Self Clearing Firms

OK, I can give you some information that will help explain this to you all. First off, let me say that we have pondered "self-clearing" since the 1980's...and have opted against it.

Firm a: Self clears 50 million shares per day for a cost of .4 cents, and then they add .4 cents and makes money. No problem. Now they are cut back to 25 million shares per day, still with the same "overhead" costs, so they break even. They now cut their costs to "break even" just to try to stay in business (while they are attempting to find a buyer for the whole firm). Now they are down to 15 million shares per day, but with the same overhead...you get the picture.

Firm b (bright) in this example: Pays xx per share for clearing costs, whether executing 10 million shares a day or 30 million shares per day. This allows the flexibility of "scaling" with only "variable' costs. So as long as we are not greedy (charging too much all the time), then the traders get a low fee, and the company stays in business. We can add offices, and continue in business, or cut back if we need to without resorting to desperate measures.

This should help explain some of what is going on in the industry.

(Yeah, I know my explanation may sound a bit self serving, but the facts are the facts). We lowered our costs considerably this year to help our traders stay ahead of the game, just to let you know.
 
Did you lower costs/commissions to traders ths year because of the mkt conditions? If yes, will you raise them when the mkt. recovers?

Also, is it true Blackwood went out of business today?

Marc
 
Originally posted by marc lehman
Did you lower costs/commissions to traders ths year because of the mkt conditions? If yes, will you raise them when the mkt. recovers?

Also, is it true Blackwood went out of business today?

Marc
More...

No, we have lowered overall costs nearly every year as we have grown. It's an extra benefit this year since the traders can sure use the extra money! I heard BW was having trouble, but haven't heard anything final yet....??
 
This thread is very quiet. I doubted that there would be many out there with any real insight into clearing costs who would actually post the info.

As for Don Bright's post..... Don was careful enough to make sure that his hypothetical self clearing firm had an unreasonably high clearing cost fee, dismissing self clearing as an uneconomical prospect for just about any firm. Not surprisingly, he then turned his post (like most of his), into a thinly veiled pitch for his firm.
Thanks for your insight into the business Don, but what did you really say in your post that was any different than mine. Nothing, except for throwing out some bullshit clearing fee number in an attempt to have people believe that clearing fees are higher than they really are. I know you are sharper than that Don. Do you think we believe that you would make reference to a number that would be anywhere close to the actual cost? Ha, ha. Sure you would,..... just like you would post your income tax return here for everyone to look at!

Sorry Don, don't mean to be bustin' your balls but truth is no one really expects you to give up the "keys to the kingdom".

Maybe you could provide some real answers to 2 questions for me;

1. How can a firm who is not self clearing allow its prop. traders to trade without commissions (excluding pass thrus)? These props. trade many millions of shares per day, the firm provides the trading capital and splits net profits with the trader. Trader does not have to put up capital to offset losses.

2. Why does volume of shares impact the cost of clearing? What is it about the actual clearing process that creates economies of scale?

I look forward to your answers Don, and I hope all is well with the heart surgery.

Traderjimbo, don't give up your quest to find the truth, seek and ye' shall find!!!

MACD :D
 
why don't you just admit that you "missed the boat" by not going self clearing? How can you even make an argument that your firm is better off paying (roughly) $2.00-3.00 to clear a trade instead of clearing it yourself for $.25-35 cents?
 
Originally posted by VOLUME
why don't you just admit that you "missed the boat" by not going self clearing? How can you even make an argument that your firm is better off paying (roughly) $2.00-3.00 to clear a trade instead of clearing it yourself for $.25-35 cents?
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I'm proud to say that we have not "missed any boat" - in fact quite the opposite is true....the major "self clearing firm" is still up for sale..."and we ain't buying" --- And your numbers are way off, sorry..:-)

As I said, we have visited the idea of self clearing, and it has never gotten to the point of making good business sense for us. We've been with SLK since 1978, and the economies of scale simply give us a better deal.

For those who don't (or won't) clear with the major firms, another pass is decided for them.

With "caps" we have traders who pay less than .3 cents per share (all shares in excess of 2500 are free of charge). Pricing is not really a big issue any more, and we like the flexibility.
 
1. How can a firm who is not self clearing allow its prop. traders to trade without commissions (excluding pass thrus)? These props. trade many millions of shares per day, the firm provides the trading capital and splits net profits with the trader. Trader does not have to put up capital to offset losses.

By eating up corporate profits, and cutting back their buying power by 85%, and leaving a zillion "stranded" traders. Nothing against them, but the business has changed, the market has changed, and that business model is simply not working. This is not an "A or B" business, there are plenty of alternatives when it comes to running a trading business, clearing, JBO, etc. We have been "able" to self clear since the 1980's, but have not done so because it doesn't make sense to us. No big deal.

2. Why does volume of shares impact the cost of clearing? What is it about the actual clearing process that creates economies of scale?

Since our Clearing Firm has to deal with only one entity, Bright Trading, who they have known for 20 plus years, and know our financial viability, they have only 1 place to look for risk control, error correction, clearing problems, tech updating, etc., vs. newer firms where they have to virtually monitor everyone, concern themselves with financial wherewithal, etc.

The economies of scale are simple...if we (the clearing members) more than cover their "monthly nut' for clearing, then they are more receptive to lowering costs.

Business is business, and things are constantly changing....heck, I may be espousing the virtues of self clearing if, and when, it makes sense to us and or traders.

Just when I think we have covered every part of the business in detail, there seems to be some stone unturned....so you have my view on self clearing.

Hope to see many of you on Monday!!

Don
 
On the contrary the model I described seems to be working quite well for some firms and is well suited to the current market environment.

Don't no what you mean about cutting back BP and leaving traders stranded. As I stated the firm is supplying the capital, and BP increases are available to the traders on an as needed basis. The trader must of course have a record that supports his need for any BP increase but it is generally not a problem.

You are right about the business having changed and in fact that is the reason why such a model works well today. By allowing traders to get in and out of positions without the penalty of accumulating commissions with every button press it makes it much more feasible to scalp in and out of stocks all day in trendless markets. It also acts a a tremendous risk control tool as there is NO reason to hold positions that do not show an immediate profit. If the trade is not working... get out and go the other way. So I reject your claim that this model does not work in today's environment.

Here is one of my questions restated again for you Don;

Can a firm negotiate a per stock, per side, per day, clearing arrangement?

A simple yes or no will suffice. If however you wish to provide some details that would be great.

I am aware that this type of arrangement may not exist at SLK but they are not the only clearing firm on the street, and certainly not the cheapest.

As you said Don, this is not an A and/or B business. The beautiful thing about this business is that lowering costs creates opportunities to do more volume and that in turn can (yes i said CAN, not DOES), create opportunities for incremental revenues.
I am sure your model works well for you... and your traders, but there are other ways to "skin the market cat".

MACD
:D
 
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