In a shrinking clearing firm market, survivors must grow, innovate or die.
The number of players in the clearing firm market
has shrunk the last few years, as tight profit margins, high costs of
continually upgrading technology, a shortage of new markets and the
commoditization of core clearing services have made growth a struggle.
For the foreseeable future, observers say, the clearing industry will
apparently continue to be a game of fish eats fish.
"We continue to see the top five getting larger and
the smaller niche players hanging onto the vine and slowly
disappearing," says Matt Bienfang, senior analyst with the TowerGroup,
a financial services research and consulting firm in Needham, Mass.
"Four or five years ago, there were over 100 players
in the market," he adds. "Today I'd be hard pressed to name more than
25 legitimate players."
Although the largest of the clearing firms-including
the Bank of New York's Pershing unit and Bear Stearns-have been quiet
of late, other companies have been amassing volume through mergers and
acquisitions.
In April National Financial, Fidelity's
correspondent broker-dealer business, completed its acquisition of
Fiserv's clearing business and started moving Fiserv's clients to its
own platform. Fidelity says the acquisition secured its place as the
second-largest clearing firm in the U.S. in terms of clients served.
Before the acquisition, Fiserv itself had been busy
buying other companies, including its purchase of the clearing business
of Investec Ernst & Co., a division of international banking group
Investec.
Penson Financial Services continued a growth
strategy that has enabled it to become one of the larger
clearing firms, with the acquisition of Computer Clearing Services, a
clearing services firm in Glendale, Calif., that focuses on the online
trading market.
Although the industry is in consolidation mode, that
didn't stop some companies from moving into the market. Last year
Automatic Data Processing, one of the world's largest computing
services firms, acquired U.S. Clearing and BrokerDealer Services,
divisions of Bank America Corp.
ADP followed up the purchase by signing its first
correspondent clearing customer-the New York City brokerage firm Murphy
& Durieu-in October. "They had always been a provider of platforms
for companies to self-clear, but never before been a clearing firm
itself," Bienfang says.
Hedge funds have also stepped into the realm of
clearing firms, with Citadel Investment Group offering institutional
clearing services. "They've expanded into clearing for other hedge
funds and other institutions," Bienfang says. "They're piggybacking off
their own system."
Established players, meanwhile, are hoping that by
adding bulk they can achieve the economies of scale to beef up their
ancillary services-which have become a key competitive area now that
clearing and settlement services have essentially become commodities.
Pershing, for example, was able to immediately add
trust and mortgage services to its platform after it was acquired by
Bank of New York two years ago, says Jim Crowley, managing director of
Pershing LLC in Jersey City, N.J. "The synergies that were created by
the Bank of New York's acquisition of Pershing really have delivered
value to clients," he says. "It's allowed us to differentiate ourselves
with respect to services."
Technology, and the ability to pack as many features
into platforms as possible, has clearly become a key selling point in
the higher tiers of clearing firm competition. As part of that
technology push, firms are also making a push into the advisor
market-largely seen as one of the few areas of growth left to the
industry.
Bear Stearns considers its technology and breadth of
services as a key advantage in its recruitment of advisors, says Ron
Suber, senior managing director and manager of global clearing sales
for Bear Stearns Securities Corp.
Among the firm's offerings is Investor Scorecard, a
client reporting package introduced last year that Suber says "provides
the advisor with the 'holy grail'-a full consolidation of assets
irrespective of the custodian."
"What's exciting about the advisor market is that
many of them are unhappy with their traditional custody arrangements,
given the advanced products that they require," Suber says.
Crowley of Pershing says his firm has put a focus on
merging technology platforms as the brokerage and financial advisory
fields have converged toward a fee-based model. "We're putting more
tools into the workstation that are needed by fee-based advisors," he
says.
That includes the Managed Account Exchange, which provides Pershing
customers access to managed account services provided through Lockwood
Financial Services, another holding of Bank of America.
Mark Healy, executive vice president and chief
operating officer of Fidelity's National Financial unit, says advisors
are particularly interested in ancillary services that help them deal
with regulatory compliance. The company's Streetscape technology, which
includes a set of risk management and mitigation tools, and integrated
functions that streamline reporting, has helped address this demand, he
says. "The evolution of the clearing industry has required the clearing
organizations to supply services past just core processing," Healy adds.
While the clearing firm market has become
treacherous terrain for smaller players, who are vulnerable to being
either swallowed up or pushed out by larger firms, some smaller firms
have managed to implement successful growth strategies, Bienfang says.
"They compete by specializing, by being the niche players," he says.
One such company is Penson Financial, which started
out ten years ago with nine employees. Now it's not so small anymore,
with operations in the U.S., Canada and United Kingdom, 700 employees
and 200 customers around the world. Donald P. Son, president and
co-founder of the company, says the company has been successful by
"providing customer service based on a flexible approach."
Son, for example, says clients have options for full
customization in the client reporting area. "If a correspondent has the
need for specific reports, they tell us what they need and we'll
generate them," Son says.