I've talked with a couple Prop shops and they've basically stated that if your profitable, we'll give you as much buying power as you need. They conveniently refuse to give a precise ratio of capital contributed to buying power, so I'm a bit skeptical. After all, if I contributed 50K of my own money, and was given effectively 40 to 1 leverage, I could make about 100K per year tax free by investing in municipal bonds. Not sure if prop shops, who make their money on commissions, would allow this To those who trade at prop shops, how does this really work? The firms I talked with did indicate that they will give a lot more leverage intraday or on open only orders. However, if you are holding overnight or longer-term positions, the amount of leverage one can get is a lot more limited. Just wanted to get the perspectives, positive and negative, from those who have been there, don that, at prop shops.
BP is greatly reduced for overnights, as the risk increases dramatically. I am sure this is very similar for most firms (I think 4:1 overnight is normal) BP intraday isnt that important if you ARENT a profitable trader (as this can be a liability if you dont know what you are doing). If you are a profitable trader and you do put up 50k of your own money, I am sure you will get more than enough BP. More than you'll probably need for intraday trading.
You can't buy municipal bonds on margin. You have to pay cash for them. So cross that idea off. And even if you could buy them on margin, there is a thing called cost of carry. In other words, you would have to pay about 5.5% to make about 5% on the municipal bonds. In other words, you are locking in a loss. Shit, if I could borrow money interest free to buy fixed income products, I would borrow a billion dollars from my firm and buy Treasuries! Oh, if it were only that easy.
Cost of carry eg. margin rate is not really talked about by these prop shops. It makes sense that there has to be a cost to "rent" money, but these firms seem to obfuscate this in their sales pitch.
There is nothing really to hide. It's usually 50 basis points over the broker call rate. Now if a firm actually lends you their proprietary capital for a split of the profits, then you are usually paying what is called a capital charge. This is different from the cost of carry. I agree though most traders fail to look at this. They think that people will actually borrow them millions of dollars interest free. Why would anyone do that? This is usually one of the bigger income streams for firms earning the spread on lending capital.
Intraday margin (your "40:1") often carries little or no cost, because the firm typically isn't extended. It's the overnight positions that will usually cost you.
Intraday margin is no cost. One of the firms I'm at charges fed funds +1.75% for interest on overnights and pays fed funds minus 1% for cash and short interest in your account. Haircut is on top of that. It varies per firm where it kicks in and how much, but it can be a lot more than the interest. Cost of carry is a very significant thing to consider if you do a lot of overnight positions.
Extended? It means the firm doesn't need to borrow any money. Typically, if you add all the trader's balances up, plus whatever the firm contributes to the "pool", it would be rare for all traders to have positions at the same time, which would exceed 6:1 on the balance (6 times is usually what a clearing firm gives to a B/D prop account).