Important Question about Retail B/D's

Discussion in 'Retail Brokers' started by jay123, Oct 23, 2003.

  1. jay123


    This question is open to anybody who has any information or knowledge of such situations.

    This is a completely hypothetical scenario thus I am not using any broker's name. Here is the scenario:

    If a retail at home trader has over 100,000 dollars in one account with a retail broker/dealer and trades in an individual account form with that b/d would that trader have any danger of losing his money if the b/d went bankrupt and closed up shop? Now I know about SPIC insurance and I know about the additional insurance that all b/d's are required to have as well. Furthermore, lets assume that the b/d declares bankruptcy out of the blue and that traders money was all settled and in cash for weeks before that occurence; does that trader have any danger at all of losing their money(aka not ever getting it back)? In other words is this money tied to the b/d or the clearing firm? Lets say for arguments sake the clearing firm is Penson Securities. Once again this is a completely hypothetical scenario, however the situation is that I do have over 100k with one particular firm that I use because the commissions are pretty darn cheap however after reviewing thier balance sheets as they are a publicly traded company it alarms me that they are really losing business and their stock is trading at 1 dollar. Once again I will not mention names but this question is on my mind and I am ready to wire the money out tomorrow morning to one of my other accounts if someone out there knows of any reason whatsoever that I may be standing in a mine field. Thanks all.
  2. SIPC is not the same blanket protection like the FDIC offers on your bank. Now that some have woken up with the Worldco debacle, you may think you are absolutely covered with SIPC. Your not, your protected. Be sure not to keep any more than $100k in cash if your worried about the broker

    all about SIPC:

    ps. anybody know how futures accounts are protected? Outside of keeping the bulk in t-bills?
  3. I don't think futures account are protected by any form of insurance other than the integrity of the clearing firm as well as the exchange for which the firm is a member of. I am not aware of any big blowups whrein cust lost $ in retail futures account. I think the exchange would cough up the $ since it would deal the industry a severe blow. Witness a broker/clearing firm at the ny exchange a year ago (?) I think the exchange made good on the $.
  4. jay123


    Spyderman I thought that the problems people trading at WorldCo had was because they were basically Sub LLC's of the broker dealer (Essentialy they are independent contractors for a broker dealer) Thus their money was not in an account of their own name it was under WorldCo's name and thus it became WorldCo's working capital. So yes when WorldCo does go under their money is most definitely gone. However this hypothetical scenario that I have set forth is one of the common sort. An at home trader aka retail trader trading within and individual account under their own name. Nothing different then Mr Richie Rich having a 100 million dollar account under his own name at Goldman Sachs. What would happen to Richies Richs' money at Goldman Sachs if Goldman declared bankruptys for example? In other words is the money tied to the broker dealer or the clearing firm? What are the ramifications to a customers money? Keep in mind once again I'm not talking about prop trading here.
  5. ib has protection to 1 mill on cash and 10 mill securities.
  6. Jay. the rich boys at GS will be "protected" the same way....Now GS going broke is not impossible, remember old Nick Leeson who torpedoed Barings, what if there was a financial meltdown? Even though you are theoretically insured....if a few big ones go likely is it the insurer could pay?

    but thanks for asking the I won't be able to sleep tonight!
  7. arnegr


    it has so many conditions, your money will almost never be returned, and if it is, it will take an effort and time greater than the loss. you lose twice, in trying to get any money out of sipc.
  8. Htrader

    Htrader Guest

    I also trade with IB, but the SIPC protection is not that ironclad.

    SIPC only applies to equity accounts and so since IB allows both futures and equity in the same account, they have to create two separate accounts to keep the money. They state that they try to move as much of your money as possible to the equity side every night, but if for some reason you needed SIPC protection, then any money in the futures account would not be covered.

    Of course, IB is one of the best capitalized retail firms out there, but I would be concerned about this if I was trading a universal account at some smaller firm.

    Plus that "10 million" insurance is really just a smoke screen. Sure, each firm has that insurance but what they don't tell you is that the insurance has a fixed overall cap limit. If a firm's capital is over the total amount of insurance provided, then everyone just gets a partial distribution. Clever marketing though.
  9. def

    def Sponsor

    htrader, i do not believe you are correct in regards to the additional insurance but I'll check. If however, you are correct, it's even a larger reason to make sure your funds are with a well capitalized firm/clearing firm that also has a conservative approach to managing risk.
  10. jay123


    Follow up to my original post about concerns of a B/D bankruptcy and how it relates to a retail account holder. I called up Penson Financial this afternoon. After going through a bunch of channels I finally got to the compliance dept. Spoke with a manger there who was also a legal counsel for Penson. In any case they have had B/D's go out of business in the past, in each case it is a fact that the retail account is tied only with the clearing firm. In other words the clearing firm holds the money. The broker dealer is simply the middleman providing the front end support for a clearing firm in terms of handling the customers needs and provides the sales staff etc. If ever there was any problem where a broker dealer shut down. The retail account holder's money, in this case with Penson, would safe. Furthermore, the customer would be told to transfer to another broker/dealer of the account holders choosing. Furthermore, the SIPC insurance and the additional insurance is not insurance of the Broker/Dealer it is insurance and I use the term insurance loosely (more adequately I should say insured) that the clearing firm provides if "god for bid" the clearing firm goes under. This applies for any clearing firm. The major ones being Penson and Instinet Clearing Services. Wanted everybody to know this, as I was on the phone for over a half hour with this person and really got an eye opener as to how things work as far as the clearing firm is concerned.
    #10     Oct 24, 2003