Clearing and processing a trade typically takes too long. More trade processing should be real-time. Margining, profit and loss, and other vital information not only need to be collected on the day of the trade, but in one comprehensive step.
Such are some of the sentiments of Robert Victor, the managing member of clearing processor InteliClear. It is a relatively small trade processor with fewer than a dozen big clients. But it wants to take on the big boys of the business, such as Broadridge and SunGard.
Victor said correspondents need real trade processing that will tell them, before the trade is completed, how profitable it is or isn’t. A 30-year veteran of the business who came into the securities industry with an accounting education, he joined what would become InteliClear LLC.
The firm’s leadership believed the financial services industry was investing billions of dollars in trading-related software solutions while essentially taking no action to improve the post-trade processing systems that still relied on batch-processed legacy solutions. These legacy platforms often required multiple systems, daisy-chained together to provide the full offerings clients required.
The manpower needed to reconcile disparate systems, as well as the inflexibility and other overhead associated with such a topography, meant the trading community was saddled with high costs to clear, settle and custody business. To accommodate the demands of the “new” Wall St., where trade volumes were higher, profit margins slimmer and regulatory and risk obligations constantly changing, InteliClear was formed. Victor recently discussed these trade processing issues in an interview with CQ&D.
CQ&D: How many clients do you have?
Robert Victor: Nine.
CQ&D: And how do they break out?
Robert Victor: We started out with high-volume trading firms, added some correspondent clearing firms and several financial firms that are using certain modules of our system.
CQ&D: Please describe the typical InteliClear client.
Robert Victor: Well, we have two types of clients. They are customers that are self-clearing or clearing for others, and customers who are using components of our system.
CQ&D: How will the latter use your system?
Robert Victor: Maybe they’ll use the margin system or they are using our system for their books and records; they may be omnibus with their clearing firm and using us for their sub-accounting. So we have a split between the two. Four of the firms clear for other firms and use our system as a competitive advantage because we’re charging a fixed cost, not on a per-trade basis. Costs are lot easier to manage and control.
CQ&D: Let’s go back to the self-clearing clients. What do these clients use your system for?
Robert Victor: It could be everything from purchase and sales to cash settlements, corporate actions-a whole of gamut of services.
CQ&D: But self-clearing isn’t a growing part of your business.
Robert Victor: Well, the road a broker-dealer must travel to go self-clearing has become more difficult, so we’re not finding a lot of new firms out there looking for new systems.
CQ&D: Why is that?
Robert Victor: Many find the current regulatory environment very restrictive, with rules becoming more stringent. In the past, you could see approval in a three- to six-month time frame.
CQ&D: And now?
Robert Victor: Now you’re talking about at least nine months to a year, year and a half. And during that time, firms need to staff up, have systems in place. It can be a burden, especially on start-ups.
CQ&D: You have argued for quicker settlement cycles. In fact, you have asked why settlement cycles can’t be the same day, or T+0.
Robert Victor: Yes.
CQ&D: Based on the recent Boston Consulting Study conducted for the Depository Trust & Clearing Corp., the industry seems ready to move to a T+2 or possibly even a T+1 standard. Do you see that happening soon?
Robert Victor: Well, I think the people who will fight it will be the people who just can’t make dramatic changes in their systems.
CQ&D: You have some concerns about the regulatory issues of moving up to T+2 or T+1?
Robert Victor: If the standard was changed because we see customer debits as a bad thing, then the customer will have to pay faster, because in the old days the risk was the customer not paying you.
CQ&D: And so…
Robert Victor: I’m not sure what T+2 gains.
CQ&D: Here’s an argument for T+2: Everyone gets his or her money or securities faster. And by the way, the rest of the world is aiming for a T+2 standard, so the United States could fall behind the advanced markets if it doesn’t move to a faster settlement cycle.
Robert Victor: That’s true. I know, for instance, the Tel Aviv stock market has a T+1 standard.
CQ&D: But you still have doubts?
Robert Victor: Internally, I’m not sure if it speeds up the delivery process. If you don’t have the security, you still have to borrow it. I clearly see interest income savings and reduced risk in moving toward a short settlement cycle.
CQ&D: So you don’t see the benefits of the current proposal unless you do something more radical.
Robert Victor: Yes, from my personal point of view as an accountant, years ago, we used to do accounting for the brokerage on a settlement date basis. And we used to make a notation what the trade date balance was as well. But from an accounting point of view, you really wanted to do your books and records on the trade date. Our margin system is trade date. We have certain things that are trade date, but the regulatory system is based on settlement date.
CQ&D: So you’re saying this movement to T+2 or T+1 doesn’t go far enough.
Robert Victor: Right. If you’re going to go T+1, why not just go to T?
Robert Victor: Because in any other business around the world, if you buy something today, you have the liability. In this business we say, “Oh, it’s two days or so before it is a liability.”
CQ&D: So your point is, if the industry continues to speed up trading, trading sometimes in micro-seconds, then why can’t clearing and settling also be done as quickly?
Robert Victor: Absolutely. Why do we need to have anything beyond T+0 or T+1?
CQ&D: You began building the InteliClear model and incorporating these real-time ideas before you came to the firm in 2005 based on your accounting background…
Robert Victor: I had a former business, and I sold it to ADP before it became Broadridge. And I said I had enough, I was not going to do any more clearing and settlement because my background is as an accountant.
CQ&D: And so…
Robert Victor: I said I want to build the ultimate accounting system for a brokerage. I decided that anything that had to do with numbers, cost-basis portfolio, margin balances-anything that would affect a customer’s balance… I was just about ready to launch the product and was simultaneously working on some elements of a back-office system. Then, some customers came to us, and asked if we could do various things, and that’s how we formed InteliClear.
CQ&D: And that’s how it happened?
Robert Victor: My company was called Stockbridge Systems, and we just changed the name to InteliClear. And really, the firm didn’t begin operations until about 2007.
CQ&D: And you put together this idea even before you worked with InteliClear?
Robert Victor: We built this platform before we even had any customers. We had a concept in mind.
CQ&D: And your idea was a simple architecture?
Robert Victor: We built the platform with all Microsoft tools. We wanted to use tools that are common to everyone. There are proprietary development tools. It is all standard Microsoft.
CQ&D: Still, while all that sounds good to many people, going to T+2 or T+1 or even a T system, as you advocate, will cause problems in some parts of the trade processing business?
Robert Victor: Sure.
CQ&D: So what is the main theme of InteliClear’s business?
Robert Victor: From a functional point of view, in clearing and settlement it’s not really that different from the legacy systems. They’ve been around a lot longer than we have. They probably have a lot more functionality than we have. But from the basic core of the system-process trades, clear and settle, handle customer records-we do the same. The difference is in how we apply the application.
CQ&D: For example?
Robert Victor: Ours is a modern architecture. It’s built from the ground up as a new system. We didn’t use somebody else’s system from Europe. We started with a clean sheet of paper. Both my partners and myself took all the things we knew about brokerage systems. We said that, because we’re starting from the beginning, we are going to build a better mouse trap.
CQ&D: And a better mousetrap is being able to calculate profit and loss on trades when they are going on, not when they are completed?
Robert Victor: That’s part of it.
CQ&D: The other part?
Robert Victor: Our real theme is a modern, streamlined architecture.
CQ&D: And that means what for the broker?
Robert Victor: Well, our first customers were firms who were doing very high volume. We’re talking about firms that were doing a half million or more trades a day. So it had to be extremely streamlined. That meant everything had to be real-time.
CQ&D: And how do these real-time features function?
Robert Victor: Once the trade goes in, the stock record is updated, the margin is done. The cost basis is built into the system. And all of this is done in a single stream. We don’t go back at the end of the day and do any batch processing.
CQ&D: And some systems, you say, are offering “shadow posting,” which means what?
Robert Victor: They make it appear to be real-time, from the customer’s point of view. For instance, they can do the stock record real-time.
CQ&D: But you’re saying InteliClear does more than that?
Robert Victor: Yes, everything in our system is done at the same time. From a risk point of view, everything happens at the same moment.
CQ&D: Can you provide an example of some functions that other processors are not offering now in real time that you are?
Robert Victor: A full margin and cost-basis system. And these aren’t off to the side, they are integrated as part of our total system.
CQ&D: Please describe what happens when one puts a trade in your system.
Robert Victor: We put a trade in and all records-not only the customer’s records and money balance, but we also do the street side, fail files and comparison files-are created at the time of the trade.
CQ&D: So you’re saying that you’re creating a T+0 system in which everything that could go wrong is checked on the day of the trade.
Robert Victor: We are creating the comparison files at the time we do the trade. We can do intraday trade comparisons so as not have to wait for the next day.
CQ&D: So you’re trying to reassure clients that your system will protect them from counterparty risk.
Robert Victor: Right.
CQ&D: Still, even with up with real-time clearing and processing system, you are not going to change the number of trade fails, right?
Robert Victor: Right. That’s because a fail to receive is not something we can control.
CQ&D: So the system won’t stop fails-you can’t control that-but you are arguing that your system and all trade processing systems should be measuring risk, the profit and loss of trades, sooner?
Robert Victor: Correct. You can find out a bad P&L on a customer’s account sooner.
CQ&D: Let’s look at one aspect of your processing system, how you measure a client’s margin.
Robert Victor: In our margining system, we have something called a projected call. During the day, as trades and entries are being entered into the system, the system is constantly monitoring what the customer’s buying power is.
CQ&D: And so?
Robert Victor: The system can tell if someone has bought $100,000 worth of securities and hasn’t put down any money on it. At this point I have a projected call.
CQ&D: A projected call is not a regulatory call?
Robert Victor: Right. It then is required to deposit or sell securities, but at any point in time, we have this projected call where we can determine risk right there and don’t have to wait until tomorrow to find out what our calls are.
CQ&D: So your argument is that trade processes have some of these protections, but not all?
Robert Victor: Yes, they are not all operating in an integrated process. I believe one needs to have an integrated process and have it all happen at once.