Blowout firewall

Discussion in 'Trading' started by foible, Dec 16, 2006.

  1. foible


    I'd like to try trading index futures (ES or ER2) and am wondering what sort of risks I'm exposing myself to. If I hold, say, 5 contracts of the ES and while I'm in the bathroom terrorists bomb Chicago and I come back to find my positions down 600 points, can the broker come after my other assets?

    What if I open up a separate account for trading the futures, can I lose more than is in this account?

    I already have one account with IB that I'm using to trade equities and I don't want to put this at risk. Is there a way to put up a firewall to protect these funds - opening separate accounts, trading with different brokers, etc.?
  2. MattF


    Trade with a stop loss.

    And if the S&P ever went down 600 points...:eek:
  3. foible


    Well yeah, I'm using a broker stoploss but you know, just "what if". 600 is extreme, but if each ES point is $50 (I think) then it would only take 40 points to take out someone that was fully leveraged. What happens then?
  4. "Can the broker come after your other assets?".... YES

    "Is there a way to *protect* your funds?".... NO

    You are 100 full recourse for all losses in your positions. If you lose more than you can pay, bankruptcy.

    [It could *possibly* be even worse.... Let's say some catastrophic event causes huge drop and stop loss orders are ineffective.... lots of clients lose "all of their accounts".

    1. The brokerage firm has "equity" which would then be used to pay for clients' uncovered losses.

    2. If ALL of broker's equity were to be used up and there still be uncovered losses, the broker's remaining clients would SHARE the total remaining loss of the broker's clients until satisfied.

    Well, the 1987 crash and 9-11 weren't big enough to trigger #2, but that's the kind of possibility we're talking about here.

    I remember the '87, crash. I had money with Refco then and after about a week I called them up and asked if they were still in business? They laughed and said, "looks like we'll have about $300,000 in uncollected debits (client losses Refco will have to make good)... but we have $20 Million equity reserve, so it won't be a problem"... and it wasn't.]

    You have to agree to these terms to have a futures account.
  5. fletch2


    options on futures. No insurance policy is free.

  6. foible


    That sounds like a very good idea. Day trading the futures would be for extra income, I don't want a Black Swan event to end my career. Some deep OTM puts might be just what I'm looking should I start trading larger size.

  7. MattF


    It's always decent I suppose to have that scenario in the deep back part of the head, but I've always tended to think after the '87 crash, that between the corrections the market itself took (i.e. haltings on those downward spirals to lessen the shock), and any major/reputable brokerage taking internal steps with lining up reserve equity, that it would now take an Armageddon-style event to have enough of a catastrophy where #2 would take place and a bit beyond...again never ruling out that possibility, but I would think you'd have better odds of gettting struck by lightning or something rather then that scenario happening...:)
  8. might want to try insulating your self away from potential losses by incorporating a business. To mitigate your personal liability talk to a lawyer before you sign anything in regards to a contract.
  9. Regarding incorporation as a means of limiting liability, most creditors are not that naïve. A new corporation that has not proven itself or has limited equity or borderline financial performance will almost certainly have to provide the personal guarantee(s) of its principal shareholder(s) in order to obtain financing or credit of any consequence from a potential creditor with half a brain. That brings you back to square one. I know that applies to conventional banking, so I don't see why it would be any different with a potential creditor to a trading business.
  10. Is incorporation the best way to go? Is that even possible for an individual futures trader to do and remove all liability?

    What about placing the ownership rights of one's primary residence into some sort of irrevocable trust (perhaps even off-shore)? What with all the bankruptcy law revisions these days, I wouldn't trust the courts to let you keep your house anymore ("homestead exception").
    #10     Dec 17, 2006