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December 1, 2012

Interactive Seeks Rejected Correspondents

By Editorial Staff

Interactive Brokers is targeting middle-market correspondents who have been shown the door by big clearing firms. These prospects often fear that not clearing at a big firm could expose them to risky smaller clearing brokerages.

"We think the way we handle risk should make people a lot more comfortable doing business here," said Bill McGowan, managing director for Interactive Brokers, an automated global electronic broker and market maker.

Interactive has offered clearing services for years, but now is putting more emphasis on the business, McGowan said.

Its pitch is plain-vanilla clearing, emphasizing a feature that once scared off potential clients.

Clients today, he contends, are more risk-averse, thanks to their fear of clearing brokers that are not diligent enough about weeding out problem correspondents.

"The joke about us has been [that for] four or five years, people were saying: 'Be careful with them because they have a real tight, real-time risk management system, and it's not benevolent. They won't give you three or four days to cover your positions and cover margin balances. They'll just take action immediately,'" McGowan said.

Today, when correspondents are often afraid their accounts could be tied up when their clearing broker has problems with bad business, that lack of "benevolence" is a big selling point, he said.

It is also a good time for a no-frills, basic clearing and custody model that doesn't offer a slew of investment services or research to the middle market, according to officials of the Greenwich, Conn.-based proprietary Interactive.

But what is the middle market?

Middle-market clients are defined by one industry analyst "as brokerage firms that are using bulge bracket or wirehouse clearing firms but are not receiving premium service," said Doug Dannemiller, of LaRoche Research in Duxbury, Mass.

"In fact, the bottom 10 percent of these clients are increasingly losing their clearing broker," he said.

How are they pushed out?

The biggest clearers, industry executives have told CQ&D, are raising deposit requirements, capital requirements or required number of ticket charges.

Interactive, which now has some 100 clearing clients, is going after proprietary trading groups, investment advisers and hedge funds.

McGowan also emphasized that Interactive has excellent risk management controls, such as a system that provides unified risk management across all asset management classes through IB Risk Navigator, and a global policy of not trading anything that doesn't trade electronically.

This, he argues, along with low costs, can offer a better environment for the middle-market client.

"We don't require any security deposit by any firm clearing here," McGowan said. "And our commission rate includes clearing and custody all in one rate, and we don't have any minimum capital requirements."

If Interactive can make a low-cost argument, Dannemiller said, "There will certainly be some middle-market clients ripe for the picking."

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