The following document is an approximate, but not exact, transcript of the Operational Leaders podcast conversation between host Terrance J. O’Malley and guest Scott Chace.

Please support the production of this podcast by downloading the Scott Chace episode.

Narrator 0:05
Welcome to the Operational Leaders podcast featuring leaders and innovators in the investment management industry, where we discuss the business of running the business with host and top industry executive Terrance J. O’Malley.

Terrance O’Malley 0:19
My next guest has over 20 years of experience as an equity trader and finance executive, the last 20 of which at his own outsourced trading firm. He previously held top trading positions, Tiger Management, Merrill Lynch, and Tiedemann International Research. In 2000 he co-founded CF Global Trading, a leading provider of outsourced trading solutions to asset managers globally. Please welcome CF Global CEO Scott Chace.

Terrance O’Malley 0:48
Scott, it’s great to have you.

Scott Chace 0:50
Thanks, Tery. Glad to be here.

Terrance O’Malley 0:53
So you’ve been doing this for 20 years and there’s been a lot of chatter recently about outsourcing the trading function. Can you give us some background on outsourced trading and on S.F. Global?

Scott Chace 1:03
You know, outsource trading has been around for almost 30 years. It was started by Furman Selz way back when, through their prime brokerage group that offered services – a lot of different services – to their hedge fund clients in the Helmsley building in New York. Out of that desk, a number of firms started and grew. I was well aware of it in the US and at the time I was doing Asian equities at ING Barings, and felt that there was even more of a need for outsource trading for international because covering the globe, having a desk that operates 24 hours is difficult. And I knew from my experience at Tiger Management that that job, while you have a lot of responsibility, it’s physically very difficult and it’s hard to do it for more than a couple years. So there was a lot of turnover on 24-hour desks. And I thought setting up CF Global where we had offices in the region would be ideal. So that’s the first thing I did. I partnered up with Robert Fleming, who we kind of had a partnership at ING Barings, and we continued that partnership where he was based in Hong Kong. I was based in New York. And we had just a few clients to start with and we operated as a small team and grew it from there.

Terrance O’Malley 2:29
So is it fair to say that recently there’s been more interest in the use of outsourced trading providers and what’s driving the interest?

Scott Chace 2:37
Yeah, I think there’s been a lot more interest in it. There are a number of prime brokers that have set up their own outsourced trading desks for their prime brokerage clients. But I think it’s being driven by a couple of things.

Scott Chace 2:50
One, funds are looking to cut costs. It’s a way to cut costs. And two, MiFID II, which is not just a European phenomenon. MiFID II is really a global thing where funds need to make sure they’re getting best execution. And if you’re just handing off your business to a counterparty, to a bank, you’re probably not getting best execution. So I think that’s what’s really driven it over the last few years. MIFID II and a need to cut costs.

Terrance O’Malley 3:24
Scott, it’s always interesting to know more about our guest on the podcast. Can you tell us about your career? How did you get involved in trading and some of your steps along the way?

Scott Chace 3:33
Well, I started right out of college. I went to UVM and started in July at Merrill Lynch in a training program. I ended up on their options trading desk, equity options, and learned to be a trader over a number of years. In 1989, I had the opportunity to move to Tokyo and work for TIR (Tiedemann International Research) and help them set up their trading operation globally. But in Tokyo with Hans Tiedemann. So that’s how I got into it and learned to be a trader. And I started to deal with a lot of hedge funds when I was in Tokyo, including Tiger Management. I moved from Tiedemann into Credit Suisse while I was in Tokyo and was trading as a sales trader Japanese equities and warrants. And Tiger Management was one of my clients and I got to know David Gerstenhaber and David Saunders and knew that they had a need to hire someone at night. And I put up my hand and went through some interviews and ended up moving back to New York in 1992 and working for Tiger, where I did their Asian trading. At first completely on my own, but then with a few other guys over two and a half year period.

Terrance O’Malley 4:53
You mentioned this earlier, but given your career up to that point, can you share some further thoughts about what went into your decision to start CF Global?

Scott Chace 5:02
Well, I saw how well it worked in the US and how popular it was. And again, felt that for international, there was even more of a need for it. And I just went and spoke to some of my best relationships. Generally, people who I worked with at Tiger to see what they thought, and I got a really positive response. So I went ahead in January of 2000, started to set up CF Global, got Robert Fleming to join me and got our licenses set up, New York and Hong Kong. And we were trading by August of that year, which you could never do these days. It would take probably a year or more to get set up to trade. Just took us a few months.

Terrance O’Malley 5:47
Was there a point where you said, “hey, this is going to work? This is going to be successful”?

Scott Chace 5:51
Well, I think our very first month of trading, we were really busy and cash flow positive. So I thought really from the get-go, that it was going to work.

Terrance O’Malley 6:01
Speaking as an entrepreneur and looking back, was there anything that surprised you or lessons learned?

Scott Chace 6:07
Well, I think the big surprise to me when I set up CF Global was the amount of cost, legal costs – what I had to pay lawyers. And I think if I were to do it differently, I would have done it less U.S. centric. I used New York lawyers to get things set up, and it created problems later with Hong Kong and London.

Terrance O’Malley 6:30
And what about in terms of building a firm culture?

Scott Chace 6:32
Well, we operate very much as a team across the three time zones, which is a really nice way to work. It’s a partnership. It’s a team. Everyone is in it together. And subsequently, we’ve had very low turnover over the years. A lot of the people at CF Global have been at CF Global for at least 10 years.

Terrance O’Malley 6:53
So switching back to the broader issue of outsourced trading, when does it make sense from a manager’s perspective? And what’s the value proposition in addition to potential cost savings that you mentioned earlier?

Scott Chace 7:06
Well, I go back to the very beginning where – when I was at Tiger Management trading of a lot of different things and not just equities, but futures, options, fixed income – I saw that banks weren’t necessarily your friend. They didn’t act as a fiduciary and were leaning against a lot of our orders.

Scott Chace 7:26
And I think to have an independent trading desk where your interests are aligned with your clients is very, very important. And it’s almost old school in how we operate, but we have no axe to grind. We don’t trade any of our own capital and we’re just after best outcome for our clients. And I think that’s sort of underlying everything we do.

Terrance O’Malley 7:49
So if a manager wants to use an outsourced trading firm, what should they be thinking about and what should they be taking into consideration?

Scott Chace 7:56
Well, I think in our space there are outsource trading firms that are more U.S. centric, maybe small, mid-cap. There are some firms that are based just in Europe and do only fixed income. I think you have to consider the product area and the strengths of those outsource trading firms. Our strength is global cross-border equities and we’re starting to get into fixed income, which I think is a big opportunity. And we also do derivatives globally.

Terrance O’Malley 8:32
So if a manager does outsource the trading function, how does the manager know that they’re getting good execution and they’re getting good value?

Scott Chace 8:39
Well, look, it’s a full-on service where we’re dealing with the PM day in and day out. And they’re not just getting execution. They’re getting a lot of information, a lot of feedback. You know, in many ways it’s like having an in-house trader. But it’s also important to look at the data and measure the execution day in and day out. And we typically will go over that data quarterly with our clients and see where we’ve done well, where we haven’t done well and where we can improve, and where they can improve on how they place their orders.

Scott Chace 9:14
So I think it’s really becoming more and more data driven. And we’re trying to use our data better and better and are always looking at new ways to do it. At the moment, we use LiquidMetrix, but we’re looking at other services as well. And we have a lot of data so we can evaluate where we’re trading, the different venues we’re using, the algorithms, and where we’re getting good results. And we’re experienced traders.

Terrance O’Malley 9:40
How scalable would you say that business is? Are there some limits on the number of clients and outsourced trading firm can take on or likely take on?

Scott Chace 9:49
Well, I mean, I think there is. It’s very much a high touch service. So we couldn’t take on a dozen new clients. We would really struggle. We would have to hire people. And that’s a slow process. So, yeah. You know, it’s high touch. You need experienced traders. And we are always careful in adding clients and not adding too many at the same time.

Terrance O’Malley 10:14
Could you get to a point where an outsourced trading firm has so many clients that order start tripping over themselves?

Scott Chace 10:20
That’s an interesting question. And we always get asked that. But we almost never trip over client orders where a client is doing the same thing in the same stock. It almost never happens. It’s very rare. And we actually audit all our trades, do an independent audit to show that we don’t favor one client over another. But in practice, it rarely happens.

Terrance O’Malley 10:44
Is it a common practice in the business to do those audits?

Scott Chace 10:47
I think we’re the only ones that do it. I haven’t heard of anyone else.

Terrance O’Malley 10:51
Can you speak a little bit about the critique of the outsource model that it somehow takes away from the firm the market color that in-house desk could provide?

Scott Chace 11:01
Well, I think the idea there is, you know, the PM likes to walk over to the trading desk and have that contact. I think everyone sees in these times, where everyone’s working remotely, it doesn’t really matter. We can do a pretty good job and connect very well remotely. We don’t have to be in the same office as the portfolio manager.

Terrance O’Malley 11:23
So I suppose one of the counterpoints then is an outsourced desk has more flow, more relationships. And so they see more, they have more access to market color and research.

Scott Chace 11:35
Well, definitely. I mean, that’s part of what we do. We have over 300 different counterparties we can trade through to source liquidity, but also get information. And we’re very active. We’re very active day in and day out. So we’re treated by those brokers as a client.

Terrance O’Malley 11:52
Over your time as an equities trader, has there been more transparency in the market in terms of pricing and where things are traded and commission rates?

Scott Chace 12:00
I think there is more transparency and more information available, and our market breadth helps with transparency where, you know, again, we’re dealing with a large number of counterparties day in and day out. Commission rates have come down a lot and it probably has reduced spreads in trades as well. But you also have crossing platforms that you need to avail yourself of and know what you’re doing. And your PM who only trades once in a while may not have that expertise. So it’s important to be able to go to a lot of different venues to get your trade done.

Terrance O’Malley 12:45
And then there’s anonymity, right. What’s the benefit there?

Scott Chace 12:49
We can give a fund a certain level of anonymity where – and that’s particularly important in some markets in Asia where you can see who the bank is on either side of the trade – we can move a client order so it’s not so obvious, especially if it’s a big order.

Terrance O’Malley 13:07
Can you talk a little bit about technology? How was that used? Where is it critical and where is it maybe an advantage?

Scott Chace 13:13
Well, technology is obviously a dynamic area and we’re always looking to improve. We have a call every week about our I.T. and what we’re doing with it, and if we want to do something differently. Obviously, you know, when we first started, we were doing a lot of trading on the phone. We do virtually no trading on the phone. Now everything is electronic. So we’re always looking for a better way to use technology to our advantage in conjunction with data.

Terrance O’Malley 13:41
So that’s a competitive advantage?

Scott Chace 13:43
I think so, because we have more of it and more of that data and we’re active day in and day out and using those technologies.

Terrance O’Malley 13:52
So let’s get back to the idea of outsourced trading being a trend. Is this something that primarily occurs with smaller firms or are you seeing it more across the board? And will this be cyclical to the extent that some of it may come back or most of this is getting outsourced and it’s not coming back?

Scott Chace 14:12
Well the trend we see is the larger funds they’re looking to outsource. Whereas before it was a medium size fund, you know, with less than a billion dollars of assets. Now that 20 billion dollar fund is looking to outsource. So I think it’s not cyclical, just like the move from active into passive probably isn’t really cyclical. It’s a long-term trend.

Terrance O’Malley 14:37
And what about firms that do very little trading and tend to be buy-and-hold, can trading just be an extension of an operations role?

Scott Chace 14:45
Well, I think trading can become a bit of an operational process at certain firms and maybe it is more operational. But to really do it, well, it’s got to be high touch and you have to be looking for constant improvement. And that’s what we try and do day in and day out.

Terrance O’Malley 15:07
So the coronavirus has obviously had a huge effect around the globe, on our lives and our businesses. How is this impacted CF Global?

Scott Chace 15:15
Well, we were able to switch over to our home offices pretty seamlessly because our disaster recovery was – everyone had a home office and a robust home office that we tested frequently. So we remained pretty integrated among our three offices. And it’s almost like a constant conference call that we have with each desk. And besides not seeing one another, it really hasn’t been difficult for us. It’s been fairly seamless. We are back in our Hong Kong office just this week.

Terrance O’Malley 15:51
So, Scott, how else is that impacting your business?

Scott Chace 15:54
So it’s been tough to obviously go see clients or reach out to prospects. But on the other hand, I think for the whole industry, people are more comfortable with a remote trader. And we’ve actually had some inquiries from funds that are looking to shore up their business continuity plans or somehow increase their capacity.

Terrance O’Malley 16:19
How about trading volumes? It seems there’s been a lot of volatility in the markets. Does that impact your business as well?

Scott Chace 16:24
So, yes, with the spike in volatility, we’ve seen a spike in trading volumes, I think, like everyone else in the industry.

Terrance O’Malley 16:32
Big picture. How is this going to impact CF Global and outsource trading going forward?

Scott Chace 16:37
Well, I think that funds see that if you have a trader remotely, they can do as good a job as someone in house. So I think that should favor outsource trading and lead to more business for us, hopefully.

Terrance O’Malley 16:51
Scott, thanks for coming here today. This has been really helpful, shedding light on the discussion about outsourced trading. If someone wants to learn more about CF Global, where can they find that information?

Scott Chace 17:02
Well, we have a website or they can send an email to me directly,

Terrance O’Malley 17:15
Thanks again. It’s been great to have you on the podcast. And best of luck with CF Global. Thank you.

Scott Chace 17:20
Thanks a lot, Tery. I enjoyed it.