Pro firm leverage and risk management

Discussion in 'Risk Management' started by huby, Jul 20, 2001.

  1. huby


    I've been reading posts on elitetrader about proprietary firms and I have a couple of questions. I don't want to beat a dead horse (I know there have already been several threads) but I haven't found the answer I'm looking for.

    I'm confused about how losses are handled. So far from what I've read, Worldco is the only firm that will actually let you keep trading once you've blown your own deposit. Apparently several traders there are thousands in the hole and are still plucking away.

    I called Bright Trading and they told me the way it works is that your initial $25,000 deposit is to protect them from your losses. But you "get" to trade firm capital. Woopty do! So in other words, I'm 'trading' firm capital but RISKING my own. If you are risking your own money and truly believe in disciplined risk management (not risking more than 1% of capital per trade) then what good is extra leverage? You would never need it! I can see how this would appeal to people who don't understand risk, but someone who does could easily see how all this extra leverage could wipe you out.

    So other than bullets, and a few other advantages that pro firms offer, why would I be interested in switching to get 10/1 margin? Other than surprise rate cuts, I can't think of when I'd EVER want that much leverage. Anyone have a different opinion?
  2. ETG (Electronic TRading Group) will eat your losses - If
    they hire you. Not only that they will pay a salary around
    2k a months. Schoenfeld Securities in Middtown Manhattan
    also let you trade their money no string attached. I am
    sure there are others.
  3. I searched and searched for the thread but couldn't find it so first my apologies to others for repeating this but someone asked.

    I got interested with professional firms due to the margin.

    When I test systems that have positive expectancy I can usually make a much higher return when I start using Margin.

    Professional margin comes in useful in 2 ways that I 'm really strong about.

    The first is more of a machine gun approach instead of a highly focused shot. I used to buy all of the stocks that had huge volume surges with tight stops. The market's momentum isn't the same as 99 so a lot of traders don't do this as much. There were guys in my firm though who were having days where they could say WOW I had a nice YEAR today. The returns in a day were what a trader with that account size could assume he would get in a year. This market is now stuck in a range so this approach isn't as useable right now.

    The other is proper position sizing with higher priced stocks.

    You are risking 2% per trade let's say.
    You have $100,000 in your account. You are looking at XYZ stock at 150. 2% of $100,000 = $2000 per trade risk.

    You short XYZ at 150 with a 1 stop because you saw it topped out. Guess what?? Your stock price is 150 and with a point stop you would need to buy 2000 shares to have a risk of $2000.
    2000 shares - a 1 point stop = $2000 but when the stock is at 150 it would cost $300,000 to do the trade.

    Now how about doing 3 of these types of trades at the same time???

    Professional Margin is really useful for stocks with high prices. It might now mean as much to you now but stocks are priced a lot lower than usual.

  4. aldrums

    aldrums Guest

  5. WarEagle

    WarEagle Moderator

    Thanks Robert. I have had huby's exact same question and even argued it with Don Bright himself on another forum but never got a straight answer, just the usual "because we are professionals" mumbo jumbo. Being someone who only takes one position at a time it never occured to me that you could use it within the same risk parameters in multiple positions. My only argument there is that if you are buying a basket of similar stocks to catch a sector move, you are really risking more than 2% of your account because the stocks will be correlated and esentially be the same position. But your explanation of position sizing makes total sense.


  6. jmcgraw


    This is obviously a possibility. But I dont think you would want to leverage ONE position 10 to 1.

    Robert's margin strategy does make sense, but there is a risk, albeit small of getting hit really bad. I would only consider using heavy margin on high priced, slothfull stocks. If you are using a very tight stop on an expensive but volitile stock, and fully leveraging your position to what would constitute a 2% or so risk on your capital, you had better be sure that stock is going to be very liquid and have a very low probability of gapping.

    I would perfer to trade highly volitile stocks using proper position sizing. This would virtually make you immune to getting your account smashed. If you choose your stops objectivly and size your position to 2% or so, you would end up with positions equal to maybe 1/3 or 1/4 of your account, but since the stocks are volitile they offer very good profit potential. And even if a worst case scenario happens, the maximum to loose would be the size of the position which is only a portion of your account. (In reality though, the maximum loss on 1 gap would probably be around 50% of the position, but why not prepare for the unthinkable? ;))
  7. jmcgraw


    Is that really true? What if a high priced stock has an average daily range of 15 points?

    Wouldnt it be better to say that professional margin is really useful for stocks with low volitility?

    Example: A 1 point risk in a 150 dollar stock is like a 0.13 point risk in a 20 dollar stock. If you wanted to risk 2% on a 20,000 account, you would need to trade about 3,000 shares of the 20 dollar stock... Or leveraged about 3 times.

    Correct me if I'm failing to see something....
  8. huby


    Thanks for the replies. I'll have to check out ETG. Does anyone know if there is such a thing as "remote proprietary trading". I would imagine if a firm is going to let you use their money, they would want you in their office to keep close tabs on you. Of course the problem is that you have to move to New York, etc. to take advantage of these kinds of offers.

    Robert, you're example about position sizing makes sense. A 1 point stop on 100 shares is the same risk as a .10 stop on 1,000 shares. It just seems to me that you need to be pretty darn accurate to make this work. I would imagine you'd get stopped out a lot more often. But then again when you're right it could really pay off. I've read your fathers books and I'm assuming this is what position sizing is all about. It seems to me that there are two ways to look at position sizing. One is of course from a risk point of view. (Don't risk more than 1-2% per position). The other is what you point out. It's ok to take on a big position as long as the risk doesn't change.

    Here is a quote from Market Wizards by Michael Marcus (pg. 26). I think this would be the main reason you'd want extra margin.

    "At key intraday chart points, I could take much larger positions than I could afford to hold, and if it didn't work immediately, I would get out quickly. For example, at a critical intraday point, I would take a twenty-contract position, instead of the three to five contracts I could afford to hold, using an extremely close stop. The market either took off and ran, or I was out. Sometimes I would make 300, 400 points or more, with only a 10 point risk."

    On pg. 27 he says: "...the thing that saved me was that when a trade met all my criteria, I would enter 5 to 6 times the position size I was doing on the other trades."

    Am I getting the right gist of this whole position sizing thing?
  9. HUby-
    A firm that you can trade with and get 10:1 leverage and stay remote is ONSITE Trading You need to have a SERIES 7 and minimum of $25,000. The payout is can also get can trade any stock you want over $5...they really don't limit you too much...but if you have a high risk position(like full margined into 1 stock, they will call you and tell you to do something)...
    You're basically entering into a limited partnership, pooling money...
    I haven't joined up with them , but I'm thinking about it to get the leverage on low risk trades.
    If you call them, they'll send you a package with detailed info.
  10. WarEagle

    WarEagle Moderator

    The thing that has kept me away from Onsite Trading are the fees. $20 a side plus ECN fees for Naz and $15 + .01/share on NYSE. After getting .01/sh with IB, its hard for me to justify. This fee structure requires large size to make sense, and it discourages scaling in and out of positions. They have an office where I live and I took a tour and love the environment, but the costs are prohibitive to success. If they ever offer a per share option with a cap on the total ticket (like Echotrade and Bright), then I would look at them again.

    #10     Jul 21, 2001