The Next Evolution of the Broker-Dealer

April 08, 2019

Just as the retail space has shifted from brick and mortar stores to online storefronts, consumers today are being presented with an increasing array of options when it comes to investing.

After years of consolidation, competition in the investing and broker/dealer space is heating up again. Online-only firms are disrupting the market, while regional players are expanding internationally; Asian and European firms in particular want to grab a greater share of their clients’ wallet by giving them access to the U.S. market.

In the U.S., for the majority of smaller broker/dealers, relying on the services of a larger correspondent clearing firm makes sense. Handing off the technology, regulatory and operational overhead can allow those smaller firms to focus on their core competencies.

However, we’re seeing an increase in the number of fully disclosed firms that are reconsidering that decision, feeling constrained by a lack of control over costs, limitations on moving into new asset classes or markets, and other impediments to growth.

While moving to a self-clearing model is not a decision to be made lightly – the capital investment for regulatory requirements necessitate a deep balance sheet or investors, while the regulatory approval process alone is lengthy and time consuming – in the end, the flexibility and freedom this model offers can make the trade-off well worth the effort.

Firms that self-clear can take more active ownership of their technology, proactively drive market expansion and consider other revenue streams, such as monetizing their assets through securities lending activities. So, both self-clearing and fully-disclosed firms are keeping a watchful eye on the new online-only players as well as the increased activity by international firms and looking at how they can continue to compete effectively.

Owning their destiny
The flexibility and potential that self-clearing affords can be attractive, but it’s important not to underestimate what’s required to make that a success. Because you’re not relying on correspondent clearers to handle the operational side, you also need to invest in people, process and technology to make the most of what self-clearing can offer.

In deciding whether to shift to self-clearing, one of the first steps is to select your technology provider, because they will be an integral part of the regulatory approval process. When considering what’s most important, look for a partner that can offer the most end-to-end capabilities around transaction processing through the full transaction lifecycle, as well as functionality for the areas that you want to move into, such as securities lending.

As you take on a greater responsibility for technology to support your business from the front to the back office, consider how you can manage that technology most efficiently. Working with fewer vendors reduces complexity when it comes to software upgrades, integration and coordination with third parties. Not only are risk, compliance and security issues increasingly challenging, they’ll also never be a competitor differentiator.

Comprehensive, end to end support from a trusted vendor that can provide hosting and managed services can also help to reduce the burden. Additionally, as these firms grow and look to expand beyond their original strategy, they need a trusted partner that can both advise them as well as provide solutions that get them to market faster and easier while reducing risk.

Finally, you’ll need deep expertise in self-clearing within your own team and at your vendor, so it’s important to consider the people element.

The move from fully disclosed to self-clearing can be done efficiently if you rely on mission critical vendors to support you so that you can focus your resources on core capabilities that can truly drive growth. Only then can you have a secure grasp on your self-clearing destiny.

Find out more about how technology can empower your business, whatever your strategy.

About the Author
Jennifer Hanes, Division Executive, Capital Markets and Credit
Jennifer HanesDivision Executive, Capital Markets and Credit

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