Most investment brokers, including investment apps, use clearing houses to ensure that financial transactions are processed correctly.
While most stock and ETF sales take seconds to complete, behind the scenes these actors play an important role in the safety of financial markets.
If you use investment apps like Robinhood, Stash or others, the app will be used by a clearing house to ensure that all transactions take place. Here’s what you need to know about these independent companies involved in all of your securities sales.
What is a clearing house?
A clearing house (also called a clearing house) is an independent company that brings buyers and sellers together in a securities transaction. The law requires all clearing firms to be members of the Securities Investor Protection Corporation (SIPC) in order to provide financial protection to brokers.
These clearing firms protect the buying and selling of brokers when one party is illegal or when the broker goes bankrupt. They also take care of the administrative tasks associated with most financial transactions. Clearing houses are essential to keep the securities markets running smoothly.
Whenever someone wants to buy or sell a financial product, a clearing house is responsible for everything that has to do with securing a securities transaction. Without clearing houses, brokers would have to call each other on the phone and email each other stock certificates (after the checks have been paid at the banks). Thanks to clearing firms, however, buying and selling stocks only takes a few seconds.
Clearinghouses take the risk of inventory transactions while they are in the transaction. Often they are only responsible for a few seconds. However, when it comes to difficult or complex transactions, the company can take on more responsibility.
Self-clearing vs. independent clearing
There are two basic types of clearing houses. The first type are independent clearing houses that work with many brokerage firms. Apex Financial is an example of an independent clearing house. This company is the clearing house for apps like:
Because Apex Financial is an independent clearing company, clients must process transactions on their behalf (companies they work with must have enough capital / money to process the transactions they are processing). The companies that use Apex Financial typically pass their costs on to their customers through management fees, transaction fees, or other types of fees. However, as an investor, you will never be charged a fee directly by Apex Financial.
The other type of clearing house is a self-cleaning company. Many large discount brokers have their own private clearing houses. These companies have enough trading volume to justify owning an independent clearing house to process their transactions. Examples include:
Self-clearing can mean lower trading costs or lower management fees for clients, but this is not always the case. The exact price you pay for your investments depends on a company’s fee structure.
How do clearing firms work for investment apps?
For an investment app to work properly, it must work with a clearing house. You can find out the exact company your app serves by searching for “Your Firm, Clearing Corporation”. These are some of our favorite investment apps and their clearing company.
National Financial Services, LLC
TD Ameritrade Clearing, Inc. * (Information also shows that TD Ameritrade has its own clearing house even after the takeover by Charles Schwab.)
Vanguard Brokerage Services
Charles Schwab & Co., Inc.
Should you choose an investment app based on their clearing house?
Typical investors, even those who buy individual stocks, are unlikely to care too much about which clearing house a company uses. Most trades are executed in seconds, regardless of which clearing company is doing the work behind the scenes.
However, high frequency traders, especially those using margin accounts, need to consider both clearing houses and brokers. A clearing house’s rules affect the rules related to margin, including the assets required to be a margin customer.
Clearinghouses are also important if you have a tendency to buy stocks with very little trading volume. Since shares in these stocks can be more difficult to buy and sell, the clearing house becomes more important in the matching process.