BP - How does Buying Power work

Don Bright · Jan 31, 2006

Quote from SnoopDogg:

I've talked with a couple Prop shops and they've basically stated that if your profitable, we'll give you as much buying power as you need. They conveniently refuse to give a precise ratio of capital contributed to buying power, so I'm a bit skeptical.

After all, if I contributed 50K of my own money, and was given effectively 40 to 1 leverage, I could make about 100K per year tax free by investing in municipal bonds. Not sure if prop shops, who make their money on commissions, would allow this

To those who trade at prop shops, how does this really work? The firms I talked with did indicate that they will give a lot more leverage intraday or on open only orders. However, if you are holding overnight or longer-term positions, the amount of leverage one can get is a lot more limited.

Just wanted to get the perspectives, positive and negative, from those who have been there, don that, at prop shops.

BP is misunderstood, and in our case has little to do with xx to 1 or some ratio. With a standard trading account ($25K or so), our guys can use a couple of million for opening only strategies, pairs, M&A, etc. If we limited BP to 20 or 30 to one, it would eliminate a lot of trading profit potential.

Overnights are more risky, so some risk charges may apply. We do have traders who take home 30, 50, 60 to 1 or more, and pay a bit for the privilege. If their trading plan is making them $50K per month, they don't seem to mind paying $5K or so in haircut fees.

Our entire group of Pairs traders, for example, are certainly glad to have the use of capital.

All the best,

Don

Don Bright · Jan 31, 2006

Quote from giggollo:

What does that mean: "The firm isn't extended"?

Some of the smaller firms have to use their traders capital in their "net capital calculation" when determining how much capital can be used by the entire firm, and are often "over extended" and have to limit the overall capital usage. We are well capitalized and this is not an issue with us. As always, check balance sheets of any firm when you join them.

Don

Maverick74 · Feb 1, 2006

Quote from Don Bright:

Some of the smaller firms have to use their traders capital in their "net capital calculation" when determining how much capital can be used by the entire firm, and are often "over extended" and have to limit the overall capital usage. We are well capitalized and this is not an issue with us. As always, check balance sheets of any firm when you join them.

Don

Don, I may be wrong, but I believe that is illegal. The NASD net capital requirements cannot include trader equity. The firm has to have 1.5 million that cannot be used for purposes of margin or haircut. That is suppose to be insurance money.

Hamlet · Feb 1, 2006

Quote from Maverick74:

Don, I may be wrong, but I believe that is illegal. The NASD net capital requirements cannot include trader equity. The firm has to have 1.5 million that cannot be used for purposes of margin or haircut. That is suppose to be insurance money.

I believe they can use it if it is locked in for one year. That is the reason firms put that provision in their llc agreement.

janet · Feb 1, 2006

Quote from heavy:

Intraday margin (your "40:1") often carries little or no cost, because the firm typically isn't extended. It's the overnight positions that will usually cost you.

I'm trying to assess if certain charges made on my account were legal. If reg t requires a broker to set SMA to largest amount of excess margin even if account value goes down, can brokerage house ignore this requirement and set SMA to current valuation or less?

If I sell security for $10000, buy another security for 11000, and have the SMA of more than the difference $1000, am I assessed $500 from SMA and $500 to Debit Balance, $1000 to SMA, or $1000 or more to Debit Balance?

SnoopDogg · Feb 4, 2006

Quote from lescor:

Intraday margin is no cost. One of the firms I'm at charges fed funds +1.75% for interest on overnights

Maverick74 quoted about .50 basis points over the current broker call rate, currently 6.00%. Fed funds is at 4.5%, so we are talking around in the 6.25- 6.5% range cost of capital at most places?

That is not much different from what you could obtain in a retail account. That being the case, it doesn't appear that there is a significant advantage to trading at a prop firm vs. trading retail unless you are primarily a day trader?

Again, I am discounting the value of the "training" and camaraderie, and focusing on the dollars and cents issues : amount leverage aka BP, cost of capital, and commission rates.

giggollo · Feb 4, 2006

Quote from Don Bright:

Some of the smaller firms have to use their traders capital in their "net capital calculation" when determining how much capital can be used by the entire firm, and are often "over extended" and have to limit the overall capital usage. We are well capitalized and this is not an issue with us. As always, check balance sheets of any firm when you join them.

Don

Thanks Don, how would i go about "checking balance sheets of any firm"?? What shoudl i ask to see, and what numbers should i look for? I think that would be quite useful to know if indeed one has the right to see that kind of info when joining a new firm..

lescor · Feb 4, 2006

Retail overnight leverage is still 2:1. Overnight prop leverage can go 10, 20, 50 times higher than that. That's a huge advantage over retail if used appropriately.

Quote from SnoopDogg:

Maverick74 quoted about .50 basis points over the current broker call rate, currently 6.00%. Fed funds is at 4.5%, so we are talking around in the 6.25- 6.5% range cost of capital at most places?

That is not much different from what you could obtain in a retail account. That being the case, it doesn't appear that there is a significant advantage to trading at a prop firm vs. trading retail unless you are primarily a day trader?

Again, I am discounting the value of the "training" and camaraderie, and focusing on the dollars and cents issues : amount leverage aka BP, cost of capital, and commission rates.

Maverick74 · Feb 4, 2006

Quote from SnoopDogg:

Maverick74 quoted about .50 basis points over the current broker call rate, currently 6.00%. Fed funds is at 4.5%, so we are talking around in the 6.25- 6.5% range cost of capital at most places?

That is not much different from what you could obtain in a retail account. That being the case, it doesn't appear that there is a significant advantage to trading at a prop firm vs. trading retail unless you are primarily a day trader?

Again, I am discounting the value of the "training" and camaraderie, and focusing on the dollars and cents issues : amount leverage aka BP, cost of capital, and commission rates.

Snoop, this is not the cost of capital in terms of leveraged capital, that is the debit rate you pay on any debit balances in your account, retail or prop. I think many on this thread are misunderstanding all the terms. A capital charge is the rate a trader pays to BORROW capital from the firm. This is usually in terms of overnight haircut, not intraday trading.

SnoopDogg · Feb 5, 2006

Quote from Maverick74:

Snoop, this is not the cost of capital in terms of leveraged capital, that is the debit rate you pay on any debit balances in your account, retail or prop. I think many on this thread are misunderstanding all the terms. A capital charge is the rate a trader pays to BORROW capital from the firm. This is usually in terms of overnight haircut, not intraday trading.

Maybe I am missing something critical here, but what difference does it make? If I borrow from the prop firms, it is a capital charge. It I borrow from a retail account, it is a margin rate/debit rate/cost of capital? Both these rates are in the same ballpark.