"Use of capital" vs. "leverage"

M

marklucas

1. Is there a difference in the terms "Use of capital," or "leverage," when discussed by a professional trading firm?

2. I've read that some pro traders can put $50k down, receiving $2M from the pro firm... But doesn't that mean that if they have a drawdown of anything over 2.5% (which anyone can), they are out the game?

How does it work?

Some clarity on these two questions would be great. Thanks!
 
Quote from marklucas:

1. Is there a difference in the terms "Use of capital," or "leverage," when discussed by a professional trading firm?

2. I've read that some pro traders can put $50k down, receiving $2M from the pro firm... But doesn't that mean that if they have a drawdown of anything over 2.5% (which anyone can), they are out the game?

How does it work?

Some clarity on these two questions would be great. Thanks!
More...

1. "Use of capital" probably refers to the trading capital and "leverage" is another term for debt (or more precisely "debt capital").

2. From what I've heard, some prop firms can give you a leverage of 100:1 but I guarantee you that their circuit breaker will not give you much room to ride out your losses, which could be both a blessing and a curse.
 
Quote from marklucas:

1. Is there a difference in the terms "Use of capital," or "leverage," when discussed by a professional trading firm?

2. I've read that some pro traders can put $50k down, receiving $2M from the pro firm... But doesn't that mean that if they have a drawdown of anything over 2.5% (which anyone can), they are out the game?

How does it work?

Some clarity on these two questions would be great. Thanks!
More...

I've addressed this several times over the years, but am always glad to help.

The best example is the placing of "opening only orders" each morning before the open. Our traders may put in 100 buys and 100 sell shorts = $millions of dollars of orders. Now, we know they can't be filled on both sides, so the "risk" is cut in half immediately. Then we see a 10-30% fill rate - sometimes hedged - of long stock and short stock. This allows for the traders to make a few hundred or so by "using" a few million - not "risking" it.

(Same thing for MOC orders, baskets, etc.)

Leverage is simply "ramping up" share size based on added risk.

There is certainly more to it, but this covers the basic premise.

Hope this helps,

Don
 
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