Capitalization of an LLC

Discussion in 'Professional Trading' started by birddog, Mar 4, 2002.

  1. birddog


    I have read a bunch of comments regarding the risk of an LLC and capitalization of firms with Sipc not applying.

    Are pro (licensed) traders not afforded sipc protection? what are the risks of being in an LLC and who would be considered the top 3 pro firms as far as being well capitilized (low risk)?

    I would appreciate any comments.

    the bird
  2. SIPC is for customers, not professionals.
  3. vsisto

    vsisto ECHOtrade

    Partners of a professional trading firm contribute capital to the partnership. That capital is firm capital and is intermingled with that of other members/partners. That's it. Many firms sell it differently, but that's all there is to it. If the members are not somehow financially tied together, then the entity is not a partnership and the traders must be retail customers.

    Look at who's $ is behind a firm. Review the firm's annual audited financial statement. Most importantly, visit the firm and meet with the individual that manages the firm's risk. Ask him detailed questions. Your capital is in his hands.

    Hope that helps.
  4. would ask these same type questions. So many "LLC's" are formed by a couple of people, with little money, who then go out and get traders money to use. This is where the risk (to the trader) comes in. We keep a minimum of $10 Million of "owners" money as a buffer between traders.

    Always insist on seeing a balance sheet, and read it sure that you see the "owners" money in a seperate place than the traders.

    Good Luck in your pursuits.

    SIPC is to "protect" customers from brokerage firms, not for members of LLC's (professional traders).
  5. Just a note on L.L.C. risk management . I know some traders think that firm capital equals stability , but capital alone does not tell the whole story. How many postions does the firm carry overnight? Does the firm have all their L.L.C. positions concentrated in a risk/arb position or carry alot of matched pairs?

    Would a smaller L.L.C. that carries limited overnight postions with
    less exposure be a better place to trade?

    Lets take two hypothetical firms:

    Firm : A

    1000 traders
    100 million in firm positions(matched pairs)
    40 million of firm conversions or hedged positions
    2,000,000 month overhead-high overhead
    Firm has leased space for 100 offices-owners must force
    traders to overtrade to stay in business because
    their commissions are so low-now .005 per share!
    If traders do not trade 100,000 shares a day , they
    are beaten!(just kidding).
    20 million in owners class "A" L.L.C. capital

    Firm: B

    130 traders
    4 million in overnight positions
    2 million in coversions or married puts
    synthetic call etc(hedged)
    90,000 month overhead- 60% of traders
    are remote-low overhead
    1 million in owners class "A" L.L.C. capital

    What firm would you consider to have less market risk ? I'd pick
    the smaller firm B, assuming they are at their risk management
    stations. Remember in trading, many times the bigger they are the harder they fall( though not always!).

    Gene Weissman
    Lieber & Weissman Sec., L.L.C.

    Hello everyone-back from a ski vacation!-Gene
  6. jem


    To amplify the above answer by GW, I would seriously consider a firms overnight exposure relative to the capital that stands between other traders and your capital.

    If there are risk arb traders and they are using your money to get their leverage--- watch out. The market by its nature destroys large positions. Heavily followed strategies that seem historically safe get whacked every once in a while. I was impressed by some of the firms mentioned here and their ability to withstand some good arb hits recently, but will they have the ability to withstand even bigger standard deviation moves in the future? That question is the question you have to have answered by any firm to your satisfaction. You should make sure that you get more than a pat answer.

    And of course you also have to make sure your capital is not "overlyleveraged" by others during the day as well.
  7. LelandC


    Anyone care to name a couple of financially solid firms that arn't overleveraged in these "arb-type" positions?
  8. Jem made some great points. If Pro firms were not well run the
    past two years, they would not have survived. Actually more NASD firms have merged or left the business. The only pro firm that had problems was Harbor Securities some years back. The example I used was "extreme" and in no way relates to any firm on the boards. My point is that firm equity has to be balanced against other factors including firm risk management and the
    experience of the Managing Members of the pro firm.

    Gene Weissman
    Managing Member
    Lieber & Weissman Sec., L.L.C.
  9. Regarding Harbor Securties, does anyone know exactly what happened? I checked out their facilities a few years back. I was very impressed by the operation and the margin they were giving me.. but would like to know if anyone has the details on their downfall.
  10. I would agree that to have survived the last few years and undergo all the regulatory changes, I would think that any of the pro firms that are left have not only good risk management but sufficient capital. I think Gene's assessment of the situations also, in choosing firm B, is right. The number one question I would ask a pro firm is how their risk management system works and how much leverage they allow traders to take overnight in risk/arb positions and outright positions.
    #10     Mar 12, 2002