Category “Prime Brokerage Information”

TradeStation’s NYSE Floor Operation Implements Buy-Side Institutional Program

September 28th, 2010

Service Focuses on Floor Broker Parity and Transaction Pricing

New York, NY, September 28, 2010 – TradeStation Securities, Inc. (Member NYSE, FINRA, NFA and SIPC), through its TradeStation Prime Services division, recently launched its NYSE Floor operation, including its outsourced trading desk, to help meet the growing demand of hedge funds and other institutional clients who seek to enhance their transaction pricing while providing additional liquidity. The NYSE trading floor features a parity based model when allocating executions allowing market participants to operate a diverse strategy mix including both classic institutional order flow and higher frequency models.

As described by NYSE Euronext on its website, “The NYSE is the only market to offer both high-tech automation for low latency and complete anonymity along with high-touch participation by market professionals to provide orderly opens and closes, lower volatility, deeper liquidity and price improvement opportunities throughout the trading day. This unique combination provides customers with the highest levels of market quality and competitiveness… Brokers on the NYSE Trading Floor leverage their physical point-of sale-presence with information technologies and order management tools to offer customers the benefits of flexibility, judgment, automation and anonymity with minimal market impact.”

As a self-clearing, agency-only broker-dealer now with NYSE Floor capabilities, TradeStation can leverage this technology and its membership by offering, through their Floor Brokers, access to the NYSE Floor along with over 40 pools of liquidity away from NYSE. Active traders, including spread traders and derivatives traders can also integrate their trading strategies into algorithms that Floor Brokers access from their Hand Held Devices that are engineered specifically for the NYSE parity based model.

For additional information about TradeStation Prime Services, please visit: http://www.tradestationprime.com/.

About TradeStation Prime Services, a division of TradeStation Securities, Inc.

TradeStation Prime Services, a division of TradeStation Securities, Inc., was founded to serve the needs of start-up to mid-sized hedge funds, registered investment advisers, professional traders and asset managers who need quality prime brokerage services, including execution and clearance, securities lending, capital introduction, and “incubation” services. Clients are offered electronic trading and decision-support platforms, including TradeStation, to analyze their trading strategies and automate or manually place their orders, and may avail themselves of the firm’s NYSE floor membership, which allows it to execute trades on behalf of clients on the NYSE floor as well as in other market centers from its NYSE floor booth/outsourced trading desk. TradeStation Prime Services is located at 400 Madison Avenue, New York, New York.

TradeStation Securities, Inc. (Member NYSE, FINRA, NFA and SIPC) is a licensed, self-clearing securities broker-dealer and a registered omnibus-clearing futures commission merchant, and has memberships or similar approved status (as well as direct connectivity for both market data and order execution) with BATS Z-Exchange, Boston Options Exchange, Chicago Board Options Exchange, Chicago Stock Exchange, EDGA Exchange, EDGX Exchange, International Securities Exchange, NASDAQ OMX BX, NASDAQ OMX PHLX, The NASDAQ Stock Market, NYSE Arca and NYSE Amex. For futures accounts, TradeStation connects directly (for both market data and order execution) with the CME Group, Eurex Group and ICE Group (U.S. and Europe) exchanges. TradeStation is a clearance member with DTCC and OCC for equities and options, serves its futures accounts on an omnibus clearance basis, and also introduces institutional equities accounts to J. P. Morgan Clearing Corp., as clearance agent. TradeStation Securities has offices in South Florida, New York, Chicago and Dallas, and an affiliated introducing broker (TradeStation Europe Limited) in London.

About TradeStation Group, Inc.

TradeStation Group, Inc. (NASDAQ GS: TRAD), through its principal operating subsidiary, TradeStation Securities, Inc., offers the TradeStation platform to the active trader and certain institutional trader markets. TradeStation is an electronic trading platform that offers state-of-the-art electronic order execution and enables clients to design, test, optimize, monitor and automate their own custom Equities, Options, Futures and Forex trading strategies. TradeStation Group’s other operating subsidiaries are TradeStation Technologies, Inc. and TradeStation Europe Limited.

Nature of this Announcement

This announcement is made on a limited basis through hedge fund and other institutional trader websites and similar media for promotional/marketing purposes, to educate potential customers of TradeStation Prime Services about its product and service offerings, and is not intended to be an investor relations or public disclosure document for TradeStation’s publicly-traded holding company (TradeStation Group, Inc.).

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Securities-Lending Risks

July 2nd, 2010

Previously, we have described how prime brokers operate in the securities lending market. Today we’ll focus in on a few of the risks associated with securities lending.  Here are some representative risks:

Credit Risk:  Occurs when lower quality credits have a higher risk of default, but offer higher rates of return; therefore, a prime broker can increase return by lending out higher quality instruments and then reinvesting the cash in high-yielding instruments.

Prepay Risk: International loans require prepayment of collateral.  This must be monitored closely. A borrower must prepay the lender for the borrowed security. If a prime broker does not require prepayment from the borrower, the prime broker will experience the risk of cost of carry loss.

Counterparty Risk: The borrower may default on its loan. This is mitigated to the extent of the collateral deposited with the lending prime broker. All loans made by a borrower will require a Securities Lending Agreement (ISMA, PSA, or OSCA). All counterparties will be subject to a credit check and approval by a prime broker.

Operational Risk: there are a variety of ways in which operational mistakes can cost a firm money. For example, a miscommunication regarding dividends can be costly to a borrower.

Example – Operational Risk:

Trader T borrows 1000 shares of XYZ Corp from its prime broker, who is acting as lending agent for the ABC Pension Fund. Trader T then lends the 1000 shares to Counterparty C. When Counterparty C receives a quarterly dividend from XYZ Corp, C must manufacture a dividend payment for Trader T, who in turn forwards the dividend to the prime broker.

XYZ Corp gives the option to its shareholders to receive dividends in a mix of stock and/or cash. ABC Pension Fund, as beneficial owner of the stock, decides to take the dividend as 700 shares of stock and $300. Operationally, this fact must be passed down the line from lender to lender so that the ultimate borrower, Counterparty C, knows how to constitute his manufactured dividend. If the chain of communication breaks down such that Trader T never informs Counterparty C of the 700 share/$300 arrangement, C will manufacture a dividend that is 100% cash ($7,300), and pass this along to Trader T. This is the dividend that Trader T must pass on to the prime broker. The operational risk is that the shares of XYZ Corp suddenly appreciate between the dividend record date and pay date, from $10 to $15 a share. The prime broker is expecting 700 shares of stock from Trader T in addition to $300 in cash. Since Trader T received all cash, he must now go into the market and buy 700 shares of XYZ Corp, at $15 a share. Thus, Trader T is exposed to a $3500 loss, because of the -$5 spread on the 700 shares between record date and pay date. Had Trader T properly informed Counterparty C of the 700 share/$300 arrangement, Counterparty C would have been responsible for manufacturing this dividend, and Trader T would not be out $3500.

Gap Risk: This is the difference between loan maturity and investment maturity, i.e. the risk of increasing floating interest liabilities without a concurrent increase in the fixed interest rate on assets.

Example – Gap Risk:

A prime broker lends out US 3-month Treasuries to Counterparty C, for cash. The Treasuries are paying 5.5% annualized. The prime broker contracts to pay Counterparty C a rebate of 5.4% which represents a positive 10 basis point spread above overnight rates for The prime broker.  The prime broker invests the cash collateral from the loan in the overnight market. Suddenly, rates drop, and the prime broker is only getting 5% on his cash. The .4% gap between the rebate and investment income is a negative spread to the prime broker, and is due to the difference in return of overnight maturities versus 3-month maturities.

One way to manage this risk is to run sensitivity analysis reports that show the effect of as little as a ¼ point change to interest rates. Another type of report, often called a Gap Report, shows notional lending deficiencies for a period due to expiring loans vs. cash due.

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Resequencing Tax Lots

June 25th, 2010

Prime brokers provide accounting and transaction information for their hedge fund customers. A Tax Lot is the fundamental cost accounting unit for the trading of financial instruments. A Tax Lot represents the purchase or sale of a specific quantity of a particular instrument at a specified time and price. Any trade-related costs, including commissions and transfer taxes, are included in the Tax Lot Cost Basis. The unit price assigned the Local Tax Lot is in the local trading currency of the instrument. The Dollar Cost of the Tax Lot is the Local Cost multiplied by the F/X Rate on the settle date of the trade.

The Tax Lot Cost Basis is a permanent attribute of the Tax Lot. The Cost Basis is established at the time the Tax Lot is opened. In the typical prime brokerage accounting systems, cost basis, gains, and losses are dynamically calculated using trade date FIFO tax lots. Futures transactions normally use intra-day FIFO tax lot procedures. However, older systems may lack the flexibility to manually sequence tax lots for optimal results. That means traders cannot override the FIFO sequencing, and therefore cannot pair-off transactions manually. This is potentially costly to a hedge fund to the extent that the fund would manage its cash broker book and swap book inventory differently from FIFO.

To modernize tax lot procedures, a prime broker might apply the following rules to an older accounting system:

1)    Make tax-lot sequencing available via user-selection and/or FIFO ordering. The default is FIFO ordering.

2)    Sequence of closed lots is frozen at end of business day that they are closed. However, open lots can be resequenced.

3)    Lot resequencing (open lots only) will be accomplished by canceling and rebooking the open lots in a position. Users will have the capability of re-ordering open lots this way, by changing the sequence of the lots.

4)    The cancellation and rebooking of tax lots due to resequencing will be transparent to users, and will not normally be visible in transaction monitors and browses.

5)    Lots must be resequenced in their entirety. Partial lot resequencing is not allowed.

Adding flexibility to the sequencing of open tax lots will give traders the ability to maximize their P&L while still maintaining full audit trail capability, essential for proper auditing of trade activity.

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Cancel/Rebook Processing

June 24th, 2010

When prime brokers maintain the trading records of clients such as hedge funds, they need a mechanism to correct invalid transactions after the fact. If transactions are corrected “in-place” then it is difficult to determine how, when, and why a transaction changed. Cancel/Rebook processing replaces “in-place” corrections with an explicit history of changes. The requirement is to have the ability to look at positions on a trade date basis, settle date basis, and action date basis.  In the following discussion, we describe a generic prime broker system for handling Cancel/Rebook.  Since the system is generic, actual implementations may differ in some details, but the concepts described below apply to most transaction correction systems.

When a user enters a correction, Cancel/Rebook automatically creates a reversing entry to remove the error, and then re-posts the entry with the correction.  Corrections made on the trade date of a transaction are updated in place. Corrections made as-of (that is, the action date is greater than the trade date) are corrected either in-place or via Cancel/Rebook, depending on whether or not the correction affects the customer’s position.

As-of corrections that affect a customer’s position are canceled and re-booked. As-of corrections that do not affect a customer’s position are made in place. The important point is that to facilitate clarity, users (such as clearing clerks) looking at transactions will by default see transactions as if they were all corrected in place. A change to an existing transaction, whether it is effected by Cancel/Rebook or by update in place, appears to the user as an update in place. Typically, the system automatically posts the cancel and the rebook as two separate transactions, using the original Trade Date. The Action Date of the two new transactions is the current date.

Changes to tax lot sequence constitute a special type of Cancel/Rebook. Lot resequencing (open lots only) is accomplished by canceling and rebooking the open lots in a position. Users normally have the capability of re-ordering open lots this way, by changing the sequence of the lots. The Cancel/Rebook of the lots due to resequencing is transparent to users, and does not normally appear in transaction monitors and browses. Lots must be resequenced in their entirety. Partial lot resequencing is not allowed.

Users are able to browse transactions within a range of Trade Dates or Settle Dates, bounded by an Action Date. That is, only transactions that have an Action Date less than or equal to the specified Action Date and have a Trade Date within the specified Trade Date Range are selected for the browse. Settle Date browses work in a similar fashion, using a Settle Date Range to select transactions with a Settle Date within the range.

Users are able to browse by Action Date, without regard to Trade or Settle Dates. Users are also able to browse by a transaction’s identifier to see the entire history of changes to the transaction. Clearing clerks enter corrections to existing transactions, and/or insert missing transactions, and/or delete existing transactions, for the current open year. Prior year changes cannot be accepted by the system.

If the correction causes a change to a previous month’s financial reporting, the previous month’s end-of-month reports must be rerun and and reported in the Period Package for the current month. The Period Package contains the close-of-month reports for each month.

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