Trading Company

[Tradewinds 12]

This thread is for the subject of a trading company. What it is, it's benefits, it's detriments, how it would be run, how you would find people to be a part of it, and what it's mission would be. If anyone has experience working in a trading company, or starting a trading company, that would be great. Or if you have no experience or knowledge, but like the idea, or dream of having your own trading company, please share your vision and ideas.

[SIUYA 11]

only good for either.....

1) leveraging other people/employees

2) limiting liability.....no so much these days as you generally have directors guarantees

3) getting a licence to operate other peoples money

 

when it comes to trading with others......thats a whole other kettle of fish, but a company structure is a possibility.

 

If you are an individual why bother with a company, unless there are tax advantages in the jurisdiction you are in.

 

is the company designed to trade its own money, other peoples money?

is it a trading company or a broker, an advisor.

why bother.....it adds extra admin if its not really needed

[Mysticforex 13]

Tradewinds,

 

I have a friend who, after the Dodd/Frank law took effect set out and opened an

IBC ( International Business Corporation ). It is based in Belize ( he is a California resident ). He did so not with the intent of acquiring a Tax Haven, but so he could open a trading acct in the UK ( thru his IBC ) and go back to trading the way he liked.

 

I am trying to pin him down to do an Interview for us here, a recording of which will be posted here on the site.

 

I also have 2 friends in Florida, who for the last 18 months have been in the process of opening their own Forex Brokerage. I am trying to get them to do a video as well.

 

I think a few people will find this information useful.

Edited March 16, 2011 by Mysticforex
sp

[ahighpfrmx 10]

I have been a part of starting an IB (Introducing Brokerage). It primarily deals with non-discretionary client accounts.

 

I figure there are 3 major pillars to be successful in getting your own trading biz running.

 

1. Raising Money-- You need money to trade it eh? Also, you need start up cash. Actually you need a surprisingly small amount to get started if you can get guaranteed by a FCM (Futures Commissions Merchant)

 

2. Successful Trading-- There are plenty of companies in business that can't trade and are still in biz because there better at ^^raising money, but if you can trade successfully there is little to hold you back. If you can trade successfully for yourself, then it's your social responsibility to share that with your fellow man :-)

 

3. Compliance-- If you pass your series 3 or 30 or series 900,000, compliance should be relatively easy. Being guaranteed by an FCM is helpful since they'll address any issues you have.

[beausifuss 10]

One good thing about the idea of a trading business is the added focus it can give to your personal plans and objectives with regard to trading. It encourages the formation of a well defined business plan, objectives to be met, as well as a detailed explanation of your competitive advantage. It encourages you to ask critical questions about different strategies, and worst case scenario plans.

[Masterchanger 10]

 

1. Raising Money-- You need money to trade it eh? Also, you need start up cash. Actually you need a surprisingly small amount to get started if you can get guaranteed by a FCM (Futures Commissions Merchant)

 

.

 

Sorry but I'm not following what "getting guaranteed by an FCM" means. BTW I do know what an FCM is.

 

Thanks,

 

MC

[Masterchanger 10]

If one were to have a large enough account say in the 5-10 million, would it benefit to open an IB (for futures) in order to reduce commissions and be a customer of your IB? I understand that there are programs such as CME/CBOT seat leases that could reduce your exchange fees and that brokerage fees are negotiable but would it make sense to be your own IB or open an IB to service your own large account or CTA?

[JnrTrader 10]

In South Africa, Our financial institutions is governed by the securities services act of 2004 which clearly states that by starting a trading company you will have to comply with the laws of the act.

 

Personally I think the laws are hard core and make it difficult to set up a company

[Tradewinds 12]

In the U.S. you can set up a company as a Limited Liability Company, LLC. The company must have at least two members. One member can be a 1% owner. The LLC can have employees. The LLC is not taxed directly, each member (owner) is taxed on their share of the company's profit. Each LLC member is responsible for filing taxes on their own.

[SIUYA 11]

setting up a company in any jurisdiction is easy....weather it be an LLC, ltd pty, LLP ....

Its what, and why that is important!!

if you take client money - you need licences (to a certain extent)

if you hire people you have extra issues such as super, taxes, HR....

some taxation authorities require you to disclose the nature of the business....income or capital gains....

 

if you are not likely to go down these paths why bother?

 

if you are trading your own money - or family money - depending on the place - look at trust structures instead (now thats a whole other kettle of fish....but well worth while for flexibility if possible)

[Tradewinds 12]

if you take client money - you need licences (to a certain extent)

 

I'm not interested in having clients in my trading company. The company would have members, and they would realize a gain/loss from trading operations. So there is a difference between clients and members of the company. Both members and clients realize gains/losses from trading operations, but the members are part owner of the company. Clients are not owners in the company. So having part owners, avoids the client problem.

My trading company would have nothing to do with retirement accounts. It's purely a business operation. However, owners could take income from the trading company, and put it into a retirement account with a broker if they wanted to.

[Tradewinds 12]

I have been a part of starting an IB (Introducing Brokerage).

 

Here is a definition of an IB:

 

Introducing Broker (IB) Definition

[Tradewinds 12]

I have been a part of starting an IB (Introducing Brokerage). It primarily deals with non-discretionary client accounts.

 

I figure there are 3 major pillars to be successful in getting your own trading biz running.

 

1. Raising Money-- You need money to trade it eh? Also, you need start up cash. Actually you need a surprisingly small amount to get started if you can get guaranteed by a FCM (Futures Commissions Merchant)

 

How do you go about that? Advertise in the classifieds for investment opportunities? Word of mouth amongst your rich friends? Go to exclusive parties with movie stars? Ask family and friends to invest?

[Tradewinds 12]

If you can trade successfully for yourself, then it's your social responsibility to share that with your fellow man :-)

 

What if you fellow man is a scum bag? How are you going to tell the difference? Will you take money from anyone, or do you have guidelines?

[Tradewinds 12]

One good thing about the idea of a trading business is . . . . . . . . . . . . It encourages the formation of a . . . . . . . . . . detailed explanation of your competitive advantage.

 

I won't ever give a detailed explanation of my trading edge. But my owner agreement gives written guarantees against a certain degree of loss, and defines how the company will handle drawdowns, or how much loss the company will take before stopping trading operations.

[MadMarketScientist 11]

I'm not interested in having clients in my trading company. The company would have members, and they would realize a gain/loss from trading operations. So there is a difference between clients and members of the company. Both members and clients realize gains/losses from trading operations, but the members are part owner of the company. Clients are not owners in the company. So having part owners, avoids the client problem.

My trading company would have nothing to do with retirement accounts. It's purely a business operation. However, owners could take income from the trading company, and put it into a retirement account with a broker if they wanted to.

 

If you have no clients are you trading soley with your own money? Or are you trading with 'members' money? If they are owners how are you going to handle them wanting input or say into the company operations? I'm a little confused on how you want this to be structured?

 

It appears to me a hedge fund is essentially the best organization for a trading company ... 2% fee + 20-50% of profits!

 

MMS

[Tradewinds 12]

If you have no clients are you trading soley with your own money? Or are you trading with 'members' money? If they are owners how are you going to handle them wanting input or say into the company operations? I'm a little confused on how you want this to be structured?

 

It appears to me a hedge fund is essentially the best organization for a trading company ... 2% fee + 20-50% of profits!

 

MMS

 

The company would employ a trader. The trader would be me, the part owner. I would be an Owner/Trader. The other owners would be required to sign a legal agreement outlining the understanding that the trader makes all the trading decisions. There would however be a couple of rules concerning losses. At a certain level of loss, the trader would be required to stop trading. That would be part of the legal agreement with the other owners.

 

I actually typed up an Owner Agreement. I'll attach it as an example of what the legal agreement would be. The company name has been removed.

Agreement.doc

[SIUYA 11]

looks like you are reinventing the wheel for what is commonly seen as a unit trust.

I also think that you would want proper legal documentation done to iron out inconsistencies, and make it more an iron clad agreement. Plus upon reading that you might find depending on the jurisdiction you fall under, any complaints might cause the authorities to either rule that you are in fact taking on clients, or would have different taxation implications. Additionally the caluclations of NAVs and your internal accounts to look after all the varying client/owner statements is pretty difficult - there are multiple vrirations of how this can be done.

There is a reason lawyers and accountants make a fortune out of the funds management industry.

[Tradewinds 12]

looks like you are reinventing the wheel for what is commonly seen as a unit trust.

I also think that you would want proper legal documentation done to iron out inconsistencies, and make it more an iron clad agreement. Plus upon reading that you might find depending on the jurisdiction you fall under, any complaints might cause the authorities to either rule that you are in fact taking on clients, or would have different taxation implications. Additionally the caluclations of NAVs and your internal accounts to look after all the varying client/owner statements is pretty difficult - there are multiple vrirations of how this can be done.

There is a reason lawyers and accountants make a fortune out of the funds management industry.

 

Thanks. This gives me more perspective to the issue. Here is Wikipedia's explanation of a Unit Trust:

 

Unit trust - Wikipedia, the free encyclopedia

 

The structure of a Unit Trust has:

 

• A fund manager
  
• Trustees
  
• Unitholders
  
• Distributors
  
• Registrars
  

 

It looks like it's called something a little different in the U.S. of A.

 

Unit Investment Trust - Wikipedia, the free encyclopedia

 

This guy in the U.S. who was just convicted of fraud, was a big hedge fund manager. He was/is a billionaire. His hedge-fund was an LLC.

 

Galleon Group LLC

 

SEC’s Gupta Case Threatens Fair Trial, Rajaratnam’s Lawyer Says - Businessweek

[MadMarketScientist 11]

Owner Name will accept responsibility and be liable for any losses over 15% of any owner's stake in the company.

 

You want to be liable for losses over 15%? Or am I reading this wrong? If not, that is way too risky for you ... even with tight risk\money management a black swan event might happen and you might get caught in a gap. I would not keep this clause in, every owner should share in that risk. You are essentially providing them free insurance!

 

MMS

[SIUYA 11]

The US is different to here in Australia, but from what I do know a LLC is a limited liability company (the equivalent of a proprietary limited company (pty ltd) in Australia).

This is usually the management company that advises and/or manages the funds.

There can be two companies that look after the fund structure/entity. The investment manager and the investment advisor. The manager looks after the day to day running of the fund, and appoints the investment advisor to make investment decisions.

The funds (the assets) are generally held in a trust structure of some sort - these may have units or shares. These are what are given to the investors. The Investors generally never invest in the manager/advisor.

 

This structure is common, but not the only one. It usually involves costs of legal, compliance, accounting.

An alternative is individual managed accounts, however, then again you run into requiring licences depending on the jurisdiction, size of assets, who you are targeting etc.

There is a lot involved and well worth learning a lot prior to running other peoples money....it all looks good until you loose and the clients complain.

 

regards the 15% loss.....yes I read that also and hence the suggestion, dont reinvent the wheel, get professional advice and proper documentation...a typo like that will ruin you. These documents are designed to protect you from the clients, and contrary to popular opinion, they dont protect the clients.

[MightyMouse 12]

Tradewinds it seems like you want to become a CTA. If you have less than 15 clients you don't have to become registered. If you have more you have to become registered with the CFTC.

 

To attract money, you will need to develop a track record. Most people with a brain are going to want to see a few years of non back tested results trading with a live account.

[Tradewinds 12]

You want to be liable for losses over 15%? Or am I reading this wrong? If not, that is way too risky for you ... even with tight risk\money management a black swan event might happen and you might get caught in a gap. I would not keep this clause in, every owner should share in that risk. You are essentially providing them free insurance!

 

MMS

 

Yes, I'm providing free insurance. :rofl: My intent was to begin with a very small investor. Like if someone wanted to invest $10,000 with me. Because I don't have a couple years track record of trading, I wanted to provide an extra incentive for someone to take the risk with me, like a family member who could easily come up with $10,000 dollars. Or someone willing to take the time to have me show them my system, and how I traded it.

 

Here's how that clause would work. Let's say there was a 20% percent loss on the investors $10,000 dollars. That would be a $2,000 dollar loss. But I would only be responsible for $500 of that $2,000 dollar loss. You see what I'm saying? That would limit the investor's loss to $1,500 on a $10,000 dollar investment. A $500 dollar loss to me won't be the end of the world.

 

Yes, there could be a catastrophic event, but all of my trades are less than 10 minutes. Most are 2 to 4 minutes. I'm not saying that eliminates the risk, but it makes it very small.

 

My intent is to be dealing with small investors. I have no desire to be managing millions of dollars. If I were managing millions of dollars, that would change everything.

 

The other issue is, that for this guarantee of a limited loss, I'm taking almost all the profits. For small investors, the math works. For a small investor, investing $10 grand with me, they could earn a 50% return. As the amount invested get larger and larger, the amount of return that the investor gets is smaller and smaller. I designed the math that way because of potential problems managing very large amounts of money. With a $10,000 dollar investment, I wouldn't worry about trading every penny on one trade. With a 500 grand investment, I would not want to risk every penny of that in one trade.

 

If someone wanted to invest $500,000 with me, I wouldn't agree to limiting their loss to 15% percent. But, I would have to take a smaller percentage of the profits. If I were trading 500 grand, and not guaranteeing a return, the investor would want 80% percent of the profits.

[kuokam 10]

To me it is no trick at all setting up a business and start trading. Companies like GE do just that and at time have their financial year save by their trading activities: just arrange a trading desk beside the regular business and...voilà! You are managing the (idle) funds at your disposal for the best.

[Charttrader 10]

I trade successfully myself without the need to market for clients - I spent three years developing a unique model that signals predictive entry and exit. Prior to that I used to have clients under a service company generating approx $30m per year. I can offer you guidance therefore from experience. Dont do it!

 

Your knowledge appears far too limited to deal with clients. The securities and financial services rules and regulations ensure that you will eventually be held to account - as soon as one client losses, or decides to falsely claim fraud (even if there is none), your life will turn to hell. Clients are nice when you make money, but as soon as you lose, and thats a certainty, then they turn on you like dogs on a bone. Best thing would be to set up a hedge fund. You are going to need $200k min just to cover that cost and the legals.

 

Human nature is weird. You can make clients 1000% one year, and they want it the next despite the market having gone quiet. They become dissatisfied. You lose, they become even worse. You earn them little, they want more. You earn them more, they want to know more. Its a wicked game not worth wasting your life on. Trade for yourself and be your own boss.:crap: