WTS alliance with T3 Trading

[ScalperJoe]

More from T3's SEC filings (SEC.gov).

T3 loses money year after year. Their own filings show their company (Class A represents their ownership's capital) lost money in 2010, 2011 and 2012. (They did not post a breakdown of earnings by member classes for 2013.)

http://www.sec.gov/Archives/edgar/vprr/13/9999999997-13-001763 (page 8 of the PDF, which is page 4 printed on the document due to the cover letter).

In 2012, the most recent year they show the breakdown of losses by member class, T3 lost over 30% of the amount of their company's capital base as of the end of that year. (Finished 2012 with $670,000 of Class A loss, and they left the year with only $1,931,000.) Looking at their previous years, this seems to be a pattern, not an anomaly.

The $10 million total capital (versus only $1.93 million of their own) on 12.31.2012 shows they are highly leveraged and running the firm mostly off trader and group leader capital contributions (5 times leveraged by using Class B and C capital contributions).

"T3 loses money year after year." Sgt. Slotter seems to dig deep into specifics, so let's add a few:

In 2010, T3 reported members' equity of $1.2 million.
In 2011, that number rose to $9.1 million.
In 2012, the number rose yet again, to just over $10 million.
And in 2013, the last year of publicly available filings, yep, it rose, AGAIN, to $14.8 million.

It was already posted that as a "Class C" member, your losses are capped by your capital contribution. In other words, if you put up $5k, then you are not liable for losses beyond that 5k. If for any reason a Class C trader "blows up" beyond their capital contribution, then the losses are absorbed by either the Class B or Class A members.

Fortunately, Class C traders have made money! Specifically...
In 2010, they made just over $63,000.
In 2011, they made $3.3 million.
In 2012, they made around $3 million.

As you correctly stated, the breakdown of members is not listed in the 2013 filings. However, it's quite possible that they made money in 2013 as well, given that the members' equity base has increased in each year since 2010.

Regarding the Class A members/owners showing a loss could just be a means of fancy accounting. You'd have to see their actual broker statements to prove the claim that T3 "loses money year after year."

Whether they show a loss or gain is immaterial until the firm has fully exhausted their Class A equity and cannot maintain operations through its cash and financing activities, and thus begins to pull equity from Class B and C traders. However, this is NOT the case with T3's filings. In fact, for the most recent year, 2013, T3 showed net capital as defined by SEC Rule 15c3-1 of just over $7 million dollars!

 

[ScalperJoe]

But wait! There are kickers! All from publicly available regulator websites.

Check out their clearing firm, ETC (full name is Electronic Transaction Clearing), on SEC.gov and Finra's brokercheck.

The SEC site shows their whole clearing firm only has $2.023 million dollars! That is smaller than many of the single, solo accounts of active trader's retail portfolio margin accounts. Repeated, the whole clearing firm is run off of a capital base of $2,023,000!

And yet more public information from the regulators websites! Check this out. Read through but make sure you get to the end, #17 in the notes.

http://www.sec.gov/Archives/edgar/vprr/14/9999999997-14-004554 (also detailed on finra.gov).

So to top it all off, ETC received a $1,000,000 fine from the regulators last year (and is appealing), along with a regulatory suspension of their CEO, the COO and the CEO of their parent company. They are also dealing with charges from Finra and subpeona's of their management by the SEC a another matter, of which they say there is 'uncertainty' about the outcome.

But wait! Sgt Slotter didn't mention the following "kickers" regarding Electronic Clearing...

From page 7:

"Cash of $43,243,200 has been segregated in a special reserve bank for the benefit of customers under Rule 15c3-3 of the SEC or agreements for proprietary accounts of introducing brokers."

If T3 is one of their customers, then it's reasonable to assume that T3's equity is maintained as part of this segregated account balance, and thus its capital is not related to ETC being "run off a capital base of $2,023,000."

Regarding the FINRA inquiry, there are Reg T margin issues and determinations of reserve requirements as per SEC 15c3-1. ETC had $2.7 million dollars as of December 2013. This has no relation to T3's financials or T3 being a customer.

The regulatory suspension of their CEO, the COO and the CEO of their parent company plus the FINRA issues may be a going concern for ETC, but not for a Class C member at T3 where the primary motive is to focus on their trading, and where the losses are capped by their own capital contribution.

 

[ScalperJoe]

More from T3's SEC filings (SEC.gov).

So to sum up, all from public filings, T3:

- lost money in 2010, 2011 and 2012 (and stopped disclosing it in 2013 thank gosh)
- runs their firm at 5 to 1 leverage off of trader capital
- plays Russian roulette with their firm's money ($10 million plus, much of it which looks like trader capital contributions) by putting it in a clearing firm with only $2 million capital base
- and does business with a clearing firm which was already punished with a $1 million dollar fine, along with its CEO and its COO/President being suspended for 6 months, which, if it loses its appeal, or one of the other pending regulatory matters it outlines in note 17 (with each of FINRA, the SEC and CBOE), will be down to $1,000,000 and lose its leadership (who is one of the guy's signing off on their SEC submitted financials!)

All these warning signs from just their public filings. Can check them out yourself.


http://www.sec.gov/Archives/edgar/vprr/13/9999999997-13-001763

http://www.sec.gov/Archives/edgar/vprr/14/9999999997-14-004554

http://www.sec.gov/edgar/searchedgar/companysearch.html

Finra.org

So to sum up, T3, also from public filings:

- had class C members (licensed proprietary traders) who MADE MONEY in 2010, 2011, 2012 (2013 not being reported by individual class) and 2014 filings won't appear until March or April 2015.
- increased its total members' equity by a factor slightly greater than 1,000% (or ten fold) from 2010 to 2013
- had open long AND short positions at the end of each year in the millions of dollars, suggesting that the firm hedges its bets and applies overnight/swing trading strategies, and thus does not exclusively rely on day trading profits to maintain its growth and operations
- does business with a clearing firm that maintains over $40 MILLION DOLLARS in segregated accounts, including those of T3

And to top it all off, it just bought out one of its major competitors, WTSprop, which includes all of its sub-groups with access to the Fusion trading platform. So in T3's 2014 filings it's reasonable to assume they will report even a greater amount of total members' equity, and perhaps even greater net capital as per SEC 15c3-1.

Surely, all of these "warning signs" would make any Class C member want to withdraw their capital immediately and put their money in a Schwab account!

 

[ScalperJoe]

For those who haven't seen this, it's quite a good look at the world of trading, including a few appearances by Scott Reddler of T3. It's from the BBC and fairly recent (early to mid 2014).

 

[ScalperJoe]

Be aware when making a capital contribution to T3 of their financials. Scrutinize them and ask questions, and require answers, preferably in writing. You have the right to ask. The SEC forces these public disclosures for a reason! Your capital contribution is NOT a deposit. It is subject to the losses of the firm including their operating expenses (read any prop firm's operating agreement).

Ok, I do agree with the part of your post about asking questions. Specifically, IF a trader has to choose between putting up, say 50k with T3 vs. Bright, I would ask the following:

1. In 2010, 2011 and 2012, T3 listed the total members' equity by class, but in 2013 it did not. What was the Class A member's equity in 2013, and what is it currently?

2. In 2010, 2011, and 2012, T3 listed ABN-AMRO as their clearing broker, a well capitalized firm with global operations. Why did T3 switch to ETC, and does T3 still maintain any clearing or prime brokerage with ABN-AMRO?

3. Given that T3 lists the dollar amounts of end of year securities owned and sold short in its focus reports, will T3 allow a Class C member to hold overnight positions, and under what terms?

For those with smaller capital contributions (the standard 5k or so), these questions are probably irrelevant. However, given that a firm such as Bright requires a much higher capital contribution, and is transparent about Class A capital, clearing, and overnights, if one wants to "scrutinize and ask questions" to T3 as Sgt Slotter suggests, then the above questions are some to consider.

 

[SgtSlottter]

Why do you think that T3 is considered a customer of ETC? Most proprietary trading firms (that are broker dealers like T3) are set up as JBOs (Joint Back Offices). Again, not 100% sure, but I think that JBO participants are technically set up as limited partners or shareholders of the clearing firm, making the funds at the clearing firm part of the firm's capital. The implication I am making is that T3's money would not be included in segregated funds and would be in a similar spot to other equity owners of ETC if they go bankrupt (aka at risk, not insured, protected).

Also - I don't think ETC is approved for Portfolio Margin Accounts, which would be the only other way T3 could be set up there, and which would make them a customer of ETC. But again, considering ETC is tiny capital wise, I can't see the SEC approving them extending extra leverage.

ETC seems to be in dire trouble according to notifications make public by SROs (search the CBOE, SEC and Finra site for disciplinary actions).

 

[SgtSlottter]

Scalper, also confused on why you think total capital matters at all? My point was that you need to find out if they have a cushion over the trader capital (Class C). Bigger is not better, it might just mean they are good BS artists. Bear Stearns was big too, but not safe. When things turned, their cushion was not sufficient. (Okay in the end none of the big banks had enough cushion, but Bear Stearns was extra leveraged and failed before the others, along with other highly leveraged lenders). In fact, if T3's Class A capital remained the same (let's use 2 million), then they grew the firm's overall capital, it means they are even more heavily leveraged onto trader capital than they were after T3's scary 2012 numbers on SEC.gov.

Class C capital is at risk is the whole point. If they don't have a reasonable cushion to cover other Class C losses, Class A or Class B losses, or their firm's operating expenses, rent or any regulatory fines or legal fees.

 

[1245]

Why do you think that T3 is considered a customer of ETC? Most proprietary trading firms (that are broker dealers like T3) are set up as JBOs (Joint Back Offices). Again, not 100% sure, but I think that JBO participants are technically set up as limited partners or shareholders of the clearing firm, making the funds at the clearing firm part of the firm's capital. The implication I am making is that T3's money would not be included in segregated funds and would be in a similar spot to other equity owners of ETC if they go bankrupt (aka at risk, not insured, protected).

Also - I don't think ETC is approved for Portfolio Margin Accounts, which would be the only other way T3 could be set up there, and which would make them a customer of ETC. But again, considering ETC is tiny capital wise, I can't see the SEC approving them extending extra leverage.

ETC seems to be in dire trouble according to notifications make public by SROs (search the CBOE, SEC and Finra site for disciplinary actions).

You said a few things that are correct and others that are a little inaccurate.

-T3 Trading Group, trades securities for it's own account & accepts LLCs and individuals as members, but they a registered broker dealer. CPM accounts are for customers.
-T3, as a broker dealer, has a referral agreement with LightSpeed Trading for retail customers. They share commissions with LS when they send customers there.
-T3 clears trades though ETC-they are either their executing broker (they offer VERY low rates) and/or they clear their traders. My guess is that those are day trades as ETC offers very little overnight leverage. It is possible that they keep their AUM at another brokers and DVP trades at end of day.
-T3 can't have a JBO relationship with ETC, because that relationship would require $25M in net capital for ETC. They don't have that.
-It is possible to run a prop firm that is mostly day trading without a JBO relationship

Their FINRA Broker Check used to say that they had a JBO relationship with ABN AMRO. It does say that anymore. Most Prime brokers are getting rid of these relationships. A prop firm does not need the extra leverage if they are well capitalized and do mostly daytrading. One more thing, "JBO participants are technically set up as limited partners or shareholders of the clearing firm," is not accurate. It is an agreement between the two firms. The limited partners have no direct relationship with the prime broker. And yes, ETC currently has an outstanding fine of $1M plus a penalty for two of the owners that would require stepping down for at least 6 months. It is being appealed. And, finally, you are correct, if T3 has their capital at ETC, they are not protected by SIPC. NO broker dealer is protected by SIPC for their capital, only customer accounts.

1245

 

[ScalperJoe]

A prop firm does not need the extra leverage if they are well capitalized and do mostly daytrading.

1245

Yes that's true, however as I posted above, T3 does not rely exclusively on daytrading.

From their most recent SEC focus report (2013), here are some amounts to consider:

Securities Owned: $26,662,904
Securities Sold, Not Yet Purchased: $27,889, 888

The amounts due from broker stood at $14,906,157 (which basically amounts to the aggregate members' equity of $14,885,476), and clearly states that this amount "may be restricted to the extent that they serve as deposits for securities sold, not yet purchased."

It also clearly states that there is "inherent risk arising from its investing activities of selling securities short" and that "the ultimate cost to acquire these securities may exceed the liability in these financial statements."

So, it seems T3 held overnight positions as of December 31st at 2:1 margin, and hedged it with an equal amount of short positions.

One can make an argument that T3 is "well capitalized" to hold such values, if in fact the trades close in the firm's favor, on both the long and short side.

However, IF the closing values of the trades have a significant impact on the firm's balance sheet, then it could cause a concern given that they are tying up virtually all of members' equity to hold such overnight positions.

 

[ScalperJoe]

Scalper, also confused on why you think total capital matters at all? My point was that you need to find out if they have a cushion over the trader capital (Class C). Bigger is not better, it might just mean they are good BS artists. Bear Stearns was big too, but not safe. When things turned, their cushion was not sufficient. (Okay in the end none of the big banks had enough cushion, but Bear Stearns was extra leveraged and failed before the others, along with other highly leveraged lenders). In fact, if T3's Class A capital remained the same (let's use 2 million), then they grew the firm's overall capital, it means they are even more heavily leveraged onto trader capital than they were after T3's scary 2012 numbers on SEC.gov.

Class C capital is at risk is the whole point. If they don't have a reasonable cushion to cover other Class C losses, Class A or Class B losses, or their firm's operating expenses, rent or any regulatory fines or legal fees.

Total capital matters since it's all "firm capital" and the way you would define your "Class C" capital risk is as a percentage of TOTAL capital. WTS took traders who only had $2,500 of capital, so let's pretend these traders migrate over to T3. Since we know the amount of members' equity was around $15,000,000, the percentage risk of a $2,500 piker vs. the TOTAL capital is a mere .00016%.

Why do you think a trader with a $2,500 capital contribution is going to worry about their capital being eroded due to a firm "blow up" when the firm IN THE AGGREGATE has approximately $15 million dollars?

It was already mentioned repeatedly that a Class C member is NOT liable for losses beyond their capital contribution. Besides, the Class C member is more likely to lose his/her own capital from platform/data fees, trading commissions and losses than the Class A members who are most likely the ones holding the overnight positions at the firm, and are hedged.

The cushion over the Class B/C capital is only relevant if the total members' overnight positions go sour. I've already stated that someone joining T3 with a large capital contribution may want to find out where T3 currently stands regarding its Class A totals, since they stopped reporting that amount in their SEC reports.