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Securities Finance Monitor: Cloud and Real-Time Data Tech Levels Playing Field for Challenger Clearing Firms

While compliance burdens remain heavy for entrant clearing firms, tech and data infrastructure have considerably evolved to provide a nimble competitive edge. We speak with Michael Sanocki, CEO of RQD Clearing.

Sanocki has a legal background with stints at a large New York-based law firm, the Securities and Exchange Commission as well as US options exchange ISE, ultimately bought by Nasdaq in 2016. In the past five years he has been leading the legal and compliance programs at Volant Liquidity, a SEC-registered options market maker. He recently became the CEO of RQD Clearing, the clearing firm spun out of Volant in 2021.

RQD is built on cloud native tech using Microsoft Azure. Compared to other clearing firms, RQD has technical advantages such as controlling its own code base and not being constrained by vendor technology, explained Sanocki. Along with that come benefits related to real-time data and a testing environment that mirrors the production environment, the latter which makes it easier for onboarding firms to integrate. Sanocki added that another advantage is “a flexible system to support differing client needs” and that the tech is backed up by a team with expertise in operations, development, and compliance for clearing.

RQD has been onboarding clients since exiting stealth mode in November 2021 at a rate of “several clients each month” and has a “long pipeline of clients that we expect to continue through to 2023”, he added. There are three categories of clients: retail broker-dealers, active traders and institutional. An announcement detailing some of the relationships is expected in Q2.

While integration is straightforward, Sanocki noted that moving away from a clearing firm can be difficult, with a 3- to 6-month cycle between contract negotiations, technology integration, testing, and production. Currently, RQD’s focus has been on broker-dealers that have retail accounts, in part because of the growth of new brokers such as Robinhood and Webull, for example. Initial products are US equities, options and ETFs, with a horizon view to expand to fixed income and mutual funds.

Real-time compliance

Becoming a clearing firm requires going through a lengthy approval process with FINRA, DTC and NSCC for equities clearing and settlement, and OCC for options. Even as a start-up, all compliance requirements are equal to those of any large market participant under SEC and FINRA regulations, said Sanocki.

Moreover, clearing firms face greater scrutiny than any other participant, in part, because they hold customer funds and securities. He added that RQD’s “number one priority is to make sure customer funds and securities are properly segregated and that we keep proper records of cash and securities moving in and out of customers’ accounts.”

Internally, tapping into real-time data eases several compliance and operational burdens. Anti-money laundering checks, for example, can be done quickly and accounts can be opened in seconds. Another aspect of real-time data benefits reporting and internal analysis capabilities for both RQD and its clients. Bespoke reports, which are augmented by push notifications, can be developed and pushed to production the same day.

Sanocki describes the compliance approach as “proactive and high touch”, some which relates to “having an organization-wide culture of compliance and strategy for working closely with clients on compliance related matters.”

For the execution arm of the business, to monitor market abuse, RQD has an external relationship with trade surveillance software firm Trillium to detect manipulation and other prohibited activity. Data protection is backed up by Microsoft for cybersecurity and encryption protocols. For margin and collateral requirements, RQD has real-time risk monitoring, with a model that keeps track of market volatility, concentration risk, and liquidity risk.

“If (clients) have a customer that builds up too big of a risky position and blows out, they can end up losing a lot of money…So being able to see all that in real time is a huge value add,” Sanocki said.

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