Newedge Plans High Frequency-Powered Move Into Securities Clearing
December 07 2010 - 4:24PM
Dow Jones News
Newedge, the derivatives brokerage, is planning a push to clear
more equities deals in a quest to win business from high-frequency
traders and hedge funds.
The Paris company intends to leverage its dominant position in
listed derivatives by managing more of its clients' collateral
across a range of markets and geographies, tapping into electronic
trading groups' penchant for efficiency.
Newedge has been working on the plan for months, but it gained
fresh momentum in November with new rules governing the way
electronic traders access U.S. securities exchanges.
"It's a game-changing opportunity for us," said Peter Buckley, a
former executive with trading firms Athena Capital Research LLC and
Tower Research Capital LLC, who joined Newedge as a managing
director in September.
The company, formed in January 2008 from the fusion of futures
brokerages run by Societe Generale SA (SCGLY, GLE.FR) and Credit
Agricole SA (CRARY, ACA.FR), is the largest non-bank derivatives
broker in the U.S., according to figures from the Commodity Futures
Trading Commission.
As a clearinghouse member firm on major derivatives exchanges
including Chicago's CME Group Inc. (CME), Newedge handles the
execution of customers' trades as well as managing the collateral
posted to clearinghouses against their outstanding
transactions.
By expanding into securities clearing, Newedge will play a
similar role for more trading firms that do not directly clear
their own share trades with the National Securities Clearing Corp.,
the unit of the Depository Trust & Clearing Corp. that handles
buying and selling on U.S. stock exchanges. The approach will be
replicated on share-trading platforms around the world, Buckley
said in an interview.
Newedge currently handles trading in more than 100 million U.S.
shares a day; the busiest U.S. clearers are estimated to do several
times that number.
Newedge will compete with firms including Wedbush Securities
Inc., Penson Worldwide Inc. (PNSN) and Fortis Bank Nederland, which
handle the lion's share of U.S. equity clearing for proprietary
trading groups, while negotiating for more securities business from
traditional Newedge clients such as pension funds.
"There's no reason we can't do both," he said.
Buckley said Newedge saw an opening after the Securities and
Exchange Commission in November banned "naked access," a practice
that has allowed some traders to do business on U.S. stock
exchanges anonymously and bypass broker-level risk controls. About
30% of market activity is carried out via this sort of pathway,
according to an estimate from Lime Brokerage.
Major providers of this access also serve as clearing firms for
electronic trading firms. Under the new U.S. rules, traders will
next year be required to have their stock orders evaluated for risk
by their brokerage firm, a move that will help level the playing
field for new entrants like Newedge, Buckley said.
"If we can come up with the best pre-trade risk tool, we go to
the top of the deck," he said. "We believe we will have the lowest
latency solution available."
Other current users of naked access could register as
broker-dealers themselves, though these firms would still need a
clearer. Beyond Newedge, major banks are also seen angling for a
piece of the business.
A key test for Newedge's initiative will be building enough
securities business for the firm to register among the most active
clearers on stock exchanges that pay rebates for trading activity.
If Newedge can build a critical mass of customers that move enough
shares per day to claim the highest rebate, the company will be
able offer more favorable terms to price-sensitive traders, Buckley
said.
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;
jacob.bunge@dowjones.com