Investing in Transparency
The demand for greater transparency around trade execution is not going away anytime soon; if anything, the trend is gaining steam.
The global financial crisis of 2008-2009 marked a watershed in this area, as some institutional investors were called on the carpet by their boards for not having a proper handle on what was happening in their portfolios.
Until now, it has been the voices of investors driving the demand for greater transparency into how and why their money is moving around, where their trades are being executed, and what are the associated brokerage costs.
“What we will see in 2016 is regulators adding their voices to those of investors,” said Joseph Wald, chief executive officer of trading-technology provider and agency brokerage Clearpool Group. “There will be a lot of new regulation like Institutional 606, Form ATS-N and other initiatives.”
While the ‘Bulge Bracket’ and other brokers have provided more transparency to their buy-side clients over the past half-decade, they stop short when it comes to certain specifics, such as giving clients a peek into the brokerage’s execution protocol, the liquidity venues the brokerage uses to execute the trade and the order in which they are used.
“For the better part of a decade, firms have ‘architected’ their systems to maximize the profits from their execution protocols,” said Wald. “It’s built into their systems and I doubt they would want to untangle all of their systems, or would even be capable of doing so.”
To meet this growing need, earlier this year Clearpool launched its own service that lets clients define their own execution protocol via Clearpool’s Web-based user interface. Traders can use Clearpool’s point-and-click interface to define where their orders are routed and in which order.
Allowing clients to define their own execution protocols “is something that other brokerages will not let you do,” said Wald.”They may do it for a large buy-side client, but they will never allow a white-label sell-side client, of which there are hundreds and hundreds, to have these capabilities for their own buy-side clients. Clearpool gives any sell-side firm the ability to completely control their electronic and algorithmic trading.”
Such an approach piqued the interest of growth equity firm Edison Partners, which has invested $8 million in Clearpool.
“The reason why we call this a ‘growth financing’ is this was an option for the company to raise capital,” explained Chris Sugden, a managing director with Edison Partners. “It was not a situation where Clearpool needed to raise capital or they would run out of money. This was truly an offensive round for the company to accelerate sales and marketing to increase market share.”
Prior to Edison Partners’ investment, Clearpool already completely built out its technology, rolled it out and ‘on-boarded’ more than 50 clients since going live, Sugden added.
Wald plans to allocate the new capital to expand the firm’s sales, operations, and technology staff by approximately a dozen employees over the next 12 months.
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