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They were setup as managed accounts. Clients actually own the assets and in turn the liabilities.

by whatok 8y ago

AznHisoka 8y ago
Got it. Seems weird anyone would sign up for something like that.
- olliej 8y ago
  I’m sure it was “cheaper” or they were friends/acquaintances and he just said “I can make you money” - because he wasn’t a “real” (eg with the presumably expensive accounts and control systems) it was probably easiest to have it set up that way. Question for people who understand things better than me: isn’t setting up an LLC in America quite cheap? Couldn’t an individual make an LLC to hold their investment funds, and then give him control of those accounts? Wouldn’t the LLC protect them? (Not saying that such a layer is free, but it seems like a relatively cheap protection)
  - whatok 8y ago
    Without getting into specifics, some investors prefer separately managed accounts. It has nothing to do with difficulty of setting things up and everything to do with preference. That said, if for some reason I wanted to invest in something that sold naked options, I would prefer to invest with an LLC.
    - tomp 8y ago
      Aren't managed accounts orthogonal to liability? e.g. if I wanted to invest my money in a managed account, I could still set up (my own) LLC to limit liability (and that could be better even for e.g. tax reasons).
      - SubuSS 8y ago
        What prevents people from setting up such LLCs and go nuts on such naked options? I mean you can bankrupt the company if they go wrong, reap it if it works out. I am sure I am missing some gaping hole there.
        tomp 8y ago
        Yeah, options are either traded on an exchange, in which case the exchange should ensure that its members/participants have enough capital to cover the trades, and that makes the exchange itself liable (i.e. the exchange is the counterparty) - see e.g. the recent case of an energy trader going belly up in Norway [1] - he wiped out the whole emergency fund set up by the exchange itself, as well as a huge chunk of the secondary emergency fund set up by the exchange members. Otherwise, you're trading options OTC i.e. directly with another counterparty (e.g. an investment bank, private trader, etc), in which case the other party bears "counterparty risk" (i.e. the proximal cause of the last financial crisis - "will the bank that I've $100bn of exposure to still exist tomorrow or not") which they should manage and/or enforce in court if necessary (i.e. options are just contracts). TL;DR: the person on the other side of the transaction needs to be reasonably sure you can hold your end of the deal. [1] https://www.forbes.com/sites/heatherfarmbrough/2018/09/14/norwegian-energy-market-trader-creates-e114m-hole-in-nasdaq-clearing-fund/#621f8746ce57 https://www.forbes.com/sites/heatherfarmbrough/2018/09/14/no...

They were setup as managed accounts. Clients actually own the assets and in turn the liabilities.

by whatok 8y ago

They were setup as managed accounts. Clients actually own the assets and in turn the liabilities.

AznHisoka 8y ago

Got it. Seems weird anyone would sign up for something like that.

olliej 8y ago
I’m sure it was “cheaper” or they were friends/acquaintances and he just said “I can make you money” - because he wasn’t a “real” (eg with the presumably expensive accounts and control systems) it was probably easiest to have it set up that way. Question for people who understand things better than me: isn’t setting up an LLC in America quite cheap? Couldn’t an individual make an LLC to hold their investment funds, and then give him control of those accounts? Wouldn’t the LLC protect them? (Not saying that such a layer is free, but it seems like a relatively cheap protection)
- whatok 8y ago
  Without getting into specifics, some investors prefer separately managed accounts. It has nothing to do with difficulty of setting things up and everything to do with preference. That said, if for some reason I wanted to invest in something that sold naked options, I would prefer to invest with an LLC.
  - tomp 8y ago
    Aren't managed accounts orthogonal to liability? e.g. if I wanted to invest my money in a managed account, I could still set up (my own) LLC to limit liability (and that could be better even for e.g. tax reasons).
    - SubuSS 8y ago
      What prevents people from setting up such LLCs and go nuts on such naked options? I mean you can bankrupt the company if they go wrong, reap it if it works out. I am sure I am missing some gaping hole there.
      - tomp 8y ago
        Yeah, options are either traded on an exchange, in which case the exchange should ensure that its members/participants have enough capital to cover the trades, and that makes the exchange itself liable (i.e. the exchange is the counterparty) - see e.g. the recent case of an energy trader going belly up in Norway [1] - he wiped out the whole emergency fund set up by the exchange itself, as well as a huge chunk of the secondary emergency fund set up by the exchange members. Otherwise, you're trading options OTC i.e. directly with another counterparty (e.g. an investment bank, private trader, etc), in which case the other party bears "counterparty risk" (i.e. the proximal cause of the last financial crisis - "will the bank that I've $100bn of exposure to still exist tomorrow or not") which they should manage and/or enforce in court if necessary (i.e. options are just contracts). TL;DR: the person on the other side of the transaction needs to be reasonably sure you can hold your end of the deal. [1] https://www.forbes.com/sites/heatherfarmbrough/2018/09/14/norwegian-energy-market-trader-creates-e114m-hole-in-nasdaq-clearing-fund/#621f8746ce57 https://www.forbes.com/sites/heatherfarmbrough/2018/09/14/no...