I may be incorrect and anyone feel free to correct me if I am wrong. The LLC gets 4-1 buying power from whatever broker it has its account with. So if they have $100,000 in the account, they have a total of $400,000 BP. A trader who is trading with them gives them 5k as a capital contribution to the LLC. The are now a limited member of the LLC and can now trade a sub-account of the main LLC account. The LLC can extend any amount of its 400k bp to that trader. The 4-1 ratio is between the LLC and the broker. That is how LLC's can give someone 200k in BP with a 5k deposit. Your deposit is basically used to absorb any losses. But if im correct the LLC account functions much like a regular retail account as far as margins go.
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PDT Rule & Prop Firms
- Thread starter tito
- Start date
bidbuster although your analysis sounds correct i think chewbacca's is the correct answer. robert green(leading trader cpa) investigated this thoroughly last year when genesis's top llc was shut down and he concluded like chewbacca that it mattered little if series 7 are not. the sec frowns on commissions paid and deposits from traders wether series 7 are not.they want a employee/employer relationship. on the leverage you might be correct but on the other 2 pts above i believe you're not. in conclusion a prop firm would not be allowed to take a deposit nor charge commissions to a trader. they would have to work out a profit split much like a gs are mer trader.
HI BidBuster,
Thanks for your informative post.
May I ask you the two-guy+website LLC is legal or not? I know it is not safe for trader's money to join it, but is it entirely illegal?
As your post states:
they are completely different, but not completely illegal......
And are all laws apply even if these LLCs are outside of the states?
Thanks in advance for your reply!!
Thanks for your informative post.
May I ask you the two-guy+website LLC is legal or not? I know it is not safe for trader's money to join it, but is it entirely illegal?
As your post states:
Quote from BidBuster:
These firms you mention should not at all be clumped in with the unlicensed LLC's that are getting in trouble finally as they are completely different.
they are completely different, but not completely illegal......
And are all laws apply even if these LLCs are outside of the states?
Thanks in advance for your reply!!
After reading the Gov. charges against Tuco I believe that this is a shot accross the bow of the entire prop industry-registered BD
or not. The SEC maintains that All deposits into firm accounts are
to be viewed as "retail" and the relationship is that of a broker to
a client/customer,thus PDT rules apply. The guys at Bright,Assent and Echo
need to relaize that Tuco is the first lamb being led to slaughter-
their hides will probably be next.
or not. The SEC maintains that All deposits into firm accounts are
to be viewed as "retail" and the relationship is that of a broker to
a client/customer,thus PDT rules apply. The guys at Bright,Assent and Echo
need to relaize that Tuco is the first lamb being led to slaughter-
their hides will probably be next.
Quote from moneymonger:
After reading the Gov. charges against Tuco I believe that this is a shot accross the bow of the entire prop industry-registered BD
or not. The SEC maintains that All deposits into firm accounts are
to be viewed as "retail" and the relationship is that of a broker to
a client/customer,thus PDT rules apply. The guys at Bright,Assent and Echo
need to relaize that Tuco is the first lamb being led to slaughter-
their hides will probably be next.
im sure that they know this and have a plan in the works. could change to a hedge fund... but what i am hearing is the <s>Gestapo</s> SEC wants to see "employees" not independent traders.
Quote from BidBuster:
By the way, if it helps any, when you join a "Real" Exchange Member Broker Dealer Prop Firm such as the ones you mentioned, you are subject to the rules of that particular exchange. So the ones that are PHLX or Arca for instance (you will have to do the homework on who is who), do not require you to retake the Series 7 exam even if it has "lapsed." The 2-year expiration is an NASD rule, applicable to only firms who are members of them, many firms you can join right away so long as you have passed the Series 7 at any point in the past, does not have to be a recent thing.
If you think I am pro-prop trading you have caught me I am. I do not think the small commission savings of an unlicensed/sub-LLC type firm is worth the risk of losing your capital and more.
Good first answer Mr. Bid!! (Saves me a lot of typing, LOL). But regarding the 2 year and lapsed license, Compliance tells me that the PHLX has filed to comply with NASD requirements. I'm sure you're aware that NASD bought the PHLX. My Compliance Officer was "big cheese regulator" at the PHLX for really long time before we hired her.
Again, good job!
Don
Quote from Don Bright:
Good first answer Mr. Bid!! (Saves me a lot of typing, LOL). But regarding the 2 year and lapsed license, Compliance tells me that the PHLX has filed to comply with NASD requirements. I'm sure you're aware that NASD bought the PHLX. My Compliance Officer was "big cheese regulator" at the PHLX for really long time before we hired her.
Again, good job!
Don
are you guys going to a hedge fund model? no 7's.. no pdt rule.
Quote from Don Bright:
No need to (at present anyway).
Don
thanks for the prompt reply. good to hear some confidence on the board.
after reading green's article he sure seems to think even the licensed props have reasons for concern. would be ashame... Bright runs the cleanest shop in the biz.
PROPRIETARY TRADERS
PROPRIETARY TRADERS OVERVIEW
PROPRIETARY TRADING FIRMS - SPECIAL NOTES ON THREATENING REGULATORY DEVELOPMENTS
SEC Obtains Emergency Orders Against California Firm Defrauding Day-Traders. Click here.
Litigation Release No. 20480 / March 6, 2008. Click here.
SEC OBTAINS EMERGENCY ORDERS AGAINST UNREGISTERED DAY-TRADING FIRM AND ITS PRINCIPAL. SECURITIES AND EXCHANGE COMMISSION v. TUCO TRADING, LLC, AND DOUGLAS G. FREDERICK, Case No. 08 CV 0400 DMS BLM (S.D. Cal.)
Excerpt: "Washington, D.C., March 6, 2008 - The Securities and Exchange Commission today announced that it has obtained an emergency court order against an unregistered securities day-trading firm in La Jolla, Calif., that was not disclosing to traders that more than one-third of their money was being used to cover other traders' losses or pay firm expenses. The SEC's complaint alleged that approximately 35 percent of their equity was diverted, leaving an approximately $3.62 million shortfall in the traders' equity as of Dec. 31, 2007. In issuing the emergency orders, the court found that the SEC had shown that the day-trading firm was violating the broker-dealer registration and antifraud provisions of the federal securities laws, and ordered the appointment of a temporary receiver to safeguard customer assets."
Initial comments from Robert A. Green on March 12, 2008:
We have been warning traders to be aware of inappropriate (and perhaps illegal) business practices in proprietary trading firms (catering to retail-type traders) for many years. See our significant content on prop trading firms below.
Although the SEC has acted to shut down some prop trading firms overnight, it hasnât caused an industry-wide thunderstorm until this new SEC order against Tuco in March, 2008.
This SEC emergency (shut-down) order against Tuco appears to be a âgoing out of businessâ sign for most sub-LLC prop trading firms not organized as broker dealers. So those owner/mangers and traders need to act fast to avoid or limit damage and trouble.
In our view, itâs also very troubling for prop trading firms organized as broker dealers (BD). Although these prop trading firm BDs are subject to better compliance and oversight (than non-BD firms); these firms may still be implicated in these types of infractions and enforcement by the SEC.
We can think of a few BD prop trading firms in particular (not naming names here) that have (in my opinion) farmed out the inappropriate behavior to sub-LLC prop trading firms, owned and managed by their BD LLC firm members and brokers. We heard from one CEO that the SEC is ready to pounce on one such prop trading BD firm soon.
A while back, day trading prop trading firms were busted for counting traders' deposits as part of their "net capital" accounts. FAS 150 accounting rules for separating true debt from true equity does not allow this practice. Prop trading firms organized as broker dealers have net capital requirements and many were alleged to be in violation; after reclassifying trader deposits to debt from equity.
Now, even if a prop trading firm broker-dealers (BD) is in compliance with FAS 150, they may have serious problems with the SEC; along the same fault lines as in the Tuco case. They too may be accused of shifting deposit money around in inappropriate ways and not disclosing this to day traders in their firms.
PROPRIETARY TRADERS OVERVIEW
PROPRIETARY TRADING FIRMS - SPECIAL NOTES ON THREATENING REGULATORY DEVELOPMENTS
SEC Obtains Emergency Orders Against California Firm Defrauding Day-Traders. Click here.
Litigation Release No. 20480 / March 6, 2008. Click here.
SEC OBTAINS EMERGENCY ORDERS AGAINST UNREGISTERED DAY-TRADING FIRM AND ITS PRINCIPAL. SECURITIES AND EXCHANGE COMMISSION v. TUCO TRADING, LLC, AND DOUGLAS G. FREDERICK, Case No. 08 CV 0400 DMS BLM (S.D. Cal.)
Excerpt: "Washington, D.C., March 6, 2008 - The Securities and Exchange Commission today announced that it has obtained an emergency court order against an unregistered securities day-trading firm in La Jolla, Calif., that was not disclosing to traders that more than one-third of their money was being used to cover other traders' losses or pay firm expenses. The SEC's complaint alleged that approximately 35 percent of their equity was diverted, leaving an approximately $3.62 million shortfall in the traders' equity as of Dec. 31, 2007. In issuing the emergency orders, the court found that the SEC had shown that the day-trading firm was violating the broker-dealer registration and antifraud provisions of the federal securities laws, and ordered the appointment of a temporary receiver to safeguard customer assets."
Initial comments from Robert A. Green on March 12, 2008:
We have been warning traders to be aware of inappropriate (and perhaps illegal) business practices in proprietary trading firms (catering to retail-type traders) for many years. See our significant content on prop trading firms below.
Although the SEC has acted to shut down some prop trading firms overnight, it hasnât caused an industry-wide thunderstorm until this new SEC order against Tuco in March, 2008.
This SEC emergency (shut-down) order against Tuco appears to be a âgoing out of businessâ sign for most sub-LLC prop trading firms not organized as broker dealers. So those owner/mangers and traders need to act fast to avoid or limit damage and trouble.
In our view, itâs also very troubling for prop trading firms organized as broker dealers (BD). Although these prop trading firm BDs are subject to better compliance and oversight (than non-BD firms); these firms may still be implicated in these types of infractions and enforcement by the SEC.
We can think of a few BD prop trading firms in particular (not naming names here) that have (in my opinion) farmed out the inappropriate behavior to sub-LLC prop trading firms, owned and managed by their BD LLC firm members and brokers. We heard from one CEO that the SEC is ready to pounce on one such prop trading BD firm soon.
A while back, day trading prop trading firms were busted for counting traders' deposits as part of their "net capital" accounts. FAS 150 accounting rules for separating true debt from true equity does not allow this practice. Prop trading firms organized as broker dealers have net capital requirements and many were alleged to be in violation; after reclassifying trader deposits to debt from equity.
Now, even if a prop trading firm broker-dealers (BD) is in compliance with FAS 150, they may have serious problems with the SEC; along the same fault lines as in the Tuco case. They too may be accused of shifting deposit money around in inappropriate ways and not disclosing this to day traders in their firms.