Prop Trading Firms - Note On Threatening Regulatory Developments

[Pa(b)st Prime]

While I view the entire landscape of Reg T, PDT rules ect. as anti free market it's the world we presently live in.

Within that backdrop I agree with Riskarb. The deposit oriented "prop model" fails the smell test.

Take a look at futures for the contrast. Both the CME and CBOT are so steadfast in their rules prohibiting "customers" from trading "prop" that one's TAX RETURNS can be "audited" by the exchange as proof that a.) there was indeed a split profit arrangement and that b.) there was no required deposit. In fact a futures prop trader is NOT ALLOWED to trade his own funds. Not even a portion of them unless that trader leases or purchases his own seat.

Without an auditing procedure a clearing firm would just put "customers" onto a membership and pocket the fee differential between exchange mandated member and customer rates.


The Feds in their infinite stupidity have done nothing more than create an environment where LLC's may engage in relatively noncompetitive business practices that clearly violate the spirit of the law. More power to Bright and Echo etal but I'm afraid their day will come.....

 

[listedguru]

Quote from Maverick74:

You make a valid point. This is one of the reasons I am laughing at this controversy. All a trader would have to do, or a firm for that matter, is create an LLC and bring traders into that LLC to trade. For example, I could start Mavco, a sub LLC of Bright. In Mavco, I make my class b partners deposit 10k towards the LLC. They then would trade out of the pool. I would mark up their commissions as the class a partner and a round and round we go. Now, it's not Bright Trading, but Mavco that profits. Bright would then charge Mavco, who is a legitimate customer of Bright. See how silly this is? Good. Carry on.

Maverick74,

If we are to believe that Green letter your example wouldn't be allowed. I think it mentions in there doing away with the LLC structure... But who the heck knows, lol...

-Guru

 

[Maverick74]

Quote from listedguru:

Maverick74,

If we are to believe that Green letter your example wouldn't be allowed. I think it mentions in there doing away with the LLC structure... But who the heck knows, lol...

-Guru

They can't do away with the LLC structure because the LLC is not a BD! They can only enforce actions against BD's. The NASD has no jurisdiction over my LLc whether I use it to invest in real estate or a trading operation. There are plenty of landmark cases that have set the precedent for this.

 

[riskarb]

Quote from Maverick74:

They can't do away with the LLC structure because the LLC is not a BD! They can only enforce actions against BD's. The NASD has no jurisdiction over my LLc whether I use it to invest in real estate or a trading operation. There are plenty of landmark cases that have set the precedent for this.

What about the non-BD pooled accounts that offer >4:1 intraday?

 

[libertad]

Do not feed the NASD SEC !!!!!!!

 

[Maverick74]

Quote from riskarb:

I can't imagine it would be very difficult for the SEC to enforce an action against the sub-LLC.

They can't enforce it because the LLC is a customer of the BD. The LLC is not a BD and therefore does not have net capital requirements under NASD jurisdiction. Beck, think about this for a second. You would have to do away with all hedge funds and private partnerships that manage money. Almost all hedge funds have managers that have their own equity in the fund. Usually the investors are passive and class b partners. But if you define in your operating agreement that the class b investors have power of attorney over their account, then of course they can trade it.

The bottom line is, all you have to do to get around any issue that deals with the government is create another layer of structure. This is why most corporations have millions of subsidiaries.

What the government is trying to do here is separate the retail world from the professional world. The reason for this is that in the retail or customer world, firms are held to different standards and levels of protection. They don't want retail firms acting like professional firms.

 

[Maverick74]

Quote from riskarb:

What about the non-BD pooled accounts that offer >4:1 intraday?

If they are not a BD they cannot be forced to comply to the same standards as a BD. Let's approach this a another way. Say I have an account at IB. I decide I'm going to let you trade a portion of my account. I have you invest 10k of your own capital as an investment in my LLC with IB. I give you 10k of your capital plus 50k of my money. We have an operating agreement that states how we are to split the profits or expenses.

My LLC is a customer to IB. As a customer, the NASD has no jurisdiction over my account. However, IB does. IB could decide that they don't like my business arrangement. Since they are the BD and they are the ones that DO have to COMPLY with NASD requirements, they could close the account or not allow it to be opened.

But the SEC has ZERO say in what is in my operating agreement. The only way the SEC can stick their fat head in is if I have enough assets or traders in my LLC to force me to register as a hedge fund. Then the SEC becomes big brother and steps in to protect the investors.

 

[giggollo]

Quote from Rearden Metal:

I don't understand. Why would the SEC do anything to help anyone? Why would they do anything constructive at all?

I guess you haven't read the SEC mission statement...look:

"The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."

http://sec.gov/about/whatwedo.shtml

The problem is by not making a public announcement about this and letting Mr. Green freely put out this press release without challenging it or qualifying it, they are creating fear and uncertainty. Some firms are being proactive and giving traders back their deposits and sending them packing as you saw in Riskarb's post. Maybe that's what the SEC/NASD want after all, for firms to "self-regulate" due to the uncertainty and fear of what might happen. But this is the kind of strategy i would expect from a regulatory organization in the third world, not the U,S and A as Borat would call it.

 

[Maverick74]

Here is a question for everyone. Why should a prime broker exist if prop firms are shut down? Do prime brokers not take deposits from an account and provide leverage? Do they not charge commissions? Do they not hold the account responsible for losses? Are they not retail customer accounts? Anyone? Bueller?

 

[riskarb]

Quote from Maverick74:

They can't enforce it because the LLC is a customer of the BD. The LLC is not a BD and therefore does not have net capital requirements under NASD jurisdiction. Beck, think about this for a second. You would have to do away with all hedge funds and private partnerships that manage money. Almost all hedge funds have managers that have their own equity in the fund. Usually the investors are passive and class b partners. But if you define in your operating agreement that the class b investors have power of attorney over their account, then of course they can trade it.

The bottom line is, all you have to do to get around any issue that deals with the government is create another layer of structure. This is why most corporations have millions of subsidiaries.

What the government is trying to do here is separate the retail world from the professional world. The reason for this is that in the retail or customer world, firms are held to different standards and levels of protection. They don't want retail firms acting like professional firms.

You make a good point, but the BD can clear the LLC business without offering leverage exceeding SEC regs. The BD and LLC are entangled due to risk inherent in clearing the LLC trades. The sub-LLC can allow trades which the BD may disallow.