Margining system at prop shops for small caps

[macrotrader]

Hello,

what kind of margining-system to "typical" prop shops have with regards to smaller stocks? For example IB uses as a general rule that stocks below 250M$ marketcap are not marginable. I would think that a good risk-management system uses other factors such as volume, %float, etc. as well to determine risk-levels. I trade mid- to smallcaps and am trying to figure out if trading within a prop shop is going to help me.

 

[rmorse]

Quote from macrotrader:

Hello,

what kind of margining-system to "typical" prop shops have with regards to smaller stocks? For example IB uses as a general rule that stocks below 250M$ marketcap are not marginable. I would think that a good risk-management system uses other factors such as volume, %float, etc. as well to determine risk-levels. I trade mid- to smallcaps and am trying to figure out if trading within a prop shop is going to help me.

Most firms look at stock price. I'm not sure what the margin cut off is, but I believe stocks under $3.00 are not marginable.

 

[zdreg]

Quote from rmorse:

Most firms look at stock price. I'm not sure what the margin cut off is, but I believe stocks under $3.00 are not marginable.

he was asking about prop shops. individual traders for prop shops are not subject to margin regulations.
FYI individual trader exposure is determined by risk management. overall firm exposure is determined by security regulation.
the OP can trade all the low price stock he wishes as long as the firm is agreeable.

 

[macrotrader]

Trying to figure out how this works...

So what you are saying is that the equity of the trader is subject to some internal margin-system? For example, very simply put, if the firm has 1M$ and 10 traders, each one of the them gets 10% = 100k buying power? But if the firm itself uses outside leverage it would be fair to pass on the margin-requirements, because the outside margin requirements will require the overall leverage. Are the prop shops usually customers of some prime-broker and will use leverage themselves? So that the 1M$ will get them 5 or 10M$ of buying power?

 

[EvOTraderV2]

Every firm sets this independently. Most do no margin on anything under $3 and no shorting anything under $1

 

[EvOTraderV2]

Quote from macrotrader:

Trying to figure out how this works...

But if the firm itself uses outside leverage it would be fair to pass on the margin-requirements, because the outside margin requirements will require the overall leverage. Are the prop shops usually customers of some prime-broker and will use leverage themselves?

Not exactly. The firm has a lot more equity held up at clearing than any one trader. For this reason, most will not allow leverage on certain prices/stocks because they've been burned in the past. You can't ask the margin requirements for 250k in cash be passed on to 5k in cash. it's not salable in that way because the 5k account doesn't have the ability to absorb losses from leverage on something under $3

 

[Don Bright]

We are simply under the rule that Stocks $5.00 and under are subject to 100% margin. They are deemed "non-marginable" - we don't worry too much about it for larger trader sub-accounts, but when someone has 100% of their equity in some little stock AND has a lot of other positions and trading, well, we ask them to make adjustments.

Don

 

[Swan Noir]

What a polite way to say we tell them to sell at least half that position before the close!

Quote from Don Bright:

well, we ask them to make adjustments.

Don [/B]

 

[jnbadger]

Quote from Swan Noir:

What a polite way to say we tell them to sell at least half that position before the close!

It's the way it should be across the board. I can't believe what our firm use to let us get away with. Thank God they cut us off before the flash crash.

I'm slowly learning that there is plenty of opportunity out there for a traditional manual day trader. It's a hell of an adjustment from automation, but it can be done.

But there is no reason for a prop trader to hold a sub 5 dollar stock overnight beyond 100% of their equity. There are too many other intraday opportunities out there to resort to holding small stocks. The risk isn't worth it for the firm, or yourself.

 

[Don Bright]

Quote from Swan Noir:

What a polite way to say we tell them to sell at least half that position before the close!

We do our best to help, give them alternatives of course. And, yes, what you said is one of them.

Don