How to self clear

nitro

nitro

Has someone gone the route of self clearing? What does it take in terms of money, regulation, software, etc? Have you written your own back office software, and is it mostly an accouting system specialized for securities transactions? Can you lease a sofware that would allow you to do some of the clearing functions, and when does it make sense (breakeven analysis, etc)? How does straight through processing allow you to do some clearing functions but not all, and save money? A large part of your comission bill is clearing.

Here is a program that I believe can do the entire gammut of clearing:

http://www.sungard.com/Phase3/

I have a million questions. I realize there is probably five people on ET that can answer these questions, but I thought it would give it a try.

nitro
 
very interesting, let's keep bumping this thread, hoping to get some answers...this might be the key to freedom from brokers...
 
"The key to freedom from brokers" :)

Uh.....nope....don't think so

First, you have to obtain permission from each market you trade

Have to get permission from DC&TT

to do that you have to pass serious scruntiny from SEC

Paperwork for one market is impressive to say the least
Like completing an "ETP" (equity trading permit)

Cost is prohibitive

Unless you can pass on the costs by carrying customer accounts or starting a prop firm, you probably can't afford the upfront nut.

As I recall, Etrade, Tradestation and TrackData all self clear in several markets. They can write off the expenses, the staff does the paperwork, and their lawyers advise them how to pass the reg issues. I am sure there are others. Private folks like Monroe Trout self cleared as I recalled. He did so by purchasing an existing firm, and he did a hell of a lot of volume.

Doubtful that a retail trader is going to make that happen., but hey good luck

Steve


http://www.wallstreetandtech.com/story/supp/WST20020710S0005

http://www.cftc.gov/industryoversight/clearingorganizations/dcoregistration.html
 
what if, say 1000 volume traders got together and formed an association..."(TAB(Traders Against Brokers))". lol
that's 1000*5000 = 5m savings in comms. which would pay the admin. fees(just dreaming : ) ).
 
Yes and no. Becoming and operating a clearing firm is both a fairly complex and not exactly a cheap enterprise It all depends on what product (or more accurately, which exchange traded product) you want to self-clear for. Phase 3, as far as I know, can only do US equities, not most of the derivatives (options, futures, etc, etc). There is GMI, which does options and futures.

For sufficiently large trading firms (for instance, Timber Hill self-cleared, obviously, which became InteractiveBrokers), it might make sense to self-clear. However, even firms like Susquehanna does not self-clear, due to ...

Keep in mind, to operate a clearing firm, it is not just the simple putting up capital to guarantee the trades, and netting out the position movements, it is also financing the positions (margining, risk-based haircuts, stock loan in case of equities, etc, etc), so it naturally becomes not just a "processing" operation.

One type of setup that was done in the past (but you can see obviously why not so much now) is something called a "facility management agreement'. Basically a firm acquires its own clearing rights (all the clearing memberships, surety bonds at the clearing corp), and then "outsources" the actual operation of the clearing processing to a larger-clearing firm. A well known example of this type of setup is The Traders' Clearing Alliance, for both Eurex and LIFFE products. Fortis Clearing is the "facility manager", I believe.

Naturally, clearing firms usually will only perform "facility management" as a last resort. Since they can make a lot more by actually clearing the trades, rather than "operate" the clearing "processes". But for a large enough customer, TCA, the volume still makes up for it.

To see how much setting up a clearing firm costs, here is a rather well known (in Chicago anyways) example. Madison Dearborn Partner's investment into Pax Clearing (which is eventually acquired by Merrill Lynch Professional Clearing, in '04 I believe). MDP invested $67.5M into Pax back in 2001.

http://findarticles.com/p/articles/mi_m0EIN/is_2000_Sept_12/ai_65168916

But note that Pax attempted to be a clearing firm for pretty much all US traded products.


Quote from nitro:

Has someone gone the route of self clearing? What does it take in terms of money, regulation, software, etc? Have you written your own back office software, and is it mostly an accouting system specialized for securities transactions? Can you lease a sofware that would allow you to do some of the clearing functions, and when does it make sense (breakeven analysis, etc)? How does straight through processing allow you to do some clearing functions but not all, and save money? A large part of your comission bill is clearing.

Here is a program that I believe can do the entire gammut of clearing:

http://www.sungard.com/Phase3/

I have a million questions. I realize there is probably five people on ET that can answer these questions, but I thought it would give it a try.

nitro
More...
 
Thanks for the detailed response. All I want to self clear are US equities. Also, from what I understand there is a way to do some parts of the clearing operation, and leaving the more complex parts to your clearing firm. I think it is called pass through clearing or something like that. There is savings in comission in doing just that. Your 'facility management agreement' may be what I thought I heard ...

nitro
Quote from rufus_4000:

Yes and no. Becoming and operating a clearing firm is both a fairly complex and not exactly a cheap enterprise It all depends on what product (or more accurately, which exchange traded product) you want to self-clear for. Phase 3, as far as I know, can only do US equities, not most of the derivatives (options, futures, etc, etc). There is GMI, which does options and futures.

For sufficiently large trading firms (for instance, Timber Hill self-cleared, obviously, which became InteractiveBrokers), it might make sense to self-clear. However, even firms like Susquehanna does not self-clear, due to ...

Keep in mind, to operate a clearing firm, it is not just the simple putting up capital to guarantee the trades, and netting out the position movements, it is also financing the positions (margining, risk-based haircuts, stock loan in case of equities, etc, etc), so it naturally becomes not just a "processing" operation.

One type of setup that was done in the past (but you can see obviously why not so much now) is something called a "facility management agreement'. Basically a firm acquires its own clearing rights (all the clearing memberships, surety bonds at the clearing corp), and then "outsources" the actual operation of the clearing processing to a larger-clearing firm. A well known example of this type of setup is The Traders' Clearing Alliance, for both Eurex and LIFFE products. Fortis Clearing is the "facility manager", I believe.

Naturally, clearing firms usually will only perform "facility management" as a last resort. Since they can make a lot more by actually clearing the trades, rather than "operate" the clearing "processes". But for a large enough customer, TCA, the volume still makes up for it.

To see how much setting up a clearing firm costs, here is a rather well known (in Chicago anyways) example. Madison Dearborn Partner's investment into Pax Clearing (which is eventually acquired by Merrill Lynch Professional Clearing, in '04 I believe). MDP invested $67.5M into Pax back in 2001.

http://findarticles.com/p/articles/mi_m0EIN/is_2000_Sept_12/ai_65168916

But note that Pax attempted to be a clearing firm for pretty much all US traded products.
More...
 
Quote from nitro:

Thanks for the detailed response. All I want to self clear are US equities. Also, from what I understand there is a way to do some parts of the clearing operation, and leaving the more complex parts to your clearing firm. I think it is called pass through clearing or something like that. There is savings in comission in doing just that. Your 'facility management agreement' may be what I thought I heard ...

nitro
More...

Nitro take a look at Shadow Financial's ShadoSuite.
Self-clearing can be cost effective, there are plenty of obstacles to overcome like establishing appropriate credit and banking relationships, meeting clearinghouse requirements and having sufficient operational staff.

Yes there are various forms of "self cleanring"
Self-clearing can be performed either on a service-bureau basis, where a third party manages the clearing platform, like ADP, or on a licensed basis with all operations conducted in house, as is the case with ShadoSuite.

Thomson Financial's S1; Comprehensive Software Solutions and SunGard's Phase Three compete with ADP in the service bureau space I've worked with a number of smaller shops who have implmented ShadoSuie..
 
Are you a US broker-dealer and an NASD member?
Do you have 2 or more Principals...
At least several Registered employees...
And quality infrastructure?
Do you have a good regulatory history?
Is your volume decent... like > 10 million shares/month?

Do you have 6 figures to spend on this...
When trading costs are << $0.003/share.

If not...
You may as well be asking...
About sending a spaceship to Mars...
(Not that such a post would be in any way unusual for this place).
 
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