I contend that it is to bring more players into the markets, to keep the market liquid and let the professionals do their business at their convenience. It is not there for the small spec to make huge amounts of profits in my view.
Actually its just another profit center for the brokerage firms. Remeber one pays interest on margin, which is in essence a risk free profit for the bank.
It's to allow the opportunity to hedge with efficient use of capital. As a sideline, speculators are allowed to play... and this increases market depth and liquidity.
It's pretty basic, the strategies that actually work (M&A, pairs, opening only, making markets, etc.) are capital intensive....not "leverage" so much as capital usage to be able to effect this techniques properly. Check www.pairtrader.com for some interesting info. Traders cannot "sell IBM" to free up cash to buy hpq or something silly like that....they have to be able to freely trade. And to carry multiple pairs, conversions, etc. It takes money to make money...we simply duplicated the floor trading business model 15 years ago. We thought it was cool in the 1970s and 1980's that we could put up $25K and use a couple of million of our Clearing Firm's money to trade with (GS). All the best, Don
it would seem that 2 of you had some agreement with the idea that it makes things easier and more convenient for the professionals and one of you had some agreement with the spec getting burned in terms of a profit center etc. Would anyone disagree with the premise that the small spec or newbie sees the leverage as a way too easy money only to find/realize later that leverage can be a pretty disastrous thing for them?
Well, I kind of disagree. You are right - with leverage comes added risk. As for myself, I'm working towards trading a bit more seriously sometime during 2007, and I've been doing a great deal of thinking as to which route to pursue (trading stocks with own money, trading retail account with retail margin, going prop, trading index futures, trading options, etc.). I may need some form of leverage in order to trade effectively, but I certainly don't view it as the road to easy money.
I suppose that could be true. I've been trading for about 1.5 years now with a very small retail account. I have the right ideas, but unfortunately commissions eat me alive. I guess that if I were to, say, pursue the prop route, I would already have some of the necessary discipline in place. Someone that is completely new to trading probably would not...