What do prop firms do when you blow up past your account balance?

Discussion in 'Prop Firms' started by clearinghouse, Dec 3, 2012.

  1. I'm not talking prop firms where you get paid a salary and are some W2 employee, I'm more talking about your Bright Brothers, Hold, Title, etc type places where you're some K1 guy coming in to trade your own money.

    How does this get handled? Do you end up owing the debt, or do they sell it off to collections, or what? I've seen traders with some risk setups that are possible for a blow up well in excess of the account balance, but I've never heard the story on the back-end of whether the firm takes the loss or their risk managers end up shouldering the blame.

    Any comments from people in the industry?
  2. 1245


    You're a LIMITED partner in the Prop Firm. They can't come after you for the balance. They are at risk and so are the other members of the firm if you lose.

  3. That's a relief. It would really suck to be working at McDonald's every day to pay my debts under the threat of some Don Bright character threatening to break my knees in some Las Vegas back alley.

    How do retail brokerages handle this situation?
  4. Maverick74


    This is not true. You need to read your operating agreement carefully. My old prop firm hired a collection agency to collect debts that went debit. You have to understand that while you are buying in as a Class B partner, you are buying into a pool, there are no sub accounts with your name on it. Your capital is going into a pool. So there is no set line where you go through your capital. We went after and COLLECTED from debit traders. I don't want to speak for Bright, but I "believe" he had someone go into him for 7 figures and that trader was paying that debt back. At least part of it. You need to read YOUR operating agreement as each firm is different.
  5. 1245


    With regard to a customer account, If the account is in your name, the broker can go after you in arbitration for monies owed. If the account is in the name of an entity like an LLC, The broker can bring to arbitration the LLC and go after the value of the LLC and all it's accounts, but not you personally unless you sign an agreement personally guaranteeing the account, which would be rare.

    With regard to the comment Mav made, just because it's in the agreement, that does not mean it is enforceable. I don't see as a limited partner that I'm responsible for more than my deposit in the firm.
  6. Maverick74


    You may not see it but we went after and collected. Apparently Don has as well. We have also ruined many a credit report. It's not kosher. We made sure the info was out there so that the next prop firm that ran a background check, and they all do now, your debt would show up and you can try to explain that however you want. At the end of the day, you are right, it's hard collecting any debt today because most people are broke. But I've always placed a very high value on my word and my credit and neither have ever been broken. Every trader has to decide what length they will go to compromise their integrity and then live with the consequences afterwards.
  7. 2rosy


    many guys i know still on the floor run a debit account. Not sure who clears them
  8. 7out


    I don't know about the US, but in Canada the debt is uninforceable nor does anyone attempt to collect.

    I personally witnessed a guy lose $50,000 at Swift during thin after hours trading when he couldn't unload his stock at the close. Swift had a very strict rule of no overnights. He was never made to repay those funds but naturally decided to leave as they would've probably reduced his future profits payments (I heard they withheld his previous month's profit cheque but never went after the balance owing).

    He also destroyed at least 2 lcd screens (possibly as many as 4) upon his attempt to persuade management to let him hold some stock overnight, but no one uttered a word about that. Guess when you face a $50k debt, $200 more is meaningless.

    However, within 6 months of that loss, the owner of that Swift location sold one of his nice cars as well as the business to one of the remaining traders (which ironically was a good friend of the trader in question).
  9. I don't think there is much that can legally be done to recover the funds unless it is explicitly agreed upon in the independent contractor agreement between the firm & the trader. If it's a loss under 10k, I would assume the firm has to eat it, as hiring an attorney and trying to recover those funds isn't really worth your time & if the firm has enough negative accounts to go after, their risk-management would probably be pretty poor.

    Most of the firms, the firms just have to eat the loss. The owners usually take the loss. The risk/sales staff generally don't have capital at risk, so it falls on the owners.

    You can only imagine what's at risk if someone is trading 20:1 leverage. All they need is a 5% move or one small move and then to "double down" and the whole account is gone. Leverage is no joke, my friends. Treat it as if it was your own cash.
  10. Retail firms don't run the risk because they provide little leverage; however, they generally will sue you and get some type of judgement. Trading with leverage is a lot like a credit line, you better be careful and make sure not to get into a situation you can't afford.
    #10     Dec 4, 2012