Consolidated clearing — the concept of aggregating trades across multiple venues into a single ticket for clearance — is not new. It's been around since 2004, when several players, including ESP, Firefly and UNX, first introduced consolidated clearing platforms.
But while the cost savings from consolidated clearing can be significant, the buy side has been reluctant to jump on board wholeheartedly. Now, however, more and more traders are starting to take notice as the shaky markets force firms to seek cost savings throughout the trade process. As electronic trading and the proliferation of dark pools continue to fragment the markets, and trades are broken up into smaller and smaller orders, the sheer number of tickets and the costs associated with their processing continue to rise.
In addition, a new crop of providers is coming onto the scene: agency brokers. Firms such as ITG and Instinet now offer their own consolidated clearing solutions.
That these big players — which are trusted buy-side trading partners — are getting in on the action may be a sign that consolidated clearing is gaining traction. Meanwhile, consolidated clearing is entering a new era with a model that offers buy-side traders more flexibility.
Evolution of the Consolidated Clearing Model
The consolidated clearing model itself has undergone an evolution in recent years. Whereas in the past, aggregation providers wanted buy-side users to trade through their pipes — offering algorithms and execution through their proprietary front ends that would then be aggregated automatically — the model now is more open to allowing buy-side firms to use whichever front ends they prefer and to trade with whomever they have relationships with. The ticket aggregation, or consolidation, then takes place on the back end. For example, if a firm submits a large block trade that is executed on 10 different venues in smaller lots, those trades will be aggregated after execution through the aggregation provider's back end application and cleared together.
Dave Sher, managing director at ESP Technologies, explains his company's model: "We act as a settlement aggregator, receiving in the trades that are executed at each of the broker destinations in one place, and we do allocations one time," he relates.
He adds that customers can access the settlement solution through ESP's own trading network or as a software application that can be customized to how and where the client trades. ESP, which is backed by firms including Credit Suisse and Susquehanna International Group, provides its Central Counterparty Clearing solution in the U.S. as well as in 18 markets in Europe and six markets in Asia.
One longtime ESP user, Franklin Templeton Investments, has been vocal about its use of consolidated clearing and the ESP model. "We are positive on the concept of consolidated clearing and single-ticket bookings," says Mat Gulley, global head of trading at Franklin Templeton. "We feel this is a benefit for our clients and works well with the fragmented and electronic markets of today."
Derrick Johnson, VP of sales and marketing at UNX, which is backed by Goldman Sachs and UBS, also believes that fitting into a client's existing workflow and processes is key for a consolidated clearing model to work. "We don't want to become a middleman and disintermediate any relationships," he says.