Why so eager for leverage at prop firms?

Discussion in 'Prop Firms' started by Daal, Oct 26, 2005.

  1. Daal


    The best traders recommend risking a most 2-3% per trade yet all the time you seen people eager to get 30-1, 50-1 if they could.
    Why?A losing streak(which will happen eventually) with this kind of leverage will probably produce serious drawdowns(probably as much as 70 or 80%), depending on the situation risk of ruin maybe even guaranteed to happen in the long run.(risk of ruin meaning you wipe all your capital but only a percentage of theirs and the firm tell you to take a walk)

    Now everybody is so eager for more leverage. I do know that you can manipulate your size so you still risk 1-3% of YOUR money even using 50-1 leverage yet that is the same as not using the leverage at all. Am I missing something?How much do you prop traders with more than 10-1 leverage take as a risk per trade of YOUR money?
  2. alanm


    1. 50:1 (if you could get that) means you can get $500K BP with only $10K of your own money instead of having to lock up $125K. If your long-term record proves that you can handle that level of risk, why not be able to make something more than LIBOR-50 (or worse) on that extra money?

    2. Risk for some types of positions is substantially less than others. ETF arb, spreads, etc. require a ton of capital with very little risk relative to a straight directional position.

    3. Some firms use up your BP when you place an order, not when you get filled. If you have a strategy (like OOs) where you get a small number of fills on a large number of orders, you need this large "phantom" buying power, even though most of it is at zero-risk (because you don't actually get filled).
  3. Midas


    There are many trading methods that benefit from that type leverage, various day trading strategies require better leverage than the typical brokerage is allowed to provide.
  4. some of these traders are aggressively flipping stocks for very small gains. they are paying a boat load of commission, but they are risking pennies to make nickels and dimes essentially.
  5. remember, it also works the other way around. your firm could suffer a huge loss on your behalf 'cuz your risk/loss stops won't help you during a halt/gapdown.

    if you're long 50,000 SIRI, LU, NT, or another inexpensive stock for a quick penny or 2 scalp, and they halt, the CEO gets arrested, and they have to restate 10 quarters-worth of earnings, would you rather be retail and lose $100,000 on the $2 gapdown when the halt is lifted, or just your $5,000 deposit?

    that, plus the cheaper tickets, is the main reason i just converted to prop. in a worst case scenario, i'd rather have someone else eat that extra $95K.
  6. If you have never traded prop or have no experience with institutional trading, there are a lot of strategies that you may not be familiar with because they are so far out of the realm of the retail trader.

    Many intra-day and longer time frame strategies are only possible with huge buying power. Yet that does not always equal huge risk. You still have to consider risk in dollar terms relative to how much of your own capital is at risk.

    I have a decent sized retail account that I trade in a bit and can make an extremely low risk 20% a year in. I use that same strategy in my prop account and make 100's of % on my relatively modest capital because I can expand the strategy as much as I want or the market will bear. I never have to see a good trade slip away because I've run out of margin.