Many middle market correspondents are seeking new clearing brokers, say officials of a startup expecting to begin operations later this year.
So Cantor Fitzgerald & Co. officials, arguing that they have spotted an opportunity in the clearing business, have just begun Cantor Clearing.
“We think it’s a great time to enter the space,” says Noel Kimmel, CEO of Cantor Clearing. “There has been dislocation with some existing providers. A lot of major providers have shifted their focus from clearing.”
Cantor Clearing’s value proposition will be based in part on middle market clients who are unhappy with their clearing arrangements.
Correspondents are often unwelcome at the brokerage powerhouses because they don’t buy sufficient products and services to pay for their pricy overheads, industry observers say. But these correspondents also feel uncomfortable about using mom-and-pop clearing operations, whose capital shortcomings could fell the brokerage at the first sign of a bad market.
“So you have certain firms at the very high end that will only deal with the largest customers. And then some which are suited for very small customers, but there’s this vast middle space that is just underserved,” says Andrew Koslow, chief administrative officer for Cantor Clearing.
“There’s a major gap in the middle market area for clearing,” he adds.
Cantor Clearing officials hope they can fill that gap by offering a new clearing brokerage service. It is slated to begin operations in the fourth quarter, pending final regulatory approvals.
Who are these underserved correspondents?
Cantor Clearing officials won’t specify the size of these underserved brokerages, but they say the target clientele will be a cross section of the brokerage industry. They will include registered investment advisors, institutional brokers, banks and other asset managers.
“It is primarily a mixture of institutional, advisory and retail,” Koslow says. Cantor Clearing, Kimmel adds, will also recruit clients by emphasizing its stability and its considerable resources as an investment bank.
“And we feel, as a firm, similar to the prime brokerage business we launched three years ago, that a clearing platform at a full-service investment bank with a strong balance sheet and focus on middle market clients is a great place to be.,” Kimmel says.
Cantor Clearing officials say they have clients lined up, in part owing to existing relationships with the firm’s prime brokerage operations.
But will the clearing brokerage have success as a clearing business?
“It’s an interesting approach. It appears they’re trying to leverage their prime brokerage into clearing,” says Doug Dannemiller, a longtime clearing industry analyst. He is also a principal of LaRoche Research in Duxbury, Mass.
Dannemiller says many big clearing brokers have been firing their small clients. “If they’re not generating at least $300,000 to $400,000 a year in revenue, they are being pushed aside by the big firms on the institutional clearing side,” he says.
Dannemiller pointed to Interactive Brokers as another broker-dealer that is trying to sell clearing and settlement services to the middle market.
An Interactive Brokers spokesman says their clients are coming to them from some of the “largest” prime brokers.
That includes some top names in the bulge bracket, as well, according to Steven Sanders, senior vice president, marketing and product development. “They are seeking to open an account with us because their current broker has raised the threshold, the assets under management or their revenue threshold, for doing business with them.”
These clients, Sanders says, need extensive risk management services of the institutional powerhouses, but also need capitol introduction services. Part of this middle market includes the smaller hedge funds. These funds are often squeezed out of the market, say industry observers.
On the one hand, smaller hedge funds, the spokesman said, desperately need capital introduction services. However, on the other hand, often they can’t afford what big institutional clearing firms are charging for capital introduction.
Dannemiller adds that, in the case of Cantor, Interactive Brokers and other institutional clearing brokerages with existing prime brokerage operations, the concept of signing up ignored middle market clients “could work.”
That is, he adds, if it generates enough revenue, justifying the use of their unused capacity.