I liked IB because of their size and conservative investment philosophy for client assets. I was unaware that they used my money to finance their proprietary trading.
My belief was that segregated funds were segregated. Since my segregated funds can be used legally to finance a proprietary trading venture, I will not trade with any broker who engages in proprietary trading. It makes no sense to assume the risk associated with proprietary trading without sharing in the profit.
The size of IB's proprietary trading operation makes one question whether their brokerage operation is just a means to fund their proprietary trading operation. Instead of operating as a Commodity Trading Adviser that risks client's money and shares the profit with the client, IB operates as a broker, risks client's money in proprietary trading, and does not share the profit with the client. Why would anyone want to place their money in such a situation.
I would like to use someone like TD Ameritrade, that has solid protection for their client's money, as a clearing broker and a smaller innovative FCM like Velocity to execute trades.
Does TD Ameritrade do any proprietary trading?
Does Velocity do any proprietary trading?
Can I use Velocity as an executing broker and TD Ameritrade as my clearing broker?
Does all of my money reside with the clearing broker or is some of it under the control of the executing broker?
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I will finish reading the whole thing later, but thank you for the thread in advance.
Still the best tactics for me would be not making a ton of research but to divide your account into several with different brokers. Three brokers is good. Even two brokers is a good protection.
Even choosing the most safe broker one does not protect himself from black swans where you account cant be paid for some reason. As a person I don't believe in safety, no matter what a salesman tells me. I am as stubborn as a mule maybe even more when it comes to believing anything.
Also, safety of funds is not to be limited to smiliar incident as the PFG one.
Day trading with only one broker with leverage higher than 10:1 is death for sure. When your broker has technical issues and you can't trade and have an open trade or pending orders (take profit and stop losses are not always stored on the server, depending on what and where you trade), you might well kiss your account good bye shall the price explode. It would be foolish in this situation not to have a second broker where you could open an opposite position of similar size for the same price as your pending order. It happened only once to me but it did save me a lot of money.
Closing traders over phone is slowly and can cost you a lot more.
So, having funds divided into several accounts proved useful to me.
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Because most other options are not very appealing either i.e pick your poison. I mainly use IB for swing trading futures because ninjatrader ATM strategies are from what I can tell correctly handled on their servers. Other brokers simulate ninja strategies on the PC meaning if a stop is triggered during an outage the original targets remain live on the system and are not cancelled. These can be triggered leaving the trader in naked positions. With the Optimus X-trader and AMP-CQG you can at least log in and cancel the orders on their systems. There is no option to do this with AMP-Zenfire. Both options are of little use to me if the outage occurs at 3 am and I'm asleep which is why IB is the preferred vehicle.
Not to my knowledge, although should be confirmed with them.
Not to my knowledge, although should be confirmed with them.
My understanding is the customer has no option but to accept the clearing broker the executing broker uses.
My understanding is the only funds that pass to the clearing broker are to cover the day and initial margins. If you close all your positions prior to the close then all your funds will be with the executing broker.
Note these represent my understanding and would recommend you confirm these points with your broker and report back if my understanding is incorrect.
Last edited by djkiwi; August 13th, 2012 at 07:45 PM.
The costs will likely be prohibitive pushing some of the smaller FCMs out of business unless they can pass on the costs to the trader via higher commission costs.
I'm not sure how this would help or work in practice for a few reasons. Firstly if you look at the MFG situation they were publicly listed with a plethora of financial information available to the trader/public. The massive sovereign debt bet that sunk them was unknown to all and sundry and happened fairly quickly. Even the most astute trader would have had difficulty seeing that one coming.
PFG is no different to AMP, Velocity, Mirus etc. They are private companies with owners also able to hide financial data. We know all of these firms are financially weak given their minimal net assets listed on their financial disclosure statements.
These issues are often hard to quantify before it is too late. For example, in a former consulting role I used to write investment mandates for very large pension funds. I remember an instance whereby one of their fixed income managers took a very large duration bet that significantly exceeded the benchmark in the mandate. I only picked this up 3 weeks later analyzing their portfolio asking why they performed so poorly during the month relative to their other fixed income managers. I was able to quantify the loss and they had to pay back the customer. The point is I only found out about this well after the event and if the bet had been much larger it could have sunk them.
You make some excellent points DJ. MF Global's demise is proof that there is no magic bullet to prevent FCMs from failing. However, some customers were able to get out in time as MF Global's financial predicament became public in the weeks leading up to the bankruptcy filing. That's little comfort to the majority who were rapidly overtaken by events, but it is in stark contrast to PFG which went under without any warning whatsoever. Public disclosure of financials clearly could have made a difference with PFG.
Last Thursday the CFTC held a public hearing to determine what steps should be taken to repair the damage done by the bankruptcies of PFG and MF Global. I’d like to share with everyone some of the highlights of the hearing:
Better Accounting Standards: There was much discussion of auditing standards for both Regulators of FCM’s and the CPA’s who audit FCM’s. There was general agreement these standards need to be raised. FXCM believes FCM’s should be required to use a top accounting firm to avoid the kind of accounting issues that plagued PFG.
Additional Disclosure Requirements: An extensive discussion on FCM transparency was held and it is clear that FCM’s are going to have to make more disclosures of their books to regulators and to the public. The question is how much is to be disclosed? On the one hand there was testimony from FCM’s like Vision who publish their balance sheet on their website and on the other hand were those who were concerned that too much disclosure could lead to possible “bank runs” by investors. FXCM believes investors should be able to see a company’s audited financial statement once a quarter. Too many investors are forced to fly blind when they choose a Futures Commission Merchant or Forex Dealer. No trader should be subjected to this kind of risk post-PFG.
Insurance: Commissioner Bart Chilton released his proposal for a futures insurance fund on the same day of the hearing. Towards the end of the Roundtable the topic turned to insurance and John Roe of the Commodity Customer Coalition once again made a forceful case for a fully insured fund for the futures industry. As of now, Commissioner Chilton’s proposal does not include retail forex, but there is no reason that it shouldn’t. FXCM supports insurance for the futures/forex industry.
The CFTC will now deliberate into October before announcing their proposals.
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Actually, I doubt this would have made any difference as PFGs public disclosures would have been based on falsified financial data. Bear in mind they had audited financial statements. They could have released these publicly but they would have been false.
For FCMs not involved in prop trading the financial strength of the FCM is neither here nor there as they have no legal right to do anything with customer funds except keep them in a segregated account.
All that matters for non-prop FCMs is whether the funds are correctly segregated and the monitoring mechanisms are in place to make sure they are segregated. You could still have a firm financially sound and stealing your money.
What needs to happen in my opinion is the regulator must check balances electronically daily provided by the bank. The problem is the bank balances need to be reconciled to the ledger balances provided by the FCM which of course could be falsified. In this case the regulator should enforce two company officers being responsible. One person for preparation of the information and the another for verification. These company officers would have severe penalties if they falsified any documents.
For firms involved in prop trading this is another matter totally and they should have strict reporting requirements on the amount of customer funds used for hypothecation so the trader can make an informed decision on the overall risk. Take IB for example, their hypothecation activities are buried in their balance sheets in inter-company transactions with their UK subsidiary. Who would know that unless there was a requirement to disclose.
Last edited by djkiwi; August 15th, 2012 at 07:00 PM.
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Just read a very interesting comment letter to the CFTC by James Gellert of Rapid Ratings I thought I'd share with everyone:
Mr. Gellert makes the following comment about the benefits of FCM’s being required to disclose their audited financials:
Mr. Gellert’s point about the difficulty of forging financial documents using the kind of standards that publicly traded companies use is well taken. Had PFG been forced to use such standards Wasendorf’s scam would have likely been caught long before July of 2012. Furthermore, ratings agencies like Rapid could break down the data in a manner that average investors could more easily understand. Although, we disagree that only ratings agencies be allowed to see such data. We believe any trader who opens an account with a FCM or Forex Dealer should be able to judge for themselves a firm’s financial health.
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Frankly, after reading that I'm not sure Mr. Gallert really understands the issues. All this looks like is marketing to me. For example, I use AMP as a broker. Their net assets are a reported $800k and they do not engage in prop trading. The issue is not applying fancy formulas but whether the funds are segregated. If AMP went bankrupt tomorrow it is irrelevant to me provided the funds have been segregated and constantly and accurately monitored by the regulator.
All Gallert is suggesting is loading up the FCM with additional unnecessary auditing costs. The auditing needs to focus on segregation nothing more and nothing less in my opinion.
Secondly, MFG was a publicly listed company and what good did that do. I agree prop trading firms like that need more stringent requirements. The important point here is disclosing the percentage of the customers funds leveraged and the extent of the exposure. Any material changes to their net derivatives exposure should be reported to the regulator daily.
I also think the Fed needs to put some heat on the UK governing authority to put some limits in the hypothecation of client funds. Bear in mind the reason MF Global went down the toilet was because unlike the US, the UK had no limits in place. They sent client US client funds to their UK subsidiary and went on a sovereign debt spending spree.
Last edited by djkiwi; August 17th, 2012 at 07:13 PM.
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