How do prop firms leverage your trades?

quote from cstfx
Say you have 20 traders each put up 50k deposits (for simplicity sake). That gives you 1MM on deposit, 4MM buying power using intraday margin rules.

Now, you give each trader 20:1 leverage on their 50k, that"s 1MM buying power (BP) each. Times 20 traders, isn't that 20MM BP?
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O.K. At retail 4million BP to these traders.
O.K. At Prop 20million BP to these traders.

Who then lends the difference of 16million to these traders??
Is it the Prop firm?? (the money that say Bright puts into an account for the trader).
Is it the Exchange??(that once you become a member can lend all these traders this BP).
 
Quote from coolpurplefan:

There's a lot more to it than that? What kind of books can you read to find out how the industry is set up or whatever? What kind of books does a compliance officer use to determine what's going on?
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Honestly I have to know. Why would you care about compliance unless you were a compliance officer? I mean studying the material for the 7 and 63 was stale enough. I can't imagine how stale all that principal material is. Honestly why? Are you into sadomasochism? Read a series 24 book would be my first thought.
 
Quote from timcar:



O.K. At retail 4million BP to these traders.
O.K. At Prop 20million BP to these traders.

Who then lends the difference of 16million to these traders??
Is it the Prop firm?? (the money that say Bright puts into an account for the trader).
Is it the Exchange??(that once you become a member can lend all these traders this BP).
More...

Quote from cstfx:

Say you have 20 traders each put up 50k deposits (for simplicity sake). That gives you 1MM on deposit, 4MM buying power using intraday margin rules.

Now, you give each trader 20:1 leverage on their 50k, that"s 1MM buying power (BP) each. Times 20 traders, isn't that 20MM BP?

Well, yes and no. Each trader has their own limits but the setup is that it would be extremely rare that all traders would use all of their equity at the same time, thus overeaching the main accounts trading limits. Plus, you have trades that would offset each other having no effect on the main account margins. You may be long 1000 shares of Citi, but another guy is short the same amt, thus crossiing out the trades (for margin purposes on the main account)
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There is no added liquidity or funds added to the trading account to cover the 16MM you question. It's all about tricky, real time accounting done by the software that the firm uses.*

*again, this is retail accounts used by sub-LLC props. Licensed firms get their leverage thru different means. I can't speak for that as I am not registered, but look at what Don says. He would know.
 
Don,

to answer your question, in a retail account, you can't be long and short the same stock/same quantity. That's a given.

But prop software treats the traders trades differently, as if they were both still open. For simplicity purposes, if they both opened their trades for the same size at the same price, but long and short, the retail account would be flat, but each traders position would still be open on their platform. They close the trades out at the same price, a trade is opened and closed on the retail account and becomes zero again. But wealth is moved from trader A to trader B depending on which side of trade they were on. This is all done thru the internal account of the prop platform that they are using. Does this make sense?

* again, this is about the sub-LLC prop that uses a retail trading account to run his business. I can't speak for how it is done with you guys, I can only speak for what I know
 
Quote from bdon:

Honestly I have to know. Why would you care about compliance unless you were a compliance officer? I mean studying the material for the 7 and 63 was stale enough. I can't imagine how stale all that principal material is. Honestly why? Are you into sadomasochism? Read a series 24 book would be my first thought.
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Guess it's weird curiosity. But, like, I was wondering lately on something unrelated and thinking what would happen if someone asked me for a basic book on the stock market. Well, several years ago I read "How to Buy Stocks" by Louis Engel and Brendan Boyd. But, I know that's kind of outdated now. It's weird.

I gotta make a list of books I just downloaded from eMule. I think it's kind of cool.
 
Hey, check this out. I was doing lots of downloading on eMule and found these books:

Come Into My Trading Room, Alexander Elder
Options: Essential Concepts and Trading Strategies, CBOE
The Economics of Money, Banking, and The Financial Markets, Frederic S. Mishkin
The Index Trading Course, George A. Fontanills, Tom Gentile
The Options Course, George A. Fontanills
Options Made Easy, Guy Cohen
Market Wizards, Jack D. Schwager
Stock Market Wizards, Jack D. Schwager
The New Market Wizards, Jack D. Schwager
How to Trade The New Single Stock Futures, Jake Bernstein
The Compleat Day Trader Vol I, Jake Bernstein
The Compleat Day Trader Vol II, Jake Bernstein
Day Trading The Currency Market, Kathy Lien
Getting Started in Options, Michael C. Tomsett
Understanding Stocks, Michael Sincere
How I Made $2,000,000 in The Stock Market, Nicholas Darvas
The Handbooks of Portfolio Mathematics, Ralph Vince
A Currency Options Primer, Shani Shamah
Japanese Candlestick Charting Techniques, Steve Nison
DeMark On Day Trading Options, Thomas R. DeMark
A Beginner's Guide to Short-Term Trading, Toni Turner
Fundamentals of The Securities Industry, William A. Rini

I only read like 3 books in that list but those are books I'd like to read in the next year.
 
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