Haircut

Maverick74 · Jun 5, 2006

Quote from optionzztrader:

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.
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Prop traders can bid and offer on both sides of the market, retail traders cannot. This does not mean prop traders are market makers. They simply are not subjected to cancel fees like retail traders are and they can post a two sided market.

optionzztrader · Jun 5, 2006

cool, thanks. i thought so. haircut fees associated with prop trades made me sense that.

that's cool stuff.

Maverick74 · Jun 5, 2006

Quote from optionzztrader:

cool, thanks. i thought so. haircut fees associated with prop trades made me sense that.

that's cool stuff.
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Wait, hold on. LOL. There are no haircut fees. Are you sure you understand?

optionzztrader · Jun 5, 2006

yes, don't worry about haircut fees stuff (i understand how haircuts work with prop traders from previous posts). i just wanted to know if prop trader could act like a market maker making two sided market even tho prop traders are not market makers themselves. that was all i needed..........very valuable info. i have been questioning this for awhile since i see redi (which is used by bright) on both sides of level 2. i understand very clearly now. thats cool prop traders can buy at bid and sell at ask.

i remember seeing in echotrade's contracts that you couldn't do certain stuff to manipulate the market (i just asked for their contract to see what prop firms had to offer, not going with them as i will go with bright when i have enuff money). just researching prop firms. i don't want to be jipped or taken advantage of. i also don't care if bright commissions are a little high as they are reputable and solid standing. i just want the leverage and use my strategies which pretty much work.

thanks for info.

Maverick74 · Jun 5, 2006

Quote from optionzztrader:

yes, don't worry about haircut fees stuff (i understand how haircuts work with prop traders from previous posts). i just wanted to know if prop trader could act like a market maker making two sided market even tho prop traders are not market makers themselves. that was all i needed..........very valuable info. i have been questioning this for awhile since i see redi (which is used by bright) on both sides of level 2. i understand very clearly now. thats cool prop traders can buy at bid and sell at ask.

i remember seeing in echotrade's contracts that you couldn't do certain stuff to manipulate the market (i just asked for their contract to see what prop firms had to offer, not going with them as i will go with bright when i have enuff money). just researching prop firms. i don't want to be jipped or taken advantage of. i also don't care if bright commissions are a little high as they are reputable and solid standing. i just want the leverage and use my strategies which pretty much work.

thanks for info.
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I was refering to options, not stock.

optionzztrader · Jun 5, 2006

no worries about haircut fee garbage for stocks or options, that's pretty self explanatory. just wanted clarification on prop trades regarding bid/ask.

yip1997 · Jun 6, 2006

Quote from Maverick74:

Jack,

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%.
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Does it mean I have more option contracts for the same capital? As a retail option trader, which broker will allow u to trade using haircut, and not reg-T.

Maverick74 · Jun 6, 2006

Quote from yip1997:

Does it mean I have more option contracts for the same capital? As a retail option trader, which broker will allow u to trade using haircut, and not reg-T.
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You cannot get a haircut in a retail account. You need to be a member of a JBO.

yip1997 · Jun 6, 2006

Quote from Maverick74:

You cannot get a haircut in a retail account. You need to be a member of a JBO.
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How can you become a member of a JBO? What is the proper career path for one who thinks he is good in option trading? I am considering trading future options as one possibility because of higher leverage.

kbeck · Jun 6, 2006

Quote from brockattack:

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 dollars...how much should I pay in interest.
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Haircut (finance)
From Wikipedia, the free encyclopedia
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In finance, a haircut is a percentage that is subtracted from the market value of the assets that are being used as collateral. The size of the haircut reflects the perceived riskiness associated with the assets.

For example, Treasury bills (which are seen as fairly safe) might have a haircut of 1%, while for a stock option (which are seen as less safe) the haircut might be as high as 30%.

[edit]
ECB use of haircuts
The European Central Bank (ECB) applies a haircut to all securities offered as collateral. The size of the haircut depends on the riskiness of the security offered as collateral. See the ECB Risk control framework

OCC: http://www.optionsclearing.com/products/rbh_documentation.jsp

Kevin