Powered by a buy-side trading culture and a flexible range of solutions that can be tailored to all types and sizes of investment managers, Cowen has long been a leader in the now fast-expanding area of outsourced trading. In an interview with Institutional Asset Manager, Jack Seibald – managing director and global co-head of prime brokerage and outsourced trading at Cowen – outlines the investment bank’s strategy and its plans for continued growth into new markets, geographies, and asset classes.
What are the benefits of outsourced trading to asset managers, both alternative and traditional?
The key benefit of Cowen’s solution is that we can be a high-touch, complete outsourced trading solution, or simply supplement an existing trading operation. Our clients leverage our established and experienced team of “buy-side” traders, support staff, and trading and reporting infrastructure, and the existing relationships we have developed over the years with scores of institutional brokers that provide research, corporate access, and capital markets flows.
The solution offers exceptional value to investment managers as it truly functions as the client’s trading desk but avoids the cost of building and operating an in-house trading infrastructure. Our agency-only model avoids the potential conflicts that may arise at other firms that make markets in securities or trade for their own accounts.
Our solution also extends well beyond execution and includes many pre- and post-trade activities ranging across trading technology integration, trade settlement, portfolio reconciliation and reporting, trade cost analysis, commission management, access to research, and capital introduction.
Which types of asset managers are you seeing the greatest demand for outsourced trading from?
Historically, outsourced trading was a solution that primarily hedge fund managers, more specifically emerging and mid-sized firms, took up. Over the past half decade or so, larger and more established hedge fund managers have also taken up the service as it became more acceptable among institutional investors.
The pandemic lockdown served as an accelerant to this process as firms found themselves in need of alternative capabilities, and perhaps as more fund managers grew comfortable with the notion that traders alongside their offices were no longer a ”must have”.
The growing institutional acceptance of outsourced trading has also found its way to more traditional investment management enterprises, including family offices, endowments, and pensions.
How is your outsourced trading offering to asset managers evolving?
Originally primarily focused on equities and equity derivatives, and mainly in the US markets, our solution has expanded both geographically and across asset classes. With more than 40 traders located in offices across the US as well as in London and Hong Kong, we serve clients around the globe with access into over 70 markets and across global equities and equity derivatives, futures, credit instruments, and currencies.
Where do you see the biggest growth potential – in terms of geographies, asset classes, new types of clients and so on?
As outsourced trading has been around in the US for many years, it’s our belief that the most significant growth opportunity for this solution exist in the UK, EU and Asia. We’ve started to see evidence of the growing uptake of the service in these geographies and based on the level of inquiry, expect to see an acceleration in the next few years.
We also believe that the solution in the credit market is poised for growth. Launched only in the past two years, our team essentially had to develop this solution from scratch as the construct and operation of the credit markets bear little resemblance to the equity markets. With a large base of dealer desks and market platforms having understood and bought into our solution, we’ve seen a material acceleration in the level of inquiry and uptake of this service.
Is the marketplace for outsourced trading becoming more competitive and/or crowded in terms of the numbers and types of service providers?
Many firms are coming to the space as a means to redeploy traditional trading desks that have experienced excess capacity in recent years. Others who are primarily in other business, such as custody, are simply adding execution services in an effort to capture additional revenues. So simply in terms of the number of firms offering these services, competition is more heated. That said, all outsourced trading solutions are not created equal. The biggest differentiator between the solution we offer and most others is that ours is truly a “buy-side” solution that starts with the buy-side technology stack that we created from the start, and everything else that followed.
What differentiates Cowen’s outsourced trading offering from others in the market?
I would say three things. First is our buy-side orientation. Most of our traders have buy-side trading experience and we have buy-side trading technology infrastructure. Second is the comprehensive nature of our solution – offering execution access across the globe; client trading technology integration and support; and pre- and post-trade operational support, in terms of full-service onboarding, clearance and settlement, trade file processing to clients and their service providers, and trade cost analysis among other things. And third is the flexibility of our solution. We can offer a full outsourced solution, or we can provide a supplemental service in terms of access to other markets and other asset classes, and our pricing is specific to each client’s portfolio activity and other needs (whether it is access to Street research, corporate access, or any other tailored requirements they might have).