Why more asset managers are outsourcing or co-sourcing trading

Executive summary:

Outsourced and co-sourced trading are now mainstream strategies for asset managers.
Drivers for this change include: cost pressures, market complexity, regulatory challenges, and changing views of trading's role.
Co-sourcing balances cost savings with control by combining in-house and external expertise.
Outsourcing models free managers to focus on their core activities, enhancing efficiency and client value.

Outsourced trading is a growing trend among asset managers, with recent headlines illustrating how firms are reassessing their approach to how trading fits in their broader strategic plans. Signs of this shift were also evident at the Fund Operator Summit/Europe 2024 conference, where I presented recently.

A live poll conducted at the event revealed that 88% of the audience—many of whom were asset managers—are actively reviewing their operating models and considering outsourcing or co-sourcing as part of their strategic reviews. So, what is driving this transformation?

Cost pressures

Unsurprisingly, one of the primary drivers behind the rise of outsourced and co-sourced trading is cost. According to the poll shared at the Fund Operator Summit, 60% of respondents cited cost savings at the corporate level as the leading factor behind their outsourcing decisions. Asset managers are under increasing pressure to reduce expenses. Trading desks, which are often viewed as non-core to investment performance, have become prime targets for cost optimization.

Co-sourcing, where firms retain some in-house capabilities while partnering with external providers, is increasingly seen to strike a balance between cost efficiency and operational control. This model allows firms to focus their internal teams on high-priority activities while leveraging external expertise for cost-sensitive or highly specialized tasks.

Changing perceptions of trading

Another key factor is the changing view of trading's role within asset management. The same Fund Operator Summit poll revealed that 63% of respondents didn’t see trading as a key value proposition, particularly among equity managers. For many firms, trading is now viewed as a mechanism to execute investment decisions rather than a direct driver of returns.

This shift has opened the door to both outsourcing and co-sourcing solutions. Firms can outsource non-strategic trading functions while co-sourcing more complex or sensitive activities that benefit from in-house oversight. This hybrid approach offers flexibility, ensuring that managers can maintain control where it matters most while reducing operational burdens elsewhere.

Market complexity

The growing complexity of multi-asset strategies and global markets has added to the challenges of managing trading in-house. Many asset managers are realizing that outsourced and co-sourced providers can offer the specialized expertise needed to manage these complexities—whether that involves managing out-of-market-hours trading, handling niche asset classes, or supporting environmental, social, and governance-related strategies.

Co-sourcing is particularly advantageous in this context, allowing firms to support their internal teams with external expertise while preserving institutional knowledge and control. For example, some firms may manage core markets internally while co-sourcing trading in specialized markets to access the expertise and scale of external providers.

Regulatory challenges

The increasingly challenging regulatory landscape is another factor. For example, the shift to shorter settlement cycles, such as the U.S. transition to T+1, along with similar changes expected in the UK, EU, and Switzerland, has created new operational challenges. Asset managers are now questioning whether their systems and processes are prepared to handle these changes.

Both outsourcing and co-sourcing trading functions allow firms to offload these challenges to specialized providers with the systems and expertise to manage them effectively. Co-sourcing, in particular, provides an adaptable solution, enabling firms to retain oversight of critical compliance processes while leveraging external resources to meet regulatory requirements.

Confidence in outsourcing and co-sourcing

Confidence in outsourcing has increased in recent years, contributing to its adoption. While outsourcing was once more common among smaller firms, larger asset managers have increasingly embraced the model. This shift has helped reassure mid-sized firms that their trading needs can be met by external providers without compromising on quality or scalability.

At the same time, co-sourcing has gained traction as a solution that mitigates some of the perceived risks of fully outsourcing trading operations. By maintaining a collaborative approach, firms can ensure seamless integration between in-house and external teams, enhancing confidence in the co-sourced model.

The bottom line

Outsourced and co-sourced trading are no longer niche solutions but increasingly mainstream strategies for asset managers. On the one hand, the growing sophistication of outsourced providers has made the transition more feasible and less risky than it was in the past. On the other, the pressures of cost reduction, regulatory compliance, and the need to focus on core investment activities are pushing asset managers to embrace these models.

At its core, the key driver behind this trend is the need to deliver value to clients. More and more, asset managers are realizing that outsourcing or co-sourcing their trading functions may ultimately be the best decision for their clients. By leveraging external expertise, they can focus on higher-value activities that directly contribute to performance while ensuring operational efficiency and adaptability.