Interactive Brokers, pushing for more clearing business, believes it can attract new correspondents who have been fired by bulge bracket brokerages and fear new clearing firms may not be stable.
These could be, for instance, hedge funds with $100 million or less in assets that have had long-term relationships as correspondent brokers for bulge bracket brokerages, but are now often shown the door because they don’t transact enough business, according to Bill McGowan, managing director for the automated global electronic broker and market maker.
“We think the way we handle risk, should make people a lot more comfortable doing business here,” says McGowan.
Interactive has offered clearing services for years, but now is putting more emphasis on the business, he says.
Interactive’s pitch is plain vanilla clearing, emphasizing a feature that once scared off potential clients.
Clients today, he contends, are more risk averse owing to potential problem of clearing brokers who are not diligent enough in weeding out problem correspondents.
“The joke about us has been (that for) four or five years, people were saying: be careful with them (Interactive) 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 says.
Today, at a time 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, McGowan adds.
It is also a good time for a no-frills, basic clearing and custody and little else clearing model that doesn’t offer a slew of investment services or research to the middle market, according to officials of the Greenwich, Connecticut-based proprietary trader and broker-dealer.
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,” according to Doug Dannemiller, of LaRoche Research Partners 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 Traders Magazine, are raising deposit requirements, capital requirements or required number of ticket charges.
So who would be Interactive’s new clients?
Interactive, which now has some 100 clearing clients, is going after proprietary trading groups, investment advisers and hedge funds.
He also emphasizes 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 says.
“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 argues, “there will certainly be some middle market clients ripe for the picking.”