PDT Rule & Prop Firms

Discussion in 'Prop Firms' started by tito, Mar 10, 2008.

  1. tito


    Pardon my ignorant question, but if the SEC starts cracking down on firms that give more than the allowed 1 to 4 margin as per the PDT rule (like what we are seeing now in the Tuco situation), why would registered firms like Assent, Echo, Bright, etc. be exempt from this?
    Is there a specific rule that states that registered prop firms are allowed to give their S7 licensed traders more than the standard 1 to 4 leverage?
    After this Tuco debacle, I would hate to open up an account with another prop firm and have this situation happen all over again.
    Any input much appreciated. Thanks.
  2. BidBuster


    Those firms register with the SEC and become a member of an exchange, such as the PHLX, NAZ, ARCA, etc... By doing that there are specific guidelines for which they can legally operate with leverage, they follow the same rules for firms and specialists on the exchange floor for capital, reporting, and the like (one of which is that all exchange member traders must have a Series 7), therefore are not governed by PDT rules (or any retail trader rules) but rather now are governed by the rules of the exchange which apply to all member firms.

    They are allowed to give leverage, charge commissions, and are highly scrutinized by their exchange regulatory departments as well as the SEC, with yearly audits and the like. These firms are specifically allowed to trade with leverage, their traders are for all intents and purposes considered Market Makers by the exchange, you will know if you join one of these firms as the paperwork requirement is much higher, you will have to have a Series 7 exam, and the exchange will conduct a background check on you as you are personally also becoming a member of the exchange and even will pay dues (few hundred dollars per year normally).

    These firms you mention should not at all be clumped in with the unlicensed LLC's that are getting in trouble finally as they are completely different.

    The "Real" I'll call them prop firms (exchange members) have to report their capital to the exchange regulators on a regular basis, have the SEC looking through their books at random, and are much safer places for traders to keep their money over an unlicensed firm.

    A non-member firm can just be a couple guys forming an LLC, getting a website, and prowling for deposits. These guys though do not have to bear the expensive legal and accounting bills that come along with being a real exchange member broker/dealer, so they are often able to offer rock bottom rates through their unlicensed LLC's until they are shut down, usually by someone getting smart and realizing that if they join one of these unlicensed firms and lose all their money, by complaining to the SEC and playing the "I had no idea what I was doing" card, they can get their money back from the partners (usually at the expense of the LLC being shut down and partners sometimes spending some time in a country club-type minimum security facility).

    Many traders do not know this, but if any do want their money back they have lost at an unlicensed firm and you do not care about hosing the others at the firm that is a great strategy to trade for free, which in all likelihood probably played a role in the current demise of the unlicensed firm being very heavily talked about here. Don't bother trying this trick at a "Real" Licensed Prop Firm, passing the Series 7 alone takes away the ignorant to the markets argument alone, not counting getting an exchange membership.

    So to answer your question in a very long winded manner, the Licensed Prop Firms you mentioned are a whole different ball of wax, your money is safer, the structure is exchange approved and sound, and you won't be risking a ban from the business like being at an unlicensed LLC may bring with it - but it does come at the cost of usually somewhat higher commission costs as they bear much higher expenses than the '2 guys and a website' LLC - the choice of what is more important is left to each trader, for many guys a rock bottom rate is worth the unlicensed risk which is why there have been a boom in the number of them lately.
  3. tito


    Thanks for the reply, BidBuster. That was very informative.
  4. BidBuster


    By the way, if it helps any, when you join a "Real" Exchange Member Broker Dealer Prop Firm such as the ones you mentioned, you are subject to the rules of that particular exchange. So the ones that are PHLX or Arca for instance (you will have to do the homework on who is who), do not require you to retake the Series 7 exam even if it has "lapsed." The 2-year expiration is an NASD rule, applicable to only firms who are members of them, many firms you can join right away so long as you have passed the Series 7 at any point in the past, does not have to be a recent thing.

    If you think I am pro-prop trading you have caught me I am. I do not think the small commission savings of an unlicensed/sub-LLC type firm is worth the risk of losing your capital and more.
  5. thank you very much that was by far one of the best posts i have seen on this subject
  6. timcar


    Looks like going forward traders MUST ASK their Prop firms to see the Prop's broker/dealers license and what exchange the Prop firm is register with.

    These non-license Sub-LLC are dangerous. This is bad for traders everywhere no doubt about it. It looks like:

    "The Price of Prop Trading Just When Up"

  7. yeah but the SEC has stated that:

    * it doesn't like to see any deposit requirements at all........because it smells like retail and thus subject to the ridiculous PDT rule.

    * it doesn't like to see "prop" firms charging commissions......because that too smells like retail and thus falls under the jurisdiction of the SEC.

    its hard to see any current prop firm survive it if can't: (1) require deposits and (2) charge commissions........retail prop firms need to be viewed as investment partnerships........where investors (traders) pool capital together to trade and individual payout is allocated based on individual profits/loss.......but these dumbfuck LLCs are all over monster offering "jobs" instead.........i've said all along that all these "job" offerings are going to get them in trouble as they lure unsuspected newbies into a risky game with a 98% fail rate........obviously most will blow up and all it takes is one person to complain after losing their life savings after being misled into a "job" and being unable to get a legit job afterwards.......and now SEC is forced to deal with an issue it rather have looked the other way on as it has for the past 70 years.
  8. dont sweat it bro, sure the tuco thing is a mess
    but it will get cleared up soon enough.
  9. timcar


    It appears that the rules states that retail investors are limited to leverage or buying power of up to 4:1 only. Many traders have been extended higher limits by these Prop firms that were unregister and also avoided having traders pass the Series 7.

    The Professional Prop firms are the only ones legally able to provide buying greater than 4:1 with the unlicensed firms getting away with it for a while until about now.
  10. As opposed to what? Worldco? Or the dozens of other licensed firms which vanished with the bubble?
    #10     Mar 12, 2008