Execution Trading or "Outsourced Trading"?

Little background, I'm not up on the finance industry and how jobs compare to each other as I've worked as a financial journalist for the last several years. However, due to some connections, I have a potential opportunity in execution trading for an outsourced trading firm. Not sure which desk I'd be on but obviously I'd be a junior trader/trading assistant.

I've been searching WSO to find some info on how this business works, but it seems most people in this role are traders at hedge funds, rather than outsourced trading firms. 

Because I don't have anything at all resembling a target background, I'm 100% taking this position if I get the offer. If nothing else it's an interesting position with great learning opportunities, giving me much better exit opportunities than I have now.

As I understand it, these firms primarily handle execution for smaller buyside firms that don't have the budget for a trading department on their own. So the workload is primarily working orders, shopping around blocks, and keeping abreast of market events? I imagine a deep understanding of different trading algorithms and which ones to use for given market conditions, as well as being able to interpret order flow are skills I'd be building.

I know this industry has changed dramatically over the last two decades with the advent of easily accessible and cheap execution algos, so in reading posts here from 2013 and so on, I'm skeptical some of the insights are completely relevant to today's environment.

Can anyone in the trading world give me some insight on how outsourced trading firms, and execution trading in general, fits into the financial markets?

Thanks guys.

Comments (8)

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  • Trader in HF - Event
2mo 

Outsourced trading is a new trend that has popped up over the past few years. It's because trading is getting very complex (dark pools, vanilla exchanges, bank proprietary portals) and markets are getting faster (even vanilla long-only funds are getting sophisticated about trading in and out of the market). 

This solution doesn't really make sense for funds that are big or at scale; you will generally always get best execution from someone you hire internally and is 100% focused on you. But if you are a $250 - $750mm single manager, and you want to trade US, EU, and APAC equities (three time zones), and as a PM you spend all your day trading ticks, this is an ideal solution. Instead of monitoring four different screens and trying to figure out which type of order, you can just feed it to the Jefferies or Jones Trading guys. There are also some ancillary benefits such as bundled research normally, lower execution costs on platform, etc. 

As a junior trader this job would be similar to a junior trader on an equity desk - watching prices, checking tickets, and interacting with clients. Generally these desks are walled off from the sell-side teams and theoretically don't have any conflicts of interests with the bank, so they are client centric. Now; if two clients call simultaneous and ask for best borrow on $100mm shares of UBER.... well, the guy that pays more fees might get a better look. 

I think it's a good place to learn equity trading if that interests you. I have not really seen outsourced trading for rates or credit, it might exist but the business model is less inclined to it. 

2mo 
headphonearb, what's your opinion? Comment below:

Dude, thank you so much. This is invaluable insight. Regarding your comment about borrows on UBER, is securities lending typically part of these desks, or are you referring to the fact that sec-lending desks would give preferential treatments to clients that generate lots of fees for the trading desk? 

Also, how can I learn more to be best informed in interviews? I've been studying how modern trading algos work with a book from an ex-Virtu guy. Any guidance on this front would be great. I know you're a sponge to your senior trader once you get on the desk, but I wanna sound like I at least understand the industry and the role to the best of my ability in interviews.

Thanks again.

  • Trader in HF - Event
2mo 

1) Borrow is going short, so yes it is considered a trade. Some larger firms make this a Treasury function away from trading; but if you're using an outsourced trading service that is a far conversation away from you. And yes, it was more a referral to that an outsourced trading desk will ultimately have to prioritize and deprioritize clients during busy times. 

2) I liked Turney Duff's book when you strip out all the noise. This job is not rocket science, but it is hard - you will be a good addition to a desk if you are thoughtful, reliable, and good natured. That is what I mainly look for in interviews as the rest can be taught. 

1mo 
headphonearb, what's your opinion? Comment below:

thought I replied to this last week, apologies if there's already a comment me that I can't see.

I read Duff's book a few years back and loved it. Quite similar to Jared Dillian's Street Freak if you haven't read that one yet.

Is it the trading duties, the relationship duties, or both that ring similar to outsourced trading from Duff's book? I know that the first ~year you're a trading assistant kinda just doing any grunt work traders don't want to. But once you become a trader, do you do the type of sales trading networking he did in the book? Getting drinks with clients/prospects and bringing them to ballgames, that sort of thing? Or is there sales teams for that?

Further, do you know if the interview process is at all similar to that of a prop firm with the mental puzzles and that sort of thing? Should I start drilling Heard On The Street questions or is that overkill?

Thanks again. WSO is so cool for this type of thing.

  • Trader in HF - Event
1mo 

To an extent - Turney worked for one firm (Galleon). You will be working for a firm that services many clients; so you are in a client facing/service role. 

Just like any client facing role, you will be better off if you have a strong relationship with your clients. This doesn't mean that Yankees tickets will magically appear; but normally decent-sized firms have a budget for entertaining clients, and you will try and see them every quarter or so to connect and keep the relationship strong. If baseball is what they like, then sure, tickets are a good idea. 

The interview process is going to vary by firm and who interviews you - generally junior trader roles involve a basic knowledge of markets, some light brainteasers, and fit questions. You should prepare for it the same way you would prepare for any junior bank trader interview. 

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1mo 
NotReallyABanker, what's your opinion? Comment below:

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