What is Haircut ?

Discussion in 'Prop Firms' started by GeorgeSoros, Aug 5, 2001.

  1. Hello ,

    I am filling my Echotrade documents and I have found
    in the rate schedule the following 'strategies' that
    I don't know called :


    It seems echotrade deals with 3 haircuts : Haircut Long or
    short, haircut conversions, and haircut risk arbitrage

    Can someone explain to me what it is and give an example
    or the 3 different haircuts ?

    Is someone using it frequently ?
  2. Haircut - "vig"
    on 10:1 margin you can trade on $25,000 deposit, a quarter
    million dollars. If you take home positions over that they
    charge you interest - haircut. no matter how they use the term it means = interest charged to you.
  3. George - not sure how EchoTrade would be using the term "haircut" in conjunction with a strategy.

    The classic definition of a haircut (as used by the futures exchanges where the term originated) is a discount against the face value of an asset posted as collateral or security against which available margin is computed.

    For example, if you deposit cash in an account - there's obviously no haircut. But the exchange might haircut T-Bills 5% (i.e., if you deposit $100,000 in T-Bills, you'll only get to count $95K as the cash deposit equivalent).

    It's also common to haircut foreign currencies deposited against US$ denominated contracts (while there's generally no haircut applied when the foreign currency is used against contracts denominated in that currency). So if you deposited 50,000 Britsh Pounds as collateral but were trading S&P futures (which of course are dollar denominated), the exchange might hit you with a 40% haircut on the BPs - so you'd only get to count the dollar spot exchange rate of 30,000 BP toward your margin requirements.

    The "haircut" term's application is therefore to denote a % reduction in intrinsic value of an asset for purposes of arriving at an "usable" value of that asset.

    But it sounds like Echotrade may be using their own definition
  4. Fletch


    Bright and Echo use the term "haircut" to describe the "risk charge" you have to pay for borrowing more money than you have in your account. In some situations the haircut charge isn't applied until you reach the amount of your capital * X. All haircut means is they "take a little off the top"

  5. Ok all thanks for your answer...

    Here is the details of the haircut fees at Echo :

    - Haircut Long or short : 2% per year on amounts over
    3:1 of Net liquidating Balance

    - Haircut Conversions : 2% per year on amounts over
    10:1 NLB

    - Haircut Risk Arbitrage : 2% per year on amounts over
    3:1 NLB for approved Risk Arbitrage positions

    -Say I use 10:1 margin all the time : Does it mean
    Echotrade will take 2% of my yearly profits per year ?


    - is it a yearly charge that is taken on every trade
    I do daily when I use the 10:1 margin ?

    Say for example :I have 25K$ on my account.
    I use 250K$ (10:1) .
    Echo will take (0.02/365)*(250K-75K)=9.58$ as a haircut ?
  6. No, ECHO and Bright do not take an extra cut of your profits. This is a margin rate amount that only applies if you take positions home overnight.

    None of this applies unless you take home greater than 2 to 1 margin overnight, then both firms charge a "haircut", which is similar to a "margin rate", only usually cheaper as far as I know.

    Instead of charging you a margin rate on long positions and one on short positions, for example if you were long $100,000 and short $100,000, a lot of firms would charge you a rate of 9.5% or whatever the going margin rate is on $200,000; These pro firms charge you a "haircut", meaning they offset the longs and shorts and charge you 2% yearly (in Echo's case) or 1/2% Monthly, 6% yearly (in Bright's case) on the $200,000. It is much better interest rate treatment at the pro firms for carrying positions, the people that are mainly interested in cheap rates are the spreaders/risk arb players.

    I hope I showed it right, I know I carry some positions overnight and it doesn't cost me very much.

  7. Thanks Jim for this clarification.

    In section 4 of the account opening document for Echotrade
    where they talk about rate schedule they also mention
    interest charges (broker-dealer rate as charged by the
    Clearing firm with no mark up)

    I understood that those interest charges are the margin
    rates we are used to...Am I right ?

    So should I think that if I take some positions overnight
    I will have to pay those interest charges + the haircut ??

  8. joesmoe


    Sorry to be difficult but Jim's definition of haircut in regards to how Bright and Echo use it is incorrect. I trade at Bright and unfortunately am all too familar with it. It is a risk charge charged to any trader who uses more than 2-1 or 6-1 margin depending on what kind of position it is (hedged or unhedged) and how much money you have in you account (<>50k).

    Haircut charges are assessed on the absolute value on all short and long positions over and above the appropriate ratio on the assets in your account. For example if you had 50K in your account and were holding an approved Risk Arbitrage spread in the amount of 700k (350k short and 350k long). The trader would get 6 to 1 on his money or 300k and pay 1/2 % per month on the difference or 400K. This can add up.

    If you are holding naked postions or have less than 50K in your account you only get 2-1 on your money and have to pay 1% per month. These charges can really add up.

    If you're a trader that refuses to hold positions overnight you need not worry at all about haircut charges.

    I'm sure Echo uses the term the same way although they appear to charged at a rate that is about 1/6 of Brights'. So if you are a trader that holds overnight and are deciding between firms, Echo is probably a better choice.

    The definition Jim used refers to the short and long spread. Currently at Bright the spread is 1.5%. Therefore if you had a 100k in long positions and 100k in short postions you would pay the difference between the long and short rebate amounts or 1.5%. This is a completely seperate from haircut charges.
  9. sktrader


    I was wondering how many consecutive days professional firms (Bright, Echo, etc) allow traders to carry leveraged overnight positions in their accounts. For example, is a trader allowed to enter a 5x margin trade on a Monday for a swingtrade, hold onto the position until Friday and exit?

    And since these firms don't charge haircut fees for <6x leverage positions, a trader basically doen't pay anything extra for this longer-term leverage? Am I getting this right?

    Just a little confused about how it works.
  10. Tom Frey

    Tom Frey

    To speak for ECHO as far as I know there is no limit of days you may hold the stock overnight and they usually allow a 1:4 margin for overnight trades
    #10     Apr 16, 2002