Prop. Firm - Where does the capital come from?

Discussion in 'Prop Firms' started by DayTrad3r, Jan 28, 2009.

  1. I was wondering if anybody knows where these firms get the capital to offer 20 - 50 - and even 100 to 1 leverage to their traders.

    It doesn't seem like the fees would cover the cost of capital and why aren't they feeling the pain from the credit crunch?
  2. tradersboredom

    tradersboredom Guest

    it's daytrading leverage.

    cash and positions don't settle til end of day.

    leverage is mostly for retail trading accounts so they don't blowup.

    10:1 leverage on stocks they assume you are professional

  3. 50 times..and 100 times leverage is irresponsible if you ask me.

    Unless you really, really know how to use that kind of fire power.

    Most traders don't and shouldn't even be offered that type of ammunition.

    I would avoid those types of firms that offer that high. Ez to blow ur accounts.

    Just my 2 cents.
  4. As i understand it, the broker dealers give 4:1 leverage to the main prop company, and the prop company gives out 10:1 knowing not all traders will be using their full bp all at the same time.
  5. how often does an average prop firm run out of BP? once a year? never?
  6. What happens during the times when the sum of all traders are using more than the 4:1? You would think that that would happen from time to time. Plus, doesn't each account show the 10:1 buying power even if it isn't being used.

  7. Very good question! I think that's why I'm considering joining a prop firm that doesn't give out leverage buying power haphazardly. It makes me worry about the business safety of the firm.

    Shortie: I think your question and my quick analysis has just allowed me to decide which prop firm I'm going to join.

    Many thanks!!!!
  8. cstfx


    Exactly. Firm account gets 4:1 on retail level, (up to 6:1 if using PM) and something like 6.something:1 on pro level. The firm then "extends" a higher level of credit to each individual trader based on experience.

    Say firm has 1MM account at genesis. This includes any owner equity plus your (all the traders') deposit(s). Probably has 4MM intraday leverage. For arguments sake, say firm has 40 traders and each has 25k account (1MM). Firm extends 20:1 to all traders, so total maximum exposure would be 20MM (25K * 40 * 20). This exceeds account leverage provided by brokerage firm (4MM). Assumption is that since you are daytrading, your time in effect is seconds, maybe minutes, so the chance that all traders will use all their leverage at the same time is lessened.

    Also, since all trades clear thru one brokerage account, if 1 trader shorts 100 MSFT and one trader is long, the net effect in the account is 0 (an account cannot be long and short the same position, so brokerage account will be flat, but internal prop account software shows one guy short and one guy long. If you are short and close your position, brokerage account goes long until long guy closes his position) so there is in effect a 0 hit on the leverage provided. And since most props only want you to trade a set list of stocks when you start out, the above scenario becomes more likely as there are only a handful of stocks you can trade at any one time. I believe Keystone, VCM and a few others use this type of prop trading to limit their exposure. It is all really smoke and mirrors on the prop end of it using the account/risk management software that works with the trading platform.

    Does this make sense?
  9. some prop firms wont fill your order until they have a matching order to offset the trade....
  10. teck


    im assuming that the 10x Bp comes from the people behind the prop- for instance a Genisis sub probably has an arrangment from genisis to use their money i know alot of these Props give the impression they are a wash in huge money and consistant profitable trades . One of my first eye openers of how bad things were at HLV was when a trader in the room anounced for the third time he couldnt buy a stock , his platform kept stating not enough Bp ,he was livid and had forked over many times the risk capital the rest of us did . At the same time my BP slot went blank . I realized at that point they were juggling our money to make ends meet , i was told they had millions in the pool before i joined -this was only one of a dozen shocks before i just couldnt pull the trigger anymore .The final blow was buying some aapl and watching it go to my profit sell point and not be able to sell it because the platform wouldnt let me cancel a stop over and over finally i got out after the stock went back to my entry.I realized then i would have to have rocks in my head to continue at that point , my job now is trying to get my capital back , after months of trying they eventually folded changed names and i was beat for my money , so beware ....i got on with them because of an artical in ActiveTrader Magazine thinking they wouldnt do an artical on crooked people .....surprize surprize.....
    #10     Jan 29, 2009