Outsourced trading desks: the new go-to?

In a context of fierce competition and increasing regulatory constraints, investment management[1] firms are under growing pressure. To optimise their costs while improving service quality, they are now willing to outsource their trading desks to specialised providers.

This trend is emphasised by the current context of Covid-19. Volatility in the market has resulted in unprecedented trading volumes, which may well have presented an organisational challenge for firms with internal trading teams.

Outsourced trading desks are becoming increasingly common among investment managers. According to a recent survey[2] of 30 European investment managers conducted by Sionic on behalf of BNP Paribas Securities Services, 20% of the firms surveyed had already outsourced all or part of their dealing activities. This is a phenomenon that may become more widespread, given that 21% of investment management firms surveyed say that they were considering this type of service in the next 18 to 24 months. “With the increasing number of regulatory constraints, including MiFID II, and the standardisation of order placement processes, more and more companies are considering delegating this activity to an external provider”, says Thomas Castiel, Head of Dealing Services within BNP Paribas Securities Services. “For others, who have not yet developed in-house resources, outsourcing is a great way of avoiding very high investment costs.”

Reducing trading costs

The main reason for investment firms to opt for outsourcing is the need to optimise their costs in a context of decreasing margins. “When a company decides to outsource an activity, the focus is always on cost and the savings that can be generated”, explains Thomas Castiel. “However, investment management companies often tend to underestimate the costs that this dealing activity represents. Numerous ancillary costs – such as operational risk, compliance and control – are often overlooked. Firms need to have a comprehensive overview of this activity to fully assess the challenges and benefits of outsourcing.”

Improved regulatory compliance

Reducing costs is not the only motivation, however. The increasing number of regulatory constraints is an important catalyst. “Since the implementation of the MiFID I and II directives, we have seen a real acceleration of the outsourcing trend, with more demand in this area”, says Thomas Castiel. And for good reason: outsourcing their dealing desks makes it easier for firms to comply with applicable regulations. “Our service replaces an investment firm’s entire internal dealing department and our role particularly involves carrying out all of the regulatory reporting, including the ‘best execution’ reporting required under MiFID II”, explains Thomas Castiel. “We allow the investment management company to be fully compliant with all regulatory obligations applicable in Europe.”

By opting for outsourcing, the investment firm also sees gains in terms of its service quality. “Our dealing service covers all asset classes – equities, bonds, foreign exchange, derivatives, etc. – and all geographical areas”, says Thomas Castiel. “Our order management system is also powered by real-time market data, which improves service quality. Finally, this tool provides access to all execution venues, both traditional stock exchanges and alternative exchange platforms, which can be particularly costly for an asset manager or asset owner.”

However, outsourcing your trading desk does not mean writing a blank cheque to the service provider. Both asset managers and asset owners have a right of inspection over the services offered by their service provider. “Within BNP Paribas Securities Services, we use a data provider who objectively assesses the quality of our services”, explains Thomas Castiel. “All transactions carried out using our tools are therefore sent and analysed by the data provider.”

Overcoming the psychological barrier

While the outsourcing of order transmission is gaining ground among both asset managers and asset owners, many obstacles still need to be overcome for this practice to become more widespread. “The main barrier remains psychological”, says Thomas Castiel. “Historically, placing orders was the preserve of portfolio managers. They have long held back any moves towards outsourcing as they fear losing that relationship with the market.” However, while outsourcing the processing of its orders, the investment management firm still retains control as well as proximity with brokers. “In fact it can retain the contractual relationship with its various brokers”, adds Thomas Castiel. “A significant effort to inform them is therefore required to reassure them in this respect.”

In a context marked by fierce competition and the growing development of low-cost index funds cutting into their profit margins, there is no doubt that investment management firms will increasingly need to consider the advantages offered by the outsourcing of their trading desks.

In Asia Pacific this trend has been gradually increasing – with a number of recent enquiries as a result of the urgent push to implement work from home or off premises trading. In Hong Kong this started in 2019 due to transport disruptions and then the unprecedented challenges of 2020 have re-prioritised the topic. This has resulted in many market participants grappling with the complexities of moving and managing their trading activities, which require a dedicated governance, strict oversight and, in some cases, regulatory scrutiny.

[1] We consider “investment managers” to include asset managers, asset owners, sovereign wealth funds and wealth managers.
[2] Outsourcing: a new dawn for dealing desks?, BNP Paribas Securities Services, June 2019



Natalie Floate

Head of Markets & Financing Services, Asia-Pacific

BNP Paribas Securities Services

Thomas Castiel

Head of Dealing Services

BNP Paribas Securities Services



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