For firms frustrated by the fact that trades executed in microseconds can take all day to be reflected in their risk profiles or margin requirements, there’s light at the end of the tunnel: A new player in the US clearing space, RQD Clearing, which will formally launch tomorrow, November 30, says its cloud-based technology platform can update all relevant data in real time, providing greater transparency, better risk management, and better service to clients, at a time when the post-trade landscape in general is undergoing a raft of changes and under greater scrutiny.

“We’re seeing a spotlight on post-trade and settlement across all asset classes,” says Stephen Bruel, senior analyst on the market structure and technology team at research firm Coalition Greenwich. “For example, with the prospect of shortened settlement cycles, the industry needs to look at all post-trade settlement work that will need to take place. So the post-trade space is definitely emerging in importance.”

In fact, Bruel says there’s so much focus on post-trade right now that the industry is at an inflection point that may create the opportunity for new, disruptive players such as RQD to emerge.

RQD was created by spinning out the execution and custody business of Volant Trading, a market-making firm founded in 2006 by former Goldman Sachs and UBS exec Brian Donnelly, who is founder and chairman of RQD. Originally set up as an options market maker, the firm expanded into low-latency equities execution in 2012, then in 2018 obtained a limited clearing license. After that, clients started showing more interest in the firm’s clearing services, and the firm decided to survey their appetite. The results surprised them: a large swathe of smaller broker-dealers were unsatisfied with the offerings available, says RQD CEO Michael Sanocki.

“We realized the clearing industry is broken, and it’s partly because of technology—old tech that is either built in-house or by one of the vendor oligopolies. It limits growth, it results in a lack of competitive pricing, and also leaves an under-served market of smaller to mid-sized broker-dealers because the large clearing firms can pick and choose the most profitable clients,” he says. “We control our code base, so we’re nimble and not constrained by vendors or outdated technology.”

Three years ago, Volant started building a team—including hiring CTO Jon Fowler—that would form the foundation of RQD. Around 18 months ago, the company obtained the required clearing licenses, and signed its first client earlier this year, a broker-dealer that provides execution services to other brokers. It now has a handful of early adopter clients, and around 15 staff overall.

Volant still exists as a separate business with its options market making and broker dealer businesses, and a broker-dealer arm in Hong Kong. The name of the new entity, RQD, is short for “required”—because “change is ‘required’ in clearing,” Sanocki says.

Tech holds the key

Greenwich’s Bruel stops short of saying that change is “required,” but says clearing is “improvable”.

“Generally, we’re trying to reduce the gap between the execution of a transaction and the settlement of that transaction. Because technology is changing, we’re finding ways to make some of those processes more real time,” Bruel says.

But Fowler says there’s still some resistance to technology changes in some parts of the post-trade space, adding that the ability for RQD to control its own code base is key to controlling its future, so it can be flexible and agile, and easily pivot to new business areas, regardless of whether a supplier supports that business line.

“APIs and cloud-based platforms are becoming more normal in the rest of the fintech space, but this particular area—clearing—has been resistant to these kinds of advancements. A lot of these firms wind up with vendors providing most of their infrastructure … and they may want to change things, but when a client transfers business from one clearing firm to another, it’s like open-heart surgery. So if you’re a clearing firm with a hundred clients on your systems, it’s very limiting,” Fowler says, adding that he believes this control provides an important differentiator that will help the firm win business in the short term.

Greenwich’s Bruel warns that changing a clearing provider represents a shock to the system for firms, and says RQD’s ability to convert interest to new business will depend on the appetite of potential clients to change, and their ability to figure out how big a job that would entail—i.e., how many upstream and downstream systems would be impacted and would also require changes.

“One of the challenges to reorganizing post-trade processes is that these core processing systems hook into so many other systems—for example, risk, compliance, reconciliation systems. … So, you can’t look at clearing in a distinct way. You have to look across the entire cycle,” Bruel adds.

Fowler says the tighter integration enabled by its technology and by giving clients a real-time view of their activities and exposures will provide a compelling value-add.

“Today, firms get a big dump of data at the start of their day, then augment that throughout the trading day, then try to sync that with their clearing firm at the end of the day,” he says. RQD’s method of integration, using Rest APIs and Webhooks to access data from its platform running in Microsoft’s Azure cloud, allows client firms to connect directly to data that RQD ingests and processes in real time, and can reflect in real time to clients.

“Capture and ingestion of data is pretty straightforward. There’s a lot of good tooling available for that. But for any transaction, there are probably 10 to 15 things you have to do,” including menial tasks such as deducting funds from an account, paying fees, assessing risk, and accounting for any margin fees or tax implications, Fowler says. “Finding a way to streamline those things that are relevant intraday, and leave the rest until the end of the day can give you a full view of your positions in real time. And instead of taking hours at the end of the day, maybe it only takes minutes, so you can reflect any changes to clients earlier.”

In addition, Fowler says he believes RQD’s focus on clearing puts it in a position to win “captive” execution business from firms initially interested in its clearing services. Unlike its cloud-based clearing platform, RQD’s execution platform maintains presences in co-location centers next to exchange gateways to ensure low-latency execution. But for the non-latency sensitive areas of its business, leveraging the cloud has all but eliminated scalability, security, and downtime concerns, he says.

“We did a bake-off between cloud providers, including a cost analysis and a functional analysis, and we felt Azure was going to give us the quickest delivery to market and the best fit with our internal stack. We use some other Microsoft technologies that are very important to us, such as SQL Server and .Net, and other cloud providers can’t offer Microsoft services at the same price that Microsoft can,” Fowler says.

‘Anything you do with EOD data is improvable’

Greenwich’s Bruel agrees that the benefits of injecting more timely information into post-trade processes has clear benefits for improving sales cycles and client satisfaction.

“Any process that you do today with end-of-day data is improvable. If you can get more real-time data into the right consuming applications, there are a variety of benefits: for example, risk management and compliance checks, but also cash management—if you get a corporate action notification at the end of the trading day, that’s one day less that you could have invested that,” he says.

But while RQD may solve some emerging clearing challenges, with such intense focus across the post-trade landscape, there are still many other areas yet to be addressed.

“You still have a lot of operationally complex securities out there—such as some bank loans and repos—whose settlement processes are inefficient and where the resources required to settle them are high compared to other asset classes,” Bruel says. “So we see a lot of post-trade processes or asset classes that have significant operational risk embedded in them, where work is being done to improve them and reduce that risk.”

Sanocki says RQD’s technology decisions will enable it to adapt quickly to future changes. “If the move to T+0 ever happens, that will be a very easy fix on our system. Or, for example, if clearing firms need to be able to handle cryptocurrencies, depending on what regulators decide, we can support that,” he says.

Fowler adds that the technology platform will provide flexibility and agility to respond to new business opportunities. “For sure there are going to be changes in the regulatory environment, there will be new asset classes, and new paradigms in how people spend their money. So a lot of new business in the future will depend on who can get started fastest,” he says.