max liability for futures trading

Discussion in 'Index Futures' started by flat5, May 18, 2005.

  1. flat5


    I have never traded futures but I am interested in learning. In trying to open an account I am getting confused by the warning disclosures about my liability for trading a futures contract - what the real (maximum) risks are.

    Let's say I have $4k in an account and I buy 1 e-mini S&P 500 at 1200. This contract has a value of $60k, but the usual margin requirement is $500.

    My first question is about the warning that stop loss orders may not be executed. Why not? How can this happen?

    My second question is: under what conditions can I be liable for MORE than the $4k that is in my account?

    Am I legally liable for the full $60k if the market somehow collapsed and my stop losses were not executed?

    What about insurance? Are policies available and does it ever make sense to buy them?

    Thanks in advance for suffering my foolishness.
  2. jrkob


    1) Because at the time your stop loss is triggered there may not be a Bid (resp Ask) in the market for you. Theoretically. Practically, it is likely that you will find somebody to buy (resp sell) from you "at a price".

    2) Also because it depends on how you place your stop order. Stop Limit Orders may not be executable if the current Bid after your stop loss was triggered is already lower than your limit and continues to go down.
  3. jrkob


    In my opinion Yes.
    For instance you are long a contract, this is the expiry date and the value of the S&P500 drops to ZERO. In that case you will owe the face value of the contract. Of course this is very unlikely lol
  4. jrkob


    I believe that 1 tick of eMini S&P500 is worth 12.50$ (somebody correct me if I'm wrong, I never traded this).
    So you owe more than 4k if your position goes more than 4000/12.5=320pips against you.
  5. flat5


    Thanks for the answers to my questions.

    My next concern here is the terms and conditions in the account signup that I am currently looking at that says:

    "In the event you fail to deposit sufficient funds... may, without prior demand or notice... sell any property belonging to you..."

    to which my initial reaction is "you've gotta be fucking kidding me!"

    They seem to be asking me to bestow to them the right to sell my house without my permission should my account be short. On the face of it, that's nutso. I can't agree to let someone sell my house against my will if my account is short $1, but that seems to be precisely what they're asking for.

    Is this standard for any futures brokerage? It seems, to put it mildly, a bit of an onerous agreement.
  6. jrkob


    Is this enforceable in the US ? (I assume you live in the US ?).
    I believe such clause is not enforceable in Hong-Kong (where I live).
  7. flat5


    I live in the US. I don't know if it is enforceable or not. My guess would be that it isn't, but I don't like signing agreements on the assumption that its clauses are unenforceable.
  8. If you sign it, doesn't that mean that you agree?

    You are ALWAYS reliable for your position no matter what happens.
    But most brokers will close your position for you if you don't do it.
    Margin calls have to be responded to very fast; If you miss the call they won't hesitate to reduce the risc for themselves to the minimum.

    Remember this is no charity.
  9. jrkob


    Well if you sign it it probably means that you agree, yes. But it doesn't make the clause enforceable. For instance penalty clauses are not enforceable (at English Law and HK Law, don't know about US Law).
    A penalty clause is for instance a clause that says that if you want to close your account you have to pay the broker a fee of 100,000$ (just a stupid example). This would not be enforceable, even if you signed off on this.

    I experienced it a few years ago with my Internet provider. There was a clause that says that should I want to close my account with them, I had to pay a fee of 6 months worth of subscription. When I closed my account they claimed the 6 months fee. I didn't pay because I knew it wasn't enforceable. We went to the small claim tribunal and the mediator advised the company not to sue as this was not enforceable. They dropped the case. I'm quite sure that a number of people agree to pay...
  10. Indeed, you're right.

    #10     May 18, 2005