Sorry for the subject line, but this is a perception that really seperates the prop firms from one another. Most Prop firms have virtually only traders money in their firms, and use that for all the trading (thus all the risk from other traders). You need to see a balance sheet to see if the owners (Class A members vs. Class B members in our case) have significant money at risk. For example, I have seen a couple of "major" Prop firms (that we all know and love), who have less than $2 or $3 Million in the "owners" portion (thus at risk). Some literally have a few hundred grand, which (IMH) is outrageous. The owners take out all their profits and leave the traders money in there to take care if themselves. We have seen the demise of several firms because of the above. This is why we at Bright Trading keep a minimum of $10Mil of the "owners" capital at risk at all times (there is considerably more, but we keep this minimum as "Class A member" capital). So, be sure to review carefully the balance sheets of any firm before getting caught in a trap. PS - Sorry if this sounds like an advertisement or something, but this fits into the "full disclosure" and/or "Public Service Announcement" type of post I hope you all find useful.
Sorry about the title but... I agree, a major point is: Does the owner of the firm have significant capital up to prevent a catastrophe. Especially if that owner is the one picking who joins the LLC. However, assuming the owner does his job correctly, that is he "knows his customer" (bad choice of words) and does his risk management correctly what is his risk if the trader gets 100% of the profits and losses? Isn't the owner saying that he doesn't want to take part of the traders risk, he wants to lend him money with which to trade. The only risk he is taking is the risk of not doing his risk management job. The owner is not participating in trader's trading decisions is he? He is betting on himself.
You're exactly right...why do "owners" take out all of their money from the firms??? You said it right...
Back to Speculator's original question. From a practical standpoint not regulatory, is a "prop" trader who is allocated 100% of her profits or losses just a customer in disguise? Or to ask it a different way, is the only difference between a customer and a prop trader with a 100% payout, the buying power allocated to her because of the capital net rule(?) and the risk of the LLC collapse (ala Harbor) versus SIPC?
The main difference is that (our) prop traders are true partners in our LLC. The "owners" risk their own capital along with the traders, and the traders keep their profits, and the "owners" keep their own. If you are a customer, then you are liable for any excess losses incurred by you, do not have use of capital availabe to you, etc. If you start any other business, you don't have SIPC or anything else to protect you from yourself...and that is what you are really saying. We put up real $$ rather than "buy insurance" or "bond" as SIPC implies. I am glad you brought up Harbor....this is why I strongly suggest that everyone review their firm's balance sheets regularly!! Warren (Harbor) had a good thing going, but did not have any (significant) money of his own involved in the firm, therefore every trader was at undue risk.
Don, I would like to ask you about a few indiscrepancies in your statements. You claim that if the same thing that happened at Harbor were to happen at Bright, the traders would be protected, right? You earlier (in other posts) have claimed that Bright will cover UP TO $10 Million of a loss if that were to occur. It is noted that many people have asked you why that $10 Million dollars statement is not in the operating agreement, and I cannot find a response anywhere. Can you please explain why this does not appear in the operating agreement? Someone correct me if I am wrong, but didn't the loss at Harbor total some $13.9 Million? If this is the case, who would eat the other $3.9 Million if this happened at Bright? Would it then be the traders? Thanks, Courtney
I will go through this one more time, just to be sure that there is no misunderstandings. The Operating agreement points to the financial statements of the company (which change every year, of course)...and that is where every trader should look to see the "owners" equity (in our case a minimum of $10million...we actually keep much more in there). Harbor's total loss was just over 1 Million (trust me, I know!), and this was enough to lose all the "owners" capital and cause grief to their traders. This is why it is imperative that all traders see that the firm's owners have a lot of $$ of their own involved. We can go down this route again, but the same answers speak for themselves. All traders should check the balance sheets of any business they become involved with. Some firms are still keeping their ex-traders money, and I have had 2 emails today asking how to get the money back. I hate to see the traders pay the price of falling for the hype of these newer firms. As you know, there are two firms out there who have been making desperate plays for traders by attempting to undercut costs and "low ball" traders...and this tactic is backfiring big time. Let's just hope that all traders evaluate their situations, check the financials, check the costs, and be sure they are in the right place. And let's all "grow" the market, and stop using deception...start using attraction. Competition is healthy, desperation is not. Sorry to post such a long note, but I really don't want to get back to a "xxxxing match" with these other firms. The "good guys" are doing fine, and we hope that everyone else does the same. Good Trading...
I heard Andover is charging prop traders 6 cents per share commission + software + pass thrus! Trader keeps 100% of profits and has to put up 10K. Can someone verify this as it seems exorbantly expensive, especially as previous posts on this thread mention much more reasonable rates.
Do you trade w/Andover? Are you a PROP trader w/Andover? Their website says .02 per share but trading prop is usually more expensive than being a customer....