The Ultimate Guide To Clearing Firms

Imagine if you had to physically collect and take possession of the paper stock certificates whenever you bought stock in the publicly traded markets.

Even before placing a trade, you would have to find a way to confirm that the seller actually owned the shares, and they would need to confirm you actually have the funds to pay for them. Once the transaction and price were agreed upon, you would have to physically exchange the money for the stock certificates to consummate the trade. If you send a check, you might have to wait five business days for funds to clear before the shares were delivered to you. Of course, if you have cold hard cash and are willing to meet with the seller physically, you could expedite this part. There’s also the risk of not receiving your stock certificates if the seller decides to renege on the trade (i.e. stock spikes much higher, seller decides to keep the stock). Don’t forget about registering that transaction with the exchanges and the DTCC to accurately record the new owner of the shares. When you’re ready to sell the shares, just repeat the whole process on the other side as a seller.

Imagine how aggravating it would be if you were required to go through this process every time you bought or sold any stock. Thankfully, these tasks are handled seamlessly and efficiently every day by clearing firms.

What Is A Clearing Firm?

Clearing firms are essential to keeping publicly traded markets flowing smoothly for all participants. Also referred to as clearing houses or clearing corporations, these firms house the actual stock certificates and contracts to expedite the clearing process.

When you execute a trade (buy or sell), the clearing firm takes on the risk as the central counterparty to both the buyer and the seller. Acting as the middleman, they ensure the delivery of shares to the buyer and delivery of funds to the seller, bearing the risk if either side reneges. They are in charge of matching the buyer and seller, processing, and reconciling the transaction.

How Clearing Firms Work

While many traders don’t think twice about these institutions, clearing firms are the backbone of the publicly traded markets. These firms enable the frictionless flow of trading to occur. 

Types Of Clearing Firms

There are two types of clearing firms, independent and self-clearing broker-dealers.

Independent clearing firms charge fees to their broker-dealer clients for their services. Many of the larger brokers have realized they can save the fees and handle the clearing function in house. These brokers may create a subsidiary to self-clear their own customers’ trades (savings that may or may not be passed to the customer).

A self-clearing broker tends to have more autonomy and agility in making decisions but requires much more capital to function. The size of their end-user customer base determines how effective their ability to scale benefits for clients can be. Large independent clearing firms may have more scale compared to a self-clearing firm limited to just the broker’s existing customer base. Also, the type of customer base will determine where the strengths of the clearing firm may lie. If most of the customers are largely long-term retail investors, then they may bolster the capacity for reporting functions while minimizing share locate functionality and short inventory.   

Roles Of A Clearing Firm

In addition to clearing trades by matching, funding, guaranteeing, processing, and reconciling the transactions, clearing firms also perform several other critical roles. As mentioned earlier, clearing firms take custody of the securities on behalf of the broker-dealer customers as well as the capital to match the trades and expedites daily settlements. Additionally, they are always exercising risk management by managing maintenance margins and determining margin rates. 

Clearing Firm Considerations 

When selecting an online broker, it’s also prudent to consider their clearing firm in the decision-making process. Clearing firms have a lot of influence on how brokers operate, which in turn can have material impacts on your trading. Since the clearing firm takes on the financial risk for transactions, they make the rules when it comes to margin accounts and even accepting you as a client. Clearing firms set the minimum capital requirements for customer accounts (i.e., $50 to $25,000) as well as determine your risk as a customer based on various background checks. 

While most investors will not be sensitive to their clearing firm choice, traders may have a preference.

Active Trading Platforms And DMA Brokers

One of the most significant factors when comparing clearing firms is their access to borrowable shares to lend for short selling. Most significant will be the availability of short inventory. You will also want to consider how well the clearing firm can locate hard-to-borrow (HTB) shares and at what rate they lend them.

Chances are if you opt for a direct market access broker (DMA), the broker has done the research for you. DMA brokers team up with clearing firms that will enable the success of their clients. They consider the clearing firm’s resources, trustworthiness, and credibility.

At CenterPoint Securities, we work with multiple, hand-selected clearing firms. If you have any questions about these firms, don’t hesitate to contact our team via the support page.


The information contained herein is intended as informational only and should not be considered as a recommendation of any sort. Every trader has a different risk tolerance and you should consider your own tolerance and financial situation before engaging in day trading. Day trading can result in a total loss of capital. Short selling and margin trading can significantly increase your risk and even result in debt owed to your broker. Please review our day trading risk disclosuremargin disclosure, and trading fees for more information on the risks and fees associated with trading.

Related Content

What is a Bull Trap?

What is a Bull Trap?

A bull trap is a price movement that lures bullish investors into thinking that the price of a stock is about to rise. In reality, any upward movement is short-lived and quickly overtaken by bearish activity, causing traders who bought into the bull trap to lose...

What are Momentum Stocks?

What are Momentum Stocks?

Momentum stocks offer opportunities for traders to ride a wave of price action for short-term profits. However, to trade momentum stocks successfully, it’s important to recognize momentum early on and know when to exit a trade. In this guide, we’ll explain what...

What are ECNs?

What are ECNs?

ECNs, or electronic communication networks, are computerized networks in which traders can trade directly with one another. ECNs have several advantages, including tighter spreads and more options for after-hours trading. However, they can also have drawbacks such as...

Guide to Unusual Options Activity

Guide to Unusual Options Activity

Unusual options activity occurs when trading volume in an options contract is high above its average. This type of activity is often due to institutional investors and it can be a signal that smart money thinks the price of a stock will move soon. Keeping an eye on...

Time and Sales Explained

Time and Sales Explained

Time and sales is a running display of all trades executed for a particular stock. It is often used by traders as a way to gauge activity around a particular stock and to find potential entry and exit points. In this guide, we’ll explain what time and sales is and how...

Best Technical Indicators for Day Trading

Best Technical Indicators for Day Trading

Technical indicators play an important role in trading, and particularly in day trading. Indicators provide deeper insight into price movements and give traders the information they need to identify potential setups and make trading decisions. While there are hundreds...