Why join a Prop Firm/JBO?

rmorse

rmorse

Sponsor
I understand if a trader does not have the capital necessary to open their own Customer Portfolio Margin account (CPM) why they look for a prop firm. I don't understand why a trader with assets would benefit from the relationship.

Your capital invested in a JBO is no longer “your” capital. It's an investment in a broker dealer as a Limited B partner. It is subject to all the downside risks of other traders, while not participating in their profitability.You are bound by all rules associated with the JBO Partnership.Managerial discretion may permit other traders to trade “larger” than their equity warrants, thus reducing other JBO traders’ capacity to take on risk. Your capital is "locked up" for 365 days. The prop firm often takes a percentage of your trading profits, yet as an investor in the firm, you don't participate in their earnings.

If you open your own CPM, you get a segregated customer account at a Prime Broker with SIPC protection. You can receive up to 6.67 to 1 haircut for leverage both during the day and at night. You can receive competitive rates and if your not happy with your rates or service, move your account without any lock up period.

Your account, your trading, your business. Any questions?
 
can depend on a number of things. you may have access to better commission rates, better connections, more leverage, lower borrowing costs, etc.

a PM account would probably be what most people would need, but others need more.
 
Quote from rmorse:



Your account, your trading, your business. Any questions?
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How much money do you need to open your own Portfolio Margin Account with your firm?
 
Quote from rmorse:

I understand if a trader does not have the capital necessary to open their own Customer Portfolio Margin account (CPM) why they look for a prop firm. I don't understand why a trader with assets would benefit from the relationship.

Your capital invested in a JBO is no longer “your” capital. It's an investment in a broker dealer as a Limited B partner. It is subject to all the downside risks of other traders, while not participating in their profitability.You are bound by all rules associated with the JBO Partnership.Managerial discretion may permit other traders to trade “larger” than their equity warrants, thus reducing other JBO traders’ capacity to take on risk. Your capital is "locked up" for 365 days. The prop firm often takes a percentage of your trading profits, yet as an investor in the firm, you don't participate in their earnings.

If you open your own CPM, you get a segregated customer account at a Prime Broker with SIPC protection. You can receive up to 6.67 to 1 haircut for leverage both during the day and at night. You can receive competitive rates and if your not happy with your rates or service, move your account without any lock up period.

Your account, your trading, your business. Any questions?
More...

Far more "flexible" leverage. A portfolio margin account is just that, a "margin account". And with that comes "margin calls".

I can't begin to tell you how many guys I know got blown out by IB in 2008 due to auto liquidation procedures. It's rare that we get extreme events like that, but when we do, it can wipe you out.

I personally am very against portfolio margin accounts for the same reason I think it's asine to give anyone 100 to 1 leverage in FX. What's the point to high leverage with auto-liquidation?

In a JBO, when a trader gets in a bind, one can borrow capital from the JBO to hedge their positions or at least work their way out of them. You have no such luxury when you get a margin call. Say you open a 150k account at IB as a portfolio margin account. And let's say you use that 6.5 to 1 leverage. If your equity drops below 100k it automatically reverts back to a Reg T margin account with 2 to 1 leverage. This will force an auto liquidation procedure in your account.

I really have yet to understand the attraction to portfolio margin. I attended one of the first meetings here in Chicago at the Union League Club when Fimat was one of the first firms to introduce it and there was little to no interest. I said at the time this will never get off the ground.

I talked to Sosnof at TOS and he said there was very little interest at TOS in portfolio margin accounts because the premise is flawed from the start. The whole point to having the "extra leverage" is to use it to hedge, not to over leverage. But it's when you get into a bind when portfolio margin will fail you.

Other advantages of the JBO are 60/40 treatment of equity options. And IB is the only firm I know of that allows one to daytrade in a portfolio margin account with less then 5 million in capital.
 
Quote from rmorse:

Your account, your trading, your business. Any questions?
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Aside from operational advantages/disadvantages a large firm offers you social interaction with other traders. It is pretty important to discuss your trades, ideas, look at what other people do etc.
 
Quote from sle:

Aside from operational advantages/disadvantages a large firm offers you social interaction with other traders. It is pretty important to discuss your trades, ideas, look at what other people do etc.
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I agree. To many traders this social interaction is everything. I was an Amex market maker for many years. I loved being around other traders. But, it's not for everyone.
 
My interest in a PM account is to reduce my target yield per month while increasing my probability of success.

I would rather sell credit spreads at 1% yield with dramatically higher probability of success than at 5% yield which much lower probability of success.

If you are just doing business as usually, but 5:1+, then I agree, stupid.
 
Quote from Traveler:

I think the PM still applies if you drop under 100k, but it only allows closing orders from that point rather than RegT.
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If your trading in a Portfolio Margin account, and your equity drops below the $100K threshold, you would be expected to add funds to your account to maintain the PM margin and risk profile associated with the account. If you don't add funds the next day, the following day, your account would become Reg-T. If your account does not use more than the requirements of Reg-T, you would not have to put in more money. The account would now be a reg-T account. If the account under Reg-T has a margin call, you would have to satisfy that.

I guess some Prime Brokers can be stricter. However, I think the procedure above will be the most common. Open or close does not come into play.
 
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