I think you are correct. Based on that knowledge, are you saying IB is safer? IB excluded, which of those 3 firms do you think would be the best choice for safety of funds? Or is it basically the same risk you're taking regardless of which FCM you go with?
Yes, IB is a lot safer. It is not perfectly safe, no firm is, but they have several additional safety buffers in place e.g. demanding high margins relative to the industry; taking out separate bankruptcy insurance for customers; having a fair amount of firm capital; being long gamma with firm capital (i.e. during market panics they will tend to make a lot of money rather than lose it). Most importantly, they were set up and are run by a former Chicago options trader. Anyone who has traded options professionally for years and survived will generally have a good appreciation of "black swans", credit risk, market panics etc. During the 2008 crisis, IB was contacting customers explaining how they were managing the risk of Citigroup going bust. I wonder if Man Financial, let alone Advantage Futures/Velocity Futures etc were doing that? They are basically set up to be robust during extreme market and financial panics. Most other brokers aren't. With the other 3 firms, I have no clue about their creditworthiness. I would recommend going over their last 3 years audited accounts, just like you would before investing in a financial stock. Then, email the CFO and ask about their risk control policies. Just be aware that smaller firms, no matter how well managed, are more risky than firms with larger amounts of capital, other things being equal.
Griffin was an individual non-clearing member and FCM (i.e. a broker). It was a customer of a general clearing member, as almost all small brokerage firms are. Velocity Futures, Advantage Futures and the like are not (AFAIK) GCMs either. So this is a totally false (not to mention irrelevant) distinction. Other customers didn't suffer because, by pure luck, the loss was not too big for MeesPierson to cover. What if it had been a Leeson-sized loss, or a Kerviel-sized loss, instead of a 10 million loss? The fact that other customers of the GCM did not suffer is *totally irrelevant*. If a system is risky, then it is risky regardless of what happened in the past. Playing Russian Roulette is not safe just because you haven't blown your head off yet. It is regrettable that this kind of anecdote-based thinking is being bandied about on a thread about credit risk. There are no excuses today for this kind of complacent and illogical thinking, after "The Black Swan" has been published, after the 2008 crisis.
*sigh* Let's say you take up BASE jumping. You successfully do 100 jumps. Then you have an accident and slam into a cliff-face before tumbling down 500ft. If you survive, will your conclusion be "BASE jumping is safe - my parachute failed and I got away with just a few bruises!" If so, then my advice is to take up a career other than trading.
Even if both you AND your opponent still have your heads atop your shoulders it does not change the risk profile of the game. So I can be more certain I would appreciate The Ghost's comments on a customer's position when dealing through an introducing broker with RCG or IB or whoever. Are there distinctions within the introducing brokers such as guaranteed (as opposed to un-guaranteed?) which I hear people use? Am I correct to state that if a firm introduces for a big clearer and you wire your funds to that clearing firm and get your statements from them your counter party is the clearer. Anything I am missing in this equation?
It seems the last post that I made to this thread the other day was deleted. LOL! It seems that facts on EliteTrader are irrelevant when it comes to advertisers. That said, I'd recommend that you do a search on Sentinel Management Group on the internet. This was a company who managed cash for some brokers, such as Farr Financial, Velocity futures, Penson, etc. These companies and others placed their customers money with Sentinel in order to earn a higher rate of return. In 2007 Sentinel got into financial trouble. Here is a link to Velocity's statement back in 2007: http://www.elitetrader.com/vb/showthread.php?threadid=101879&perpage=6&pagenumber=17
This puts a ? on how safe funds are with FCMs. I may get paid no interest on my funds while the FCMs invest my money trying to make a return for the FCMs. It sure pays to know something about who is holding the funds. I like IB when it comes to the security and safety of client accounts. OldTrader, how would Penson compare to RCG when it comes to safety of client funds? Penson is a new kid on the block when compared to RCG.
Absolutely correct. Most of these guys pay no interest, then they turn around and invest your money to earn the interest on it for their own profit. The problem is that they stretch out on the risk curve to earn a few extra basis points. If they lose that money, the question is whether they are of a size that they can repay the customer money. A loss of the customers segregated funds could wipe out some of these FCMs. This is a huge reason why I have chosen IB...solid financials, plenty of net capital, and insurance on funds which are swept into the Universal account, rather than being stuck over in something risky like Sentinel. Saving a little money on your commissions is not worth the loss of your principal. And the Sentinel case was a real live case that nearly turned into a disaster. I'm not familiar enough with either of these companies to have an opinion. Penson however had money at Sentinel. That would bother me alot aside from any other considerations. I guess it goes without saying that your segregated funds could potentially be invested safely, other than trying to do something riskly to make a little extra like the Sentinel thing. The FCM still makes money, albeit somewhat less because they have gone out on the risk curve. I don't know what stops them from doing this...certainly not their account forms. Call me crazy, but if I'm going to lose money I'm going to lose it trading where I've got a chance to profit, as opposed to losing it because someone else, unbeknownst to me, invests my segregated money and then loses. OldTrader
Boys and girls if you read this and take it to heart you get to take the quiz. Upon passing the quiz you will get a diploma certifying that you have a degree in basic counter part risk. This is knowledge worth having. I have one additional question that I hope Old Trader will be clear on. If a trader goes through an introducing broker yet wires to and gets his statements from a clearing firm -- let's say IB because they truly are the pick of the litter -- is his position as secure as it would be dealing directly with IB?