In Fidelity's case, though, self-clearing makes sense because of the vast reach of the firm and the different lines of business. Fidelity has its fingers in a lot of different pies, ranging from online brokerage to mutual funds, pensions and insurance.
In the second quarter of this year, it traded 5.6 billion shares, about 2.7 percent of the NYSE total. In the first quarter, the personal-investment side of the business averaged 64,214 commissionable trades, compared to 89,421 for the institutional-brokerage group. Last year, the firm carried out 857.1 million customer transactions. It maintains 17.7 million customers, who have 65.1 million accounts. With numbers like those, it's no wonder the firm self clears most of its trades.
But it comes at a price and that's maintaining the infrastructure and keeping abreast of regulatory developments. That's because Fidelity has a penchant to build things itself rather than buy and Masiello notes that the brokerage group's ""basic operation is a proprietary platform."" When the firm needs a technology partner, they seek a ""best-of-breed solution.""
Now with T+1 looming on the horizon, it will take more investment and Fidelity is working on its back office and straight-through processes. ""It's a very significant undertaking,"" she says, adding ""it will send a lot of people out of the self-clearing world. It will lead to some consolidation as firms decide it's too big of an expense.""
For Fidelity, she says, that spells opportunity to build out its systems and not only service its internal business, but land new clients. ""We've committed significant resources to building our services and technology.""
Service Bureaus Help Users Fill Gaps
For Rich Malone, chief information officer at Edward Jones in St. Louis, Mo., the decision to self-clear is about controlling his firm's ""own destiny.""
In a sense, Edward Jones is like many self-clearing firms that extend their services to other firms in a correspondent-broker relationship. Except that Malone's clients aren't competing firms, they're 8,000 branch offices scattered across communities in Canada, the United Kingdom and the United States. The firm plans to expand that to 10,000 by next year.
""We feel our business model is a little bit different than the standard financial-services company.""
Clearing and settlement is ""one of our biggest issues,"" because of scale, he says. But that scale means Edward Jones is ""better equipped to do the things we want to do and is big enough to (self-clear). No other brokerage firm has as many physical locations. It's one of our challenges.""
That's why, he says, technology and the network joining the offices is ""so important. It facilitates the whole operation.""
Rather than simply rely on building a proprietary platform, though, the firm looks to third parties to ensure that the clearing system runs smoothly on two continents. Edward Jones uses service bureaus, including ADP, Wilco and ISM (part of IBM) to do some of its processing.
That puts the onus on the service bureaus to maintain and develop next-generation technology to drive clearing and settlement, allowing Malone to focus on other technology issues.
""We do our own thing and partner where necessary on certain processes."" Malone says that the move to build straight-through processing has the firm reviewing its systems. ""We want to be more efficient and want to be more real time than we are today,"" he says, adding, ""It's all up for debate and discussion.""
""Clearer"" Battleground Will Be Broker Workstation
Financial firms looking to outsource the clearing function need to make sure their vendor's broker workstation is up to snuff, according to a recent TowerGroup report on correspondent-clearing brokers.
The report, authored by James Hanley and Nicolas Parks, notes that spending on the correspondent-provided broker workstations will grow from $0.4 billion in 2001 to $0.56 billion in 2005, a compound-annual-growth rate of eight percent.
The report also says that ""drastically lowered"" trading volumes, are forcing clearing firms to re-evaluate their strategies and provide products that support a full-service business model.