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Leverage financing discussion

  • #1
  • First Post: Feb 22, 2015 4:50am Feb 22, 2015 4:50am
I think people needs to be wise in digging into this issue. Prime brokers finance up to a 2% margin and up to 50 times for brokers or funds. That's the prime brokerage model which then explains which institutional brokers like FIXI and etc only provide four different tiers for leverage and at max at 1:50. Now let's dig further, normal MiFID regulated brokers provide 1:100-500 leverage. Question is how do they actually finance it? Do they have such a market cap ? No not really refer to FXCM. So shouldn't ppl actually rethink this issue and find a easier way to define bucket shops or partial bucket shops through leverage? Simple but a debate we should try and face. If brokers say they finance it themselves we know it's bull.
  • #2
  • Feb 23, 2015 3:48pm Feb 23, 2015 3:48pm
This seems to be a bigger issue than I thought.. no one understand it
  • #3
  • Edited 4:49pm Feb 23, 2015 3:58pm | Edited 4:49pm
Since you work for the industry, this is a rhetoric question... Since this is a rhetoric question, what is your purpose with this thread ? Why don't you answer directly ? You want to see what people say in order to laugh at them ? lol

To answer, Brokers are most of the time netting out customer positions against each other.
  • #4
  • Feb 23, 2015 4:50pm Feb 23, 2015 4:50pm
Quoting plotinus82
I think people needs to be wise in digging into this issue. Prime brokers finance up to a 2% margin and up to 50 times for brokers or funds. That's the prime brokerage model which then explains which institutional brokers like FIXI and etc only provide four different tiers for leverage and at max at 1:50. Now let's dig further, normal MiFID regulated brokers provide 1:100-500 leverage. Question is how do they actually finance it? Do they have such a market cap ? No not really refer to FXCM. So shouldn't ppl actually rethink this issue and find a...
Probably none of them (i'm not talking about bucketshops) have a market cap that let them be able to offer 1:100 leverage for example, however keeping in mind that most of clients will:

- not use the whole leverage at any given time (the ones who use it, let's say 1:100 leverage or more, will just need a 40-50 pips market movement to be margin called and get out, so really a short time!).

So let's say that 99% of clients never use more than 1:20 leverage on their trades.
Of all these clients, around 10% are the big ones, the ones with accounts above 250-500k, they are a smaller number compared to the other 90% of mini or small accounts, however they represent the big slice of the overall deposit size on the broker.
Now, these "elite clients" rarely use more than 5x leverage.

So, even the ones who offer 200-500x leverage have not really to worry about it, the few clients that use all of it are margincalled in a matter of days/hours (and usually those are mini-account traders, a few hundreds bucks), and the huge majority of clients rarely use more than 20x leverage.
  • #5
  • Feb 24, 2015 10:59am Feb 24, 2015 10:59am
Quoting MaximeCau
Since you work for the industry, this is a rhetoric question... Since this is a rhetoric question, what is your purpose with this thread ? Why don't you answer directly ? You want to see what people say in order to laugh at them ? lol To answer, Brokers are most of the time netting out customer positions against each other.
I'm not a broker so in theory I would have no idea how they finance 1:500 leverage right?
  • #6
  • Feb 24, 2015 11:00am Feb 24, 2015 11:00am
Quoting tunera
{quote} Probably none of them (i'm not talking about bucketshops) have a market cap that let them be able to offer 1:100 leverage for example, however keeping in mind that most of clients will: - not use the whole leverage at any given time (the ones who use it, let's say 1:100 leverage or more, will just need a 40-50 pips market movement to be margin called and get out, so really a short time!). So let's say that 99% of clients never use more than 1:20 leverage on their trades. Of all these clients, around 10% are the big ones, the ones with accounts...

Exactly, that's what I meant, probably none of them actually finance or cover excessive leverage e.g. 1:100 on a 250k USD acc.

True about the risk and ruin time frames.
  • #7
  • Feb 24, 2015 11:12am Feb 24, 2015 11:12am
Quoting plotinus82
{quote} I'm not a broker so in theory I would have no idea how they finance 1:500 leverage right?
You seem to have very good contacts in this business, so I think you should have more informations...
  • #8
  • Feb 24, 2015 11:15am Feb 24, 2015 11:15am
Quoting MaximeCau
{quote} You seem to have very good contacts in this business, so I think you should have more informations...
It's an unknown secret by all
  • #9
  • Feb 25, 2015 6:28am Feb 25, 2015 6:28am
Quoting plotinus82
{quote} Exactly, that's what I meant, probably none of them actually finance or cover excessive leverage e.g. 1:100 on a 250k USD acc. True about the risk and ruin time frames.
Exactly, most of brokers (even the big ones) don't have absolutely a market cap that would allow all their clients to open 100x leveraged positions in the same time (as we know however, only a few newbies use such leverage in full, and all of them are wiped out from the market).

Even the biggest retail brokers, take fxcm for example, right now have a market cap of 93.4Millions (source yahoo finance, as fxcm is publicly traded company, informations are public), OK before the snb their market cap was of 1.3Billions (source fxcm website), then their stocks have lost 90%, but let's stay in the present moment now, 93.4M.

Customer equity (september 2014) 1.91 billions (source fxcm website).

So, they have 1.91 billions (let's say approximately 1.5billions after the snb event, their customers had lost 250mln on that occasion and some customers left the broker scared of the stock crash, so let's say 1.5billions), and a market cap of just 93.4millions.

So, with 93.4 millions they are offering 1:100 leverage on 1.5 billions..

I must admit that i've no idea how that is possible, maybe i made some huge errors on my calculations, but the numbers seems correct.

So, how do they do?

About the other small brokers, we have to keep in mind that a vast majority of small brokers are in truth just white labels of big brokers, so they pass all their orders to the big broker, like dukascopy for example (plently of small brokers are white labels of them).

But this fxcm thing puzzled my mind.

***Disclamer:
All numbers and hypotesis and calculation on this post are represent my merely opinion on the matter and does not want to be presented as real data of any kind. By reading this post you agree on this fact.
  • #10
  • Feb 25, 2015 6:35am Feb 25, 2015 6:35am
FXCM is not that big

Look at Interactive brokers or IG Markets markets' cap : close to 2B... 20 times bigger
  • #11
  • Last Post: Feb 25, 2015 8:13am Feb 25, 2015 8:13am
Quoting tunera
{quote} Exactly, most of brokers (even the big ones) don't have absolutely a market cap that would allow all their clients to open 100x leveraged positions in the same time (as we know however, only a few newbies use such leverage in full, and all of them are wiped out from the market). Even the biggest retail brokers, take fxcm for example, right now have a market cap of 93.4Millions (source yahoo finance, as fxcm is publicly traded company, informations are public), OK before the snb their market cap was of 1.3Billions (source fxcm website), then...
Agree. Bucket shops everywhere in Europe.
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