Clearing Firms Replacing FINRA
Small firms being squeezed out
In 2006 the NASD announced they were going to merge with the NYSE and eliminate the one firm one vote rights of over 5000 brokerage firms in the United States. While some ushered in the idea of a public dominated board, others cautioned that without one firm one vote, small firms would go the way of the dodo bird. Here we are five years after the implementation and over 20% of the membership( 1000 firms ) is now extinct and things are getting worse. While we continue to believe that over burdensome regulation has made it too difficult for small firms to compete , it appears that clearing firms are doing more harm to small firms then regulation.
We have been reviewing the plight of clearing for several years now and it appears that the lack of availability of quality low cost clearing is forcing another wave of small firms to close their doors. Some clearing firms have taken it upon themselves to literally become the compliance department of introducing firms and are now prohibiting or severely limiting the business lines of their introducing firms. Years ago most clearing firms took the position that they were not responsible for anything their introducing firm cleared through them but today the opposite is happening. Due to the Anti money Laundering and Patriot Act, Clearing firms have a greater responsibility then ever before. Whether its stock certificates, Suspicious activity reports, Financial Crimes Network or recording wires in or out over $10,000 , clearing firms have become the shadow compliance department of introducing firms and as a result are axing smaller producing firms for lack of production.
Penson financial recently collapsed, ahem, merged into an entity known as Apex Clearing. This restructuring has caused turmoil for small firms as Apex has sent notice to all of the correspondents that they require a one million dollar deposit. There are not too many small firms that can afford to pony up one million to a brand new clearing firm so the end result has been that a large majority of firms have been sent to COR Clearing which was formerly known as Legent Clearing. As if these constant shake ups weren’t enough, some clearing firms have been raising their fees and deposits to such high levels that it’s almost impossible for a small firm to stay in business. The cost to clear and sell a single stock certificate has soared to the point of obscene and is forcing additional firms to shut down. This trend appears to be getting stronger and stronger.
6 years ago a small firm would receive several unsolicited calls per week from clearing firms seeking their business. Today, small firms are calling the dozen or so clearing firms that are still in business and begging them to take them on. The problem has reached a tipping point and it is obvious that several hundred more firms will be forced to shut their doors in the coming years if things don’t change. So what can be done? We are glad you asked!
We believe there needs to be additional competition in the clearing arena. For instance, since 2000 there have literally been only a handful of firms approved to do correspondent clearing. In this day and age of technology, how is it possible that only a few firms can clear for other brokerage firms? As for self clearing, there is still too many firms being denied the ability to self clear their own trades. 30 years ago all you needed to self clear your trades was some capital. Today you can not only have the capital but pay a software vendor $20, 000 per month and have the same exact back office system as the largest firms on Wall Street. There needs to be a strong clearing firm for the small firms to utilize before there are no small firms left.
