Subscribe Feed (RSS)Messing with the SEC
April 6th, 2008 by eyal | Filed under Day Trading. |
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Trying to bypass regulations like the Pattern Day Trader requirements is asking for trouble.
The complaint alleged that Tuco provided traders with services unavailable at a registered broker-dealer. As alleged in the complaint, they allowed traders to day-trade without meeting the $25,000 minimum equity requirement under NASD regulations for such trading. The SEC’s complaint also alleges that for each $1 in the trader’s sub-account, Tuco and Frederick allowed the traders at Tuco to use up to $20 of Tuco’s equity, which has been invested by other traders, to purchase securities (20:1 buying power). NASD and NYSE regulations, however, only allow a day-trader to have 4:1 buying power. The SEC’s complaint also alleged that Tuco received transaction-based compensation for its members’ trading, and Tuco’s traders conducted substantial day-trading through Tuco’s brokerage accounts both in dollar amounts and number of trades. As a result, Frederick earned substantial commissions on the trading as the registered representative for the Tuco principal accounts at the registered broker-dealer.
The complaint alleged that Frederick then used substantial amounts of his commissions to pay Tuco’s operating expenses.The complaint also alleged that the defendants’ inaccurately reported to the traders their equity balances.
H/T to Assaf.
Doesn’t this basically describe every small prop firm I’ve ever heard of? In fact, I thought these practices were exactly why most small prop traders went to a prop firm in the first place…
Richard - those were my thoughts exactly, I couldn’t see how this is any different. But I don’t know much about prop and never been to one so.. maybe someone who has can shed some light on this.
that will definitely change the business model
I guess the key is that they weren’t registered properly. Whatever difference that’s supposed to provide.
I know that by SEC regs, prop firms can legally extend the massive leverage and skirt PDT rules only if they’re registered members of an exchange and their traders meet certain regs (like the Series 7 in the US).
I don’t see the big deal, but if it was simple to register, I guess they’d've done it.