Yes, I actually did read the complaint. And what concerns the SEC is that Tuco "allegedly" ran out of money to pay their operating expenses and started taking money out of the individual traders accounts to the tune of 3 million to pay for their expenses. I can't even count how many ways this is illegal. You may want to pretend this is no big deal, hey, what's a few dollars among friends. But it's actually a huge deal if it's true. Now, I am not saying they did it and I'm certainly not trying to convict Tuco before their day in court. So as of now, these are simply allegations. See, this is the problem with "some" sub LLC's. Here is how it works. Usually a large successful trader who currently is a member of an exchange and a BD, say Assent for example, decides he wants to start up a sub-LLC. Why would he want to do this you ask? Many reasons, number one being commission over-rides, number two being that he can create a sub account that when combined with a large pool of traders, can get a ridiculously low rate. He uses this low rate to save on his own trading commissions, and also to earn a mark up on anyone else he brings into his own sub-LLC. His overhead is usually very little as he usually just piggy backs the actual BD that he trades through, in this case, Assent. It's actually a pretty sweet deal for him as he lowers his cost of doing business and earns a nice over-ride business. The problem is, many times the guy that does this is what we call, credit rich, cash poor. Meaning he really doesn't have the deep pockets that Assent has to absorb over-head costs and to absorb trading losses. He is kind of operating "on faith" so to speak that everything will go smoothly. Well, there's the rub. Most of the time, things don't go smoothly. Sooner or later trouble strikes. And when it does, the sub-LLC owner, being cash poor, runs into trouble. Now at this point any number of things can happen. He can try to siphon money out of the sub-LLC temporarily to pay expenses with the hopes of paying it back with either his over-rides or possibly his own trading profits. This ruse usually works if the problem can resolve itself quickly. Often times, that is not the case. The logical next step is to hurry up and bring in as much new business as possible to earn more over-rides to make up for the cash short-fall. The downside to this solution is the recruiting of sub-par traders or high risk traders that blew out somewhere else and are desperate for a deal. So they are willing to come in on less then advantageous terms. Of course, bringing in bad traders to a sub-LLC already on the brink is not going to make things better, only add more risk. Another possible solution is for the sub-LLC owner to try to trade his way out of this predicament. The downsides to this are obvious as any losses will just further sink the ship. The sub-LLC owner at this point is in a situation very much like that of a lending institution who has a lot of bad loans on their books but can't turn to the fed for liquidity if they are not a bank. The sub-LLC owner has no one to turn to as no will be the lender of last resort, including the BD itself. We all can see the number of ways this can go bad and really fast at that. I have theories as to what might have happened at Tuco, but posting them will only draw anger and ire from current Tuco traders so I will keep my theories to myself. But I have a pretty good idea what happened. I am very familiar with sub-LLC's ratboy and how they can go bad. I've been in this business long enough to see all the good AND the bad that comes from leveraging mediocre traders as a source of income. It sounds enticing on paper, but the reality is far from it. Regardless, I think before we jump to any conclusions we should wait and see what the court decides to do and what the final outcome is.
Mav, I highly doubt that stock traders would be able to switch (successfully) to futs markets because they are so much harder to trade with the same edges. The way I see it is that the exchanges stand to loose 20% - 10% of their volume flows / income if the SEC takes this too far. Based of rough calculations (see link) http://www.elitetrader.com/vb/showthread.php?s=&threadid=121235
lets all get something straight here. a ton have vouched for tuco on this board and never had a problem getting there $. BUT NONE OF US HAVE SEEN THERE BOOKS AND THE SEC HAS. SO WHO ARE WE TO SAY 100%THE SEC IS JUST WITCH HUNTING?for instance why was tuco borrowing millions of $ each week to cover margin calls? tuco was killing it so why did they ever have to touch any of traders deposits period? bright never touches any traders deposits. making millions per year why did tuco have to pay expenses out of traders deposits?the truth will come out in a few weeks and we'll see what evidence the sec has.
Just because you have a 7, doesn't make you an exchange member. LOL...There are requirement and it isn't cheap. If I am not mistaken, it is something like 5 million cash...I will look it up. Now lets talk about a portfolio margin account, this has a rules different than a regular margin account, you have to have at least 100k in the account, if you fall below this, regulation T, applies and there are some other requirements if I am not mistaken. IF you want more info, I will give it to you... I will look up the margin for exchange members..
To be an exchange member setup or buy a BD. Register it with the exchange and pay the exchange a couple of thousand dollars a month, on top of the cost of maintaining a BD. Or get your series 7 and get registered at a BD that is already a memeber of the exchange. Maverick is right that CBOE members don't need a series 7, however most people don't think that is going to last for much longer because of the merger. So I wouldn't count on using that as a way around having to get a series 7.
My mistake then. I thought you said once you get the 7, you get extended leverage, which is not true.
I never said that. Leverage has nothing to do with a series 7. A series 7 is required to become an exchange member of all the exchanges except the CBOE. Leverage is a by-product of being an exchange member. The two are mutually exclusive.
Fees are required to be a member per trader, every year. AND to get the preferred leverage minimum equity is required, which is more than 25k.