TD Cowen has invested heavily in people and technology over the years, and now clients are seeking different forms of hybrid outsourced trading services from the provider along with delving deeper into new asset classes, says Michael Rosen, managing director and global co-head of prime brokerage & outsourced trading.
How has the perception of outsourced trading as a concept changed among asset managers and hedge funds over the past couple of years?
Perception is following the typical trend we have witnessed over many years in the industry for outsourced services. As time has gone on, we have seen more and more services get outsourced – starting 30-ish years ago with fund administration and back-office services and then moving to IT Support Services, Compliance, Outsourced CFO Services and now Outsourced Trading. As time passes, each of these services have become more pervasive, then more acceptable, and typically reach an inflection point where they are perceived positively because of the additional value they offer and the safeguards they provide.
If you perform any of these services I mentioned – including trading – within your own organisation, it is difficult and more costly than the equivalent outsourced solution. In the case of Outsourced Trading, it’s almost impossible to put in place the equivalent geographic and asset class coverage that we provide. We have well over 40 traders located around the world with experience trading essentially every listed asset class and many OTC ones as well. Additionally, our traders have 20-25 years of experience on average, with a disproportionate of that on the buy side. This combined with their multi-asset class experience makes it difficult for an investment manager to replicate unless you are managing tens of billions of dollars in AUM.
In addition, we have spent tens of millions of dollars on our technology stack over the years, and unless you are one of the biggest funds out there, it is near impossible for any entity to make the investment we have made.
What kind of models are being adopted – are you seeing more of a demand for full outsourcing or co-sourcing?
When it comes to outsourcing, some firms will outsource the entire trading operation while others turn to – what we call – hybrid solutions. The hybrid solution can take many different forms, whether it is just using us for the international trading because an entity doesn’t want to build out and staff a foreign desk, or it could be by asset class as some larger long-only entities have just outsourced the equity portion of their book because they still believe they have an edge when it comes to fixed income. Outsourced trading comes in many different flavours now. We also act in a back-up role for a number of different hedge funds so traders can go on vacation, or during periods where they become busier, and they need help – we can pitch in. The flexibility of today’s technology now affords us the opportunity to do many things that 10 or 15 years ago we simply couldn’t do.
How do you see outsourced trading expanding in the years to come – will there be more adoption of outsourced trading from different types of firms in the future?
We are starting to see larger, more traditional managers gravitate towards outsourced trading. But we haven’t yet seen the domino effect that we believe will occur when a large well know traditional manager decides to deploy an outsourced trading solution. When that happens, it will make it acceptable for any and all to move to outsourced trading because it’s clear the economics make sense. I think that is inevitable. But it’s a question of who and when.
How is TD Cowen evolving its offering and what changes have you recently made in terms of talent, geographic coverage and asset classes?
We’ve added FX outsourced trading and fixed income outsourced trading. We believe the latter is just about to take off because there is more value-add in fixed income outsourced trading than equities. The nature of the market is such that it’s not screen-based – or at least a good portion of it isn’t – and you need to have relationships to ascertain price and liquidity much more so than in the equity markets.
In equities you can look at any EMS and see where an equity is trading, plus or minus a couple of pennies, and get a good indication of price and liquidity. If you have a distressed bond or a developing market bond, you don’t know if 84 or 86 is the best bid and offer or if the right price for size is 80 or 90.
So, our fixed income desk having connectivity to 50 or so liquidity providers and knowing where the market is on any instrument you want to trade provides real value. If you have trader with limited relationships, come in to buy an illiquid instrument that trades by appointment, they could easily be 5% off the market versus a desk like ours with the breadth of market coverage that we do.
I do think we are at an inflection point where outsourced trading, which started some time ago in the equity markets, is about to transition in a big way to other asset classes, including over-the-counter (OTC) markets. We do outsourced trading for in OTC FX options, for example, where the liquidity providers have to make you a price and a size, and that’s something which is of real value, just as with fixed income.