Expanding into new markets and asset classes

Published on 18 January 2022

The buy side faces multiple challenges: from keeping up with regulatory and technology change to growing capacity while managing costs.

Mark Goodman, Head of UBS Execution Hub and Platforms, explains how partnering with an outsourced trading provider can help the buy side to respond to this, support growth and expand into new asset classes and regions.

Dan Barnes: Welcome to Trader TV – your insight into trading for professional investors. I am Dan Barnes. Buy-side trading desks are under operational pressure as resourcing is outpaced by market activity and evolving trading models. With me today is Mark Goodman, Head of UBS Execution Hub and Platforms at UBS, to discuss how desks are engaging with outsourcers to alleviate that pressure.

Mark, welcome back to the show.

Mark Goodman: Thank you very much. Pleased to be here in person.

Dan Barnes: How is the buy-side trading desk under pressure today?

Mark Goodman: So to start with, it’s probably worth thinking about the context in which the buy-side trading desk is operating. The buy-side generally is under pressure in terms of fees due to competition. And at the same time, under pressure on costs due to technology, regulatory and other changes that need to be managed.

There was a survey last year by Alpha FMC, which found that 60% of asset managers expect a downward pressure on fees to continue for the next decade. As a result of competition, asset managers are trying to differentiate and move into new areas. And every single change that is made like that, that requires a change on the trading desk as well.

So you have the possibility of how do you increase your capacity? Obviously, you can cross train individuals, so train your equity trader in fixed income, but at the same time, that’s not necessarily increasing your capacity. The challenge is how do you continue this performance? How do you deliver the firm in a context where the firm is looking to make cost savings to protect its margins as well? And that’s a difficult problem to solve.

Dan Barnes: What effect is that operational model have on that?

Mark Goodman: Broadly speaking, I might be oversimplifying; the buy-side has the challenge of trying to optimize capacity, and by capacity I don’t just mean number of traders, although that is one factor, it’s the skill sets of those traders. Are they single asset classes, are they multi asset class, fx?

It’s also the technology platform and brokerage network that they’re operating on. And that creates a fixed cost, which is relatively inflexible in terms of scaling up and down. So as a buy-side trader, you’re trying to work out, how do you optimize that capacity? And the normal way to do that is to look at your average: average in terms of volumes, but also what does an average day look like in terms of markets or regions you need to trade, or asset classes.

But averages have their own weaknesses. If it’s a slow day, then you probably have excess capacity and that impacts your costs. But if it’s a busy day, you perhaps don’t have enough capacity and that can actually impact performance. So you’re constantly trying to manage these two conflicting factors at the same time as actually trying to service a firm and service your clients, which can be quite challenging.

Dan Barnes: That makes a lot of sense. So then how does an outsourcing provider support them through this?

Mark Goodman: Simply put, an outsourcing provider can help alleviate that problem by turning fixed capacity, fixed cost into a variable capacity and a variable cost. We would like to see outsource trading seen as one tool in the toolbox so that they can manage their core capacity and use outsourced trading as a way to scale that up or scale it down as is necessary.

What’s quite important here, though, is to think about what markets you might need or how easily can your partner flex into new regions or new asset classes? What’s their underlying technology strategy? How are they going to use that to actually scale up? So I do think that outsourced trading has a place to help buy-side traders manage their optimization capacity. But I also think that the choice of outsourced trading partner is quite key for that to be able to solve the problem.

Dan Barnes: And also, is there a question then around the time scale with which you engage with an outsourcer? This must be looked at as a long term solution, which is going to change in its relationship?

Mark Goodman: Yeah, I think very much so, because this isn’t like where, you know, you may be able to choose a brokerage to trade a specific market and then you might add one to two so that you have options and someone else might come up with another solution you can switch. This is a long term relationship.

And we certainly find with clients that building up that level of trust so that you can really act as an extension of the client’s business that takes time and understanding on both sides. So I would certainly say this is not a choice that a client makes quickly and easily. I think this is about finding the right partner in the market that matches your capabilities both now, but also your capabilities you might need in the future.

Dan Barnes: How well do you think outsourcing is understood and how mature is the market?

Mark Goodman: It’s an interesting part of the market because it’s actually been around in some form for 20, 20 plus years. But if actually you look at the characteristics of it, it’s many different models and a level of somewhat opaqueness around what outsourcing actually is. So we would normally categorize that as an immature market to some extent, and we were very keen to try and understand what we felt outsourced trading should be.

Fx, we don’t see it as genuinely outsourced trading, where someone is using a single broker or predominantly an individual broker for execution. That for us is a sell-side desk, and that option is already available to the buy-side. We also think it’s important to not be competing with the sell-side for order flow. For us and outsourced trading desks should be representing the client almost like an extension of the client’s business. And in that respect, they should be representing the client to the market.

We’ve been very keen to get clarity in all aspects of the offering. So pricing; like what is the client paying for outsourced trading vs the underlying broker? You need to be transparent around who you’re rooting to and why you’re rooting that. You need to be transparent about the incentivization for the outsourced trading desk and is that aligned with the client? If the community as a whole focuses on that transparency and that clarity, then I think we will see this business come to maturity and we’ll actually see it as a very viable, value-added option for the buy-side.

Dan Barnes: Yes, of course, if they’re going to one broker, that broker might have the option of providing a risk trade or an agency trade in a way that will offset certain types of risks. So maybe you want to execute based on speed or size of an order. But if you have an outsource desk, then you have all those options available via all the brokers you’re reaching out to.

Mark Goodman: Yeah, absolutely. I think the benefit for a client is that when you’re dealing with an outsource provider, their capabilities are the sum total of the needs of all of their clients. So actually, you get more than you would necessarily build yourself, because you’re benefiting from perhaps people who are doing trades that you’re not very active in very often or that you’re new to. And it’s just a, you know, a new activity for your desk. You can bring that capability on very quickly at that point.

Dan Barnes: What is UBS’s approach to outsource trading?

Mark Goodman: We built out a product about 15 years ago, targeting banks, broker dealers and similar types of clients. Last year, we extended our outsourced trading to our global wealth management business. So what that means is that UBS Execution Hub, which is our outsourced trading platform, is now offering service to 300 clients and the world’s biggest wealth manager across cash equities, cash fixed income, structured products and funds.

What we’ve done this year is we’ve taken that foundation and we’re building out a product for the buy-side to leverage things like the broad broker network that I referred to, that comes as part of that foundation. As well as our global capabilities we’re already able to provide in region trading in Europe, in the US and in Asia to our clients. So we’re not outsourcing the outsource, if you like.

At the same time, we have built a new technology stack because we’ve been very focused on our data strategy and how we can use some of our machine learning techniques we’ve used in other businesses and apply that to the outsourced trading problem. And we think that will become truly differentiated over time.

Dan Barnes: I’d like to thank Mark for his insights today and of course, you for watching. To catch up on our other shows or to subscribe to our newsletter, go to TRADERTV.NET.