Bright, Echo, etc...

Discussion in 'Prop Firms' started by F-Trader, Dec 1, 2002.

  1. I've already done search. :confused:

    I am switching from retalil to a Professional firm (No Prop).

    My question has to deal with "BLOWOUTS". :eek:


    What happens if I have say $50,000 in my account and I Blow it Out, say a $200,000 LOSS. I am assuming that I would be responsible for the entire loss.

    What happens if I don't have the $$$ to pay back the loss. Are the other members responsible for my loss?

    What happens if I have a LOSS that exceeds the entire amount of capital in the Trading firm? Would the members be responsible for the entire loss, or am I limited to the amount of money that I had at the firm?

    I am not worried about myself blowing out, I am concerned about new young traders who could possibly cause severe damage to a firms capital.

    I would appreciate any help.

    Thanks in advance.
     
  2. You are generally not responsible for losses that exceed the amount of capital you have in the firm. If you loose more than you have, the firm eats the difference. But all the reputable ones control their risk well enough and are capitalized well enough that one or several traders are not going to bring them down.
     
  3. When you say the firms "EAT" the difference, I assume that you are talking about the owners, NOT the members.

    I would assume that the owners would then go after the trader thru the Civil courts to recapture their loss.

    Thanks for the input.
     
  4. When you join a proprietary trading firm, you become a partner in the LLC, although you are a different class than the owners who share in the profits of the firm. You have your own sub-account which tracks your capital in the firm and your p/l, but you are trading the firm's money.

    Say you have $10k in your account and are holding what seems like a fairly safe overnight position. You come in the next day and the stock or spread has blown out and your position is 20 grand underwater. Your capital is gone and so is 10,000 of the firm's money. They might tell you to hit the road, come back when you have more money or they can just let you keep trading in a deficit position. If you decide to walk away from the loss, there isn't much they can do, since you are a partner in their business and technically you are trading on their behalf.

    The 10k hit is a hit to the firm's capital, but it is only going to affect the partners who share in the firm's profits. All the other traders aren't going to have to cough up money to cover it. But if the damage was catastrophic and was more than the firm's capital base could bear, the firm's existence could be in jeopardy, then everyone is at risk, because they are all partners. That's why you need to make sure the firm you are with has a large capital base and practices good risk control. Remember, you're a partner in a private business, no government insurance to bail you out.

    That's my understanding of it anyway, someone more in the know please step in and correct me if I'm wrong.
     
  5. LA ECHO

    LA ECHO ECHOtrade

    F-T,
    I can only speak for ECHO but the chances of someone with a 50K account losing $200K is almost impossible. In fact it is extremely rare that any account would ever go negative at all, especially by thousands of dollars. The reason for that is that risk is assessed constantly and there are very few traders in the firm holding any overnights at all, let alone unhedged ones.
    As a direct answer to your question though, the legality of it is simple: the trader would owe that money to the firm and the firm has the right to take legal action against the person that owes it. If the firm were to sustain a loss it would come out of firm capital and/or the owners/partners capital before affecting any traders accounts.
     
  6. cashonly

    cashonly Bright Trading, LLC

    Hi F-Trader,

    I can only speak for Bright and what I know of. (Don is the final Bright authority speaking on ET).

    We have very rigourous risk controls for both overnight and INTRADAY trading that would make this situation ALMOST impossible. I say almost because I have seen times where a stock halted trading intraday, news was announced and then it moved something like $20 when it started trading again. If you were in a position adversely at that time, the scenario described could happen (I don't know of any specific instances of this happening, but I do know of a lucky trader who was holding large in the correct direction<g> - but his account could've taken the hit in the other direction without calamity - due to our capital requirements).

    If something like this were to happen, we'd like to see the trader make good on the loss. However, we are an LLC and the way our agreement is worded, I don't think we have a legal recourse to recoup the loss from the trader. Again, I can only speak for our firms, based on what I've read here, it seems that other firms have that legal recourse.

    Would the loss hit other traders accounts? Probably not. With Bright, according to our agreement, $10 million of the "A" members capital (owners are "A" members, traders are "B" members) would have to be taken out before any "B" member traders accounts could be hit and that's a lot of capital to chew through. As a class "B" member, you're only liability is limited to your capital at the firm. That's why we're so focused on Risk management - to prevent anything even close to that from happening.
     
  7. You are absolutely correct to be concerned about someone else causing a trading firm major problems, thus causing the other traders to lose their accounts. We put in a minimum of a $10 Million "buffer" between the traders, in cash, that shows up on our balance sheets.

    I suggest to everyone that they review and understand the balance sheets of any Firm that they plan on associating with.

    Don
     
  8. You may want to also consider the capitalization and reputation of the clearing firm that the shop uses.

    I think the real risk is if the clearing firm goes under.
    If a major catastrophe were to happen within your prop firm, there is nothing in it for the clearing firm to lose the business of all your firm's traders, so they may be able to keep you in business, even if it is through another of their LLC customers.

    Of course, it all comes down to what you can work out with them.