After years of internal debate, Knight Capital Group has taken the plunge and begun self clearing.
Knight, whose longtime clearing agent has been Merrill Lynch’s Broadcort, recently began self-clearing a small percentage of its trades. It currently self clears about 60,000 of the roughly 4 million trades it executes each day.
Knight officials said the move is expected to be completed over the next year or so. They estimate the savings to the publicly traded brokerage firm at about $20 million annually. More importantly, it will give Knight greater control, company officials said.
“We still have a great relationship with Broadcort, but we’re doing this so we’ll have more control over our trades,” said Steven Sadoff, chief information officer for Knight Capital Group.
“This will mean our clients will have a one-stop way of finding out about their trades,” added Chris Pento, a Knight managing director who is overseeing the project.
Knight officials said they had been thinking about self clearing for close to a decade, but decided to begin the process late in 2008. Industry observers say that self clearing makes greater sense now, in the aftermath of the market meltdown of 2008, when fears of counterparty risk were heightened. Knight will now keep post-trade functions within its shop.
However, industry analysts said the move is not without its risks. That’s because Knight is going to keep all of the clearing functions in house. Market observers privately say that going to self clearing this way can be a daunting task.
Others who have gone the self-clearing route have outsourced technology providers such as ADP or Thomson Financial, they say.
Or, notes Pento, some firms have tried and failed to make the transition to self-clearing internally. “No one, in the last three years, has done what we’re going to do and succeeded,” Pento adds. “But we are confident that we can do it.”
