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December 20, 2007

Clearer, Clearer on the Wall. Who Has the Fairest Model of them All

Clearing Quarterly & Directory

By Gregory Bresiger

Also in this article

Two competing clearing models are battling for the hearts and minds—and the business—of the institutional clearing client.

One model uses numerous vendors. The best clearers don’t do it all in-house, this odel’s supporters say. They farm out some technological and trading functions. They use vendors, but demand much of them, according to advocates of this model. A clearer that makes vendors compete so that correspondents can receive updated trading
functions provides the best service for the institutional broker, they say. Examples of this model are National Financial Services and Pershing LLC, a unit of the Bank of New York Mellon.

“If you have five vendors all competing for correspondents, then those five vendors are going to be constantly adding new functions, keeping up with demand because they know that, at any point in time, that institutional broker has lots of choices,” says Bob Mahoney, a vendor. Mahoney heads institutional trading for online brokerage thinkorswim and was formerly chief executive of OMS Arrowhead Solutions, which was
bought by thinkorswim.

But others argue for a different clearing model. They think a clearer should have the experience of clearing for its own traders and have its own proprietary systems before it clears for others.
 
They believe the institutional broker needs a clearer that has the capacity to do everything in-house. And this model is superior to one that uses many vendors, a Knight Equity Markets official contends.

A Key
“It is very important to us in a clearer that he doesn’t have to go outside to clear any portion of our business. That is certainly key,” says Frank Grampone, managing director, head of operations for Knight Equity Markets, which uses Merrill Lynch clearing subsidiary Broadcort Capital Corp.

Grampone was recently approached to switch clearers, but didn’t. Why? The clearer, which he declined to name, used lots of outside vendors, which Grampone feared would lead to problems when his firm had any unique issues.

A clearing official whose business is now primarily retailoriented agrees with Grampone’s assessment. “The key to selecting the right clearing partner is to partner with the firm that is really in the business that you’re doing, not supporting the business you are doing,” says Craig Gordon, president of RBC Dain Correspondent Services.

Gordon contends that NFS and Pershing are not the best for the institutional broker because they frequently outsource, lacking institutional expertise (see related story page 9). He also asserts that they claim their platforms support every possible kind of client. “You’re catering to everyone, but servicing no one really well,” Gordon says.

Clearers, brokerage officials and their clients debate these two different models every day in deciding whether to retain or find a new clearer. Pershing and NFS, the 800-pound gorillas of the clearing business, use many vendors, including thinkorswim, Reuters and various OMSs. Internal competition, thinkorswim’s Mahoney says, is a good thing.