Global custodian Northern Trust has launched its integrated agency-trading service for buy-side clients in North America.
Outsourcing front-office trading function is not new, Dan Houlihan, executive vice president, head of asset servicing, Americas at Northern Trust, told Markets Media. “We have been doing it for several years.”
The service, which covers from trade execution to settlement, is currently live with 41 clients across Australia, New Zealand, Switzerland, and the UK.
Typical clients have anywhere between $1 and $60 billion of assets under management, according to Gary Paulin, senior vice president, global head of integrated trading solution ITS at Northern Trust.
Northern Trust supports trading in all listed equities and fixed income and is building out its facility for derivatives trading while using transaction cost analysis reporting from Trade Informatics and trading algorithms from six providers.
The firm ranks its providers using a variety of variables monthly, noted Paulin.
Every month the firm puts its sixth-ranked provider in the cinder, he said. “We call them in, discuss how they and we can improve, and then they might get back in in the following months.”
Driving the growth of this new business line in the latest trend in outsourcing, or what the firm called “The Third Wave of Outsourcing,” which also happens to be the title of a white paper that Northern Trust plans to release on October 14.
The first wave of outsourcing occurred during the 80s and 90s when asset managers began outsourcing their back-office processes. The second wave came a decade later as firms started to outsource their middle offices.
Each occurred at the end of a long bull market, noted Houlihan. “We can argue if we are at the end or heading toward the end of another long bull market.”
The difference now is the margin pressures that asset managers are under, added Paulin.
“When you look at margins at this stage of the cycle are really at their lowest altogether, according to Oliver Wyman,” he said. “You have a situation where active managers’ revenues are going to fall 36% over the next five years. Their costs do not move by 36%, but their margins already are affected.”
When Northern Trust began offering its integrated service a few years ago, its initial belief was that the serving the small funds with $10 billion in assets under management and whose long-only strategies made their trading desk an expense.
However, the bank has found traction with asset managers and asset owners that are not among the top ten largest firms, said Houlihan. “It is the middle that does not have access to the human capital and or the real capital that the trillion-dollar club has. They are coming to grips with that as a result of the pressures.”