Sniper and Icarus,
I guess I would be the best to respond to this since I have been trading professionally for almost 7 years now.
Out of all the firms who do this, one went down. Harbor was an accident waiting to happen. Ask anyone who traded there what the atmosphere was like at that firm. There were no risk parameters, you could click as many shares into the software as you wanted. (The fellow that had the big loss took on a 600,000 share position!) Also, the guy that ran the firm would encourage guys to take bigger positions and to trade the high fliers. I once talked to him, and told him that I trade NYSE stocks and risk-arb, he told me I was nuts and if I wanted to make real money I should be trading china.com. Their burn-up came as no shock to any of us who knew them, we were surprised it took as long as it did.
Now, the first thing that happened since then is that the SEC came and revamped the LLC's. All the other firms, who were running clean, doing things right, and would never have anything like that happen, still had tons of new regulations and scrutiny placed upon them. At the time, the LLC's had to have $100,000 in equity to open their doors. Now the SEC minimum is $1,000,000, but the clearing firms won't let them trade with less than $1,500,000. They are also now audited all the time, the regulators are all over them. The biggest change that was visible to the public is the rule that all traders have to have the Series 7. No one was grandfathered in when they did this by the way, if you were already trading you had 6 months to get it or bye-bye.
The biggest change we saw is that all the firms became very strict with limiting leverage. I defy anyone to try and walk into one of these firms and try to lose more money than is in your account. From what I see, it is impossible. Harbor's risk management was to look at your sheets the next day, they had no way of knowing what you were doing until the day after you did it. For the other firms it is all real-time, I have tried for my own peace of mind placing large orders (away from the market, so in case it went through I wouldn't get filled) and at least at Echo, the order will not even get past my terminal. A message pops up "Exceeds max trade size." Try to place too many small orders, you get "Exceeds max buying power." They also have a staff of people watching every trade that anyone at the firm does.
Now, lets compare that to a regular non-pro firm. From what I understand, anyone can open one of these firms with $5,000 in equity. $5,000!!! That's why on the internet every Tom, Dick, and Harry is trying to promote one of the countless firms that has Realtick and clears Soutwest or Penson. Where is there more financial security, in $5000 or $1,500,000?
But they are SIPC insured you say? We'll, let's look at that. For a trader like me, and I would say that among the guys I know I am average, I carry about $50,000 in my account. I make on average $30K-$40K a month (except for this month, July has sucked) and I have them send me all my profits every month. I utilize about 20 to 1 leverage. So if I were at a place like IB, to trade as much as I do I would need to carry about $500,000 in my account. I go home every day in all cash, I don't take home any positions. If somehow Harbor happened, which I doubt could ever happen to any firm again, I would worst case, be out $50,000. If the non-pro firm went bankrupt, SIPC insurance would kick in, yay! So I wait a year and a half (that's how long I hear it has taken them to pay out, I have not experienced myself) and I get a check for $100,000. Yup, SIPC only covers $100,000 in cash. So in that instance I am out $400,000. You tell me, in both worst case scenarios, which is worse, $50,000 or $400,000?
By the way, in case of a blow up, at a pro-firm you are not lowest priority as you would be with a regular firm. With the LLC's, the owners of the LLC, the class A members, lose every cent of their money first, before any of a traders' money is touched. Call any of them and ask. They also have legal implications if they disclose how much money they have, so none of them do it. It is not that they don't want to, I have heard that some of them have upwards of $50 million bucks. I am sure they would not be ashamed to tell you that unless they couldn't.
Hopefully I have answered the questions for you guys. I encourage you guys to call any of the pro-firms and ask them all this. Call Echo, or another pro-firm I like is Lieber. Ask Gene Weissman at Lieber about this stuff too, he has some old posts in here about this and is very good about explaining it all too.
One more thing that made me feel very secure. One day I had the idea to play a little QQQ, and I put in to short 200 shares, I put the order about a half-point above the market just to mess around. About a minute later my phone rang, it was the Echotrade Trading Desk telling me that I didn't have to send QQQ orders as a short, that it has different rules, I could just sell it. Dang! They watch every order that goes by! Since then I have been very comfortable that my money is safe.
-Jim
