Outsourced trading: Customized solutions to support every investment firm

BHM Article

Advances in technology and regulation have encouraged institutions of all sizes to explore outsourced trading.

February 2024

Financial services firms are changing the way they trade in response to market volatility, regulatory pressures and the proliferation of new technologies. For many, this means outsourcing all or part of their trading activities to drive higher returns and optimize operations – and this customized approach is helping them capitalize on previously untapped opportunities.

In our recent report, Outsourced trading as a strategic advantage, we heard from a number of firms around the world about how they are incorporating outsourcing into their strategies and the benefits they’re seeing from gaining cost efficiencies to refocusing resources on business growth.

Adopting a new approach
When Apostle Funds Management, an Australia-based investment manager, began trading client capital in-house in 2022, outsourcing equities trading and currency management to State Street was a logical next step.

“We have funds that are in fairly early stages where there's a lot of work that needs to go into research and developing the strategies, and the last thing we want to do is put a lot of energy into execution as well,” said Joe Unwin, portfolio manager at Apostle Funds Management.

Historically, institutional investors, including asset managers, hedge funds and pension funds, managed their trading operations in-house with dedicated traders responsible for executing trades, managing orders and optimizing trading strategies. However, this “one-size-fits-all” approach leaves little room for flexibility, and the model is quickly becoming outdated in an environment that continues to be shaped by advances in technology.

Apostle is among a rising number of young and growing funds that have taken hold of this trend, and our research reveals that this emerging practice has already begun to benefit investors of all sizes, including global institutions.

Optimizing trading strategies for firms big and small
Advancements in trading technology and regulation have encouraged institutions to explore more cost-effective and optimal trading solutions. This includes the proliferation of electronic trading platforms and algorithmic trading, and recent regulatory changes such as Markets in Financial Instruments Directive (MiFID) in Europe and Regulation National Market System (Reg NMS) in the United States.

Outsourcing trading desks allows international funds to remain focused on portfolio management and generating alpha while gaining access to scale, insights, liquidity and technology.

Smaller institutions view outsourced trading as a strategic enabler, to expand into new markets and asset classes, enhance liquidity, or reduce operational and administrative burdens. Even large investment managers are increasingly outsourcing all or a portion of their trading. One institutional investor with a global footprint said that they initiated an outsourcing relationship with State Street as part of their growth strategy, aiming to improve investment returns and reduce costs for underlying investors. By outsourcing direct trading, portfolio execution, pre-trade compliance, settlement and currency hedging, the firm’s investment managers could access more markets and asset classes.

"Our competitive edge is not in trading; it's as a long-term investor with very patient capital. We're not going to generate the alpha that we generate from the trades themselves," they said.

A highly customizable solution
It is increasingly clear that outsourcing can suit diverse investment needs.

From global asset managers to family offices, institutions now have the option to outsource all or parts of their trading operations to reduce operational costs and risks, opening the door to new sources of revenue, markets, asset classes and customers.

Outsourcing services have also expanded to cover a wider range of asset classes, including fixed income, foreign exchange, derivatives and alternative investments.

As firms seek to reduce costs, navigate market volatility and expand their offerings, a tailored approach to outsourcing can deliver the flexibility and agility they need.

Discover our full suite of outsourced trading solutions.


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