Quote from Swan Noir:
Boys and girls if you read this and take it to heart you get to take the quiz. Upon passing the quiz you will get a diploma certifying that you have a degree in basic counter part risk.
This is knowledge worth having.
I have one additional question that I hope Old Trader will be clear on. If a trader goes through an introducing broker yet wires to and gets his statements from a clearing firm -- let's say IB because they truly are the pick of the litter -- is his position as secure as it would be dealing directly with IB?
There's a good question. I don't really know the answer to that one. Personally I've never dealt with an introducing broker. I like to deal directly with the firm that is clearing my trades. I'm not saying that the introducing broker setup makes it inherently more risky, because in the end risk comes from the actions of those who hold the money. The problem though is what input the introducing broker has into the disposition of money.
As I said above, Penson GHCO had money with Sentinel. They are also a large clearing firm for various introducing brokers. And Penson was involved in the bankruptcy of Sentinel...you can look up the documents on the internet. How much they lost and whose money it was I don't know...you might be able to find that on the internet as well.
Here's what I know: anyone who put money with Sentinel in my opinion was a fool. Here's why amongst other reasons: "The weighted-average maturity of securities in the fund was 33 years, mostly in corporate securities. Only about 6 percent of assets were in overnight loans." referring to Sentinel's prime portfolio. Here's a link to an article discussing some of this:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a6W7XECOfjPg
Now think about this: Anyone who invested their customers segregated funds with Sentinel put these funds into a portfolio with a maturity of 33 years!!! Why? Evidently the maturity caused the yield to be higher, and THEY (meaning the broker, not the customer) was earning the interest on the money. It was a profit center for the broker.
Now, that carried a huge risk. Long term securities fluctuate much more than something like T-Bills for instance. Further, in times of stress like these long term securities may well be less liquid. They may be especially risky because at the time all the customers want their funds back, Sentinel may be unable to liquidate the portfolio without creating large losses, and thus the inability to return the customer money.
So again, what happened here is that brokers who placed money here either overlooked the risks they were taking with their customer money, or they purposely took the risk in order to earn higher rates of return on their customer money.
Therefore the very first consideration I have about my broker is how strong they are financially. In the Sentinel case for instance, the question is whether the broker could have returned their customers money, if the customers money was lost at Sentinel. Next though, I'd want to know how the broker is holding my money...because the ability for instance to place money at Sentinel is a problem. At Interactive Brokers for instance, any excess funds that are not being used as margin are held in the Universal account and insured by SIPC and 3rd party insurance. You margin is held at the exchange. This is one big reason why I deal with IB rather than some of their smaller competitors.
So when you come down to the question of an introducing broker versus the underlying clearing company....my own preference would be to deal directly with the clearing company...but then I would further want to know where and how my money is going to be held. Like I said, Penson got caught up in this Sentinel thing. What were they thinking? Obviously they survived it. Farr Financial was also involved, and is another clearing firm for IBs.
At one time you could put your money in T-Bills which served as your margin deposit at your broker. Since I'm now with Interactive Brokers, I don't know what the policy is these days. But if I were out looking for a futures broker, and didn't want Interactive Brokers for some reason, my preference would be for a broker where I could hold my funds in T-Bills. However, I have to say that IB has the best set-up in my opinion with the Universal account.
OldTrader
You should all focus on trading. 99,999999% of you will lose money due to trading, not because of bankruptcy of your broker.