Cutting Costs in Trading Internationally By Cutting Out a Clearing Agent in the U.S.
November 30, 2009
One way for American brokers to achieve healthier profit margins and greater visibility into foreign markets when they trade internationally is to eliminate a middleman in the United States.
The trick? Don't use a clearing agent in North America. Push settlement and clearing onto a local broker in the country where the trade takes place, thus eliminate steps along the way-and the fees and charges that come with them.
You may not only save time and money. But you can get smarter in the process, finds Mark Esposito, CEO of Esposito Securities LLC in Dallas.
Esposito trades overseas on behalf of a range in institutional clients. Cutting out steps is helpful, but what matters to him most is staying close to brokers in local trading markets.
"The closer you get to the local market center, the more knowledgeable and educated you are and the better you can execute for clients," explains Esposito. "There's a lot more to a cross-border market than you can see on your screen. There could be a million share seller out there that only a local broker knows about. Your screen might be showing only a thousand shares available, but a local broker might know about that million share seller."
To get closer to local markets, Esposito Securities uses an electronic trading system called GlobalX that sends trades directly through local in-country brokers. Esposito says he also uses other similar products such as Goldman Sachs REDIPlus, but that GlobalX provides the best coverage globally.
GlobalX is an international trading platform, which connects U.S. brokers to off-shore counterparts in about 90 markets via Tradeware's hub-and-spoke FIX Network, which uses the Financial Information eXchange protocol for messages. This system provides customers with transaction and settlement support.
GlobalX is different from traditional correspondent clearing because it pushes the settlement and execution burden from the U.S. to the local market executing broker. In doing so, GlobalX eliminates the need for a U.S. clearing firm or a local custodial account.
"Having the local dealer-broker execute as well as settle shares to the customer's local account removes two steps that happens with traditional correspondent clearing where a single transaction typically washes through two sets of books. Clearance and settlement fees associated with these two extra steps make it difficult to make a profit on an average international trade," says Tradeware executive vice president Cody Callihan.
Local delivery [of shares] to local accounts occurs about 90 percent of the time, according to Callihan. That means a U.S. broker dealer like Esposito rarely has to take physical delivery of shares and incur the associated expense. Just report to each client where they are being held.
What Esposito likes best about GlobalX is the direct relationships it provides with local brokers that he can translate into a high level of customer service.
"Our main objective is to seek out and find the best execution for the client. If that means smaller profitability now, I'm okay with that. We are in this for the clients and hopefully that is going to make the franchise stronger in 10 years," says Esposito, who adds that he has grown the firm from four to 30 employees since the company's founding three years ago.
