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.