CQ&D Cover Story: Changing Places

Your customer is now less patient. Will you lose him?

It’s a whole new ball game for the client. 

Many correspondents, who once dreaded changing clearing brokers, are no longer tied to your platform and products. They can, and often will, go elsewhere.

"I do believe it is getting easier for firms to change," said Doug Dannemiller, a longtime clearing industry analyst with his own research firm, LaRoche Research Partners, in Duxbury, Mass.

A former analyst with Aite Group, Dannemiller says five years ago, about 120 clients changed clearing brokers. In 2010, it was about 135.

"It’s up slightly. But it will be up more as the industry improves, because operationally, it is becoming easier to move," he said. He said when trade volume increases, it will lead more brokerages to become more finicky about the quality of their clearing brokers.

Other brokerage officials and clearing industry observers generally agree that the clearing relationship is less sticky.


The prevalence of the Web, the wave of broker-dealer mergers and the relentless march of technology make the transfer of data easier. So correspondents are less fearful of change.

"Changing clearing brokers is still something you want to avoid, but yes, it is now much easier for a client to go elsewhere," said Matt Bienfang, head of U.S. client sales for industry consultant BlueMetal Architects. Bienfang is a longtime clearing industry observer.

So sticky business-the kind of business you can count on through the ups and downs, owing to the inconvenience and the costs of switching-is disappearing.

"There’s no doubt that it’s now become much easier to switch," said Alois Pirker, an industry analyst and research director for Aite Group.

Pirker says the ease with which different systems can be integrated "has improved a lot over the past couple of years." Applications transfers are less daunting, he adds. "So it becomes a far less difficult transition."

Pirker and others listed several examples.

Services on the Web can ensure that data flow won’t be interrupted when a brokerage has a new clearing platform, Pirker says.

"The ability to use these services to integrate data flow and information across several platforms has really made a big difference," he said. Before, he noted, a transition could be difficult.

One reason behind not moving was the often difficult process of beginning a completely new data integration system.

"It meant starting from square one again, and some of that can now be done through the Web. That ultimately benefits brokers who want to change clearing platforms," he said. 

He notes that, in the dark ages of clearing transitions of just a few years ago, getting to a well-integrated, efficient platform took a lot more effort.

"That effort," Pirker said, "has been reduced lately." He added, however, that most of the transition improvement is taking place at the top of the clearing business, the institutional brokerages.

So it’s easier than it used to be, but there’s an exception. The ability to move easily still depends to some extent on a broker-dealer’s mix of business.

Those brokerages that are dependent on the clearing firm for certain services will still face problems. One example is when a correspondent needs to use the clearing firm’s workstation, he said..

Pirker also says there are so many more legal responsibilities for a retail clearing broker. Therefore, a retail clearing broker transfer is more challenging than for the institutional broker.

But ultimately, he warns, it is the changes at the front end of new clearing relationship that frighten many correspondents considering another clearing broker.

"You’re going to have to live through a lot of change with a new workstation," Pirker said. "It’s going to have a different feel."

Indeed, Bienfang says there remains a great divide between the institutional and retail broker.

"The institutional broker today has better controls over their own data," Bienfang said, He added that regulatory requirements have forced this brokerage to obtain more control and access to their own data.

"So when you have stronger possession of the data, then it is easier for you to set yourself up to move from one clearing broker to the other," Bienfang said. Pirker added that it is also easier for institutional brokers to avoid reporting problems because of the control over data.

Institutional brokers are also more data-sensitive for a competitive reason. Knowing more about their data can mean better client relationships.

"This includes business intelligence on their own business or business intelligence on their customer’s business," Bienfang said. "They know how to aggregate it. They know where it is. They know how it behaves. So making a switch is easier for them."

Bienfang notes that institutional brokers are more likely to have multiple clearing relationships than retail brokerages. Bienfang says the smoother transfer process comes at a time when the clearing industry practices are being streamlined.

"I think the entire industry has made the settlement process, and trade affirmation confirmation, much more straight-through than it ever was," Bienfang said.

"Moving accounts from one place to another is also now a much more seamless process. It can be very easily done," said an executive at a large brokerage who declined to be quoted by name. He added that industrywide reporting standards are also facilitating clearing transitions.

Before this technological revolution, executives say, they used to rely on the clearing agent to perform the matching process. Now they can do it in-house.

Still, the officials at InteliClear, a company offering software back-office services, dissent from the view that technology has made transitions a walk in the park. They don’t see a real technology breakthrough that eases transfers between clearing brokers, and believe there is still a decided reluctance to change clearing firms.

Nevertheless, they do agree that when a clearing change happens, institutional brokers have a big advantage.

"It makes a big difference when you have your own front end," said Robert Victor, managing director of InteliClear. He believes it is easier for the institutional than it is for the retail broker because it doesn’t have the level of investor responsibility. The institutional broker is usually more efficient and has a deeper understanding of clients.

So which firms aren’t benefiting from clearing brokerage transitions made easier?

Executives say there are correspondents who depend on the clearing broker for almost everything. They use the clearing broker for front-end services.

Indeed, clearing industry officials will rarely talk publicly about clients changing platforms, owing to potential regulatory and competitive problems. However, several privately confirmed that correspondents are becoming more demanding about their clearing relationships and that retail brokerages are at a disadvantage.

"For the traditional retail broker-dealers, it is still difficult, because a lot of functionality is tied to the infrastructure of that clearing broker," said Chris Pento, a managing director responsible for clearing at Knight Capital Group.

"Whether the client is actively using the broker-dealer’s Web services or using it for execution services," he added, "the fact that they’re retail-oriented in business means it is much more disruptive to the business and cumbersome to the client base."

On the other hand, Pento gives an example of an institutional client in the driver’s seat.

"Let’s say you’re a high-frequency, professional trading or agency broker-dealer, and you’re not happy with the clearing broker’s service or pricing," Pento said. "You can get this business moved rather easily. And there’s really little disruption to your business." And how long do these once feared moves from one clearing platform to another take?

"Typically, a good transition from one clearing firm to another can take two to four months. In the case of a smaller broker, with a retail book, it can take four to six months," said one clearing executive who asked not be identified. He also warned that the time of a transition is one factor in destroying a relationship. The other is the quality of the transition. By contrast, the client who is less dependent on the clearing brokerage-the one who has much more institutional than retail business-won’t be intimidated by changing clearing brokers.

And that means clearing brokers should consider if they will benefit from or will be harmed by the lack of stickiness in the clearing business.

But, for the smaller client who is more dependent on the clearing firm and has a big book of retail business, the stickiness factor remains.

For this kind of brokerage, it’s the same old losing ball game.