PDT Rule & Prop Firms

Just curious I have not heard one trader from say SMB Avitar Keystone or an Assent LLC post that trading operations have been halted at these companies. It really is just the same few guys posting endlessly on the PDT rule and what the SEC wants going forward. The solution being offered also happens to be the buisness model they presently own and operate under. That is not an accusation they seem to be fine individuals with good reputations on this site. Yet they serioulsy underestimate the sophistication of a lot of the LLC owners and members. Enough has already been posted in defense of the buisness model on this site. The reason Tuco is in so much trouble is that one of their principals was a reistered rep with GLB. Had that not been the case the SEC would have had no grounds for action. That being said the reality is that the SEC is taking a serious look at these operations and does not like them. The question is do they have the authority to take down LLC's that are properly structured as private MTO's with 1 retail account that meets all PDT and REG -T guidelines. Or is it neccessary to pass new legislation to take such action. The other possibility is that they are going to harrass the clearing firms and B/D that specialize in this area with crippling audits and other forms of harrassment so that they will give up without a fight that the might legaly be able to win.

 

best post of the thread!

 

Only way trader can get leverage higher than 4:1 is too become a “Professional Trader” at least this is what the SEC has said repeatedly. Trader gets series 7, becomes member of Day Trading Firm, becomes member of exchange. Since Day Trading Firm is member of exchange and SRO overrules the SEC rules these Firms can provide leverage greater than 4:1 through some JBO agreement or other types of agreements.

The reason Tuco is in trouble is the guy used traders capital to pay for Tuco operating expenses and use traders money to cover other traders losses the B/D knew this and in turn action was taken. O.K.

Mr. Sir Larry you are telling us its possible/legal for a Retail trader to get leverage greater than 4:1. Of course the SEC is not happy with “THESE OPERATIONS” it allows Retail Traders to obtain leverage greater than 4:1.

 

sir larry do you really think the sec can click there fingers and llc's are gone in 2 weeks? we're talking the gov't here. it will literally take months to years for the sec to do something if they are going to. we know the sec says over 4-1 inside a non licensed llc is illegal.the question is do you really think tuco is going to sit there and not rat on the 100's of non licensed llc's giving over 4-1 leverage?they're going to ask the sec how can we continue operating in a way which is legal. if the sec says you have to do this and this and tuco see's that there not applying the same standards to other llc's i'm sure they'll sue the sec for unfairness of enforcement. penson probably clears for 90% of these type of llc's so one letter to them to enforce the laws will change the whole gig

 

I did not mention leverage. I am of the opionion that 10 to 1 is a recipe for disaster. I had this conversation with you on the original Tuco thread.(monstercrat) However I do maintain that if an LLC holds 1 account and it does not exceed 4 to 1 then they are free to allocate BP as they see fit. They are after all a private partnership. They might blow up and members will have to accept the fact that they joined a reckless operation. That is the price they pay for being greedy. But as a practical matter I think it would benefit all parties involved for the Sub LLC industry to de-leverage and impose Reg T on sub-accounts. Many already do. Timcar to answer your question. A member of an LLC does not have a retail account or any account for that matter. The Firm owns an account and provides mebership and operating agrrements as well as a sub-account authorization form that give the member trading privlidges on the master account. This account is subject to all applicable regulation and guidelines. The real problem is not PDT and Reg T its the operating structures of some of the LLC's and how they present themselves to the public.

 

if it were not for this tuco situation. no one would be concerned about possible changes to the sub-llc model . the sec knows about all the sub-llc firms on the street & has let them do business for years. no suprise to most. just more concern since its in the spotlight at the moment. their may be some changes by some firms with being pro-acitve. the model works for many because the demand is their & their is too much money at stake. not everyone is going to get licensed for leverage, that is not realistic .. just some consolidation in the industry perhaps out of concern rather then any action the sec may enforce. over time the concerns will fade & its back to business as usual like it never happened.

 

In regards to the Series 7 Exam, a friend of mine who has an MBA and worked as a Smith Barney financial analyst said it was the hardest test she has ever taken. My brother in law, who has a Harvard MBA, said it was tough but nothing you can’t pass if you know the material. Despite this, national statistics show that only 66% of first-time test takers pass and the national average score (over the last 6 months) is 73%.

So I had some idea of what I was facing. I used the Dearborn CD and the "Smart 7" web program so that I could have two sources of information to compare and rely on. Yesterday, on Saint Patrick’s Day, I sat for this long and grueling 6-hour exam....

I am proud to say that yours truly not only passed on the first try but also received a very respectable score of 90%.

Now I know that this whole test is practically useless and pointless in terms of applying any of its content to what I will be actually doing as a prop trader...

... but if taking and passing it gets me that huge leverage I could not otherwise get in a retail firm and it gives me more regulatory and legal protection in some sense (NASD member)... then it was completely worth all the effort and time I put into it.

 

SEC doesn't have to click there fingers. LLC's are in prevent mode now and don't want a Tuco situation of their own. Most of them (if not all) are getting their guys regis. and doing everything legit now.

 

Sir Larry I do hope that these Sub-LLC firms can continue to operate it gives trader with limited funds a change to play the stock market. What concerns me is are these arrangements legal. If trader has his $10,000 at a retail brokerage he is subject to both REG T and PDT rules. No day trading and no leverage greater than 2:1.

If trader moves his $10,000 to these types of firms suddenly trader can day trade and usually gets leverage around 20:1. In essence the trader can CIRCUMVENT both REG T and PDT rules will out being a Professional trader, without obtaining any type of license. The only problem for the trader is that his money is not guarantee by any gov’t agency and is only back up by the Prop firm owners good word.

THE SEC NEEDS TO PROVIDE SOME CLARIFICATION AS TO THE LEGALITY OF THESE FIRMS.


If these types of firms are legal and can continue to exist as they do today then they should run ads in Craig lists that goes something like this::::::

“Why trade Retail put down $5,000 with us get 20:1 and day trade all day. AVOID both REG T and PDT rules without getting a license.”

OR

“HEY Traders don’t have enough capital to trade with and want to day trade. Put down $5k with our Prop firm pay low commission rates, keep 100% of your trading profits and payouts to you once a week. It’s just like RETAIL Trading but you bypass REG T, PDT rules and unlike Professional Stock Trading you don’t need a license.”

Could do theses all day.

Don’t get me wrong I’m all for circumventing both REG T and PDT rules and not getting a Professional Stock Traders license. With these types of firms all trader has to do is put up a small $5,000 deposit and start trading tomorrow. Traders only risk is the Prop firm might go under with your deposit.

Anyways the next “Tuco” might have the SEC calling the FBI saying: hey FBI guys someone ran off with $10,000,000 of these traders money can you help us find him. No more trading and no recourse for these traders to get any of the money back.

 

The problem is an LLC can't legally solicit monies from non licensed traders.