Insights on the Equity Clearing Market
Clearing brokers or clearing firms are liaisons between many types of investors or broker-dealers and clearing corporations. Not to be confused with central clearing houses, clearing corporations/agencies, or central clearingparties, broker clearing firms, such as Apex Clearing, act as an integral part in equities exchange. Clearing firms are responsible for holding deposited funds on behalf of a brokerage's clients, settling trade and cash transactions and for calculating the collection of margins from individual traders. These firms are members of clearing corporations, such as The DTC, The Options Clearing Corporation, and National Securities Clearing Corporation, each having several dozens of clearing broker/clearing firm members.
Top Clearing Brokers
While complete lists of clearing firms are not available, several sources ranked clearing services over the years based on broker-dealers served. In addition, some financial organizations listed clearing firms. Full details of the history of clearing brokers for the last decade, including mergers and acquisitions, may be found on the attached spreadsheet.
- As of 2012, Pershing LLC, Penson Worldwide Inc. , and National Financial Services LLC were the top three ranked clearing brokers.
- In total number of dealer-broker clients, Pershing, RBC Correspondent Services, and Merrill Lynch Professional Clearing Corp. & Broadcort were ranked the first through third clearing brokers in 2015, while Apex was ranked 6th.
- By 2019, the top ranked clearing brokers included Pershing BNY Mellon, RBC Correspondent Services, Hilltop Securities Inc. , Wells Fargo Clearing Service First Clearing , and Apex Clearing Corp. Other notable clearing brokers listed in 2019 include Axos Clearing , Merrill Lynch Professional Clearing Corp, and one of the largest Fidelity Clearing & Custody Solutions, with approximately $1.2T in assets under management.
- Pershing LLC, a BNY Mellon subsidiary, states they are "the industry's largest provider of clearing and settlement solutions" and offer services ranging from "Global clearing and settlement in equities, fixed income, annuities; multi currency capabilities ; a proprietary rules-based compliance engine and fully integrated alerts ; adviser access to reporting and a single view of client holdings, from mutual funds to 529 plans to annuity policies ; to award-winning client statements and information delivered the way investors prefer—including on mobile devices."
- Hilltop Securities offers clearing services including transaction processing, broker productivity tools, FINRA compliance tools, secure transmissions of customer and firm data, all from a single data source.
- According to their website, "RBC Correspondent Services specializes in providing comprehensive clearing, custody and execution services to varying types of broker dealers, from full service wealth management firms to traditional retail brokerages, from institutional and FinTech to dually registered firms." As well, "RBC Advisor Services specializes in custody and clearing services to RIAs who serve the high-net-worth marketplace", which includes such capabilities as capital markets access, credit and lending, turnkey and separately managed account platforms, and research.
- Apex Clearing, a Peak6 company: Simply put, "Apex is a digital clearing and custody engine that was one of the first companies to digitize the activities associated with securities clearing and custody" primarily through its hybrid advisor platform Apex Ascend. The platform "complements an existing trading app or advisory practice with client-led account opening, risk profiling and portfolio matching.
- "Apex's fully-integrated, customized solutions allow registered investment advisors (RIAs), digital advisors, fintech firms, broker dealers and full-service firms" to operate through its custody and clearing engine.
- Axos Clearing is the result of Axos Financial acquiring COR Clearing mid-2019. One of their broker-dealers describes the company as "Axos Clearing provides technology, administrative services and product offerings through multiple customized platforms in order to allow correspondents to focus on growing their businesses. In addition, they provide their correspondents introductions to capital providers, issuers, compliance, capital markets specialists along with other front and back-office functions."
- Axos Clearing's website states their systems correspond with "all the leading order management and executions systems that can be integrated with (the) platform."
- For Axos Clearing's earnings call for the period ending December 31, 2019, CEO and President Gregory Garrabrants reported, "In Axos Clearing, broker-dealer fee income was $5.6 million and $11.2 million for the three and six months ended December 31, 2019, respectively", and "Ending customer margin balances were approximately $226 million on December 31, 2019, compared to $275 million on September 30, 2019, with the Federal Reserve lowering rates by 25 basis points in the December quarter and by 75 basis points in calendar 2019. Axos Clearing signed two new IBD firms and two RIA custody firms with approximately $200 million in AUM in the December quarter."
- Smaller clearing firms that appear to focus more or primarily on clearing services include Velox Clearing, Vision Financial Markets, LEK Securities, Clear Street, Quantex Clearing, and Cowen Inc. More details including their websites may be found on the attached spreadsheet below the 2019 clearing firm listing section. Velox Clearing appears to be a direct competitor to Apex in terms of tech, size, and target market.
Consolidations, mergers, or acquisitions have been prevalent throughout the past decade in clearing services. Aside from the seven mergers and acquisitions annotated in column G in the 2012 section of the attached spreadsheet, several more have taken place.
- Part of Penson Worldwide was acquired by Knight Holdings in 2012, while other assets were transferred to Apex Clearing at its inception. "Correspondent and customer accounts of Penson’s U.S. broker-dealer subsidiary, Penson Financial Services, Inc." were transferred as Apex began operations in June 2012.
- Knight Capital Group acquired Penson Futures and placed it under Knight Execution & Clearing Services LLC, which provided futures execution, clearing and custody services that facilitated transactions among brokers, institutions and non-clearing FCMs on major U.S. and European futures and options exchanges. In turn, KCG sold its compiled futures division to Wedbush Securities in a 2014 acquisition.
- RBC Correspondent Services acquired top listed Mesirow Financial in a 2012 transaction, placing about 50 brokerage and advisory firms and $3.5B in assets.
- In 2012, Legent Clearing changed its name to COR Clearing LLC. Subsequently, it was announced in January 2019 that COR Clearing was acquired by Axos Financial, adding 60 independent broker-dealers and 90,000 customers, and the new entity was rebranded Axos Clearing.
- Wedbush Securities acquired "select assets of Crossland LLC including its futures execution and clearing operations in 2014." Crossland LLC was a leading provider of futures and derivatives trading as well as clearing services.
- Also in 2014, JP Morgan offloaded its third-party broker-dealer clearing business to National Financial Services, a subsidiary of Fidelity. At the time, it made National Financial the second largest US clearing firm, behind Pershing LLC.
- In 2016, Hilltop Holdings facilitated the merger of its broker-dealer subsidiaries First Southwest Company LLC and Hilltop Securities Inc., which was formerly Southwest Securities. Based in Dallas to this day, Hilltop offers a very wide range of financial and securities services.
- Announced in April 2017 was Virtul Financial's $1.4B acquisition of Knight Capital Group, including its clearing services firm. The transaction completed the journey of Penson Futures original assets.
- 2019 saw Siebert Financial acquire StockCross Financial Services, a clearing broker-dealer. The result merged StockCross into Siebert’s current broker-dealer subsidiary, Muriel Siebert & Co.
- A Chicago-based investment and technology firm PEAK6 acquired Electronic Transaction Clearing, Inc. (“ETC”), a custodian and clearing provider in September 2019 and meshed it with Apex Clearing, based in Dallas, Texas.
Internal or External Equities Clearing
Accenture lists five factors and three main drivers in determining self-clearing or outsourcing clearing as a service. The drivers include control, cost, and capabilities. The factors are strategy, platform ecosystem, capabilities, service level agreements and economics. Primarily, the decision is based on economies of scale.
- The main drivers in determining outsourcing clearing as a service such as control: Specifically as it pertains to how much flexibility and access firms want to give clients and advisors for direct trading. Additionally, a broker dealer needs sufficient economies of scale to support self-clearing operations and justify maintaining them. Finally, a broker dealer must determine what its core capabilities are and weigh them against the availability of specialized platforms for clearing as a service.
- In a white paper commissioned by Torstone Technology in conjunction with the Aite Group, it is noted that the trend is for clearing brokers to strategically exit the clearing market after " battling the rising cost of compliance and operating in a margin-compressed environment. The results of the paper were derived from interviews "with 24 operations executives at both buy-side and sell-side institutions during the second half of 2017 and the first half of 2018."
- The paper concludes "Self-clearing isn’t the right option for every firm in every market, but for brokers that have sufficient expertise, credit, and collateral availability in a certain market, it is a logical route." And, it continues by demonstrating a balance between costs and strategic priorities must be weighed.
- One brokerage firm quoted in the paper states it "has a level of competency and a healthy enough balance sheet to self-clear and connect directly to CSDs in its selected markets. The COO feels that the team is able to provide a better service at a lower cost than it would if it outsourced the function because, though the firm processes a large volume, much trading is done in smaller and more illiquid markets and the firm has not needed to add staff even though it self-clears."
- Yet, a different broker uses a hybrid model that outsources in some markets but self-clears in others. "The more standardized and high-volume markets are easier to outsource than others. In fact, firms with complex internal architectures may not be keen on outsourcing overall because of the amount of internal process standardization that is required to work with an external provider in an efficient manner."
- Finally, the paper reports "Firms that choose to outsource tend to do so because they feel an external provider is better positioned than the firm’s IT and operations teams to keep pace with market changes. The lower total cost of ownership via the outsourcing model’s smaller in-house IT footprint is appealing for some trade and settlement support teams that are trying to reduce overhead costs and direct line items on a firm’s books. Compliance can be a driver also, as external providers generally have larger teams to dedicate to regulatory change management across their client base."
- Independent Financial Partners provides five reasons for its decision not to self-clear: cost, technology, compliance, multi-custodian support, and the firm's recruiting and growth.
- LPL Financial reasons since it is self-clearing, the client can open most of the common account types online, including most advisory accounts, and immediately start performing trades. All of their trades and "operations are processed in a single location, eliminating third-parties and reducing costs by using a single sophisticated platform."
- "Self-clearing firms are required to have a larger capital store than typical brokerages since they are taking on the risk for trades themselves", states Speed Trader. "Self-clearing firms can pass on the cost savings of not paying commissions to an external clearing house to its customers by way of lowering commissions, although this is not always the case. Instead, some self-clearing firms keep their commissions competitive with non-clearing firms in order to improve their margins."
- Towards the end of 2018, Robinhood built out technology for clearing and settling trades on its platform for its more than 6 million accounts. Robinhood co-founder and co-CEO Vlad Tenev said, "It was a huge investment in the future of Robinhood, and it will have a massive impact on our business and the customer experience."
- Aite states, "Self-clearing isn’t the right option for every firm in every market, but for brokers that have sufficient expertise, credit, and collateral availability in a certain market, it might be a good option."
- Each clearing firm claims to use the latest technology and each has its own tech platform unique to the firm. Almost all firms boast of their creative and flexible APIs that support integration between various platforms. Overall, there are few observable, consistent trends across the industry segment. This makes sense in an industry with no more than 55 firms.
- Late last year, Apex joined the list of clearing firms using a post-trade surveillance tool, Trillium's Surveyor Enterprise platform. The platform allows "clearing firms to monitor for different kinds of manipulative trading tactics across multiple global markets and asset classes." Trillium's software tool permits clearing firm's "correspondents to instantaneously review, analyze and respond to surveillance inquiries helping to streamline the compliance process, reduce manpower requirements and potentially minimize the risk of analytical errors."
- As with a very wide range of other industries, the Covid-19 pandemic has demanded an increase in the use of video conferencing tech for clearing firms to maintain normal communication threads. Apex is no different. The clearing firm is fostering virtual teamwork through the use of tech.
- Velox Clearing also addresses the immediate requirement and probable future choice of more 'stay-at-home' or remote work. “I think the most important thing during any of these times is you need to have a stable system that won’t go down for your customers,” says Michael Higgins, Velox Clearing CEO.
- The Velox article continues, "With investors on the edge due to the coronavirus, investment advisory firms have been hard at work conceptualizing new ways to attract clients, or in some cases keep the existing customers they have. Gone is the days of charging clients a commission for a trade. The new evolution of finance has shifted strategy to give transactions away for free, but then figure out how to earn revenues in other means such as banking revenues, order routing revenues, or other means."
- Several clearing firms have added Sterling’s Aggregator solution, specifically its risk and compliance OMS offerings. "Sterling Aggregator allows clients to manage pre-trade risk, routing, and execution and view real-time risk for equities, single-leg options, and multi-leg options from multiple trading platforms, both those from STT and from other providers. Aggregator also allows clients to view all orders, manage trading risk and enforce all 15c3 compliance controls in real-time."
Rules & Regulations
In short, both the SEC and FINRA provide guidance and regulations required of clearing firms in order to remain compliant. The requirements are vast and detailed. The following contain links to the important pages, and each website/web page linked provides full clarity over the particular compliance subsection.
- Hardin Compliance provides a yearly overview of compliance requirements for broker dealers, with particular points applicable to clearing firms.
- The SEC recently extended enhanced requirements to all clearing firms. "The SEC adopted rule changes that extend enhanced requirements beyond systemically important firms to all registered central counterparties (CCPs) and central securities depositories. The enhanced standards were initially established in 2016 for firms that are deemed systemically important."
- The SEC rules are provided in an extensive PDF.
- The FINRA FAQ page provides many questions and answers to commonly posed questions.
- The 4540 FINRA reporting requirements for clearing firms begins "Each member that is a clearing firm or self-clearing firm shall be required to report to FINRA in such format as FINRA may require, prescribed data pertaining to the member and any member broker-dealer for which it clears."
- FINRA’s 2020 Risk Monitoring and Examination Priorities Letter described areas of focus for FINRA’s 2020 risk monitoring, surveillance and examination programs.
As originally stated, many terms are used interchangeably depending on the source. In addition, a platform that was mentioned repeatedly throughout the research process, but appears not to be a clearing firm is Refinitiv, a brokerage processing platform. Also, there are a few technologies used by clearing firms that is not 'in-house' designed or coded, such as Sterling's Aggregator solution. Finally, much of the information specific to individual clearing firms, including Apex, may be found consolidated on the above mentioned attached spreadsheet.