If those trades become too risky, the clearing broker can demand a bigger deposit or force the firm to take its business elsewhere.

The bank was one of Amaranth's clearing brokers, and it scooped up the hedge fund's energy positions at an attractive price.

Bear Stearns insisted, successfully, that its risks as the fund's clearing broker should exempt it from further contributions.

The Baron case has turned a spotlight on the role of clearing brokers in the complex machinery of Wall Street.

In the United States, there is a separation between the Clearing Broker and the Depository.

It also means that the clearing brokers bear the risk of default on the leg of the transaction that they are servicing.

Clearing brokers process and guarantee the trades of small firms, maintain their customers' accounts and in some cases lend the firms money.

The Executing Brokers send the fills to the Clearing Broker that was designated by the investment firms.

Indeed, the largest securities firms clear for themselves and their customers are not even aware of how crucial clearing brokers are to the machinery of the market.

A clearing broker, sometimes called "a broker's broker," guarantees the trades entered into by its client firms, who are called "introducing brokers."

This means that there will be multiple clearing brokers that have to reconcile shares and money against other clearing brokers.

Alerted by customer complaints, Mr. Spitzer and the firm's clearing broker were able to reverse the transfer, and the money was returned to the customer accounts.

One issue the commission is examining, Mr. Levitt wrote, is "ways in which clearing brokers can be more responsive to red flags they receive about misconduct" at their client firms.

According to prosecutors, the hedge fund maintained an account with Financial Asset Management, although the fund's assets were held by Bear Stearns Securities, which served as the clearing broker.

Last year, it processed more than $77 trillion worth of trades while National Securities, which also stands behind the brokerage industry's clearing brokers, guaranteed and settled more than $44.6 trillion in trades.

Around this time, one key element of the Wall Street warning system was activated: Mr. Meriwether's clearing broker, the Bear Stearns Companies, intensified its scrutiny of the fund's trading activities.

The investigation has focused attention on the relationship between small troubled brokers like Baron and big Wall Street clearing brokers like Bear Stearns, which continued to clear Baron's trades despite a troubled track record.

It alluded to the firm's role as clearing broker for A. R. Baron, a defunct brokerage firm that prosecutors charged with bilking investors, and a recent court order that the firm pay $111 million to a former customer.

Ameritrade Clearing Inc. was established as a clearing broker in 1983, and by 1987 TransTerra Company became the holding company for Ameritrade, and the company was subsequently known as TransTerra Company.

Bear Stearns is also under investigation by the United States Attorney for the Southern District of New York for the firm's role as clearing broker for Sterling Foster, a defunct New York brokerage house.

Clearing brokers execute the trades of their client firms, and if one of those firms cannot deliver the cash or securities required to satisfy its obligations, the clearing broker must settle the trade with the opposite party.

C1 Bear Stearns Settlement Bear Stearns has agreed in principle to settle S.E.C. securities fraud charges in connection with the firm's role as the clearing broker for A. R. Baron, a failed brokerage firm.

Behind the phalanx of clearing brokers is a sort of "broker of last resort": the National Securities Clearing Corporation, owned equally by the New York Stock Exchange, the American Stock Exchange and the Nasdaq stock market.

Any Wall Street firm not large enough to clear for itself must contract with a clearing broker to back its trades; the cash balances the introducing broker must deposit as security with the clearing firm will vary with the volume and riskiness of the introducing broker's trades.

The law firm then reported the matter to Mr. Morgenthau's office and to the Investor Protection and Securities Bureau of the New York State Attorney General's office, which is investigating the role that clearing brokers play in processing trades for small, trouble-prone brokerage firms.