Discussion in 'Prop Firms' started by brockattack, Jun 2, 2006.

  1. How much can I reasonably expect to pay for borrowing money from a firm who gives a 15% haircut. Assume I borrow 1/2 million much should I pay in interest.
  2. Maverick74


    It doesn't work like that. In order to get a haircut, you must be in a JBO. In a JBO environment, you are paying a debit rate for any long stock and long option positions and receiving a credit rate for any short stock or short option positions as well as cash balances.

    A haircut charge is only applied if you trade OVER haircut. Then you are charged for just the amount you go over.
  3. JackR


    OK. I've searched and cannot find a definition of haircut. Lots of use of the term, but nothing explaining what it is. It seems to be some type of charge against a balance of some type and applies to prop firms.

    Would someone please provide a definition.

  4. Maverick74



    A haircut is the amount of risk capital one has to put up to hold an overnight position. It usually is 15% up and down for equity options. Index options are much less. Usually 10% for NDX, and 8% to the downside and 6% to the upside for SPX and DJX.

    This means it doesn't matter how many options you buy or sell, how much stock you are long or short, all that matters is the actual risk on your position. This differs a lot from Reg T, where every purchase must be paid in full even if it actually reduces the risk of an existing position.

    Haircuts were started on the floor and mainly used for market makers in options. Without haircuts, it would not be possible for a local to make deep liquid markets unless he had tens of millions of dollars and that would not be cost effective.

    Many people confuse the term haircut with margin. They are not the same thing. Haircut can increase your margin but margin is not a haircut.

    Here is an interesting way to look at haircut. Haircut has a mathematical relationship to time. The more time you have, the less your haircut. As you approach expiration, your haircut moves closer and closer to parity. On expiration day, your haircut will equal parity. Parity being the full risk of the position. So time discounts that risk at the beginning. If you graph it, it would look similar to the curve of delta over time. As you approach expiration, your deltas get closer to 100 or 0 for ITM and OTM options respectively. The more time you have, the closer your deltas are to 50. Therefore, your most lenient haircuts will be at 50 deltas and your less lenient ones will be closer to 100 and 0.

    Since straight stock does not have a time component, it's haircut is a flat line fixed at 15%.
  5. You also get a haircut on treasury postions and futures positions. The longer the time to maturity, the bigger the haircut.

    The haircut is minor if you have a basis position on (e.g. long 10 yr cash, short 10 yr futures), but the haircut is increased if you hedge the cash against something else e.g. eurodollars.

  6. "Haircut" is an official NASD term from the NASD regulations section called "Net Capital Rule".
    Go to the online "NASD MANUAL".

    The Net Capital Rule only applies to NASD member accounts not subject to Regulation T.

    The Joint Back Office arrangement is a loophole allowed by the NASD.
    With certain restrictions, like you MUST have $1,000,000 Net Capital, you can gain relief from Reg T.
    But you also lose nearly all protection from the Regulatory System...
    And are basically at the mercy of your (hopefully honorable) Partners.

    In real world terms, haircut is very similar to margin.
    15% haircut for common stock essentially means its 15% margin, with qualifiactions...
    Like whether you are hedged or concentrated.

    15% is for common stock... and it goes way down for less risky securities.

    For example,
    There is an "Undue Concentration" clause...
    So the basic haircut percentage is for a fully diversified porfilio.
    The more concentrated in a few stocks your porfolio is... the higher goes the haircut (margin).
  7. JackR


    Thanks to you three for your responses. It will make reading some of the comments in the prop related threads much more understandable.

  8. I don't think my question was really answered, although I do appreciate all the responses. My question is how much can I expect to pay in interest on lets say 50,000 and 15% haircut and I use all 50K just on long stock positions.
  9. Maverick74


    Your question was answered. You don't pay interest on haircut. You pay interest on capital that goes over your haircut. You pay interest on debit balances. So if you are long 50k in stock, you will pay the current long rate. This is typically 50 basis points over the broker call rate. In other words, its the rate you are charged for any debit positions in your account.
  10. prop traders are just like retail traders where they buy at ask and sell at bid, correct? sorry, just making sure since prop traders pay fees on haircuts. since haircuts are used by market makers/specialists, this makes me think a prop trader could possibly trade like a market maker since they are charged haircut fees.

    hope this makes sense. i'll reword it:

    retail investors only pay commissions and sec fees mostly, so they get to buy and sell at ask/bid respectively. retail investors don't pay haircut.

    market makers/specialists buy and sell at bid/ask respectively while they are privileged to use haircuts.

    since prop trader trades are associated with haircut fees, do prop traders buy and sell at bid/ask or ask/bid? do prop traders get to act like market makers, that is my question?

    sorry for sounding naive, just wanting to make sure. i am trying to understand the prop firm world before i possibly jump into it. better to be safe than sorry.
    #10     Jun 5, 2006