capital security

Discussion in 'Prop Firms' started by cstu, Mar 20, 2004.

  1. cstu


    I am wondering if anyone has any ideas as to what the best way to protect a sustantial capital contribution designed to provide leverage at a prop firm or for trading as a retail account.

    Don Bright has said on many occasions that one should "check the balance sheet". He has also stated how open Bright is in this regard. I applaud this transparency but do realize a balance sheet is only a "snapshot" of one point in time and certainly does not take into account trading risk control factors.

    I have been surprised as to how many times I have seen references to not getting money returned. The last thing I need as a trader is to worry about getting paid or to worry about someone else blowing me out.

    Is anyone aware of any non-affiliated companies that would provide insurance against any losses to my contribution that were not incurred because of trading?
  2. alanm


    Aside from the references to Worldco, which failed some months ago, most people seem to complain that the structure of their particular firm is such that member capital has to be held for one year. This should be in the agreements (which people don't always read), and should be expected. It's not that they don't ever get their money back, it's just that they don't want to wait.

    Don Bright will be along shortly to point out that Bright Trading does not have such a requirement :)
  3. Thank you, I guess the consistency of my statements allows for such "front running"...LOL ...

    Just to clarify, is not the BT is "exempt" from anything, it is simply that we choose to keep adequate capital in the Firm to protect our traders from any concerns, real or implied, that might arise.

    The balance sheets are a "snapshot" - but a committment to keeping a minimum of $10,000,000 between the traders is on-going and verifiable for all of our traders to see.

    Obviously, we keep much more than the $10Mil of "owners" capital in the firm....but I think we are one of, if not the only, firm's that maintain this promise.

    Security of capital is basic right for all traders....

    Feel free to call with any questions about how to check out any firm.

  4. I checked into this pretty thoroughly several years ago, and the cost was prohibitive. This policy would have to be written by a "Special Lines " company.

    If your firm has true retail traders, excess coverage above the 500k SIPC coverage is available to the firm, but not to individuals.

    By the way I talked to SIPC's General Counsel and he said the $500k insurance is over and above anything that happens to be left in the firm. Of course cash coverage is limited to 100k.
    Also, if you are short and a firm is taken over by SIPC, they are likely to buy in any short positions "at the mkt".

    My advice is to ask for an Income Statement for the past 3 years.
    A Balance Sheet is not a good picture of a firm's health, because it is generally legally possible for a Class A member to withdraw.

    In short , the profitability of the firm will tell you the likelihood it will be a going concern.
  5. Hi Mr. Profit...just a note about balance sheets vs. income statements. If the Company makes a zillion dollars, so what? They can take all the money out. A Balance Sheet that shows specifically that the Firm has allocated money (as you know, a minimum of $10Mil in our case) of Class A (owner's) capital to the LLC, which covers the Class B (traders).

    Since you know that I consider you one of the most intelligent people I know, and we both have accounting degrees, I just wanted to clarify the details for the newer traders.

    The continuing profits are, obviously, a must as well. Be sure that they check the 'division' of any larger we all know, as soon as a subsidiary loses too much money, the parent company will cut them off like obnoxious stepchild!

    All of this is much easier now that we can count all the (viable) firms on one hand now.

    Let's get together for lunch soon....I'd like to "catch up" a bit.


  6. Don and I both have acctg degrees, but I guess we will disagree
    (in a friendly manner) as to which is most important.

    As to someone taking out all the profits, they could do this the day after the balance sheet was created.

    I think the test of whether a firm is a going concern is whether they are making a lot of money. In that case, it doesn't really matter if they take out the profits. They aren't going to quit, even if faced with some rogue trader, as long as they think they can make money in the future.

    The simple fact is that both statements are important. That's why they are both reported (along with the Statement of Cash Flows)
    for public companies.

    In reality, for a private company, there could always be contingent liabilities which management says are "low risk" which turn out to be high-risk events. If managment classifies them as low risk, no reserves are required.
  7. Year after year balance sheets, showing the same (at minimum), capital from the owner's reflected for the safety of the trader just happens to be the choice that we have made in this regard.

    I do think that it is very questionable when a Firm does not easily hand out (again at minimum) their balance sheets to show some sort of reserve for the trader's protection.

    Public Co's have different reporting requirements, and divisions of public co's (such as a trading firm) should show new people their specific numbers....Kind of hard to break out "Al's Trading" from a balance sheet for "Worldwide Computer Systems" financials.

    Just be sure that you can get your money back immediately, and don't fall for the stories about the "need" to hold back capital... You can count the legitimate firm's on one hand...and be sure to steer clear of the "sub-llc.s' ...and you'll be fine.

  8. Don, I don't think Worldco was a sub LLC.