What is FX outsourcing
If you are a serious forex trader (institutional or retail) who wants to make good use of your capital, then you may agree time to market and cost of forex execution are critical challenges. There is no doubt that the learning curve in forex trading is steep especially when you are starting from the position of a complete novice. Also, managing your positions is a tough endeavor if you simply can’t find enough time to dedicate to market analysis and watching your positions. This is why forex trading outsourcing could be the magic that you need to succeed as a forex trader. But what really is forex trading outsourcing, and why do you need it?
Outsourcing, in the basic sense of the term, refers to the practice of ceding certain core operations of an organization to third parties. For an individual, outsourcing entails nominating someone else or an entity to execute forex trading decisions on your behalf. Proponents of forex trading outsourcing say it enables traders to get the best returns by allocating resources to the best players in the market. Outsourcing takes on different forms where it might involve ceding complete decision-making power to the third party or allocating just bits of the decision-making process.
Things to consider when outsourcing
Outsourcing comes with important advantages, although this is not to say it does not have downsides. It means even as you weigh the benefits, you will be doing yourself and your money great justice if you considered the worst-case scenarios. But what exactly should you consider when outsourcing forex trading?
- Transaction cost analysis – the third parties to whom you outsource forex trading activities charge fees just like any broker would do only that the third parties mostly charge for order execution. But does the third party generate returns that justify the costs you incur? Transaction cost analysis provides the means to determine the true cost of outsourcing. It entails the calculation of costs such as price appreciation, market impact, investment delay, opportunity cost, and timing risk, as well as many other hidden costs.
- Nature of the outsourced forex provider – the essence of outsourcing forex trading is to give your money the best chance of returning good profits. It means getting an outsourced forex provider that always looks out for your best interests. As such, an important thing to consider is whether the outsourced forex provider is acting merely as an agent or as a fiduciary. A fiduciary is law-bound to act in your favor at all times whereas an agent might exercise some semblance of discretionary that might hurt your interests.
How to determine which outsourcing firm will be the best
A Harvard research discovered that outsourcing creates an enabling environment for elasticity and flexibility. Organizations that outsource are able to focus on the aspects of their operations that they are really good at without compromising the entire production chain. In a sense, forex trading outsourcing works in a similar manner, where you cede some activities to firms that have the best expertise and equipment to deliver great results. But how do you determine the outsourcing firm that will meet your desired results?
- Historic forex trading
Because the outsourcing firm will be your fiduciary, it will make all the critical forex execution decisions for you. Ceding such power to a third party implies having trust in its ability to make the right decisions. There is no better way to find out this capability than evaluating the historic forex trading of the outsourcing firm. Historic data is a treasure trove of insights on the quality of the decisions the firm makes, and whether the transaction costs incurred are justifiable. The best outsourcing firm has a great record in terms of returns and it keeps losses at a minimum.
- Processing costs
Outsourcing firms have an array of fees they charge clients usually based on the quality of service provided. Preferably, an outsourcing firm should have low processing fees. Also, such a firm does not include hidden fees that will eat into your returns.
- How trades are done
The main motivation you outsource forex trading is to use the best strategies available and the best platforms to earn better returns. Naturally, therefore, you will consider how the outsourcing firm does its trades to ascertain where it stands among the competition. In other words, the best outsourcing firm uses the best platforms, as well as deploying market-beating strategies.
Laws and regulations
Forex trade outsourcing could go awfully wrong if you fell into the jaws of swindlers prowling in the dark creases of the market. Legislations such as Markets in Financial Instruments Directive (MiFID) enacted by the European Union help to deter swindlers from succeeding. Specifically, MiFID obligates financial markets players such as forex outsourcing firms to disclose information that supports their legitimacy, meaning that as an investor, you are protected when you choose to outsource forex trading.
Outsourcing firms are also subject to anti-money laundering (AML) and know your customer (KYC) regulations. This is because the firms are structured as investment managers. But the application of the regulations could differ especially when a firm is acting more like a fiduciary than an agent. Oftentimes, the regulations are stricter on agents than they are on fiduciaries.
Managing conflict of interest
Instances of conflict of interest in outsourced providers could cost the clients dearly. Luckily, most forex trading currently takes place electronically, meaning clients have easy access to execution data which they can compare with market data to smoke out any hint of conflict of interest. This means the client – which is you, the outsourcing party – should always take time to review the data in great detail to try and spot any events that might seem unexpected.
Furthermore, clients can manage conflict of interest by seeking to understand the ownership structure of the outsourcing firm. The knowledge helps especially in determining how the firm generates revenue. Equally important is the knowledge about the firm’s forex policy, its cost tolerance for various items including the size of the instrument, pair, and deal.