What is Haircut ?

[cashonly]

Originally posted by joesmoe
Sorry to be difficult but Jim's definition of haircut in regards to how Bright and Echo use it is incorrect. I trade at Bright and unfortunately am all too familar with it. It is a risk charge charged to any trader who uses more than 2-1 or 6-1 margin depending on what kind of position it is (hedged or unhedged) and how much money you have in you account (<>50k).

Haircut charges are assessed on the absolute value on all short and long positions over and above the appropriate ratio on the assets in your account. For example if you had 50K in your account and were holding an approved Risk Arbitrage spread in the amount of 700k (350k short and 350k long). The trader would get 6 to 1 on his money or 300k and pay 1/2 % per month on the difference or 400K. This can add up.

Sorry to be difficult, but joesmoe's numbers aren't quite accurate.
If you have $50K in your account and have $700k hedged ($350 long, $350 short - don't need to be approved, hedged means equal dollar value long and short), then, as joe says $700K is subject to haircut. As indicated, bright's haircut on hedged positions don't kick in until you go over 6:1, so in this example, only $400K is subject to haircut. BUT, the haircuts are on a sliding scale and for everything if you're between 6:1 and 12:1 it's 2% PER ANNUM and if you're between 12:1 and 18:1, it's 4% PER ANNUM - which is the case here (1/3% per month).

If you are holding naked postions or have less than 50K in your account you only get 2-1 on your money and have to pay 1% per month. These charges can really add up.

Yes they can. Bright encourages hedged positions over naked.

In addition, regarding hedged positions, Bright gives you a little "wiggle room". Say you're holding $300K long and $400 short, well then it looks like that would be considered as $600K hedged and $100K naked. But Bright gives 20% wiggle room (based on the lowest value, which in this case is $300K), so we would say that 20% of $300K is $60K for a total of $660K and we would consider $660K of the $700K hedged. When people are trying to hedge, it's difficult to get the numbers to match exactly and a trader shouldn't be penalized for that.

If you're a trader that refuses to hold positions overnight you need not worry at all about haircut charges.

I'm sure Echo uses the term the same way although they appear to charged at a rate that is about 1/6 of Brights'. So if you are a trader that holds overnight and are deciding between firms, Echo is probably a better choice.

Maybe I'm not reading echo's numbers properly, but they look almost identical to Bright's and DEFINITELY NOT rate's that are 1/6th of Brights. To me, they seem practically the same. You may want to take another look and compare the two for yourself or enlighten us further.

 

[rtharp]

Haircut rates

Cash

Bright lowered rates for thier haircuts to match ours. You should know this all too well as for a long time all of your spread traders who were holding 30 times their equity in spreads were calling ECHO so that they could pay 2% per year compared to 12% a year (What Bright USED to charge and does not anymore as our rates now match) ECHO used to be a lot lower rates than Bright.
look at the age of the posts. They were correct when being posted.



Rtharp

 

[cashonly]

Originally posted by sktrader
I was wondering how many consecutive days professional firms (Bright, Echo, etc) allow traders to carry leveraged overnight positions in their accounts. For example, is a trader allowed to enter a 5x margin trade on a Monday for a swingtrade, hold onto the position until Friday and exit?

Bright has no limits on consecutive days you can hold overnight

And since these firms don't charge haircut fees for <6x leverage positions, a trader basically doen't pay anything extra for this longer-term leverage? Am I getting this right?

Actually, no haircut fees for <6x when the positions are HEDGED. When they are naked, haircut fees start after 2:1

But keep in mind that the clearing firm still charges broker call margin interest for ALL stock held over 1:1

 

[cag]

Rtharp,

If your rates are now the same as Bright can you explain the 1% monthly haircut as compared to the 2% yearly charged? Bright clearly states the 1% monthly charge on unhedged positions but on Echo's site there is no reference to this charge. Therefore, I was under the assumption Echo did not charge this vs Bright until you just posted how your haircuts are identical.

 

[cashonly]

Originally posted by rtharp
Haircut rates

Cash

Bright lowered rates for thier haircuts to match ours. You should know this all too well as for a long time all of your spread traders who were holding 30 times their equity in spreads were calling ECHO so that they could pay 2% per year compared to 12% a year (What Bright USED to charge and does not anymore as our rates now match) ECHO used to be a lot lower rates than Bright.
look at the age of the posts. They were correct when being posted.



Rtharp

Uh-Oh. My sincere apologies. You are absolutely correct. I didn't notice the dates. Thanks for the heads up.

 

[Don Bright]

It seems that Cash has posted the calculations already. Bright allows the trader a pretty free rein in running their business, and if their strategy calls for large overnight positions, we have the capital to accomodate them. As in any cash-intensive business, there will be interest and risk charges involved. We have adjusted our rates to reflect market conditions, while not limiting the overall cash usage (as many firms have been forced to do).

Haircut charges have been in use on the various exchange trading floors for years, and allow the traders to run their business with "eyes wide open."....and when something "blows up" and the traders run into the firm's money, the fees will hopefully offset the losses, thus allowing new traders to continue.

 

[cag]

Don,

Your haircuts are straightfoward but what on top do you add percentage wise over the margin interest of the broker charge?

 

[rtharp]

there is no margin for use of capital intraday. This is one of the advantages of professional firms

Robert

 

[Don Bright]

Originally posted by cag
Don,

Your haircuts are straightfoward but what on top do you add percentage wise over the margin interest of the broker charge?

I missed the post, but I'll get back to it (my DSL is down today, having to dive in and out via my Redi machine, while trying to trade...this is one way to "slow me down" )

1. Interest is charged based on overall net cash position of each trader...this is charged by the clearing firm, not Bright Trading.

2. Haircut charges are charged by us as a "risk fee" for $$ used in overnight positions in excess of 2 to 1 traders equity. Naked (straigh "shots") are 1 % per month. Hedged positions (based on $$ long and $$ short) are posted in the fee schedule. All traders review this before trading in their "new trader orientation." We lowered our costs considerably for the traders who use capital this way, while still allowing them to have access to significant money (most firms have cut back considerably the amount of capital usage).

I hope this helps.....Don

 

[sktrader]

Does anybody know approximately how much clearing firms (of professional firms) charge as interest for margin? I know it's calculated as LIBOR plus a certain percentage (basis point) , but I'm not sure what that add-on percentage is.


Thanks again