No Company Has Meaningfully Tried This in a Decade

Velox Clearing says other firms are running systems beyond repair so it started a new one from scratch for RIAs and hedge funds.

(Illustration by RIA Intel)

(Illustration by RIA Intel)

Two years ago, having seen first-hand what they would be up against, a group of people left one clearing firm to start their own from scratch. Now, Velox Clearing is finally onboarding RIAs, hedge funds, and others.

There hasn’t been a meaningful attempt at a new clearing business in the past decade and one is way overdue, according to Pat Kelly, CEO of Velox Clearing.

Most of the existing clearing firms for broker-dealers, RIAs, hedge funds, and others, are running on decades-old technology beyond reasonable repair. Pulling them into the present day and positioning them for the future is a tremendous undertaking, Kelly told RIA Intel.

“Many legacy firms have been slow to adapt to change and have instead focused their efforts on patching aging systems that are simply not equipped to handle today’s volumes or functions.”

The old guard isn’t just being stubborn about change. Fee compression has forced clearing firms to think harder about whom they do business with. Some clients, given their size and risk, might no longer have an acceptable profit margin, especially considering the holding capital they might require a clearing firm to keep, Virginie O’Shea, Research Director at Aite Group, said.

At the same time, the dated technology is hampering those firms. The cost and time to cure that is immense and not without risk either, she said. Clearing systems, the pipeworks that settle trades, are complex and the stakes for overhauling them are significant.

“It’s like changing an airplane engine while it’s flying. Best of luck to a firm entering the space but it’s not something I would do without considering it carefully first.”

The “volume-based game” of clearing also requires a lot of capital and is a tough one for new entrants. Others have considered it, but few have gone on to start one. For that reason, any new clearing business is a relative rarity, O’Shea said.

But the researcher, who was not familiar with Velox Clearing, didn’t outright dismiss the company’s prospects. If Velox delivers the promised, fresh technology that will improve risk management it leads with, the firm should attract the small to medium-sized companies it seeks.

“We’ve leveraged our expertise to build a solution with technology and risk management at the forefront, rather than as an afterthought,” Kelly said.

Velox Clearing’s customer service will be differentiated, according to David Herron, the former CEO of the Chicago Stock Exchange and a member of the Velox’s board of directors. Unlike at other clearing firms, where clients seeking help may have to endure dead-ends on an automated phone menu, when clients call Velox, one of its 25 employees will answer the phone, he said.

“I know from being with bigger firms people focus on the profit margin associated with the customer. With us, every dollar is going to matter so we’re not going to be pushing firms out the door because they aren’t going to be big enough for us,” Kelly said.

Although much of trading execution, clearing and risk management has been automated, the industry still spends $170 billion on it every year, according to Accenture’s Capital Market’s Vision 2020 report.

Asset-servicing and clearing (excluding investment funds services) accounted for $36 billion of that revenue in 2017.

Velox Clearing is a wholly owned subsidiary of Hong Kong-based Zinvest Financial Holdings, a financial technology company that also operates a hedge fund and a retail brokerage in Hong Kong. Kelly said the owner might eventually consider doing business in the U.S. but it is currently only investing in Velox Clearing and intends to support it for the long-term.

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