Report of Examinations of Day-Trading Broker-Dealers

Discussion in 'Prop Firms' started by riskcap, Mar 26, 2009.

Should HedgeFunds be registered with SEC

  1. NO. Pursuant to either Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940.

    10 vote(s)
  2. Maybe

    1 vote(s)
  3. Yes change the the Investment Company Act of 1940

    5 vote(s)
  1. riskcap


    See below link

    The Staff recommends that day-trading firms continue to enhance their risk disclosure and educate customers about day trading. For example, firms should consider providing traders with specific data on the costs and fees associated with day trading, including estimated break-even points. In addition, if firms tout the profitability of day trading, they should be prepared to provide specific information to support their claims. :eek: The Staff found that several firms' advertisements contained exaggerated or unwarranted claims.

    IV. Examination Findings and Recommendations

    A. Organizational Structures
    Day-trading firms are typically organized in one of two ways: as traditional corporate entities or limited liability companies or partnerships ("LLC"). These organizational differences separate day-trading firms into two specific operating models with fundamentally different characteristics.

    Most day-trading firms are organized as traditional customer-based corporate entities and are members of the NASD. Customer-based firms are required to comply with federal securities laws and regulations that are designed to further customer protection. Firms that conduct a retail customer business must comply with NASD membership requirements; customer reserve requirements;8 the Federal Reserve Board's initial margin9 and SRO maintenance margin requirements;10 and SRO suitability rules.11 The Staff estimates that there are more than 100 day-trading firms organized as retail brokerage firms.

    The second model is the LLC partnership structure in which a firm operates a proprietary business. These firms represent that they do not have customers, but "members" who become part owners of the firm. Day traders at these firms, as part owners, contribute capital to the firm and in turn, trade the firm's capital. Most of these firms are members of the PHLX. There are approximately 13 day-trading firms that are members of the PHLX. To become a member of a day-trading firm structured as an LLC, individuals are required to sign operating agreements that designate the member's ownership rights including: profit sharing arrangements, restrictions on withdrawals, provisions limiting losses, and other provisions common to partnership agreements. Because these firms are exempt from registering with the NASD, they are not subject to the NASD Conduct Rules.12

    Prior to a change in its rules, the PHLX allowed members of proprietary firms to trade proprietary accounts without being licensed representatives. Thus, proprietary day-trading firms were able to advertise day trading to the general public and accept members that were not licensed. The PHLX recently amended PHLX Rule 604 to require individuals trading off the floor of the exchange to pass the Series 7 licensing examination.13

    B. Fees and Costs
    Day traders incur significant trading costs. Day-trading firms generally charge commissions of between $15-$25 per trade and charge a substantial amount for additional services such as RealTick III data feeds, news, and exchange fees, which range between $50-$675 per month.14 Day traders must factor in these fees and costs in determining the point at which they are able to make a profit. The following graph highlights the fees and costs of day trading:

    For example, a day trader who makes 50 trades per day at a firm with moderate fees ($16.70 per trade, $150 per month), must generate $16,850 each month in trading profits to recoup the costs of the trades.

    In addition to the costs and fees described above, many firms stated that they require prospective customers to have a minimum amount of money to open an account. A February 2000 review of seven large day-trading firms revealed that five firms required initial deposits ranging from $20,000 to $75,000. A few firms noted, however, that their initial deposit requirements may be relaxed in certain circumstances, depending on the experience of the prospective day trader. Two of the seven firms did not indicate any minimum capital requirement.

    C. Common Characteristics of Day Traders
    The Staff analyzed the limited customer information obtained by day-trading firms to generate a profile of day traders based on their self-reported age, income, and net worth.15 The Staff compiled age information on 224 day traders and found that over half (57%) were between 20 and 39 years of age.16 As shown in graph 2 below, there are fewer day traders between the ages of 40 and 79.

    The Staff also reviewed limited information on annual income for 166 traders.17 As shown below, more than half (53%) of the day traders purportedly earned more than $100,000 annually. The data does not indicate whether any of this income is derived from day trading.

    Net worth information was compiled for 168 day traders.18 As shown below, most (78%) indicated that they had a net worth greater than $200,000. Six percent, however, reported net worth of less than $50,000.

    Based on the information reviewed with regard to these day traders, most day traders in this limited sample appear to be under the age of 40, earn more than $100,000 per year, and have a net worth greater than $200,000.

    The Staff did not determine whether day trading was generally profitable or unprofitable, but did seek to determine whether there were any factors common to traders who had profitable accounts and common to traders who had unprofitable accounts (at the time of the examinations).19 The Staff compiled year-end 1998 trading data for a sample of the profitable and unprofitable accounts at each of seven day-trading firms.20 The Staff reviewed a total of 123 trading accounts. The average of the profitable accounts was $177,732, while the average of the unprofitable accounts was $73,756. The Staff did not find a correlation between training and profitability or prior trading experience and profitability. It appears that many day traders with both profitable and unprofitable accounts had varying levels of prior professional trading experience, ranging from no experience to significant experience.

    I knows its old but its the only daytrading facts from SEC so it must be real..right? :cool:

    Prop Trading firms: Because these firms are exempt from registering with the NASD, they are not subject to the NASD Conduct Rules.12

    And that's the game.....Jim Carey.
  2. Why are you reading SEC crap from 10 years ago???
  3. riskcap


    This is all I could find regarding Prop Trading firms and facts.

    I have not seen FACTS posted but only rubbish from other websites claiming profitibility.

    If you can find facts please post.
  4. LOL...that was my first response too...but, in all seriousness, this is partly what caused (rightfullyu so, IMO), the need for licensing etc. in lieu of having quasi retail firms allowing "daytraders" to engage in something they knew little about. My brother spoke on a panel with the Regulatory people, and agreed..."trading should be left to professionals"...... but, in all fairness to retail traders, he also said..."isn't this still America?"

    In any event, full disclosure is again here on ET my suggested due diligence for any business venture in the field.


    Edit: I voted "maybe" - Since we have to disclose full audited every damn thing to the regulators, so should hedge funds, LOL..... I'm not sure...still "America" ..... :)
  5. jnorty


    People on these boards don't understand how much per month many of these big prop shops are making. Many of the huge vol shops do 1 bil per month vol and pay .0005 or less per share to clear. Several are grossing $2-$3 million per month in overides. Thats why any trader who pays more than .003 per share or $3/1000 with 30-1 up to 100-1 buying power is a fool.