were brokers/trading firms get the leverage and margin from?

WallStreetHero

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does anyone know where the margin or leverage come from when your trading with a broker, prop firm or a hedge fund.
do they have contacts with banks or is it there own money what they lend you.
 
does anyone know where the margin or leverage come from when your trading with a broker, prop firm or a hedge fund.
do they have contacts with banks or is it there own money what they lend you.

they dont lend you anything, it is just a technicality to work out collateral.......
 
what money?,

you are directly taking the risk with your margin as collateral.
 
yes so if the leverage is 3% for crude oil and its trading at $70/barrel and $7000 a contract, i will put down $210, so where would the $6790 come from?
 
yes so if the leverage is 3% for crude oil and its trading at $70/barrel and $7000 a contract, i will put down $210, so where would the $6790 come from?

if you are trading this with a spread better, or a broker, in their environment, they dont need to lend you the remaining amount.

your position is truncated. its insignificant to your margin and only for formality. if you wanted to take physical delivery of the asset, then you need to come up with the remaining balance for the full position,

maybe i am having difficulty explaining this, but moving large sums of money around is not necessary when you have put down the collateral for a certain amount of staying power.
 
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if you are trading this with a spread better, or a broker, in their environment, they dont need to lend you the remaining amount.

your position is truncated. its insignificant to your margin and only for formality. if you wanted to take physical delivery of the asset, then you need to come up with the remaining balance for the full position,

maybe i am having difficulty explaining this, but moving large sums of money around is not necessary when you have put down the collateral for a certain amount of staying power.

so you are trying to say that its just numbers what dont really exist?
 
yes so if the leverage is 3% for crude oil and its trading at $70/barrel and $7000 a contract, i will put down $210, so where would the $6790 come from?
Look at the theoretical case where the world is just you, your counterparty (broker) and their counterparty (the exchange). When you trade with them, your counterparty takes on the risk with the exchange on your behalf. The margin they will require you to post should, in theory, be, at the minimum, the exact same margin the exchange demands from them plus whatever spread they will demand to compensate them for running your credit.

Now the example you gave above is not right, because the exchange margin is never equal to the notional value of the contract (with oil at $70/barrel it's actually $70000 and nobody would trade on these terms). It's whatever the initial/variation margin, which would be significantly smaller than the notional value of the contract.

The last step is the economies of scale that come into play. If you are a large spreadbetting shop/broker and there's lots of people taking lots of different positions, it's very likely that a whole bunch of them offset and your net exposure to the exchange is actually a lot smaller. That leads to significant reduction in margins, which can then be passed on to the end user such as yourself.

Finally, all of the above is not to say that the counterparty you're facing can't be leveraged. Most likely it is, through a whole variety of arrangements (although, looking at IG Group, for example, it's not at all).
 
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