So I read that some day traders can manage accounts amounting to many millions of dollars. This got me wondering. How exactly do they protect this money if they use an online broker since from what I read SIPC only protects cash up to $250,000 and stocks up to $500,000? So just as an example imagine you have a day trader who is managing a super large amount say $100 million dollars. At any given one time all this money might be held in the brokerage firm as cash, but cash is only protected up 250 grand. So what if the brokerage firm were to go bankrupt or, given all this hacking stuff in the news lately, some hacker were to erase all the account data showing your stock holdings and cash holdings? Since all the stocks would be held in street name and since SIPC only protects to 250 grand, wouldn't you be screwed? What I'd like to know is how do day traders protect themselves from these things?
Some solutions include: Have more than one clearing broker to give you some more security via diversification. Study the financials of your brokerages and make sure you like what you see. If you are a hedge fund, use a prime broker you trust to take their custodian role seriously (although I don't really know how much of a "guarantee" this provides -- maybe someone else can chime in?). Lloyd's of London supposedly offers policies for clients of certain brokerages on a case-by-case basis. That said, I think there's a certain level of risk here that you can never get away from. In my opinion, small accounts have better protection with SIPC. Also, most "day traders" managing accounts of at least $100 million are trading (mostly) other people's money, anyway (trading assets gathered by a hedge fund or a bank). They just take a cut of the profit.
Interesting blog called,"The False Comfort of SIPC Insurance." https://blog.wealthfront.com/false-comfort-of-sipc-insurance/ If been in this business since 1981. I once worked for a failed broker, but was not an employee at the time of closing down. No one lost money. I'm not sure why this question was focused on day traders, but large funds split their assets over banks and brokers to be prudent. Many hedge funds don't multi-prime until they have $500M or more, but can use a bank to keep unused assets. Traders in this forum worry more about SIPC limits with relatively small accounts when investors with millions are less concerned about the broker and more concerned about the funds losses. Oh, and BTW, excess SIPC can only be taken out by the broker dealer, not the client. And it is not per account, but for the aggregate loss of the firm that is not covered by SIPC. The payouts over time have been almost nothing. IMO, choose a BD that provides the services and support you require at a fair price. If there is a choice, choose one without a firm trading desk. Bigger has never offered more protection. If they have a trading desk and they are larger, they take bigger positions. 1245
I'm surprised that there doesn't exist anything like CDARS but instead with brokerage accounts instead of CDs. Also, yes the question does apply to billionaires too. Do they invest with online brokers? I didn't include this question before since I just assumed they physically hold their stock certificates and make long term investments. Also, could you list some online brokers that don't have trading desks? How do you find out if they do or not?
No, they don't hold stock certs. That is just not done anymore. May companies only offer electronic certs now. You can buy securities in a cash account and it is VERY safe, as it can't be loaned out. But, large institutions that don't buy on margin, still lend out their securities for extra income through their broker. And no, large hedge funds and pension funds don't generally use online brokers. They use large cap BDs like GS, JPM for their size, research and broad offering. They DON'T use them for low commissions and often don't care what they are charged as it does not affect their returns and the commissions pay for the services they require.
A friend of mine moved a very large account to a firm that had $20,000,000 in excess SIPC. He moved in $18,000,000 in cash and securities and told them they could have double that if they increased their coverage. A few weeks later they faxed him the papers showing him his account was covered for $50,000,000 and he sent them the rest. My impression was it was only his account that was covered over the 20 mil and I seem to remember it was Aetna that wrote the original policy and the addition. I'm dead sure of everything in paragraph one and less sure of the rest.
Swan Noir, It is possible that lloyds of london will sign a policy for one account. I guess, why not. It is likely they will NEVER have to payout. What is more typical is for the Excess SIPC policy to cover a much larger gross coverage for all accounts. This is an example from ML: In addition to SIPC protection, MLPF&S has obtained excess-SIPC coverage through a Lloyd’s of London syndicate. This policy provides additional protection for shortfalls above the SIPC limits (including up to $1.9 million for cash), subject to an aggregate loss limit of $1 billion for all customer claims. From Apex: In addition to SIPC coverage, Apex has purchased an additional insurance policy through a group of London Underwriters (with Lloyd's of London Syndicates as the Lead Underwriter) to supplement SIPC protection. This additional insurance policy becomes available to customers in the event that SIPC limits are exhausted and provides protection for securities and cash up to an aggregate of $600 million. This additional insurance is provided to pay amounts in addition to those returned in SIPC liquidation. This additional insurance policy is limited to a combined return to any customer from a Trustee, SIPC and London Underwriters of $150 million, including cash of up to $2.15 million.
I agree that the firms typically purchase blanket coverage but, if memory serves, the rider to this policy , covered a single account. As I am sure you know once their is an existing policy firms tend to allow a great deal more "creativity" in a rider than they ever would in the base policy itself. While I am surprised the ratio of cash is so low as a percentage of the $150 million, the policy you describe may be a strong selling point for Apex to big players unless of course many firms have bought additional coverage in similar size.
Cash is always the problem. Securities alway have a journal entry in your name and are generally moved very quickly from a failing firm to the firm accepting the accounts. Sometimes cash is lost or stolen. So a firm like Lloyd’s of London is happy to receive premiums for that which they will never have to pay for. The cash coverage is always what you are really concerned with. I would recommend that anyone that is that concerned, and I'm not, should fund their account with 6 month T-Bills. You will lose 5% of your buying power but your assets will be much safer. I would only do this is I were managing a large fund.