Clearing Firm: Your Broker’s Broker

You learn so many things if you pay close attention. On my recent brokerage account switch from Wells Fargo to TD Ameritrade, I noticed this in my transaction history:

Transfer of security from First Clearing

Who’s First Clearing? I thought I was transferring from Wells Fargo Advisors.

It turns out that my account had been with First Clearing all along. First Clearing is a Wells Fargo subsidiary. Wells Fargo Advisors sets the prices and provides customer service; First Clearing actually does all the real work in buying and selling investments for the brokerage account.

It was disclosed in the account agreement I agreed to when I opened the account. I just didn’t pay as much attention at that time.

"[Wells Fargo Advisors, LLC] will act as your introducing broker and First Clearing, LLC (“FCC”) will act as the broker that will carry the Account and extend credit on any margin purchases."

In addition to doing the actual work for Wells Fargo Advisors, First Clearing also does the work for other brokers. This is similar to how Amazon sells its warehouse picking packing and shipping service to other retailers. Amazon developed expertise in running a warehouse efficiently in serving its own customers. Now it also sells that service to others.

Fidelity also has a similar arrangement. Fidelity’s clearing subsidiary is called National Financial Services. National Financial does the work for Fidelity. It also does it for others. When these clearing firms work for others, they use a generically sounding name such as First Clearing or National Financial so as not to compete with their clients’ brand.

From this article on the web, I see large discount brokers such as Charles Schwab, TD Ameritrade, and E*Trade all have their own clearing operations, but they use their own name, which means they are probably not serving other brokers. Smaller brokers such as Scottrade, TradeKing, Zecco, and OptionsHouse use a small third-party clearing firm called Penson Financial Services. Penson is publicly traded on the NASDAQ with ticker PNSN. At $0.55 per share, Penson has a market capitalization of just $15 million. That doesn’t give a whole lot of confidence.

Should you care who’s doing the work behind the scenes? I think so. You want a company that knows what they are doing and makes sufficient investment in technology and personnel.

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Comments

  1. Arthur Shunk says

    A note about Penson. I have a Zecco account and tax documents were delayed until mid-March this year. Shortly after receiving them, I received an email from Zecco stating that some users would receive corrected documents as the ones sent may have had errors. This was all supposedly the fault of a system upgrade at Penson.

    Last year(for 2010), there was a delay as well. I do not recall what the issue was at that time but again, this was all Penson’s responsibility I believe. So, something to keep in mind. Zecco also upgraded it’s site in 2011 which caused some issues for a time.

    I use Zecco for some trading as the have very low costs but the bulk of my assets are with TD Ameritrade. I have used them since about 1990 with no issues so have been a little put off by my experience with Zecco/Penson.

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