It’s a busy time to be a fixed income trader.
Following the 2022-23 surge in official interest rates, asset managers are searching for clues as to when and how fast monetary policy might start to be loosened. A rate cut by the European Central Bank has only heightened speculation about the timing of other central banks following suit.
Meanwhile, major platforms are reporting continued growth in fixed income trading volumes this year. Portfolio managers are increasingly taking outright positions, hedging or managing their cash more effectively to take advantage of historically high money market rates.
The net result is that many buy side firms could benefit from outsourced trading for their fixed income requirements. At the Fixed Income Leaders Summit in Boston during the summer, a workshop hosted by Marex gave executives from a wide variety of buy side firms an opportunity to explore the drivers behind this trend and why it shows no sign of slowing down.
At the event, Dan Barnes, editorial director at Markets Media Europe, introduced an audience Q&A session with Bobby Croswell, global head of equity outsourced trading at Marex, and me to tackle some of the burning questions that asset managers have. In this article, we discuss questions that came up and how outsourced trading providers, such as Marex, are responding.
What kind of options are available to funds that may be interested in outsourcing?
The buy side is not monolithic. Firms considering outsourced trading want to know whether potential partnerships can fit with their own unique profiles and their short- and medium-term plans. For instance, are they interested in outsourcing all of their needs or adding supplemental resources? Do they only need extra resources at certain times?
The message here is that asset managers need not settle for one-size-fits-all solutions.
It’s true that some providers are more rigid about what they will or will not do for a client. But the industry has evolved considerably in recent years, with more competition than ever before. That means that asset managers have choices.
Some may want a flexible pay-as-you-go arrangement, others a retainer with a volume cap, and others a solution with a flat fee. If a provider is not able to work within your parameters, it may be time to look elsewhere.
The other key development to note is that outsourced trading is no longer focused so heavily on equities. The practice did begin with equity markets, but many firms, such as Marex, now offer outsourced trading in multiple asset classes.
What are the main arguments favoring outsourcing for fixed income?
Apart from the operational flexibility and the potential cost benefits that an outsourcing relationship can create, there are at least three major arguments that asset managers may want to consider.
Outsourcing means they get:
- Access to more liquidity sources. Some funds are able to open their own bilateral lines with banks. But maintaining those lines may not always be practical due to ongoing requirements related to anti-money-laundering and KYC measures. Either way, few funds can match a specialist outsourced trading provider in terms of the size and breadth of its dealer network.
- Coverage in more time zones and geographies. The time zone coverage is another big plus as it means that funds do not need to have traders working at pre-dawn hours in order to trade in another time zone.
- The benefit of more expertise. It’s not just equity managers who may benefit from the bench strength of an outsourcing firm. Even for those funds that have experienced bond traders, the fixed income arena is so wide that there may be parts of the market that they are less familiar with.
Is it just about people or are there are other factors?
There is no question that having the right people is essential for successful fixed income trading, as it is all about relationships. Marex has prioritized this, which is one reason why even high AUM funds are increasingly engaging with firms such as Marex.
Technology is important too. For instance, Marex uses LSEG TORA for its order and execution management system (OEMS). It provides global connectivity to executing brokers and access to an array of pre-trade data to aid trading decisions. This is just one of many tools, and the team continually evaluates other services to complement its offering.
One other factor that often gets overlooked is focus. A fund manager has to wear a lot of hats, from risk to compliance to analysis to trading.
But an outsourced trading firm such as Marex will have its trading hat securely on all day long. Not only does this mean it in tune with what’s happening in the market, but it also reduces the inefficiencies, missed opportunities and risk of mistakes that juggling multiple roles plays.
How can asset managers know if they have received a good service?
This question gets at the heart of an interesting aspect of the fixed income market. Best execution for bond trading can be subjective and will vary from one trade to another.
A key determinant may be the size of the order. For instance, with an order that is many times market size, best execution could be determined by likelihood of execution. On the other hand, for a more modest-sized order, the key factor may be price.
Often, best execution comes down to the skill and experience of a trader. That, in fact, is another benefit with respect to specialist outsourcing providers since they will generally be staffed by expert traders who have deep experience with all manner of execution-related situations. It’s certainly something we strive for at Marex.
One last point to make is that because no two trades are ever the same in fixed income, this is also another area where communication is key. Marex prioritizes open discussions with clients who seek to understand how best execution was determined for a given transaction.
An ongoing conversation
Those are some of the more prevalent questions on the minds of asset managers.
Even though outsourced trading has become much more commonplace, it’s clear that there is still an education process to be had for asset managers, as evidenced by the curiosity at the Marex workshop at the Fixed Income Leaders Summit.
As the world adjusts to a more dynamic interest rate environment, we can only expect more fund executives will see the value in partnering with an outsourced trading provider.
