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To prop or not to prop...
- Thread starter pandorasbox
- Start date
Quote from yip1997:
Don,
Did you mean 2% haircut charge per year?
Suppose I have 1 million capital, and I buy 10 million value of stocks. What will be my interest for a year?
4 mil * 0.02 = 0.08 mil?
If you have $1million, and have a $10 million worth of hedged positions (within 20% long vs. short - remember, we don't recommend gambling with naked long or shorts, who does really?) - you would have 6 $million with no haircut charge, and only $4million with 2% per year (only for the time you held those postions, most of our people trade in and out on a daily, weekly, or monthly basis). "
We have some traders who may pay $2,000 per month in h/c fees, but if they're making $20K per month, they seem to be pretty happy to have access to such inexpensive capital.
Don
Don..What about charges for excess usage of capital intraday only? I dont know what kind of leverage you offer intraday, but lets assume 20:1. Now what if I wanted to use 40:1 instead (hedged) on a regular basis...how does that work in terms of whether its allowed, and what extra haircut charges (if any) i would be looking at for using that extra capital intraday only?
Don - would you please clarify for yip1997 and for all of us, when you say there is a 2% haircut charge for borrowed funds (>6x and <12x), isn't the total cost 2% plus the base borrowing cost (broker call rate + ??), and if so, what is that curernt piece of the total cost? Thanks Don! This is my first post, and I believe your posts add a lot of value to this site - thanks for all of your comments.
Quote from giggollo:
Don..What about charges for excess usage of capital intraday only? I dont know what kind of leverage you offer intraday, but lets assume 20:1. Now what if I wanted to use 40:1 instead (hedged) on a regular basis...how does that work in terms of whether its allowed, and what extra haircut charges (if any) i would be looking at for using that extra capital intraday only?
Many use 100 times equity, intraday, we monitor by risk, not dollars. Same for the opening only orders, many use $3Million or so with $20K in their account, again, depending on overall risk, lenth of time with Bright, and if we like them, LOL.
All intraday use of capital is free of interest or haircut charges, of course.
Don
Quote from eengland:
Don - would you please clarify for yip1997 and for all of us, when you say there is a 2% haircut charge for borrowed funds (>6x and <12x), isn't the total cost 2% plus the base borrowing cost (broker call rate + ??), and if so, what is that curernt piece of the total cost? Thanks Don! This is my first post, and I believe your posts add a lot of value to this site - thanks for all of your comments.
OK, this is for overnights only. If you have $30K in your account (for example).
You are now long $90,000 and short $85,000, thus hedged.
You receive interest on your cash balance plus the short stock money of around 5%. You pay (approx) 6.5%, so a 1.5% differential (pretty good compared to banks, etc.). And, remember most retail accounts don't receive short stock interest.
At that level there is no haircut.
For amounts over that, we use the:
6-12 times equity = 2%/yr.
12-18 times =4%
18-30 times = 6%
for an average, at 30 times of around 3.6 or so.
Does that about cover it? If not, let me know.
Don
Quote from Don Bright:
Many use 100 times equity, intraday, we monitor by risk, not dollars. Same for the opening only orders, many use $3Million or so with $20K in their account, again, depending on overall risk, lenth of time with Bright, and if we like them, LOL.
All intraday use of capital is free of interest or haircut charges, of course.
Don
Thats interesting...Now setting aside factors like whether you like them or not and how pretty they are, how do you define "risk" both for monitoring purposes and for access-to-capital purposes? Is it simply based on how much they are exposed to either long or short side, or is it more complicated? Is this "risk" variable a subjective measure or can you quantify it?
Quote from eengland:
Don - would you please clarify for yip1997 and for all of us, when you say there is a 2% haircut charge for borrowed funds (>6x and <12x), isn't the total cost 2% plus the base borrowing cost (broker call rate + ??), and if so, what is that curernt piece of the total cost? Thanks Don! This is my first post, and I believe your posts add a lot of value to this site - thanks for all of your comments.
Look at the following thread.
Mav finally got it and confirmed that it is 2% + GS debit interest. I still don't quite understand yet. LOL. Nobody answers my example there. I believe prop firms are intentionally misleading us so they can make profit from the interest charge.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=90662&perpage=6&pagenumber=4
Quote from yip1997:
Look at the following thread.
Mav finally got it and confirmed that it is 2% + GS debit interest. I still don't quite understand yet. LOL. Nobody answers my example there. I believe prop firms are intentionally misleading us so they can make profit from the interest charge.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=90662&perpage=6&pagenumber=4
I am giving you full disclosure. You pay to borrow cash to GS of around 6.5, you get back on short stock and your cash amoutn 5% approx., meaning that your net is 1.5% approx.
Then you get 6 times your equity with No haircut charges.
If you need to use more than 6 times you simply use the sliding scale I described from zero to 6% per year...at 30 times equity, it amounts to about 3.6% per year.
So, on hedged positions, it's approx 1.5% go use GS money. And 6 times equity for no haircut, etc.
That's all there is to it.
Don
The key words here are what is GS charging you and what is Bright charging you. Combine the two and you get the total. Don is telling you only what THEY charge you. Subtle difference.