How to Understand How a Clearing Firm Works

A financial Clearing Firm, also called Clearing House, is a financial organization that handles trades, settlement and delivery of stocks and securities. More specifically a Clearing Firm 'is an agency or separate corporation of a futures exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery and reporting trading data. Clearing houses act as third parties to all futures and options contracts - as a buyer to every clearing member seller and a seller to every clearing member buyer.' (http://www.investopedia.com/terms/c/clearinghouse.asp)

This article explains a little on how a financial Clearing Firm works and what it's purposes are.

Instructions

1. 

   A Clearing Firm is usually a member of all the national stock exchanges, which allows them to place trades, settle accounts and match real time buyers and sellers of stock. Most smaller investment firms do not have the capability to execute stock trades, so they have to go through a Clearing firm to conduct business for their clients; hence the saying a small investment firm will "clear" through a Clearing firm.

   Additionally, many of the online brokers such as E*Trade, TD Ameritrade and Scottrade go through Clearing firms, although some such as Wachovia Securities and Bank of America Investments have their own clearing operations.

2. 

   Clearing firms have access to most of the stock exchange's trading software platforms. This allows them to accurately and efficiently place trades for the smaller stock brokerages they clear for. The major stock exchange software platforms are: NYSE uses a hybrid market, where some of the orders are routed on a purely electronic basis using a system called DirectPlus, and some of the orders are sent to the exchange floor via SuperDOT for human interaction. The NASDAQ stock exchange is purely electronic, there is no physical trading floor. It uses a trading system called SuperBook where customer trades are matched using an electronic network. Clearing firms have access to both the New York Stock Exchange and NASDAQ trading systems and are able to enter trades on them throughout the day. There is much more information about how the trades are executed after they are entered, but for the sake of this eHow article we will keep it short.

3. 

   Clear Firms also serve other duties where they process clearing of funds. In the United States, they work with The Electronic Payments Association to provide Automated Clearing House (ACH) money transfers to other participating financial institutions. The Automated Clearing House (ACH) provides a network of banks and financial institutions to transfer money electronically from one customer account to another. An ACH transfer is convenient, fast and usually free for the customer.

4. 

   Other duties of a Clearing firm are to make sure the brokerage firms they "clear" for are following and abiding by all federal laws, regulations and standards, as well as any state and local laws. Clearing firms are watched over by FINRA, the largest independent regulator of security firms in the US. The SEC and Federal Reserve also maintain regulations for Clearing firms to follow. The Clearing firm in turn, watches over the brokerage firms they "clear" for and make sure they follow the rules as well.

5. Some of the most well known Clearing firms are:
   Bear Stearns Securities Corp
   Goldman Sachs Execution & Clearing
   Legg Mason Wood Walker
   National Financial
   Pershing (Subsidiary of The Bank of New York)
   Wedbush Morgan Securities