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March 1, 1999

The New Challenges For Clearing Brokers Correspondent Clearing Staying in Front in Digital Age

By Staff Reports

Also in this article

  • The New Challenges For Clearing Brokers Correspondent Clearing Staying in Front in Digital Age
  • Page 2

A clearing and execution firm was once considered the invisible partner in the life cycle of the institutional and retail trade. The visible partner was the broker dealer on the front lines, sending the trade to the clearing firm for processing. The clearing firm's customer, the introducing or correspondent broker, arranged the trade while the clearing broker merely facilitated some routine backoffice functions.

This old-fashioned view of the correspondent-clearing firm, as the low-cost backoffice for other broker dealers, is becoming obsolete.

Times have changed.

As regulators continue to push clearing firms to accept more responsibility for the business conduct of their customers, clearing firms themselves are quietly coming out from under the shadow of a less-scrutinized past.

In an intriguing twist earlier this year, the clearing unit of New York-based Bear, Stearns & Co. named Richard Lindsey, the director of market regulation at the Securities and Exchange Commission, as second in command.

Lindsey's appointment came as Bear Stearns was under investigation for its role in the collapse of A.R. Baron, a small New York-based broker that cleared through Bear Stearns.

Bear Stearns dismissed suggestions that the hire was made to clean-up the firm's image, stressing that Lindsey was brought on board for his impressive qualifications and professional experience.

Indeed, it is not unusual for SEC regulators to step into top posts at Wall Street firms.

Moreover, Lindsey must follow strict governmental standards in his dealings with his former employer.


Today, clearing firms do more than operate low-cost backoffices that provide recordkeeping and margin financing, as well as interfaces to industry utilities. They are the providers of decidedly high-technology services for retail and institutional customers.

U.S. Clearing Corp., the New York-based clearing unit of Fleet Securities, said it is working on a special Internet product tailored for wholesalers and third-market trading firms.

If it comes to fruition, U.S. Clearing Corp. would provide these correspondents with the ability to receive orders from their own customers via an Internet link.

"Right now, we have an Internet product for retail brokers, but we are getting more and more calls for a similar system for wholesalers and third-market trading firms," said Joseph Turk, director of marketing at U.S. Clearing Corp.

"The product being developed would eliminate much of the need for correspondents' customers to pick up the phone and call in their orders. It will save time and labor," he added.

Strictly on the institutional side, the Jersey City-based Pershing Division of Donaldson, Lufkin & Jenrette said the most consistent customer request is for more straight-through processing of trades.

"Good connectivity to the systems and the ability for these systems to communicate among themselves is important," said Peter Farkas, head of institutional marketing at Pershing.

"Correspondents like the opportunity to send parts of their orders down electronic systems so they are free to handle the bigger block trades," he added.

Farkas noted, however, that institutional traders are not ready to embrace the Internet in the same way that retail brokers have done.

On the retail side, Pershing provides its NetExchange Pro, an Internet-based account-management system used by brokers for account information, online trading, market data and other services.

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