General question sorry if its out of context is it the trend these days for prop firms to self clear? Is there really that much of a cost savings ?
If a prop firm reaches sufficient volume, then it would be more cost effective to self clear. The volume threshold naturally depends on the clearing system used, and the number of ops staff required to run the daily operations (errors, statements, and bookkeeping). Running a backoffice consist mostly of fixed costs (systems, staff, etc), while having a clearing firm clears the business is entirely a variable cost model (per share, or per contract). Let's take equities as an example, a simple clearing systems that would do all the DTC movements, etc, and let's say 4-5 ops staff would be probably about $1-1.5M annually including overhead. So let's say the firm pays say 5 mils pre share for clearing (maybe a bit high), so if the firm trades 250 mil shares a month (not all that much really), then the firm would come up a bit ahead. There is a middle ground, of course, there are such thing as "facility management" in which the firm outsources the clearing operation to a clearing firm, but the firm would still be responsible for all breaks (and the risk), and still use its own DTC box, then the cost would be lower than if the clearing firm just clears the business. Naturally, very few clearing firm would do the lower-margined "facility management" business these days.
I also think you have to look at the risk. Clearing for others involves risk of holding positions overnight and lending out margin as I understand the buinesss. I think that's why more firms do not self clear. I asked this same question to the many different firms that I've been with over the past 8 years. Just my 2 cents worth.
This is what I don't understand about self clearing. How can firms such as Genesis, Hold and Assent (before the Sungard merger) call themselves self clearing when they are not members of the NYSE? I always thought that self clearing involves being a member firm in the exch you trade in. For Example, Bright uses SLK to clear their trades and SLK is a member firm of NYSE. Echo clear thru Merrill which is a member of NYSE. How did Genesis,etc become self clearing?
FWIW, we reached "critical mass" 10 years ago, as far as volume goes...we addressed the idea of self-clearing, but decided against it for many reasons...if you self clear, you have a fixed overhead amount (gigantic)..and therefore you lose your flexibility in business management. It also makes sense that SLK/GS, who clear zillions of shares, should be better equipped for clearing already. We don't need a roomful of employees, we don't have to worry about "out trades" or errors in clearing. When our volume dipped for a short time around 2001 or so, we didn't have to worry about laying off salaried employees or anything. In addition, the constant need to upgrade back office hardware and software is very expensive. We prefer to stay "lean" (no comments on my girth, LOL)....and flexible, and it's nice to have a good relationship with our clearing firm, who we've been with since 1978. Again, FWIW... Don
As far as I know, Hold is member of NYSE. Not sure about Genesis. Who does Genesis use to clear their traders? Anyone? I heard that Genesis does good volume monthly.