Regulators Cracking Down on Independent Prop Trading Firms

The diaspora of feet all over the Street is leading some folks to sign up with shady prop trading firms.

The allure is tempting; put down a deposit and get a credit line that you can lever up 20 to 1.

But the SEC is cracking down on shops that are essentially Ponzi schemes, pass this along:

The Securities and Exchange Commission today announced that it has obtained an emergency court order against an unregistered securities day-trading firm in La Jolla, Calif., that was not disclosing to traders that more than one-third of their money was being used to cover other traders’ losses or pay firm expenses. The SEC’s complaint alleged that approximately 35 percent of their equity was diverted, leaving an approximately $3.62 million shortfall in the traders’ equity as of Dec. 31, 2007. In issuing the emergency orders, the court found that the SEC had shown that the day-trading firm was violating the broker-dealer registration and antifraud provisions of the federal securities laws, and ordered the appointment of a temporary receiver to safeguard customer assets.”

A while back, day trading prop trading firms were busted for counting traders’ deposits as part of their “net capital” accounts. FAS 150 accounting rules for separating true debt from true equity does not allow this practice. Prop trading firms organized as broker dealers have net capital requirements and many were alleged to be in violation; after reclassifying trader deposits to debt from equity.

Now, even if a prop trading firm broker-dealers (BD) is in compliance with FAS 150, they may have serious problems with the SEC; along the same fault lines as in the Tuco case. They too may be accused of shifting deposit money around in inappropriate ways and not disclosing this to day traders in their firms.

Update: TUCO Trader responds to allegationson Compliance Insights:

The SEC didn’t bother to ask Tuco about it’s multiple accounts (which can and do offset each other) and they are not accounting for all the money correctly with their allegations. Tuco is a standup firm with plenty of capital I know Doug and the partners personally and I have a private agreement with them not as a customer but as a class B memeber of the firm. The “money defrauding” allegations are not what this is about. This is about Tuco being bullied for not being a “licenesed” broker dealer and profitting from commissions and assigning leverage which only “registered” broker-dealers can do. Ehem! Very clear example of government “regulation” trying to “protect investors”, but which also inadvertantly elimantes competition… hm, I wonder why?!! The only thing being defrauded here is capitalism and private independent traders being able to compete with Ibanks, MM firms, and hedge funds. Traders aren’t investors who need protecting, we’re smart capitalists and the PRIVATE agreement we entered into under a PRIVATE LLC is no business of the governemnt! Tuco does not represent itself and has never represented itself as a broker, PERIOD!

Compliance Insights

SEC Obtains Emergency Orders Against California Firm Defrauding Day-Traders
Green Trader Tax
-----------------------------------------------------------------------------------------------------------------------
The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

Comments:

<< Back to main