Will Notional Funding Now Become the New Standard?

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DPH
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Will Notional Funding Now Become the New Standard?

Post by DPH » Fri Nov 18, 2011 1:33 am

Given what happened at MFG can anyone make a good case for funding their trading account with anything more than the required margin? (Notional Funding)

It would require a little more work for the occasional wire to be sent or received, but isn’t it worth it?

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Post by cliffg » Fri Nov 18, 2011 2:31 am

Quote:
For example, Hoffman Asset Management (as of this writing) has had a maximum drawdown of about 12.55% on its $250,000 nominal account size program. This means a $31,375 drawdown in cash terms. The maximum margin usage is about 15% on $125,000 or, about $37,500 in cash terms.

Should that not read 250,000 rather than 125,000??

Being in the process of finally finalizing an account opening with Interactive Brokers I was thinking about the same notional funding question. How skinny can one go??
The only caution I can see with an outfit like IB is that from what I read they will automatically close out positions on your account if you are over margined. No one or two days to get the money down to them. That was one nice thing about my Broker --- Price Group / MF Global sometimes it was 1 1/2 to 2 days before the wire actually hit Harris and my account.

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Post by Moto moto » Fri Nov 18, 2011 3:38 am

this is a two edged sword.
With a broker like IB at least you figure that they will automatically stop people out and so your risk is minimised in that they are keeping a tight control on the risk taken by their clients.
Equally so they need to offer a system that can allow instant (or very speedy) deposit and withdrawal facilities. If anyone might do it I think IB will offer it.
They also have different levels of clients - retail and professional - this would make a difference I am sure.
However - there is the added advantage of having a broker stop you out - it saves you doing it :)
As an example - I was lucky during the 2008 meltdown in FX.
I had a hedged trade on with what I thought was enough margin. While travelling between Australia and the UK, the AUDUSD dropped so quickly my hedge was taken out, and by the time I got off the plane it had saved me money....or at least made me money as i was unhedged.
A rare occasion of course, and it may have gone the other way, but an example none the less.
Ultimately though - it confirms that as someone else has mentioned - there is absolutely no upside in taking on the risk of an FCM - keep the minimum and some margin for error - maybe based on where your stops would be, and be prepared to transfer money more regularly.

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Post by Toosday » Fri Nov 18, 2011 7:27 am

I believe, the answer to the question of "how skinny you go" is a personal risk management one. In my case I found that doing some research in developing the distribution of required margin was a useful exercise because it forced me to recognize scenarios that do occur. Anytime you you notionally fund, there will be a probability that you will have a margin call. This was easier for me to deal with when I realized that there is also a lower probability that even with a fully funded account you will have a margin call.

In the end, testing, along with a little bit of judgment helped me with my funding ratios.

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Re: Will Notional Funding Now Become the New Standard?

Post by AFJ Garner » Fri Nov 18, 2011 9:38 am

DPH wrote:Given what happened at MFG can anyone make a good case for funding their trading account with anything more than the required margin? (Notional Funding)

It would require a little more work for the occasional wire to be sent or received, but isn’t it worth it?
Absolutely agreed. No other way forward.

DPH
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Post by DPH » Fri Nov 18, 2011 12:46 pm

For example, Hoffman Asset Management (as of this writing) has had a maximum drawdown of about 12.55% on its $250,000 nominal account size program. This means a $31,375 drawdown in cash terms. The maximum margin usage is about 15% on $125,000 or, about $37,500 in cash terms.

Should that not read 250,000 rather than 125,000??
Thanks Cliffg, yes it should have read $250,000 (I also need to increase the Max DD since it has increased since I wrote this)

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Post by Chelonia » Sat Nov 19, 2011 4:21 am

Never did it any other way for a fund or MA.

Not sure what order types are being used by you guys but when using GTC stop entries these also eat margin, and when your on margin call and/or are not able to take a new position you can just cancel far out entry stops releasing margin at the same time. This will give you enough time to wire additional funds.
If my average margin to equity is 15% i place 25-30% with the broker

When trading through a publicly listed clearing firm you may also want to build in a rule to change broker when their share price drops by 50% (or whatever number you deem fit). After all we are trend followers.

Needless to say perhaps but you may also want to consider diversifying amongst (custodian) banks.

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Post by Aaron01 » Sat Nov 19, 2011 9:54 pm

Chelonia wrote: When trading through a publicly listed clearing firm you may also want to build in a rule to change broker when their share price drops by 50% (or whatever number you deem fit). After all we are trend followers.
Yes, but is share price the optimal measurement by which we gauge the risk of the institution, or do we use how their debt (bonds) are trading? And is 50% the optimal param or is it something else?

Seems like we'll need to create systems to gauge the soundness of the institutions with which we do business. :lol:

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Post by rhc » Sat Nov 19, 2011 10:55 pm

Aaron01 wrote: Yes, but is share price the optimal measurement by which we gauge the risk of the institution, or do we use how their debt (bonds) are trading?
I suppose the theory is that today’s share price will (ideally) discount events that have yet to happen or are in the process of happening.

Enron, AIG, Lehman, MFGlobal (and all the rest of them) all tipped their hands before TSHTF.
Easy to see this in hindsight, and somewhat easy to see in real time, but to ACT on this information in real time might be a different story altogether

The share price may not be the “optimal measurementâ€
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Moto moto
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Post by Moto moto » Sun Nov 20, 2011 4:15 am

In the case of MFGlobals share price you needed cash in the bank as your cheque was bounced or the transfer never came through.....it happened that quickly. So even a well rehearsed exit might not have worked..

What is needed is a whole system of red flags that a company is not doing what it should be doing and the share price is just one of those mixed in with a market sentiment filter.
So in other words, rather than relying on the system, trust in others and the government regulations to provide some protection you need to do your own due diligence, and ultimately much like most of trading even this will be worthless and your real savior will be diversification, cutting losses and running with the trend.
Maybe we should start a thread with examples, put together a list of the X number of relevant flags - good for all future due diligence - even if it amounts to little - it might save some of us in the future. (and no they dont include you saw the CEO going through their neighbors rubbish bin in the middle of the night - but that definitely would be sign there is something not quite right)

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Post by Chuck B » Sun Nov 20, 2011 7:50 am

Using long term data, ala weekly charts, everybody here would be short the gambit of financial stocks from JPM, GS, MS, XLF, KBE, BK, what have you, and would have been short these stocks for a long time now.

Just compare the whole financial industry group with the S&P...I run a trend system on the spread (division spread) between XLF (and KBE) vs the S&P weekly data for example. It went short on 11/24/2006 and rode the whole collapse before closing the short on 04/03/2009. A brief reversal to long on 05/08/2009 which went nowhere and reversed back to short on 12/18/2009. It's been short ever since then...almost 2 years now. Imagine that. With QE2 and QE3 basically benefiting the banks, etc, and the whole time this spread is showing the financials are horrid. It's now approaching the 2009 spike low where there were only a few weeks in early 09 that traded below current levels.

The KBE/SPY division spread has been short since 07/23/2010. Check out BK/SPY division spread -- below the 2009 lows now. Perhaps BK will have some "interesting" news at some point. Just remember when the big news hits on long lasting trades in these types of things, that's often the time to violate the trend system exit (which will be WAY up above), use discretion, and exit the trade. ;)

Hence these types of evaluations of industry groups (I run trend systems on many of these spreads) does give you some insight into the health of that industry, but the real question within this thread is trying to define an actionable point in time. If you followed something like what I've pointed out, you'd have all your funds in Treasury Direct probably and just hope the US Govt won't confiscate those funds from you during a collapse. :shock:

More likely, as some have pointed out, following the credit of the company you're interested will yield much more timely information. CDS' or bond prices. Stuff like ATR triggers on weekly data where you get a discontinuity...heck, just throw a trend system on spread data on France, Spain, Italy et al bonds versus the Bund this year an look at how well it has captured the collapse in the EU.

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