Outsourced trading has been around since the early 1990s, but since that time it’s grown significantly. More small-to-mid-sized asset management firms are looking to “right-size” their business, that is, save money by cutting in-house traders (or not hiring any in the first place) and relying on a third-party outsourced trading firm. That keeps traders up at night.
While many veteran traders see outsourced trading as a curse that jeopardizes their job security, Jeff LeVeen Jr., a managing director and the head of outsourced trading at JonesTrading, counters that it’s actually a blessing, as its growth is opening up career opportunities – he hires buy-side traders to staff his group.
“For [buy-side] firms launching with $25m-to-$200m in AUM, there are only so many people they can afford to hire internally – if you’re launching with $200m, you probably need a COO and several analysts, which creates salary pressure in an environment of lower management fees,” LeVeen says. “For an average trader, you’re going to spend a couple hundred thousand dollars of comp to get him or her in the door, and you have to put a Bloomberg Terminal and an order management system, so each trader is easily going to cost at least $400k or $500k per year.”
LeVeen began his career as an institutional sales-trader at Salomon Smith Barney and was with the firm for eight years, during which time Citi and later Morgan Stanley acquired it. LeVeen then worked for nine years at KCG (since acquired by Virtu Financial), rising to MD before joining JonesTrading in 2014.
“We’re not an electronic block-crossing firm – we’re a human-driven agency-only block-trading firm, executing trades for hedge funds and mutual funds, including emerging managers,” LeVeen says. “With the growth of outsourced trading, I have heard the comment that the traditional buy-side trader feels threatened by the number of outsourced firms winning the trading business of emerging managers.
“I understand their side of the equation – if there was one outsourced trading firm 20 years ago and today all of a sudden you have 15 firms doing it and more managers running their trading via an outsourced service provider, it’s obviously a threat to them, [but] 90% of our employees are traders who cover institutional asset management clients, mainly firms looking to downsize and streamline expenses,” he says. “We’re not making calls to say, ‘I think you should outsource your trading and get rid of traders.’”
Often a firm will outsource trading for the first 14 months, get up to a billion or so in AUM and they decide they want to hire a very senior buy-side trader from a competitor, LeVeen says.
“In those cases, we created a stable job opportunity to for a buy-side trader, as it’s less risky to make that move 14 months in,” he says. “Also, outsourced trading firms are hiring many ex-buy-side traders to expand their teams.”
Buy-side traders are the most appealing pool of candidates that JonesTrading looks to hire.
“We’re hiring good-quality buy-side traders that wanted to come over to the sell side, maintain contacts with the PMs and buy-side analysts and traders they used to work with and now cover them from the sell side,” LeVeen says. “They have training interacting with PMs and they understand their daily asks.
“To the buy-side traders concerned by outsourced trading and how it will impact their career opportunities, a sell-side outsourced trading platform will probably pay those traders better,” he said. “On the other hand, it’s risky for someone signing on to become the head trader at a big long-short manager, because that long-term seat is dependent on that one firm’s results.
“Working at an outsourced trading firm and trading on behalf of three or four managers offers diversity and a bit more stability than joining a new launch.”
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