When professionals execute a trade, they know the process is far more complicated than dodging black swans or wondering whether dead cats should be able to bounce. Simply clicking a button or giving a verbal order might kick off the process, but it has to settle – clear – to get the money rolling in. 

What is clearing in trading? As a trusted prop trading firm in Chicago, Black Eagle Financial Group simplifies the execution of those trades for you by facilitating the behind-the-scenes steps. Here’s why understanding the clearing concept is so crucial to successful trading.

What Is Clearing in Trading?

Clearing is how the industry describes the process of settling trades. 

The steps ensure that the buyer and seller each receive what’s been promised by the financial trade and have the means to make that exchange. A clearinghouse acts as a third-party intermediary for a safe, seamless transaction that a buyer and seller can trust. 

Technology Affects Modern Clearing

As with any other aspect of finance and trading in the modern markets, technology plays a key role in today’s clearing process. For example, by incorporating automation, trusted clearinghouses create faster, more reliable transactions with fewer errors. Technological tools also:

• Reduce the transaction costs
• Adds greater security to the exchange
• Virtually eliminates the chances of errors (and fraud) 

Without this faster, more secure clearing in trading, the speed and efficiency required in modern trading markets would be largely impossible.

The Importance of Clearing

What is clearing in trading? If you grasp clearing’s role, you’ll soon realize its importance in this game. As a start, clearing involves:

• Accurately matching buy and sell orders for the trade settlement
• Enhancing the efficiency of trades informed by data reporting
• Ensuring trades clear to avoid unintended losses and settlement risk
• Validating the funds of the buyer
• Validating the securities the seller holds
• Facilitating the direct transfer of funds and securities

Ultimately, clearing gives the parties involved in the transaction a measure of trust in the process. Because of clearing, buyers know that the seller has the securities to offer, and sellers know the buyer has the required funds to complete the transaction. Without this trust, trades wouldn’t happen as quickly or as efficiently, bogging down the entire market. 

Our proprietary trading firm alone can offer our clients more than 130 pre-built trading routes thanks to clearing. With such a wide range of options for routing orders, we deliver what our clients need – and fast.

How Clearinghouses Work in Trading

What’s the role of the clearinghouse? Well, what is clearing in trading without the mediation platform to take care of all the logistics? Essentially, the clearinghouse manages the process of clearing, acting as the intermediary for both sides of the transaction. 

The clearinghouse gives the buyer and seller a reason to trust in each other’s promises, so to speak. It vouches for both sides, doing the background work to guarantee that the buyer and seller are equally legitimate. The advantages include saving both parties from having to investigate the other, which reduces the transaction’s overall costs. 

In fact, the work of clearinghouses is how proprietary trading firms like Black Eagle Financial Group can set customized pricing for their valued clients. Clearinghouses charge clearing fees for each transaction, and brokers pass these to the individual traders’ commissions. These transactions would not occur as seamlessly or quickly as they do without the actions of the clearinghouse across multiple kinds of markets.

Clearinghouses for Stock Trading

What is clearing in trading stocks? Firstly, it’s important to know that the major stock exchanges use their own clearinghouses to facilitate trades. Any stock traders using these exchanges go through this specific clearinghouse to guarantee the availability of sufficient funds.

By serving as the middleman for stock trades, the stock exchange clearinghouses play a key role in risk management. The behind-the-scenes verification work from the clearinghouse also lets the trade happen immediately, which is fantastic in dynamic markets like this.

It’s also important to understand that the stock exchange clearinghouses allow traders to use either cash or margin when making buys. A seller doesn’t have to worry about funding or the margin requirements because the clearinghouse verifies these funding sources. Should something happen to disrupt the stock trade, the clearinghouse gives both parties protection against unanticipated losses.

Clearinghouses for Futures and Options

Clearinghouses also mediate the trading of futures and options, filling a role similar to stock exchange clearinghouses. Futures and options traders use the clearinghouse as their intermediary, particularly for margin calls. That works because, during a margin call, the clearinghouse can pull the funds from its account to ensure a smooth transaction without interrupting the markets. 

Because of its constant verification process, the clearinghouse knows the funds will be available to cover the margin call. So, without these kinds of guarantees and actions from the clearinghouse, futures and options trading would be far riskier. Imagine trying to verify these things yourself and still making lightning-fast trades that keep you in the black.

Professional futures trading gets complex quickly with multiple currencies at play. Letting the clearinghouse handle all the complex calculations allows the two parties to simply execute their trade and keep the market ticking along.

Clearinghouses for Banking

You already know that clearinghouses also play a role in financial clearing in the banking system. Here, the clearinghouse helps individual banks settle the transactions they make among each other as one client makes a payment and the other receives the deposit.

With banking, you may be familiar with terms like automated clearing house or electronic funds transfer. Technically, you could describe clearinghouses as the ACH facilitating EFTs between banks. By automating these transactions and tasks, the clearinghouse gives banks the ability to handle a significant volume of transactions daily and keeps folks transacting.

The clearinghouse also simplifies the movement of money by calculating the daily transactions between banks rather than moving digits for each transaction. The clearinghouse’s tracking lets the banks just settle the differences at the end of the financial day. Plus, banks don’t create their own verification systems for these processes, as the clearinghouse’s universally accepted system saves everyone money.

Trust Black Eagle Financial Group for Help With Understanding What Clearing Is in Trading

At Black Eagle Financial Group, our proprietary trading firm works with professional traders and trading groups who want to elevate their trading to the next level. We support you at every step, focusing on the long term to create relationships that last with vendors and clients. Why not let us handle the day-to-day work so that you can focus on trading? 

What is clearing in trading? How could managing chart patterns or transaction processing better reduce the associated costs of your trades? See what Black Eagle Financial Group’s mentorship opportunities and a plethora of services can do for your trading – call us today at (833) 253-2453!