Will Prop firms ability to provide leverage be effected by Liquidity/Credit issues?

Discussion in 'Prop Firms' started by nysetrader78, Aug 16, 2007.

  1. Any thoughts???
  2. I don't see why it would. I would think (hope) that these firms are keeping things extra cautious in this enviroment. But I see no reason why our BP should be effected...

  3. another angle ...

    could these massive swings affect prop firm liquidity?

    do most prop firms "rein in" their traders BP wise
    or tell them if they lose a certain amount that day
    to cut down in their size ?

    I would assume some prop traders have made hundreds of thousands of dollars ( the creme de la creme trading with the biggest BP ) do any traders even these gunslingers
    have big down days too or wild P+L swings ?

    I am tempted to swing for the fences but have been very cautious
    and even so see thousands of $$$ swings in my acct in recent weeks ( mostly to the plus side thank god )
    and I am not even trading stock index futures

  4. We've been really fortunate during all this, including this morning with 50 point moves in the Spoos. I believe only 3 or 4 traders had to be contacted for any risk concerns, and a whole bunch of people loving the volatility.

    I guess we'll be glad when the "slow Summer doldrums" are over, LOL...what if all this movement happened in October?

    Last time I saw this type of thing was the Long Term Capital Management era....makes one wonder....what the heck is going on with the "powers that be"? Or, are we the "powers that be" LOL.

    All the best,

  5. Interesting points SethArb.......ones that I have already pondered given that I am a prop trader and not only have seen my P&L swing drastically (thankfully to the upside for the most part also) but even more so with other large BP traders around me.

    However, the orignal concern was more along the lines of whether the Prop firms would be able to continue to secure the BP they need via access to loans and leverage without and issues related to excess cost and availability.

    Maybe Don can clarify this, but my understanding of Prop leverage is that the firm pools the traders capital and their own invested capital, and then borrow the remaining money needed on a daily basis to meet their capital requirements. I believe the max legal leverage for the firm itself is somewhere around 6 or 7 to 1.....correct me if Im wrong Don. This total aggregate BP for the firm is then allocated to the traders as they see fit obviously.

    So my question is, will it become considerably more expensive for the Prop firms to borrow the remaining capital needed, drastically changing their level of profitability? Also is it possible that they will not be able to borrow this money at any cost due to lack of liquidity? Maybe I am streching here, but it seems like a relevant point given our current state of affairs.
  6. Well, there are two scenarios that I see here. Bright Trading does not have to use their traders capital for Reg T or Net Capital requirements (we're fortunate enough to have more than enough money of our own to satisfy all our traders needs)... but a lot of firms do "pool" their traders money so that they have enough capital, thus a much more risky situation.

    The number you're looking for is 6.667 times capital supplied by the Clearing Firm, Goldman in our case. This can vary depending on the relationship between the trading firm and the clearing firm...again, we are fortunate to have full access if ever needed.

    As always, I suggest that everyone stay aware of their individual firm's liquidity and financial status.