max liability for futures trading

Quote from flat5:

I have never traded futures but I am interested in learning. In trying to open an account I am getting confused by the warning disclosures about my liability for trading a futures contract - what the real (maximum) risks are.

Let's say I have $4k in an account and I buy 1 e-mini S&P 500 at 1200. This contract has a value of $60k, but the usual margin requirement is $500.

...

What about insurance? Are policies available and does it ever make sense to buy them?

Thanks in advance for suffering my foolishness.
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id NEVER use any broker charging $500 margin for day trading.

either:

you are not trading at the exchange, but a bucket shop


or


your account funds will not be protected should the broker go bust.


the exchange DEMANDS full margin. most brokers accept 1/2 for day trading. YOU CANNOT GET AROUND THIS.

if the broker is charging less, then that will be because ALL his customers positions are held in the same account with whom he is clearing with rather than your own individual account. (the only exception to this may be if you are known to the broker - ie have been trading there some time and he is confident of your risk)

the dive broker/bucket shop can offset one persons margin (longs) with another customers position (shorts) - depositing the SPAN requirement according to total position of all customers.

if that account blows up then its good night vienna and you have no recourse.

quality brokers will ALL offer segregated accounts meaning your account is safe as houses - even if the broker goes bust. (unless you blow up of course!)
 
Quote from FredBloggs:


quality brokers will ALL offer segregated accounts meaning your account is safe as houses - even if the broker goes bust. (unless you blow up of course!)
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I thought that futures were NEVER safe, even not with a quality broker?
 
Quote from ForrestGump:

LOL. Generally, the biggest threat to the account is the TRADER himself.:D :D
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Ouf, that reassures me. At least i will know as first when my account is gone.
:D

And Prof will survive us all as he doesn't trade at all. He's smarter than we think.
 
Quote from flat5:

Thanks for the answers to my questions.

My next concern here is the terms and conditions in the account signup that I am currently looking at that says:

"In the event you fail to deposit sufficient funds... may, without prior demand or notice... sell any property belonging to you..."

to which my initial reaction is "you've gotta be fucking kidding me!"

They seem to be asking me to bestow to them the right to sell my house without my permission should my account be short. On the face of it, that's nutso. I can't agree to let someone sell my house against my will if my account is short $1, but that seems to be precisely what they're asking for.

Is this standard for any futures brokerage? It seems, to put it mildly, a bit of an onerous agreement.
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Stops on Globex are local and not native. This means that a stop is located on your local machine and if it doesn't trigger (connection lost to the exchange), you will not get your stop filled. This could also mean that the market is crashing so hard that it is limit down every day and you are long, so you are not able to get out. This has happened in the past where the market is limit down as soon as it opens and trading is halted. There is an outside chance of this happening and can happen to you in any instrument or product you trade.

Secondly, you are personally liable for your losses. This is the same as charging $60k on your credit card and then losing your job. You owe it and it will be recovered by suing you for all of your belongings. The clearer has no right to repossess your house without a court decision. In that case, you declare bankruptcy and get protection. You are hopefully in a homestead state where your home is protected. A clearer can't just take your possessions. They have to go to court and drag you there. I think the clearer is referring to the possibility of you owning a seat to an exchange that may have some market value and that resides with them. A CME seat may be worth $190,000 and may be sold to cover losses. Again, all of this stuff must be done under arbitration orders or court.
 
Quote from FredBloggs:

[...]
quality brokers will ALL offer segregated accounts meaning your account is safe as houses - even if the broker goes bust. (unless you blow up of course!)
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ALL U.S. brokers MUST maintain customer funds in a segregated account and maintain registration with the NFA. These funds may not be used to conduct broker business. He can't use it for payroll, capital expenses, etc. This money must be available to cash out traders at a moment's notice.
 
Quote from spike500:

I thought that futures were NEVER safe, even not with a quality broker?
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What do you mean by this? Futures are backed by the underlying product. They naturally have more risk because of leverage and margin. You can't trade a futures contract without margin. The DOW mini will have the same value of the 30 dow stocks underlying it plus interest minus dividends. If all 30 stocks' value crashes, then the future contract has to as well. So they are not more unsafe other than the leverage used to trade them.

Good luck all.
 
Quote from FuturesTrader71:

What do you mean by this? Futures are backed by the underlying product. They naturally have more risk because of leverage and margin. You can't trade a futures contract without margin. The DOW mini will have the same value of the 30 dow stocks underlying it plus interest minus dividends. If all 30 stocks' value crashes, then the future contract has to as well. So they are not more unsafe other than the leverage used to trade them.

Good luck all.
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I thought stocks were protected by a kind of insurance. Which wouldn't be the case with futures.
If you broker goes broke you can recover your stocks or their value but this seems not to be the case with futures.

This is what i mean:
40 Is my money insured?

No. Unlike the banking or securities industry, there is no insurance in the futures industry.
 
Quote from FuturesTrader71:

ALL U.S. brokers MUST maintain customer funds in a segregated account and maintain registration with the NFA. These funds may not be used to conduct broker business. He can't use it for payroll, capital expenses, etc. This money must be available to cash out traders at a moment's notice.
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just checked their web site of the broker i was thinking of.

they do say they offer segregated accounts - so i was wrong.

sorry for the miss information guys.

oddly though, they say that customer funds aren't insured against bankruptcy etc which made me think that the funds werent segregated. if they were (are) segregated then broker going bust shouldnt be an issue anyway.

:confused:
 
Quote from spike500:

I thought stocks were protected by a kind of insurance. Which wouldn't be the case with futures.
If you broker goes broke you can recover your stocks or their value but this seems not to be the case with futures.

This is what i mean:
40 Is my money insured?

No. Unlike the banking or securities industry, there is no insurance in the futures industry.
More...
The exchange's clearing service provides similar assurances. The Clearing Corporation is one such entity. Every exchange has a major clearer backing it (Eurex Clearing, etc.).
 
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