Navigating the New Normal: Massimo Labella & Chris Elliott, Cowen

Evolution of trading: Why is outsourcing the ‘new normal’ and what comes next?

Massimo Labella, Head of Outsourced Trading Europe, and Chris Elliott, Outsourced Trading Sales at leading provider of outsourced trading solutions, Cowen, recently met with David Berney, founding partner of Ergo Consultancy, an independent European trading consultancy for asset managers and hedge funds, for a frank exchange on outsourced trading and the “new normal”. They addressed some of the nuanced points that often get lost in the noise as well as looking at what to expect in a post-Covid world.

The pandemic has shown, if further proof were needed, that it’s possible to run an effective trading operation without traders and portfolio managers sitting side-by-side. Armed with that knowledge, more and more buyside firms are exploring outsourced trading desk solutions.

In fact, market participants did more than just survive all the upheaval. They thrived. Data from the World Federation of Exchanges showed global cash equity market capitalisation cracked $100 trillion for the first time last year as volumes and price levels steadily gained ground following an initial jolt when Covid-19 paralysed much of the planet. Exchange-traded derivatives volumes, meanwhile, jumped 43% in 2020.

Unsurprisingly, outsourced trading desk solutions have been getting a lot of attention. News of new outsourced trading agreements has become commonplace and competition among providers has intensified. If buyside firms are not actively taking steps, many are at least finding themselves in the category of “outsource curious”.

A different mindset

David Berney: First, why are people talking about a ‘new normal’ and where does outsourced trading fit in?

Chris Elliott: Outsourced trading itself is not new. Firms of all types and sizes have long understood its benefits. In fact, the trend towards outsourced trading desks has been gaining momentum for several years. It’s been more common in the United States, but funds all over the world are deploying this model.

What is new is that market participants now have a better appreciation for how outsourced trading can not only match the functionality of an in-house desk but also exceed it.

Having had to set up remote trading arrangements in short order, funds have been rediscovering what really matters in terms of the value their traders bring. More often than not, the value relates to expertise and experience, not whether they sit in the same room as the portfolio manager.

You’re saying that the upheaval of the past year has only added to the focus on outsourced trading. Which sorts of firms are showing most interest?

Massimo Labella: If we looked at the last 10 incoming queries we’ve had, it’s a small start-up, a large start-up, a massive asset manager, a large hedge fund, a fund-of-hedge-funds platform…. It’s the whole range. Every single inquiry is different. We have spoken to quant funds who would not typically outsource their trading, but we have seen situations where they are adding fundamental traders or looking for expertise in different asset classes. The common thread is that they see the current moment as an opportune time to reconsider their trading desk in a new way.

Chris Elliott: We’re certainly seeing a lot more exploratory interest. For instance, one large asset manager is interested in supplementing its in-house team as it grows. Another large hedge fund is looking to outsource its trading for U.S. and Asian markets.

In terms of size, at a certain point – say, above $30 billion in AUM – an in-house team may make sense. But even in those cases, there are benefits from outsourced trading in terms of business continuity plans, post-trade services or addressing gaps at a geographical or asset class level. For any firm below that size, it would be difficult to create a desk that could compete with what a provider offers in terms of depth and experience.

People often think about outsourced trading in blanket terms, but actually, there are many varieties. How would you describe the types of solutions available?

Massimo Labella: You can begin by considering two broad models. There’s the agency model – one to many – where the client wants to be talking to a range of brokers and takes advantage of the outsourcing provider’s network. Then there’s the RTO model, or reception and transmission of orders. That’s where the client directs the outsource provider as where to execute. That’s the first divide.

Chris Elliott: You could think of it in multiple choice terms. Option A would be agency, Option B would be RTO, Option C would be a combination of the two. At Cowen, we pride ourselves on providing Option D all-of-the-above!

What about those who have historically dismissed the idea of an outsourced trading desk?

Chris Elliott: Every conversation is different. Every client has different needs and different views. Some firms will not currently consider outsourcing their trading desk as they believe their traders provide added-value. Then there are those who just naturally do it, because they prefer to concentrate on managing the funds and feel the trading is more a commoditised function.

But even for those who prefer to keep their trading in-house, there is a co-sourcing conversation to be had. That’s another example of how the past year has encouraged market participants to review their operations and see what they can do differently or better.

Massimo Labella: The question starts with where value gets created. Some people believe it’s execution. Some people, if we’re talking about equities, believe it’s stock selection. Generally speaking, the answer is a bit of both. That is one of the reasons many firms are looking at supplementary solutions, retaining some in-house trading functions and outsourcing others.

The other point to make is that outsourcing creates strategic flexibility. We recently spoke to a medium-sized asset manager that mostly focuses on fixed income. They are looking at a new equity strategy and want to outsource the trading with us. In another case, we have a smaller start-up where the portfolio manager has always done the trading. But he wants to be able to focus on strategy. Outsourcing the trading function gives him the opportunity to do that.

Varying perspectives

Who at a buyside firm do you need to reach to ensure that there is a proper understanding of what outsourcing solutions can do?

Massimo Labella: There’s a question as to who’s making the decision at the hedge fund or asset manager. It might be the portfolio manager who’s asking about outsourcing. Or it could be the COO or the CFO or somebody on the non-investment side. We may find that the PM wants an in-house trader, whilst the COO or CFO wants to focus on costs by not hiring a trader, or not hiring another trader.

If it’s a portfolio manager, we’re talking to them about trust and day-to-day contact. We want to show how outsourcing is not so fundamentally different from in-house, only you get more trading options and more depth and experience than what you might be able to hire on your own.

Trust is important on many levels. We have one fund platform that conducts its more complex trading in-house, but outsources plain vanilla trading. They don’t see a lot of value in performing that function, but at the same time they need to know that all of their requirements will be met.

Chris Elliott: With a COO or CFO, who generally wants a more efficient operating model, there are different concerns. They often relate to cost and supporting services. There is the operational support, the risk reporting, the shadow reporting and all the other things that a provider can do. These are issues that often don’t form part of the initial conversations but can make a big difference to the client. And they can be tailored. For instance, there can be region-specific or asset class-specific services.

People tend to think of outsourcing in terms of replication. If I trade equities in-house, I can now trade equities via a third-party provider instead. But it’s more about enhancement, isn’t it? For instance, there is the issue of adding asset class capabilities.

Chris Elliott: A lot of our clients are focused mostly on one asset class, but their fund mandates may allow them to trade other assets. An event-driven fund or a fund that goes across the capital structure, they’re probably good at equities or credit, but generally not both. For such firms, it’s reassuring to know the capability is there for areas where they are less proficient.

Massimo Labella: Also, what a lot of funds do not always consider is that they may already be outsourcing some of their trading, just not in a competitive way. If a fund buys something that’s not in their base currency, they may leave the FX trade for settlement to be done by their custodian. Instead of the custodian doing the FX, why not have it done by someone who makes execution their raison d’etre? That creates better execution and puts alpha back in the fund.

In MiFID II, it’s often missed, but you should get the same execution quality across your asset class mix. You would need a lot of people on your desk to be able to do it. You would need broadly skilled individuals and a deep broker list, all of which hampers a small to mid-sized fund. An outsource relationship raises their game. It makes the firms more interesting to investors as well, because they’re leaving less money on the table for other market participants. As for those execution quality improvements, they go straight to fund performance. They don’t go to the management company, but go directly to the fund holder.

In fixed income, for example, there has been a major shift towards electronification. Does that make outsourcing more or less relevant?

Massimo Labella: Asset managers’ lives do get easier with electronification. But what it doesn’t do is increase the strength, depth and size of the trading desk.

You can see this most clearly if you’ve got a one-person trading desk, which your average hedge fund does. For a fund to have, say, a three-person desk, it might start somewhere around $20 billion. It’s quite a big undertaking to hire a three-person desk. What you get with a co-sourcing arrangement is other people. When your trader is out or busy, you’ve got strength in reserve. Also, at a lot of funds, portfolio managers do their own trading. An outsourcing arrangement allows the PM to focus more on the key investment decision-making function.

The other, and perhaps more important, issue is counterparty risk and the number of venues an outsourcing provider can reach. A provider, by its nature, is likely to have broader international market access. That leads directly to best execution. When you combine the benefits of electronification and of outsourcing, you generate even more value. You are able to compare a broader set of counterparties quickly. An outsourced trader provider, for instance, will have built relationships with liquidity providers, the kind that a small fund is unlikely to have.

How important is geographical coverage?

Massimo Labella: Certainly, any asset manager needs to be able to trade assets in all of the time zones. Whilst it is not that important where the trader is physically sitting when the trade is made, outsourcing providers are providing local knowledge and expertise. Cowen, for instance, has long had a significant presence in the United States. It has also been trading in Europe and Asia for a considerable time. At the point where we wanted to expand and build the business, to get to the same level of recognition as we have in the US, it became important to ensure we had boots on the ground in Europe and Asia and provide a follow-the-sun regime throughout the global trading day.

The range of providers and the services on offer

Among the outsource trading providers, there is a wide range. There are investment banks and brokers, custodians, asset managers, non‑bank liquidity providers and outsourced trading firms. Some are more independent than others. What is the value of independence?

Chris Elliott: The main value is that there is no conflict of interest. An independent, buyside agency-only outsource provider can see itself as an extension of the client. It never has to make a decision based on competing incentives. The only incentive is to get the best trade for the client.

Massimo Labella: While Cowen does have a full-service investment bank, that operation is completely separate from the outsourcing service. The separation is not just legal and administrative – it includes the order management system, so there can be no visibility from either side of what the other side is doing.

At the same time, there are benefits to having the support of a larger entity. By having a large operation sit behind the outsource service, we can offer a range of post-trade services because we have the capabilities. We have more development resources and a dedicated compliance operation. For some clients, that broader range of services makes outsourcing or co-sourcing a more compelling case.

Chris Elliott: Technology is also important. One large asset manager we’re talking to is interested in a full-service outsourcing solution. They are focused on the ability to connect their systems to multiple custodians and the operational support that is provided.

You refer to yourself as a buyside outsource trading provider. Is there a difference between buyside and sellside providers?

Massimo Labella: The sellside trader is trying to find the other side of every trade before going to the market. For the buyside firm, your primary raison d’etre is to achieve the best possible execution for each singular order.

Your firm has been in the outsourcing business for over 20 years. Other firms are new entrants. Considering the core functions of an outsource provider, does that make an actual difference?

Massimo Labella: In some ways. Different providers will have different offerings based on their competencies and experience. There are also barriers to entry that mean a firm that has been in this business for a while can do things that others might not be able to do. There may be relationships that have been formed with liquidity providers that result in better liquidity. These are elements of the business that have to be built up over time.

Trading operations involve a lot of technology, infrastructure and administration. What is the process for moving to an outsourcing arrangement like?

Massimo Labella: The main time element concerns the idea of getting comfortable with the concept. That can vary based on the client. Once a company has decided to move, the onboarding can be extremely quick. Or rather, it can be as quick as the client wants.

There’s a standard set of tasks to complete and these are straightforward. If the asset manager wants to proceed slowly, that’s possible too. Sometimes, a client is juggling tasks. Maybe they also need to onboard a prime broker or a new administrator or a system.

Chris Elliott: The value of having a fast, easy onboarding process became apparent in the past year, when funds had to adapt to radically new conditions. As we move to a post-Covid world, that value is likely to remain at the forefront of people’s minds. One of the lessons the pandemic has taught us is that largescale change can come at any time. That randomness is a significant feature of the “new normal”.

Once a firm has started an outsourcing relationship, there is the question of how it is managed and maintained. That will depend on the nature of the services provided. If a client wants a bespoke service with shadow reporting, for example, then the relationship will be more involved than with a more standard outsourcing arrangement.

What’s absolutely key is that the client doesn’t view the move as a major project involving lots of work – because it’s not. A client can start small, in one asset class, and make only a handful of trades a year. They might then want to incorporate a second asset class and increase the amount of trading. If a client doesn’t use it, they don’t pay for it. Essentially, an outsourcing arrangement can be as large or small, or as bespoke, as the client would like. And it can change over time.

You’ve talked a lot about the uniqueness of clients. If every client is different, how can we talk about the future of outsourcing? Wouldn’t it be different in every case?

Massimo Labella: That is just the point. The future of outsourcing is about uniqueness. For a lot of firms, the product they see on the desktop will look the same for each customer. We view it differently. We have integrated with all the main OMS/EMS providers. We’re building an aggregator for FX so that what we show to each client can look different, depending on their needs. Whatever they need, we want to be able to have that in the product. If it means buying it or building it, we will.

One last question. As you look to the future, what are some of the main lessons you’ve drawn from the past year?

Chris Elliott: If I had to sum it up, it’s that we’ve learned that funds need to be ready for anything. Every market participant in the world has experienced this in one way or another. That’s why we have invested so much in expanding our capabilities, so that as conditions evolve, we and our clients are able to adapt. Eventually, we think that every fund will want to have some outsourced trading relationship, even if it’s just as a back-up. On top of all the strategic and operational reasons to consider outsourced trading, this last factor is the icing on the cake. An outsourced trading solution can help a fund adapt to just about any new normal you can imagine.

Cowen ( offers outsourcing trading solutions for clients around the world, trading equities, fixed income, foreign exchange and derivatives. The outsourcing service is wholly independent from Cowen’s investment bank.
Ergo Consultancy ( is an independent firm, advising hedge funds and asset managers on all aspects of trading and execution. Ergo helps firms to select outsourced trading partners or build in-house trading desks.

©Markets Media Europe 2021

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