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 acquired it (it merged with Morgan Stanley after he left). 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 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."
LeVeen says that many of the trading roles it takes on may have disappeared anyway as firms look to save money: "We’re not making calls to say, ‘I think you should outsource your trading and get rid of traders.’"
Often a newly launced fund will outsource their trading for the first few years, and as they grow their asset size, they may opt to hire an internal trader, 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 into the fund's existence than it would be on day one,” he says. "Also, outsourced trading firms are hiring many ex-buy-side traders to expand their teams.”
Buy-side traders are a very appealing pool of candidates that JonesTrading looks to hire.
“We’re hiring good-quality buy-side traders that not only bring along their trading experience, but their many years of relationships with colleagues they used to work with," LeVeen says.
“For 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. “It’s risky for an experienced trader signing on to become the head trader at a newly launched fund, 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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