money of the prop firm

[opt789]

Quote from WinstonTJ:

Think of it as a giant pool. If you have 300 traders each with $5k down that's a pool of $1.5M capital. Not every trader uses 100% of their capital at all times. Adding leverage helps spread things out but since the capital is a floating pool the firm doesn't need to borrow as much as you would think to supply the leverage they offer.

This is basically correct. The prop firm is seen as one single entity to their clearing firm, so they just need to be in line with haircut requirements and undue concentration levels as a whole. Additionally most firms have traders who put up a more substantial amount. There are traders with several hundred thousand in their accounts, and the firm gets to use everyone’s capital as a whole. In overly simplified terms the firm gets 6.6 to 1 leverage overnight so they just have to be within that to satisfy their haircut which is why their overnight leverage limits are so restrictive. You can run detailed analysis of the intraday trading and you will find traders not using their leverage at the same time and occasionally offsetting each other. If the SEC and the exchanges did such an analysis some of the smaller firms would be forced to go under because they don’t have the necessary intraday capital, but they usually only check overnight positions.

 

[Don Bright]

Quote from WinstonTJ:

Think of it as a giant pool. If you have 300 traders each with $5k down that's a pool of $1.5M capital. Not every trader uses 100% of their capital at all times. Adding leverage helps spread things out but since the capital is a floating pool the firm doesn't need to borrow as much as you would think to supply the leverage they offer.

(Just observing) ...be careful with this thought process, the "comingling" of funds is illegal. Many firms have bitten the dust attempting to do this.

I don't like discussing legalities much on the board, but if you would like to call I may be able to elaborate.

Don