Futures Broker Due Diligence Notes post PFG - Reviews of Brokers and Data Feeds | futures io social day trading
futures io futures trading


Futures Broker Due Diligence Notes post PFG
Updated: Views / Replies:21,676 / 112
Created: by djkiwi Attachments:4

Welcome to futures io.

(If you already have an account, login at the top of the page)

futures io is the largest futures trading community on the planet, with over 90,000 members. At futures io, our goal has always been and always will be to create a friendly, positive, forward-thinking community where members can openly share and discuss everything the world of trading has to offer. The community is one of the friendliest you will find on any subject, with members going out of their way to help others. Some of the primary differences between futures io and other trading sites revolve around the standards of our community. Those standards include a code of conduct for our members, as well as extremely high standards that govern which partners we do business with, and which products or services we recommend to our members.

At futures io, our focus is on quality education. No hype, gimmicks, or secret sauce. The truth is: trading is hard. To succeed, you need to surround yourself with the right support system, educational content, and trading mentors Ė all of which you can find on futures io, utilizing our social trading environment.

With futures io, you can find honest trading reviews on brokers, trading rooms, indicator packages, trading strategies, and much more. Our trading review process is highly moderated to ensure that only genuine users are allowed, so you donít need to worry about fake reviews.

We are fundamentally different than most other trading sites:
  • We are here to help. Just let us know what you need.
  • We work extremely hard to keep things positive in our community.
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts.
  • We firmly believe in and encourage sharing. The holy grail is within you, we can help you find it.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

Reply
 4  
 
Thread Tools Search this Thread
 

Futures Broker Due Diligence Notes post PFG

  #1 (permalink)
Identify Evaluate Execute
Mercer Island WA
 
Futures Experience: Advanced
Platform: Ninjatrader/Strategy Desk
Broker/Data: Various
Favorite Futures: TF/NQ/ES/Stocks
 
djkiwi's Avatar
 
Posts: 561 since May 2010
Thanks: 980 given, 1,524 received

Futures Broker Due Diligence Notes post PFG

After the PFG collapse I've been evaluating my futures brokers to determine whether my capital is adequately protected. I'm certainly not panicking but it is clear regulation is poor and the required legislation to protect my capital is some time off. In any case it is prudent to review and take action if appropriate. I thought I'd share my own personal due diligence notes so it may provide some information to others who may be concerned.

Note, prior to opening my existing accounts I'd done a fair amount of due diligence. For this round of due diligence I'm only considering brokers that offer both equities AND futures as they are the only ones able to piggy back their existing equities SIPC coverage.

I've broken the analysis down into; invested capital, proceeds from sales/ initial margin, overnight margin and proceeds of overnight margins and sales. The most important aspect for me is capital protection so that is my ultimate focus. The three candidates chosen were Interactive Brokers, Tradestation and TD Ameritrade/Think or Swim. I only use IB for futures right now but am considering TD/TOS (already use for equities) and Tradestation. I will still evaluate IB to confirm that I have adequate protection.

To conduct due diligence I spoke to the following people:

1. TD- Manager of the trade desk,
2. IB - Manager of the margin desk
3. Tradestation - Senior account rep.

Basically I kept asking for someone else to speak to until I got someone who knew what they were talking about. This in itself was a long drawn out process. I was lucky with tradestation as the first person I spoke to was very knowledgeable.

Disclaimer: The following table and notes are based on telephone discussions. I could have misunderstood some areas and have nothing at all in writing apart from what is on their websites which may also be factually inaccurate. In other words these are personal notes so traders should conduct their own due diligence. If you believe anything I have written is factually incorrect and have specific knowledge in this area please provide any views so I can provide an update to the table.

Here is a summary table:

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


Notes to Table (Table updated in post below):

COVERAGE

1. Interactive brokers

Note 1. If you open up a futures account without an equities account and deposit cash with IB it is covered by the SIPC as futures cash and equities cash is commingled. Because this is a cash account and not an insured deposit account it is covered by SIPC and not FDIC.

Note 2. Once you make a futures trade and then liquidate by the end of the day the initial margin and profit cash stays in the commodities accounts unless you choose the option to sweep to the securities account. Make sure you have this option selected. The commodities account falls under normal segregation rules and there is no SIPC coverage.

Note 3. If you make an overnight trade the overnight margin is transferred to the segregated account there is no coverage. IB calculate the margin on the total of the position. So if you are short -$1m ES and long $1m TF then the entire margin is transferred to the account. Again, if you liquidate, make sure the securities option is checked or the cash will stay in the commodities account.

2. TD Ameritrade/Think or Swim

Note 4. If you open a futures account and deposit cash with TD it is covered by the FDIC for institutional failure as the account is classified as an insured account. If you want to be covered for fraud, open a securities cash account and choose to sweep to that account and be covered by SIPC.

Note 5. If you make a futures trade and liquidate by the end of the day the initial margin cash is automatically transferred back to your preferred sweep account at the end of the day.

Note 6. TD Ameritrade operates an omnibus fund which deals with margin on overnight trades. This means they only transfer to the clearing firm the net position of their total client funds. This means if the clients are long $100m and short $90m then they only transfer overnight margin for the net $10m based on the pro-rata of accounts. They still segregate the cash in total for the required margin but only $10m is transferred out of the TD umbrella. According to them only when the cash leaves TD Ameritrade and deposited with the clearing firm does it become uninsured. Note I spoke to Interactive Brokers about this and they said that wasn't within the rules and the margin on the gross position had to be transferred.

If you liquidate a swing position then you don't need to do anything as the cash is automatically transferred back to the FDIC insured deposit account.

3. Tradestation

Note 7. If you open a futures only account at tradestation there is no SIPC coverage on your capital. The cash between futures and equities is kept in entirely separate accounts. There are two solutions to this:

Firstly open an equities account as well as a futures account and keep the cash in the equities cash account which is insured by the SIPC. Transfer only what you need to cover any initial and overnight margins into your futures accounts. Transfers take 24 hours to process.

The second option is to have most of the cash in Tbills. So if you have a $100k account buy $90k in Tbills and then leave $10k in cash. The TBill is 95% marginable. If you blow through the $10k in cash then you can draw-down the Tbill by paying a $10 fee for each draw down.

Note 8 - If you liquidate a futures trade by the end of the day and are concerned then you must have the equities cash account setup so you can transfer the initial margin and profit cash back to the equities account, otherwise the cash will sit in the commodities account and be uninsured.

Note 9 - Same as above

4. Futures only Brokers

No coverage

OTHER RISKS

Note 10-Further investigation into broker proprietary trading revealed some significant risks to trader account equity. Proprietary trading is the brokerage trading in its on right. The additional risk to customer funds occurs through the brokerage using client assets to collateralize its positions. The is perfectly legal and is sanctioned by the fed as follows:

Under the U.S. Federal Reserve Board's Regulation T and SEC Rule 15c3-3, a prime broker may re-hypothecate assets to the value of 140% of the client's liability to the prime broker. For example, assume a customer has deposited $500 in securities and has a debt deficit of $200, resulting in net equity of $300. The broker-dealer can re-hypothecate up to $280 (140 per cent. x $200) of these assets.

Of the three brokers mentioned above, only Interactive Brokers operates a prop trading desk and a very active one at that. In fact according to recent filings Interactive Brokers re-pledged or re-sold $7.9 billion of $16.7 billion of available client funds. In addition the customer through the IB Fully disclosed clearing agreement authorizes this. These big bets have helped IB make a staggering $850,000 pre-tax profit per employee. Compare this to Apple $400,000 per employee, Goldman Sachs $75,000 and Amazon $9,000.

https://www.interactivebrokers.com/Universal/servlet/Registr...sedClearingAgreement.jsp

Note Section D4 from this agreement which is basically a mirror image of MF Global:

4. To the extent allowed by the Laws and Regulations, Interactive and its affiliated
companies ("Affiliates") may engage in stock lending activity and the lending of
Customer collateral, securities or other property including, but not limited to, using
Customer collateral, securities or other property for their own accounts or for the
accounts of other Customers, and lending, either to themselves, to their Affiliates, or to
others, any Customer collateral, securities and other property held by Interactive in
Customers' Fully-Disclosed Accounts. Pursuant to applicable Laws and Regulations,
Interactive or its Affiliates may deposit collateral, securities and/or other Customer
property with third parties and may pledge, re-pledge, hypothecate or re-hypothecate
Customer collateral, securities and/or other Customer property
, either separately or
together with other securities and/or other property of other Customers of Interactive
for any amount due to Interactive in any Interactive Fully-Disclosed Account in which
Customer has an interest. Interactive or its Affiliates, may so pledge, re-pledge,
hypothecate or re-hypothecate Customer collateral, securities and/or other property
without retaining in Interactive's or its Affiliate's possession or under its control for
delivery a like amount of similar collateral, securities and/or other property and
Interactive or its Affiliates may return to Customer collateral, securities and/or other
property other than the original, or original type of, collateral, securities and/or
property that Customer deposited with Interactive. Collateral that is registered with a
third party may not be in Customer's name.

Note: To get around the US Federal Reserve Board's Regulation T IB, Goldman Sachs and other investment banks use their UK affiliates to hypothecate assets. Whay are they using UK affiliates? The UK has no minimum formula for hypothecating assets so they are open to leveraging client funds many times over. MF Global did exactly this with the sovereign debt bet being many times the total of client funds.

Conclusions

Based on the information above the following conclusions can be drawn:

1. In the event of broker fraud/theft IB, TD and Tradestation appear to be a safer alternative to Futures only broker's because they are covered by SIPC insurance as opposed to futures brokers that have no coverage.
2. Although IB, TD and Tradestation are covered by the SIPC there may not be sufficient solvency to cover claims as the SIPC only has a net $200 million in assets due to the Madoff fraud (present and future claims) exhausting most of its funds. Furthermore the SIPC may simply deny payouts to futures only traders as SIPC is primarily intended to protect securities traders.
3. IB exposes the trader to additional business risks through its ability to hypothecate client assets to collateralize its positions. This is primarily what happened to MF Global. MF Global used client assets to collateralize its European sovereign debt bet that went wrong. IB has the legal right to do the same but in the event of failure could be more catastrophic as it can pledge equities portfolios as well.
4. The risks of futures only brokers have been clearly exposed with the recent demise of PFG due to officer theft. This exhibited significant control issues with the regulator over monitoring segregated funds. The public perception is the regulator does not have sufficient expertise to protect client accounts from dishonest FCMs.
5. If the regulator is able to exhibit in the future that its ability to monitor and control these segregated funds is flawless then FCMs without a prop business could be deemed a relatively safe second alternative to SIPC firms such as TD Ameritrade/Think or Swim or Tradestation (provided equities account in place as well).

Cheers
DJ


Last edited by djkiwi; July 21st, 2012 at 05:50 PM.
Reply With Quote
The following 81 users say Thank You to djkiwi for this post:
 
  #2 (permalink)
Quick Summary
Quick Summary Post

Quick Summary is created and edited by users like you... Add FAQ's, Links and other Relevant Information by clicking the edit button in the lower right hand corner of this message.

 
  #3 (permalink)
Market Wizard
Las Vegas, NV
 
Futures Experience: Advanced
Platform: Abacus, Slide Rule, HP-65, Metastock, TOS, NT
Favorite Futures: Futures
 
aligator's Avatar
 
Posts: 3,424 since Aug 2010
Thanks: 1,053 given, 5,822 received
Forum Reputation: Legendary



djkiwi View Post
I also considered the ownership structures of the above entities, whether they had prop trading and their financial condition.

@djkiwi,

Grate work, thanks. I respect the fact that your decision is personal, so I will not ask about your selection. However, could you possibly comment on your findings with regards to your quote above, prop trading and financial soundness. How do they stack?

Thanks a bunch!

Reply With Quote
 
  #4 (permalink)
Membership Revoked
los angeles
 
Futures Experience: Intermediate
Platform: nt
Favorite Futures: cl
 
Sunil P's Avatar
 
Posts: 292 since Jan 2012
Thanks: 427 given, 175 received

This is scary stuff going on lately,almost contemplating going back to holding equities. The sleep would be better.

Reply With Quote
 
  #5 (permalink)
Market Wizard
New Orleans, La (Mardi Gras City)
 
Futures Experience: Advanced
Platform: NinjaTrader
Broker/Data: Ninjatrader / Optimus Futures / AmpFutures
Favorite Futures: ES / 6E / 6B / CL
 
DavidHP's Avatar
 
Posts: 996 since Aug 2009
Thanks: 798 given, 1,360 received

Here is a post showing some ratings of brokers.
Find your broker and decide what it means.

First MFG(lobal), Now PFG: Who Is Next? | ZeroHedge

Rejoice in the Thunderstorms of Life . . .
Knowing it's not about Clouds or Wind. . .
But Learning to Dance in the Rain ! ! !
Reply With Quote
The following 4 users say Thank You to DavidHP for this post:
 
  #6 (permalink)
Elite Member
Houston,Tx
 
Futures Experience: Advanced
Platform: NinjaTrader
Broker/Data: Mirus Futures/Zen-Fire
Favorite Futures: TF
 
ThatManFromTexas's Avatar
 
Posts: 2,302 since Feb 2010
Thanks: 1,208 given, 4,293 received


DavidHP View Post
Here is a post showing some ratings of brokers.
Find your broker and decide what it means.

First MFG(lobal), Now PFG: Who Is Next? | ZeroHedge

@DavidHP



Atlas was founded 10 months ago. Who are they and what is their standing in the industry? How did they come to their rankings?

I'm just a simple man trading a simple plan.

My daddy always said, "Every day above ground is a good day!"
Reply With Quote
 
  #7 (permalink)
Elite Member
Germany
 
Futures Experience: Advanced
Platform: TradeStation
Favorite Futures: Futures
 
Posts: 88 since May 2012
Thanks: 53 given, 90 received


djkiwi View Post
Note 2. Once you make a futures trade and then liquidate by the end of the day the initial margin and profit cash stays in the commodities accounts unless you choose the option to sweep to the securities account. Make sure you have this option selected. The commodities account falls under normal segregation rules and there is no SIPC coverage.

To my knowledge, SIPC never approved the practice of cash sweeping from the commodities to the securities account. If IB goes under, SIPC could simply classify you as a futures only trader and deny coverage. You would then have to sue the SIPC if you thought otherwise but I think the success of such a lawsuit would be very questionable.

Trading off T-Bills seems to be the only solution to have SIPC coverage as a futures trader. Please confirm directly with the SIPC if you want to be sure.

Reply With Quote
The following user says Thank You to Outlier for this post:
 
  #8 (permalink)
Elite Member
Pismo Beach CA
 
Futures Experience: Intermediate
Platform: TOS, IB, Fidelity for 'swing' trades
Favorite Futures: ES, NQ, IBB, IWM, NG
 
heywally's Avatar
 
Posts: 160 since Apr 2010
Thanks: 80 given, 89 received


Outlier View Post
To my knowledge, SIPC never approved the practice of cash sweeping from the commodities to the securities account. If IB goes under, SIPC could simply classify you as a futures only trader and deny coverage. You would then have to sue the SIPC if you thought otherwise but I think the success of such a lawsuit would be very questionable.

Trading off T-Bills seems to be the only solution to have SIPC coverage as a futures trader. Please confirm directly with the SIPC if you want to be sure.

There's a whole big thread on the SPIC/IB futures insurance thing over at elitetrader .... don't have a link.

"The Future Ain't what it used to be"
Reply With Quote
 
  #9 (permalink)
Identify Evaluate Execute
Mercer Island WA
 
Futures Experience: Advanced
Platform: Ninjatrader/Strategy Desk
Broker/Data: Various
Favorite Futures: TF/NQ/ES/Stocks
 
djkiwi's Avatar
 
Posts: 561 since May 2010
Thanks: 980 given, 1,524 received


aligator View Post
@djkiwi,

Grate work, thanks. I respect the fact that your decision is personal, so I will not ask about your selection. However, could you possibly comment on your findings with regards to your quote above, prop trading and financial soundness. How do they stack?

Thanks a bunch!

@aligator. As mentioned above I currently use IB for futures, also AMP for futures and TD for stocks. Frankly, the issue for me personally is am I going to reduce my uninsured cash in AMP and move it to TOS and/or tradestation to spread around the risk?

At this point I've decided to leave everything as it. Moving to tradestation or TOS would require a major system change. My system is purring right now using ninjatrader with a multi-broker license connected to TD for stocks (although only 32 bit), IB for stocks and futures and AMP for futures. I'd seriously consider TD/TOS though as there are protections there having the equity accounts. I was impressed with tradestation on the telephone but found the whole equities/futures thing a little messy.

The poor datafeed of IB is of no consequence to me because I use Zenfire from AMP. The IB connection although aggregated was rock solid during the flash crash. Irrespective of what anyone says about IB the executions between AMP and IB have been identical. As I use primarily limit orders or stop market orders queued well in advance latency is not such an issue.

TD and Tradestation have no prop trading which are pluses. In addition none of them appear to have an overenthusiastic CEO trying to make their mark like MF Global. i.e trying to turn the brokerage into an investment bank which was the primary cause of the failure.

Cheers
DJ

Reply With Quote
The following user says Thank You to djkiwi for this post:
 
  #10 (permalink)
Identify Evaluate Execute
Mercer Island WA
 
Futures Experience: Advanced
Platform: Ninjatrader/Strategy Desk
Broker/Data: Various
Favorite Futures: TF/NQ/ES/Stocks
 
djkiwi's Avatar
 
Posts: 561 since May 2010
Thanks: 980 given, 1,524 received



Outlier View Post
To my knowledge, SIPC never approved the practice of cash sweeping from the commodities to the securities account. If IB goes under, SIPC could simply classify you as a futures only trader and deny coverage. You would then have to sue the SIPC if you thought otherwise but I think the success of such a lawsuit would be very questionable.

Trading off T-Bills seems to be the only solution to have SIPC coverage as a futures trader. Please confirm directly with the SIPC if you want to be sure.


@Outlier. I agree with you about this. I wrote about this here and it's worth updating the first post with this key point. At the end of the day IB and TD etc can say what they like but it's the intent of the policy that would dictate. SIPC would probably just deny coverage to futures traders.

https://futures.io/brokers-data-feeds/21573-pfgbest-accounts-frozen-16.html#post239283

For me personally most of my IB account cash is used for stocks. If I only traded futures and had no stocks and there was call on the SIPC coverage I'd probably be at the end of the line. To get around this issue the trader could put most of the cash in low beta stocks as the initial margin cash for futures would be very low. So if 90% cash was allocated to stocks and the 10% to initial margin for futures then the trader would be in a better position for priority.


Cheers
DJ

Reply With Quote
The following 4 users say Thank You to djkiwi for this post:

Reply



futures io > > > > Futures Broker Due Diligence Notes post PFG

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)

Adam Grimes: TBA

Elite only

NinjaTrader: TBA

Dec 7

Linda Bradford Raschke: TBA

Elite only

Ran Aroussi: TBA

Elite only
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
Recommend futures, options Broker? sam1197 Reviews of Brokers and Data Feeds 17 March 27th, 2013 01:42 AM
SPI(SFE) Futures Broker tspencer Reviews of Brokers and Data Feeds 26 September 12th, 2012 06:38 PM
Best futures broker for swing traders? muscleman Reviews of Brokers and Data Feeds 4 June 24th, 2012 08:57 PM
What is best broker for intermediate term futures trader? muscleman Reviews of Brokers and Data Feeds 11 April 17th, 2012 04:02 PM
Futures Broker v CFD Provider for trading futures rcampbell Reviews of Brokers and Data Feeds 3 January 5th, 2012 01:53 PM


All times are GMT -4. The time now is 09:53 AM.

Copyright © 2017 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts
Page generated 2017-11-20 in 0.18 seconds with 20 queries on phoenix via your IP 54.198.134.32