Pro firm leverage and risk management

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

  1. sorry this is kinda jumbled but I am answering all the posts above and am tired/drunk from the night. I'll edit this post later when my head is clear.

    Huby yes that might be a possibility. I'd like knowing I have the capital to use if something bizarre is there. Think of it as best case planning in addition to worse case planning.

    There is a limit for each trader depending on their styles. Nobody though is allowed to put 10 -1 leverage on one stock that's nuts.

    The more experience I get the closer my stops seem to get. I now trade off a one minute bar with usually .10 to 1 point stops depending on the pattern.

    I also tend to make more use of professional margin on the short side. Stocks go down fast but up slowly. This allows for greater size and closer stops. I can pinpoint tops on certain stock patterns by .10 or maybe .30 while making 6 or 7 points.

    Technically they are the same (to answer another thread about a 20 dollar stock and a 100 dollar stock)for that post about 20dollar stock with 3 times leverage but it's a lot harder to pin point something on lower price stocks for me.

    This makes me more comfortable also about a halt. Usually halts are for downside protection not upside as upside usually retraces.

    The only thing that worries me is Greenspan doing a ratecut while I'm short but those moves are usually very short term and retrace.

    A great example of high probability shorts was a few weeks ago the day EMC and AMD both warned of earnings and future.
    There was nothing to bring in buyers that day. (I wasn't thinking but realized it later --hindsight but I learned but the best thing to have done there was SHORT IBM , NVR and any other stock over 100 that day. Each stock was pretty much guaranteed to go down a few points due to their high volatility.

    Now on other firms let's not go off topic. Everyone knows I'm with Echo and think of the world about them.

    Let's see to summarize them.

    10-1 leverage plus
    Series 7
    $25,000 minimum
    penny per share cost and that's it with rebates for high volume.
    $300 per month datafeed/software which is rebated after 300,000 shares
    remote and offices
    high end equipment.
    great staff
    plenty of technical support
    bullets at .03 per share
    100% PAYOUT!
    ability to trade any price stock including under 5
    and risk management wouldn't ever even let a trader get fully magined into a stock so I don't have to worry about others.

    Onsite you pay a commission on top of a penny per share and usually have to give up a % of profits. If you are a beginner who has a lot of losses than lose their money and when profitable come to Echo afterwards so you can keep 100% of your profits.

    Other firms are

    available by click on this thread
    #11     Jul 22, 2001
  2. I've commented extensively on this subject regarding real world risk management, and not just theoretical RM.

    I was stuck with the SLK Redi+ system, which was the worst fate that circumstances could have ever punished me with. There were no effective RM methods available whence one would enter NASD trades. While some pathetic extent was available for Listed stocks, it paled in comparison to what other firms offered.

    Let's not take a Retail Investor (read simplistic) view of the value of STOPS (trailing, Buy Stops, Sell Stops, Sell Limit Stops, etc.). These methods allow you to automatically protect or participate where you would otherwise miss some event.

    While most commentary suggested that there's the down side to these, let's always remember that these are INSURANCE against catastrophic losses, not GUARANTEES against loss. Just imagine getting out of DropLikeA-Rock-Stock at $88 instead of at $47. Say you bought in at $92. You'd be as happy as a ...

    Let's further say that you put in a Stop Limit at 90 & 87.

    I'll give 5 Cyber credits to the first person to explain what happened in that case, and how that real world RM example achieved our overall objective of limiting risk/loss....
    #12     Nov 24, 2001
  3. Limitdown,

    I just want to comment on your response to REDI. You say that "I was stuck with the SLK Redi+ system, which was the worst fate....". REDI+ is a decent system, but you have to remember that there are no stop orders accepted by OTC Market Makers. You must use "Mental Stops" when trading NASDAQ. In
    reality, I use "mental stops" when trading NYSE. Remember a "stop order", becomes a "market order" when the stop price is reached. I would rather decide myself if I want to use a market order. In reality, it is not necessary to use a market order if you are long and put in a limt order below the bid . I believe I had commented to you in the past about REDI+ software. Please remember there is no NASDAQ stop orders for NASDAQ trading. If your direct access software accepts NASDAQ stops, your software triggers a market order when the stop price is reached, which might be the worse thing to do if the stock is crashing, since your order(if you are long) will be "pinned" to the NBBO bid on NASDAQ level II you might get filled 1 dollar below the market or more if the stock is selling off!Many direct access software is now proactive, so stops may improve. You would get a better stop out if you executed the trade yourself , clicking 1/8 below the best bid on level II and hit an ECN like ISLAND. In terms of trading volume ,REDI+ is the largest direct access software and it is backed by Goldman-Sachs. REDI+ has worked well for us.
    In reality, it's the trader not the software that makes the biggest difference. REDI+ also offers an excellent API for systems traders.

    Risk management is an important factor in choosing any trading firm. Robert and Don have both commented at length on it. Leverage is be be used and not abused. If you are a true Series 7 professional trader, the margin and services offered by pro firms give you a significant advantage in the marketplace. Many pro firms desks are manned by former market makers, floor traders and specialists. The owners of most pro firms come from a trading background, so we understand the needs of the true professional trader since we trade or have traded many years .

    Gene Weissman
    Lieber & Weissman Sec., L.L.C.
    #13     Nov 30, 2001
  4. I, too, was astounded to hear such negativity from any trader about Redi+. I am aware that some firms may not be able to clear with SLK (GS) or for whatever reason cannot get Redi, and that they want to try to make it sound as if it were by their choice (small chuckle).

    With the merger of ARCA and REDI, we expect to see a big boost in not only performance but overall reliability as well. This is simply due to the expanded backbone of connectivity routing.

    I just noticed a post from last July about "pro firms" from a guy who seems to brag that Worldco allows traders to keep on trading while they are in the hole. Gene, as you know, this practice is not exactly prudent, and would only be done by firms who have either made money from their commissions to more than offset the losses, or have some type of profit sharing agreement. We have (as I am sure you have) worked with traders who have gone deficit...but this is done in an attempt to salvage an otherwise good trader who may have hit some hard times.

    I don't think you can play in many "poker games" without money, and if these guys want to gamble, let them use their own money (at least for the small initial amount of risk).

    (small "rant")...:)
    #14     Nov 30, 2001
  5. For traders who leave negative accounts, why not just not accept a new trader at your firm who has walked away from a debit at another firm. When I went to my old firm, that was the first question they asked. (I left positive) That will prevent the cowboy traders from abusing leverage if they think they can't walk next door as they explained it to me.
    #15     Nov 30, 2001
  6. Traders cannot leave "negative" accounts and go to another firm. Responsible firms must report such activities to the regulators, which puts a freeze on their ability to continue within the industry.
    There has been a lot of communication between firms about "rogue traders" ..and we try to keep the industry standards up. We always try to work with our traders who have stuck by the rules, and may need some help to stay in business.
    #16     Nov 30, 2001
  7. tom_p


    I am a private (retail) Nasdaq direct access trader. I do not possess a Series 7 nor have I ever traded with a pro firm in my life. I've used REDIplus software - execution was sloooooooooow and the fills were terrible. If I were offered commission-free trading using REDIplus, I would graciously decline, Goldman Sachs and SLK notwithstanding (medium chuckle).
    #17     Nov 30, 2001
  8. Hitman


    Actually, I know quite a few traders who left my firm for our arch rival, Andover Securities (which to Worldco is the equivalent of Bright/Echo), with a negative balance for a fresh start, and many traders left other firms and come to ours in similar conditions.

    Worldco does not require a capital contribution especially for fresh college graduates (for some, there is a minimal contribution of say 1-2K, so you actually have something on the line other than your time of course and will give it all you got), you can cut it anyway you want, not many companies can afford to keep a trader who is down 10-20K after commissions. It is called raw power in term of financial strength. While things have got tougher for sure, our firm still uses the same shotgun approach, with the principle that just one trader who survives out of four will easily make up the losses of other three (let's face it, it is not that hard to be at least gross positive, as I am sure most new traders are down a lot more in commissions than actual gross loss).

    And some of our best traders were down 10-20K in firm capital before they make it all up in one good month. It is called giving rookies a chance, it is called the best possible starting point for a rookie. The only reason other firms can't do it is because they can't afford to back people up like that, when you can back people up when they are new, and give them all the time in the world to get better, you build loyalty.

    That's the way Worldco do it, and unlike Schonfeld/ETG, we offer a much higher payout with no strings attached, no hand-cuffs, nothing. You be the judge.

    And get off that high horse, every firm is out there to make commissions, as long as the trader does size and is gross positive, it is like an ATM machine to the firm. You can slice it and dice it anyway you want, but a trader that averages 100K shares each way is better than one who does 20K each way regardless of their actual P&L, as long as they are positive after commissions, don't even be a saint, don't say "oh we only salvage good traders", few college graduates can come up with 25K to persue their dream career, Worldco gave me that chance with a $1000 capital contribution, can Bright do the same thing?
    #18     Nov 30, 2001
  9. Hitman, you have always posted good notes (despite what some detractors have said..."hey, I've been through that, too,,,and may still be getting some negativity)....keep it up!

    "Can Bright offer that?" Of course we can, and we have a standing offer at 18 Universities and Colleges (maybe 20, not sure about BYU)...where we will give approved interns (after they receive course credits from us) in each school (the top qualifier) up to 1 Mil of trading capital to use with no cash requirement at all, and our standard payout (which you have to admit, 100% is pretty good!).

    We have experimented with several policies over the years regarding capital requirements, and currently have several on the "low cash" or "no cash" program. For us it has not proven to be a good deal for the trader or the Firm (overall). We are always willing to try new things. I applaud WorldCo for bringing in young, well educated people to trade (it sure beats those other college "recruiters" from brokerages and accounting firms, and the like).

    Since we grew primarily from the influx of experienced floor traders and market makers, we were never concerned about initial capital requirements. What has been working extremely well is our "business within a business" strategy, where successful traders "sponsor" new people themselves, help by mentoring, and share some of the profits in their own way. This works out well for everyone, and allows for "group pricing" which benefits all traders in the long run.

    The trader profitability (thus staying power) is obviously the "prime directive" here, and we are glad that other firms are taking different approaches to recruiting new people. We have benefitted tremendously from other firms'practices of training, and many of our people have come from such "training grounds." I know personally several traders at WorldCo who are loyal there, even though they may get a little better payout here or whatever, and I respect them for it!

    For what its worth, I think WorldCo has been a fair and open participant in our field of endeavor.

    (long winded, sorry, still winding down from a long week!)...

    #19     Nov 30, 2001
  10. Hitman



    I have absolutely no beef against your firm, I most definitely gained a lot more respect for it after you answered our questions on this board.

    It is just that when I was 20 and had no college degree, and Worldco gave me the shot that I desperately needed with a $1000 capital contribution, you know, it was like almost the only opportunity for me in my quest to have any chance to defeat my arch rival (because the market doesn't care whether you graduated Ivy League or not at all).

    Granted, in hind sight, they would be hard pressed to find someone who wants it more than I do, and they wanted me as much as I needed them. Still, I appreciated it and for as long as I work for them, I will try to bring them customers :)

    As I said, everyone should go out there and compare, as everyone's situation is different. I still say you are better off starting at Worldco than any other place, because of the no/low capital requirement and ease of acceptance (if I was accepted with nothing but a pure heart, you too will be accepted), and an incredible combination of commission rate / payout ratio (by the time you get your first check, it will probably be something like $1 a ticket 1 cent a share 85% payout).

    However, for veterans, it really is a toss-up. May the best firm win the best players.
    #20     Nov 30, 2001