Clear Street, an independent prime broker, is building a cloud-native clearing and custody solution to compete with legacy technology by offering real-time access to data.
The New York-based fintech recently brought on the venture capital arm of trading firm IMC as a strategic investor, which Clear Street Chief Operating Officer Andy Volz said will help the prime broker add products and expand internationally. Clear Street wants to break further into the mid-size hedge fund space, Volz said.
Many major prime brokers, like global banks, built their systems decades ago. Volz said Clear Street, founded in 2018, has had the advantage of being able to build on a modern technology stack. Now that the core system is built, and Clear Street has grown its equities and options products, Volz said the priority is developing across asset classes and client types.
"We want to be in every market and every asset class," Volz said. "That's table stakes to achieve the vision that we want to achieve. What we want to be known for is customer experience driven by technology."
Clear Street clears north of 3% of the U.S. equity market on some days, or more than $10 billion in notional value. Now, Volz said the firm is rolling out derivative offerings, like corporate bond assets and fixed income.
Josh Galper, managing principal of Finadium, a specialist research and advisory firm in the securities and investments industry, said Clear Street isn't the first fintech to try and solve pain points in the prime brokerage market, but that its modern technology stack is appealing to clients.
The prime brokerage industry is laden with legacy technology, which can mean limited access to real-time data. To address pain points and increase transparency, independent vendors have worked on creating systems for services like liquidity management and fee analysis.
"Most of the clearing technology that's out there is in a data center, it's mainframe batch processing," Volz said. "Ours is a re-architect of that infrastructure. It's cloud-based, it's microservices, it's streaming versus databases. It's completely different from what's out there in the big banks and clearing houses."
Volz has spent more than a decade building prime brokerage businesses for several firms. Wells Fargo bought one of those companies, Merlin Securities, in 2012 to use as an entrance into the prime brokerage space. In addition to its ability to provide real-time data, Clear Street plans to eventually offer all solutions through application programming interfaces, including clearing, account opening, onboarding and funding.
Galper said that while larger hedge funds have the scale and resources to build this type of technology or bring on a third-party platform, smaller and mid-size firms could see a "significant benefit" in Clear Street's solutions.
"What hedge fund clients are looking for is a combination of transparency, risk management, and a way to optimize their own relationships with counterparties," Galper said. "It's no longer possible to have one piece of captive technology from one prime broker and expect that to work across the firm. Instead, hedge funds need technology that's going to capture reporting on multiple prime brokers, and integrate that into one platform. So prime brokers themselves have been working to develop this technology, as well as independent vendors."
In 2020, J.P. Morgan made a strategic investment in Arcesium, an investment management technology company for hedge funds, that allows clients of the bank's securities services business to use the fintech. Other players, like Kayenta and Hazeltree, also provide treasury solutions to hedge funds. Galper added that hedge funds have distinct needs, there isn't a one-size-fits all solution, and many big banks use third-party vendors to capture more of the market.
A shift in the prime brokerage industry has also spelled a potential opportunity for a market grab, Galper said. A few prime brokerage heavy hitters have recently exited the space, including Credit Suisse and Deutsche Bank last year, which each served around 1,000 major hedge funds.
Clear Street's clients range from individual active traders, proprietary trading shops, market makers and up to $10-billion-plus hedge funds, but Volz said Clear Street is focused on serving hedge funds with $5 million to $500 million in assets under management, proprietary trading shops and other non-hedge fund institutions.
"No one's really made a bespoke offering for that segment," Volz said. "I think globally, in the long run, that's where we make the biggest impact."
Clear Street has about 260 institutional clients, more than 200 of which it added in the last year, Volz said. The platform serves another 1,000 clients in the active trading segment. Volz said the cloud platform, a modern alternative to older technology, has also allowed the company to scale quickly. Clear Street is a "sizable" Amazon Web Services customer, Volz said.
Financial details of the IMC investment weren't disclosed, but Volz said the market maker, which provides liquidity on trading venues, will help Clear Street expand its clearing solutions for the market making, proprietary trading and brokerage community. Galper said the IMC investment will be helpful in developing Clear Street's client acquisition and technology.
Last spring, the fintech raised $165 million in a Series B round, led by Prysm Capital, to accelerate its platform launch. The firm has also rapidly hired, bringing on nearly 200 people since Volz started in August 2021, primarily on the product and engineering team.
