Are prop firms still 100% payout? Wasnt there rule changes a while ago..

Discussion in 'Professional Trading' started by tradenstuff, Feb 10, 2013.

  1. Wasn't there some kind of sec change a few years ago pertaining to deposit style prop firms?

    The standard model was 100% payout after your negotiated rates as a class b member using firms capital.

    Is this still standard for places like echotrade?
  2. 1245


    The SEC does not make it that easy. The SEC and FINRA made a statement that they are concerned about the MAster/Sub account set up and who is the owner of that sub account.

    Basically, when you join a deposit prop firm, you become a Limited Class B Partner of a Broker Dealer. You deposit your money and get a sub account to trade in to track you P&L. That sub account is owned by the firm, not the trader. Paying near a 100% payout also gives the illusion that the sub account is owned by the trader. This is a red flag to the SEC that the Broker Dealer is really offering a customer account and getting around the day trading requirements, Reg-T requirements, and they are finally taking action the way the regulators take action, slowly.

    Back in 2011, most Prop firms had JBO (Joint Back Office) relationships with GSEC, ML PRO and Penson. This JBO relationship is the backbone of the prop industry and where the leverage comes from. GSEC after speaking with regulators determined that any sub account with a payout over 80% put them in a place where they could be fined in the future for allowing this activity. Finra has stated these high payouts are a "red flag". The CBOE has been slow to act to protect their members as long as possible from leaving.They make money from regulating these firms. A lot of money.

  3. 1245


    This is a better explanation:

    and this is from a FINRA letter to BRoker Dealers dated 2/8/2011

    Master/Sub-Account Relationships
    Master/sub-account relationships raise a host of regulatory issues for firms and carry the risk that the firm does not know the identity of its “customer” as required by federal securities laws, including the Customer Identification Program (CIP) provisions of the Bank Secrecy Act, and FINRA Rule 3310. In some situations, despite the fact that there is an intermediary master account, a
    firm may be required to recognize a sub-account as a separate customer of the firm. FINRA examiners closely review firms’ procedures for determining the beneficial ownership of each account within a master/sub-account structure in accordance with the guidance published in Regulatory Notice 10-18. FINRA examiners will review firms’ systems for monitoring, detecting and reporting suspicious activity in master/sub-account structures, whether or not the sub-account should be considered the firm’s customer for CIP purposes.
    FINRA examiners also will focus on whether the firm is properly monitoring transactions in master/sub-account structures for potentially manipulative activity and reporting that activity, as appropriate, on a Suspicious Activity Report (SAR). In a recent enforcement action, FINRA sanctioned a firm for failing to adopt risk-based procedures to verify the identity of sub-account holders, even though these customers lived overseas in high-risk jurisdictions and could freely execute trades for their own profit, and also for failing to adopt effective procedures for detecting suspicious activity.16 FINRA examiners also will assess whether the master account is acting as an unregistered broker-dealer. Further, if sub-accounts are represented as individual proprietary traders of the master, examiners will determine whether such proprietary traders are required to be registered and will also review the relationships to determine whether such traders should be recognized as separate customer accounts.
    Master/sub-account relationships have also raised issues under other FINRA and SEC rules, such as margin rules and books and records requirements. If a determination is made during the course of an examination that the beneficial ownership of the sub-accounts is different from that of the master account, the sub-accounts would need to be recognized as separate customers and firms could encounter significant net capital charges for under-margined accounts and significant SEA Rule 15c3-3 reserve formula implications. See Regulatory Notice 10-18 for additional information.
  4. That's not a prop firm, that's an arcade. Bring your roll of quarters to play. A real prop firm needs talent not chump change.