Self Clearing and Pricing

Discussion in 'Trading' started by Don Bright, Jun 3, 2002.

  1. Copied from another thread: Consolidation...pricing wars..

    I have spoken about both the consolidation within the industry and of the benefits/perils of self clearing before. Just for the record, the reduction in the number of firms (about 60% in 2 years) has left a number of traders in a bit of a lurch, but at the same time has helped some firms grow stronger. The "fixed" costs of self clearing can cause for some (extremely) short term pricing wars ....offers made in desperation just to keep the doors open...and for the buyer to beware of.

    As Gene W. has posted in the past, there is more than just costs, but we at BT have always had the focus on trader retention (via lower costs, firm viability, and trader profits)...which allows us to maintain a slightly higher than "bare bones" price for a few traders, and a great price for the majority, all while maintaining our continuing in the business. We do this by not "bending over" to every 1 or 2 percent difference in costs, but having the margin to adjust to the marketplace....and we don't spend wildly on new 'toys" and "big parties" (which I have actually seen posted as a "positive" when picking a silly).

    Stay tuned as our structure continues to mature and grow, all with the traders well being in mind. As for the handful of competitors who will stay in the game with us....I say "bravo" ...let's keep a fair playing field....and grow the industry.

    As I have said to the heads of other firms, some nasty ...some nice....."we are all teams in a "league of our own" and we must not "self destruct"...and I hope that those that are causing the problems will try to see the bigger picture, so we can can all thrive in the is business we all love....

    (Sorry if I got a bit too deep here, we are just hitting our stride in another big growth spurt, and I want to everyone to do well).


    Don Bright (not an alias)
  2. so what does it cost a self clearing firm to match the trades and print them to a file?


    "As I have said to the heads of other firms, some nasty ...some nice....."we are all teams in a "league of our own" and we must not "self destruct"...and I hope that those that are causing the problems will try to see the bigger picture, so we can can all thrive in the is business we all love.... " ----Don Bright

    "We must not self destruct"--really means, DON'T RUIN THIS RACKET
    "We can all thrive in this business we all love"---WHERE ELSE CAN WE GET SHEEP TO CHURN AWAY ALL THEIR PROFITS INTO OUR POCKETS...
    I'm sure this post won't be up for long (censorship). I just think this is an absolutely moronic statement from the head of a trading firm.
    Lower costs for firms mean lower commissions for traders (if they're smart enough to negotiate a proper deal).
    The self clearing firms can give better rates which undercuts places like Bright, so of course Don's not happy with that.
  4. "Just when I think I have seen the stupidest comments ever...this guy emerges from some cave and starts posting"...and is having hallucinations about reading between the lines of my post, kinda sad really......(sorry all, but I just couldn't is so amusing to see this type of mindless retort). Now for a "normal" response:

    There have been many self-clearing firms come and go, and we have explored self clearing...but with the tremendous economies of scale that come from being part of a bigger team, who isn't worried about paying salaries and covering basic costs, we can be a lot more versatile in our apporoach to the business. Self Clearing is fine for some, but has proven to be a nightmare for many....When the day comes that it makes sense to self clear, we will do it...but for now we don't want to be locked in to a high fixed cost....just good big deal.

    Have a good day..

  5. Were all adults here...I hope!

    Don, I agree that you have to protect your biz. I trade for a living, but I was also on the other side (ran a successful branch and worked on the clearing side).

    I run my trading as a business and I sure you and every astute trader agrees it is a must. As a trader, I would like to see the lowest possible commissions.

    The price war?!?!?? Retail trading is nearly done. Very few people have the psychology to trade a market like this so for a firm is to survive they must give the trader a VALUE for his/her cent per share.

    I've never looked at BT because I feel you just can't compete on price or trader tools. I may be wrong, but I can't see the value in paying $.001 per share at a firm that isn't cutting edge.

    Please let me know the VALUE that Bright has to offer.

    Clearing is cheap! Each firm is entitled to a profit/markup, but over 100% is pathetic. We as traders support the firms. Hell, one good trader can support an entire branch. Each time a BD lowers their rates it tells the trader......Hey I'm not gonna stick it to ya as hard.

    If the principals of firms would focus on building value and stop promoting their firm on message boards they wouldn't have to focus on price as much.
  6. GHansen


    My 1 1/2 cents:

    * Don: Nice commercial. Bright offers capital, training, and OK commissions. But they have have a pisspoor execution system, no proprietary "trader tools," and bare-bones service--which I think DOES cost their traders money.
    * Volume: 1 cent per share is NOT a ridiculous commission...IF you're doing less than 2 million shares a month
    * Don: Sorry, but you can't respond both immaturely and "normally" in the same post. It doesn't fly.
    * Don: I couldn't agree more on your point about self-clearing. It entails many problems including fixed costs, system problems, short-list limitations, pricing inflexibility on small orders, accounting issues, regulatory issues, etc., etc.
    * Tick: You are absolutely right, BD's must add value...When an industry gets mature, pricing commoditizes it. That's what's happening to the day-tradng industry. Almost no one has anything different from the next guy.
    * Tick: A 100% markup on clearing and execution is VERY reasonable...In fact, even a 300% markup is reasonable because that's only 1 cent on a .0025 cost basis. It's not the lowest you can get but it IS reasonable--especially if your trading style demands a lot of capital backing.
    * Here's the shocker of all time: If you DO want value. Don't expect to pay 1/2 cent per share to get it!!! Real "Value" has an expense attached to it--otherwise it ain't that valuable.
  7. Actually, <i>if</i> -- and this is the 'big if' -- the cost of clearing a trade at a real, live, established firm (not one of the 10-pc's-in-an-executive-suite firms) is .0005 (it may even be less) per share, then I'd say one can expect alot of value for .01. And, I'd say that .01 is about 10 times higher than the price ought to be.

    And, we're talking about clearing. It's bean counting. It's not rocket science. 'Value' is a pretty easy thing to achieve in a fungible product.

    Trade clearing is the goose that laid the golden egg in the equities market. Rates must come down, and they will. It's just a matter of people getting fed up enough, just like they did when MM's traded around their price improved orders, resulting in new order handling rules, etc. NYSE is the next Humpty Dumpty owing to the specialist system (sooner or later ecn orders will have to be acknowledged). Clearing firms are right behind them.
  8. GHJ


    Clearing is typically 1/4-1/3 cent per share if you are a new firm--assuming you have the required capital, background, and licensing. .0015 if you're an established firm. Execution, pass-throughs, and all other related per-share costs are EXTRA. For a non-billable NYSE order a big firm pays 1/4-1/3 per share for clearing and execution.

    Factor in 1/4 cent in other expenses, and there are a LOT of other expenses (employees, leases, office overhead, data, communication lines, professional fees, software, regulatory, exchange fees, compliance...).

    The revenue above this is gross profit.

    From that you have to pay for the value-added services you provide your traders. If you charge a penny/share there isn't THAT much left thereafter. If you have a problem with a firm making 1/3 cent profit then I suggest you hang a shingle of your own, and "see how the water is for yourself" Don would put it. Hahaha

  9. I'm talking strictly of the operation of trade clearing. Not trade execution, not support for traders, not sponsoring props, no front end 'value added.' I have a hard time believing that it costs a clearinghouse 1/3 cent per share to clear a trade, when billions of shares are cleared a year. Maybe I am wrong, wrong, wrong. I'm doing my due dilligence now.

    As an aside, from the LaBranche annual report, we learn that the specialist firm has made more money than ever in this falling market. This sort of pokes holes in the theory that specialists lose money supporting stocks. And from Bear Stears, one of the largest clearing firms there is, we glean: "<i>Never an unprofitable year in 78 years</i>" Hmmm. That's more than can be said of most traders. The house edge, they call it. "Duke and Duke always get the commission." Sure, it's risky business. But they seem to manage.

    If it costs them more than 1/1000 cent per share to clear (and clear only), I'll be surprised.
  10. You got me!.....I made a mistake with the 100% markup, that's not too high.

    By the way 300*.0025 = .75

    The value we pay is in the commissions. Value is an opinion how we perceive the worth of something.

    Traders can pay 1/2 cent and get value! To me value is a stable platform, good executions/quotes, new and leading edge tools, along with a good support group.

    Paying more for slow executions and a mediocre platform and a training class would make me a foolish consumer, not to mention a terrible business manager.

    Firms that can't cut the fat and/or develop new systems to become more competitive will fail! Evolution my man, survival of the fittest.

    In a couple of years clearing costs will be so inexpensive they will almost be nonexistent.
    #10     Jun 3, 2002