Clear Street
Peter Eliades, managing director of electronic trading at Clear Street, speaks to Carmella Haswell about the power of best execution in the prime brokerage market and how regulatory frameworks are shaping this entity for broker-dealers
What are the key considerations in delivering best execution? How have you refined your services to enhance execution services offered to clients?
Although the US Securities and Exchange Commission (SEC) proposed new regulations to help to codify a federal best execution standard in December 2022, interpretation still involves resolving connotations and nuances based on broker type, trading objectives, retail obligations, and related policies and procedures.
The SEC requires the basic tenet that brokers must achieve the “most favourable price” for their clients. Yet, by design, that definition allows some degree of interpretation to ascertain reasonable diligence when accessing the best market and price for a specific security. There is also the mention of specifically avoiding any “conflicted transactions”, which includes inter-positioning of affiliate interest, not disclosing payment for order flow arrangements or aspects of proprietary market-making involving retail order flow.
At Clear Street, we adhere to these principles and follow the guidelines established by the SEC and other regulatory agencies such as FINRA.
How are clients refining their routes to market, and applying a wider range of execution venues to meet their trading strategies?
Client liquidity requirements are always top of mind at Clear Street. As such, we have enhanced our execution stack to accommodate their increasing appetite for new venues and customised solutions.
Several new liquidity sources have come to market recently. Being liquidity-verbose yet agnostic is the most critical factor in allowing our clients to access liquidity as efficiently as possible across fragmented markets.
Therefore, we need a robust ability to handle high-capacity order flow and direct that request to bespoke solutions to fit our clients’ needs. This involves placing an extremely competent client gateway layer to acknowledge, refine and deliver concise messages expeditiously to downstream risk and execution systems.
We are days away from completing this integration, which will allow us extraordinary flexibility when routing very specific client requests to execution solutions around our complex.
Fragmentation is a component of our US market structure by design and it is here to stay. It is up to the innovative broker-dealer to invest in technology and sew the “market fabric" efficiently back together for our clients in real-time.
How do you interpret the impact of technology, such as electronic trading, on prime brokerage trade execution?
There is an inextricable relationship between a prime broker and electronic trading — they go hand in hand.
Our primary objective is to align with our clients and coordinate a solution to significant drivers such as funding costs, execution capabilities, or balance sheet optimisation to help differentiate our services.
One critical requirement for a prime brokerage firm is the ability to communicate information to clients efficiently and bilaterally. We must offer best-in-class technology to facilitate this handshake via high-speed, accurate data transfer and position reconciliation so they can compute and digest their own portfolio risk and PnL.
At Clear Street, we use a strategic cloud infrastructure. We have efficiently achieved this data strategy goal via a web-based client portal, where our clients can monitor critical position and funding metrics supplemented by secure file transfer protocol (SFTP) facilities to transfer necessary information every minute of the day.
How does current or impending regulation present a hindrance or opportunity for the use of electronic trading in this space?
Electronic trading helps Clear Street to comply with accessing venues — sometimes more than 20 venues in the same parent order. Often, algos are programmed to return to places that are significant liquidity sources at that very moment.
The SEC proposed a new Best Execution rule in 2022, which bears important distinctions from the current FINRA Best Execution and Interpositioning rule. The FINRA rule requires an evaluation, but is much less prescriptive regarding what needs to be evidenced. This permits a number of factors to be considered, including price improvement opportunities, the likelihood of execution of limit orders and the size of the execution.
In contrast, the first part of the SEC’s 2022 rule includes a more detailed set of requirements — including obtaining and assessing reasonably accessible information (price, volume and execution quality), identifying markets that may be reasonably likely to provide the most favourable prices for customer orders, and incorporating material potential liquidity sources into its order handling practices and ensuring that the broker or dealer can access this.
Electronic trading, and the data it can generate, can assist brokers in complying with each rule set. In this regard, looking at algos, assessing MIC codes on fills, and reviewing the FINRA OTC transparency data are all components of a compliance regime. Using transaction cost analysis (TCA) and other analyses will always be a part of this as well, but trading electronically generates the type of audit trail required.
What are the latest developments in prime brokerage trade execution and their implications on the market?
Clear Street has purposefully built its electronic strategy to accommodate a wide range of prime brokerage client personas and their varying needs. That is a tall task when considering the variety of investment theses across strategies. Client success is defined by tight strategic alignment and coordination across our business lines and engineering teams to ensure we have a complete solution for their needs.
Specifically, it requires that our execution channels integrate alongside risk and margins modules and extend an understanding of how to net and assign positions across entities, accounts and asset classes in real-time. These calculations also need to be transparent for our clients, so they are aware of their own exposures and funding costs.
We solve this balance by harnessing the latest technologies across clearing, risk, position management, market data, financing, margining and proprietary settlement systems. Most importantly, we sew that data fabric back together at the execution phase of the trade and during the transition across corporate actions, dividends, symbol changes and other events that bring challenges when marking to market.
We are uniquely positioned to offer these solutions across equities and options in the US, coupled with a highly specialised high-touch desk. We support trading from 04:00 to 08:00 ET in equities, core and extended sessions for options.
Can you share your final thoughts on best execution in the prime brokerage space?
Increased connectivity and fragmentation across our market centres and liquidity destinations require more robust infrastructure and routing capabilities than ever before. As best execution requirements continue to rise, broker-dealers must stay ahead by investing in technology and innovating across their stack. As a technology-first firm, Clear Street can stand up key processes efficiently and effectively, yielding a more complete and cohesive electronic trading solution.
