemic.

Exposure to key person risk is another example. What happens if the head of dealing gets sick? While this had already been a concern, the pandemic’s scale and longevity put new emphasis on the risk of losing operational leadership for an extended period. The pivot to working from home also highlighted the inadequacy of traditional plans with many firms accelerating processes g to bring remote access technologies in line with their business requirements. When using an outsourcing partner, the day-to-day operations in these scenarios sits with them, helping to ensure continuity. 

Governance and regulation

Following the financial crisis, transparency, fairness and accountability have been reinforced as the key characteristics of good governance. New regulation means more oversight and reporting responsibilities which can create challenges as management fees are trending downwards.

With MiFID II focusing on transparency of transaction costs and the UK’s Senior Managers & Certification Regime emphasising personal accountability, there is likely to be a profound impact on corporate structures and, potentially, significant impact on business models. An outsourced trading model could help to alleviate these pressures through the use of advanced technologies and analytics that ensure transparency without the cost of building new in-house infrastructure.

Cost effectiveness

While ensuring business resiliency and regulation might be the biggest drivers for change for some firms, costs will always play a huge role in decision making and rethinking operating models.

The COVID-19 pandemic has provided an opportunity to review and reset operations. Instead of carrying the cost and complexity of running an in-house trading desk, firms can now move to an outsourced one - freeing up capital to invest in strategic growth and moving costs from a fixed to a variable basis in line with the direction of travel for revenues.

All things considered, investment managers have one goal in mind – generating alpha and doing it as effectively as possible. Old assumptions about outsourcing have been challenged and proved incorrect – where it had been seen as a reactive strategy, focus has now shifted to the variety of other benefits offered including supporting risk management, streamlining operations, enhancing governance and improving operational and technological resiliency.

Outsourced trading is a proactive and future-focused decision and, as a result, firms of all sizes, and across all regions, are seeing the benefits and opportunities it presents for an enhanced way to do things.

Gary Paulin is global head of Integrated Trading Solutions at Northern Trust Capital Markets