Online Brokers Decry Cash Crunch in Clearing Firm Deal
Last update: 6/21/2012 4:56:22 PM
By Jacob Bunge
Some U.S. discount brokerages face a dramatic jump in the cash they have to post to back stock and options trades, forcing a standoff between one of the sector's largest clearers and firms that warn the move could hamstring clients' investing.
Apex Clearing Corp., which processes transactions for hundreds of thousands of retail investor accounts in the U.S., has in recent weeks told brokers that they would face higher deposit requirements, with one brokerage claiming it faces an increase of 13,000%.
The move has spurred legal action to delay the increases amid concerns they would prevent brokers from winning new business, and sparked allegations by competitors in court that the Chicago-based trading firm behind Apex is trying to stifle competition.
"There is no rational factual, legal, financial, or risk management basis for Apex's out-of-the-blue demand for such a staggering increase in the clearing deposit," wrote lawyers for Tradeking LLC, a stock- and options-based brokerage based in Fort Lauderdale, Fla., in court documents.
Apex executives defended the move as necessary to safeguard and stabilize its business.
Apex was created last month when Chicago-based Peak6 Investments LP partnered with Penson Worldwide Inc. (PNSN) to provide new capital and management for the troubled trade clearer's U.S. securities business.
Penson had struggled for nearly two years to turn a profit against a slowdown in stock trading and historically low interest rates, and its valuation tumbled last year after the company disclosed a large, illiquid bondholding that raised questions around risk management.
"Our primary motivation is to protect our end customers, and ourselves, and we're really focusing on the stability of this business," said Daniel Rosenthal, a senior partner of Peak6 who last month was named chief executive of Apex.
Rivals disagree. TradeKing and Zecco Holdings Inc., an online brokerage firm based in San Francisco, have secured court injunctions this week to postpone the increases while they figure out their next steps, which is expected to include arbitration through the Financial Industry Regulatory Authority.
"As a precaution we wanted to ensure no interruption of service to our clients and we felt we needed the assurance of a court injunction to make that happen," said Michael Raneri, chief executive of Zecco, in an interview.
Zecco and TradeKing last month announced plans to merge in a deal that would create the sixth-largest U.S. retail brokerage firm, with about 500,000 customer accounts.
The combination would create a powerful competitor to OptionsHouse LLC, a discount brokerage founded by Peak6 in 2005.
TradeKing in a court filing called Apex's sudden move to boost capital requirements "highly suspicious from [an] unfair-competition vantage point."
On June 7, shortly after the deal between Peak6 and Penson completed, TradeKing was told that the firm would need to send Apex an additional $13 million to back up trades, vastly outstripping TradeKing's prior clearing deposit of $100,000, according to court documents filed by the firm. That figure has backed up the firm's approximately 200,000 retail customer accounts for more than two years, TradeKing told the court.
TradeKing's lawyers in the filing suggested that "an underlying orchestrated plan to run TradeKing out of business" was supported by OptionsHouse's efforts in recent years to acquire TradeKing, including a similar overture from Apex on the matter shortly after requesting $13 million from TradeKing this month.
Mr. Rosenthal declined to comment on the assertions. He said the increases were based on a formula measuring risk and applied uniformly to each brokerage's clientele. "It wasn't a particular firm getting picked on," he said.
George Ruhana, chief executive of OptionsHouse, said that his brokerage currently has "eight figures" on deposit with Apex, after OptionsHouse was requested to put up more capital alongside other firms. He declined to comment on the accusations in TradeKing's court filings.
"We're hoping to negotiate a good outcome," said Don Montanaro, chief executive of TradeKing. He said there would be no impact to his clients.
Some brokerage officials saw the move driving consolidation among smaller providers at a time when trading business has slowed. Turnover in the U.S. stock market this year has fallen to its lowest level since 2007, and June brought a 10% month-on-month decline in activity amongst major retail brokerage customers, according to a report from Sandler O'Neill + Partners.
"If Apex forces this issue, I don't see what other recourse those smaller brokers would have, besides leaving," said Daniel Bardelli, director of operations for Stock USA Execution Services, a brokerage that relies on Apex to handle its customers' business. Transitioning clearing firms can take several months, according to brokers.
Mr. Bardelli said that several firms have already discussed the possibility of merging their business with Stock USA and becoming branches or other affiliates, because they may not be able to meet Apex's higher capital requirements.
Chad Hessing, owner and president of Cobra Trading Inc., said his firm recently had set up a separate clearing agreement with Wedbush Inc. and is preparing to shift some business there, though Cobra had not yet received any notice of steeper deposits required by Apex.
"If they were to increase my deposit drastically in that respect, there's no question we would look elsewhere," said Mr. Hessing. "A lot of firms like Cobra don't have a lot of idle cash."
-Write to Jacob Bunge at email@example.com
(END) Dow Jones Newswires
June 21, 2012 16:56 ET (20:56 GMT)