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July 31, 1998

Getting the Right Partner to Clear Your Trade Volume: A Clearing Broker's Size Does Help, But Sma

By Staff Reports

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  • Getting the Right Partner to Clear Your Trade Volume: A Clearing Broker's Size Does Help, But Sma
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One thing is more certain than death and taxes in the arcane world of correspondent clearing: nothing stays the same.

Profound? Not exactly. Deep down, does it give consolation to the dozens of active trading desks scouring the nation regularly for larger broker dealers that will clear and settle their trades? Nope.

But the statement does underscore trading desks' preoccupation with selecting the most suitable broker dealer, or correspondent clearing firm, to handle their business.

So how do trading desks pick the perfect partner? Is price-per- transaction a useful guide? Not really, some experts say.

"Ticket charges are usually left as opaque as possible," said Lawrence Tabb, group director of The Tower Group, a Newton, Mass.-based securities-industry consulting firm. "In some cases, that leaves clearing firms room to charge as much as possible."

Ticket charges typically include the cost of trade processing, margin-balance financing and frills such as extra customer reports.

"If your firm does not need a clearing firm that has international clearing capabilities, then it might be best for you to settle for a small clearing firm," Tabb said.

What small clearing firms lack in size, they sometimes compensate for in areas such as personalized customer service and hand-holding. Some larger clearing firms, of course, would argue that they can do just as much. "Look at your needs first," Tabb recommended.


A plethora of regulatory reforms, pending rule changes and heavy-duty technology requirements are some of the biggest hurdles facing broker dealers, or introducing brokers as they are known, choosing a larger broker dealer for record keeping, trade financing, processing and other backoffice functions.

On the technology side alone, the large amount of capital tied up in robust computers that can process and record trades, track margin balances and short positions, and interface with the National Securities Clearing Corp. (NSCC) and the Depository Trust Company in New York, does not justify the cost for many small trading firms.

It is this large capital outlay that has pressured many trading desks in the past 12 months to discontinue their self-clearing operations and to sign deals with larger and better-equipped broker dealers.

"In the past 12 months, more self-clearing firms are signing agreements with clearing firms than the combined total of self-clearing firms that did so in the past five years," said a senior executive with Correspondent Services Corp., the clearing unit of New York-based PaineWebber.

At the moment, several pressing technological hurdles are facing Nasdaq trading desks. One is the Order Audit Trail System, or OATS, made mandatory by the Securities and Exchange Commission on March 16. OATS is a real-time electronic system for gathering and reporting more than two dozen trade details for the NSCC.

To put that in perspective, OATS requires firms to install a system that can process and refine data faster than the current 90 seconds allowed for turning around the same volume of information. Desks will be required to provide the exact hour, minute and second of execution for each trade.