The following discussion is a summary of some of the principal risk factors involved in trading securities with ECHOtrade. This discussion does not contain a complete description of all of the risk factors involved in such trading activities.
Trading securities and options involves Substantial Risk. Day trading and other short term trading strategies are extremely risky. A person trading as a member of ECHOtrade should be prepared to lose all of his money used for trading. Trading on margin or with professional leverage can result in trading losses far in excess of the amount of capital in a trader's trading sub-account or the amount of capital designated to a backed trader's trading sub-account. A decline in the value of the securities that a member purchases may require the member to provide additional funds to the firm to avoid the forced sale of his positions. Short selling as a part of a trader's trading strategy also may lead to extraordinary losses because the trader may have to purchase a stock at a very high price in order to cover a short position. This risk is greatest in volatile markets. Option trading as part of a trader's strategy may also lead to extraordinary losses caused by market moves in the underlying security or index. Options trading should be done only by those who are knowledgeable and educated in options. Before you decide that options are right for you, know that options trading is extremely risky, is not suitable for everyone and substantial losses may occur. You will also need to read the publication by The Options Clearing Corporation. Before you decide to become a member of ECHOtrade, you must carefully consider whether such trading activities are suitable for you in light of your trading experience and personal financial circumstances.
The securities markets are extremely efficient and competitive. Successful trading with ECHOtrade requires skill and discipline, as well as experience and knowledge of capital markets. There is no guarantee that a trader will be successful implementing his trading and investment strategy. A substantial percentage of day traders are not successful.
A member should only invest risk capital in the firm. No person should fund their contribution to the firm with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required for current income to meet your living expenses.
A trader that contributes capital to the firm is subject to the risk that his capital may be lost to satisfy a liability of the firm if another member fails to satisfy his obligation to contribute capital to the firm. This situation may arise if a member incurs an unpaid trading debit balance. A trader that contributes capital to the firm is also subject to the risk that he may be liable to contribute additional capital to the firm to eliminate a deficit in his own capital account.
ECHOtrade's current risk management policies require that a member cease trading if his trading sub-account balance is $5,000 or less; a minimum of $25,000 is needed to trade options on a limited basis. The firm also restricts trading activities of traders with trading sub-account balances that are greater than $5000, but less than the required starting balance. The firm's risk management policies permit the firm to assume control over a member's trading sub-account and to adjust, close-out or liquidate a member's positions. The firm can change its risk management policies and liquidation procedures from time to time and that the firm may use different liquidation procedures in similar circumstances, as the firm's management shall determine is in the best interests of the firm. ECHOtrade is a broker-dealer registered with the Securities and Exchange Commission and is a member of the Philadelphia Stock Exchange. ECHOtrade is a proprietary trading firm. The firm does not have retail customers. ECHOtrade is organized as a limited liability Company. Each trader is admitted to ECHOtrade as a member of the firm and trades a trading sub-account that is designated as a sub-account of the firm's account. As a member of ECHOtrade, a trader will not receive any of the protections generally afforded to customers of a broker-dealer, such as the customer protection rules of the National Association of Securities Dealers Regulation, Inc. and the segregation of customer funds and securities required under the Securities Exchange Act of 1934. The Securities Investor Protection Corporation does not insure members' trading sub-accounts with the firm nor does any other form of insurance cover them. As a member of the firm, a trader's capital is part of the firm's capital and can be used by the firm in the operation of its business. Use by the firm of a member's capital is not limited to the activities of such member.
There are a number of members (Backed Traders) whose trading activities are and will be backed by other members (Backers). Such arrangements involve the agreement of the Backers to accept responsibility for trading losses of the Backed Traders. The trading profits of the Backed Traders trading sub-accounts are split between the Backed Traders and the Backers. However, the Backers are not required to contribute a specified amount of capital or any capital to the firm to support the trading of the Backed Traders so long as ECHOtrade has sufficient amounts of capital to support all of its trading activities or can borrow the capital necessary to support such trading activities. This leverage is available because the capital of all of ECHOtrade's members' constitutes firm capital for regulatory purposes, and the firm, as a registered broker-dealer, is not restricted by the margin regulations as to the amount of funds it can borrow from its clearing firm to support its trading activities. To the extent the trading activities of the Backed Traders are supported by ECHOtrade's capital without any capital contributions being made by any members for a particular Backed Trader, such trading activities may be supported by the capital of the other members. The members, other than the firm's manager and the Backers, have no control over the trading activities of the Backed Traders.
ECHOtrade, in its sole and absolute discretion, (i) limits the amount of capital available for trading by each member, (ii) shall limits the leverage available to a trader for intra-day and overnight positions, (iii) can change the amount of leverage available to a trader at any time, (iv) may apply different limitations to different members, and (v) may suspend or terminate the trading activities of any member at any time.
ECHOtrade has absolute authority: (i) to sell any and all securities and other property in any member's trading sub-account, (ii) to buy any or all securities and other property which may be short in such accounts, (iii) to adjust the positions in such accounts, (iv) to implement hedging or offsetting transactions to reduce risk in such accounts, in all such cases without demand for margin or capital or additional margin or capital, notice of sale or purchase, or other notice of any kind to the affected member or members, and (v) to transfer funds from the capital account of a Backer to the trading sub-account of a Backed Trader to cover losses incurred by the Backed Trader, without prior notice to the Backer.
Most traders trading activities at ECHOtrade are leveraged. The use of margin leverage, which is a form of borrowing, exaggerates the effect of trading gains and losses. A relatively small price movement in an unfavorable direction in a trader's position can result in substantial losses if the trader's position is highly leveraged. The leverage ECHOtrade makes available to a trader augments the risk of trading losses by the trader. Traders, other than Backed Traders, are personally liable to contribute additional capital to eliminate a deficit balance in their trading sub-accounts. In addition, trading losses of other members of the firm that create a deficit balances in their trading sub-accounts may be charged against the capital account of other members.
ECHOtrade's traders typically engage in a high volume of trading activity. Each trade costs the member initiating the trade a commission and clearing charge to his trading sub-account. Regardless of whether a member's trading strategy is successful, the member will be responsible for the costs and expenses associated with his trading activities, including brokerage commissions and clearing charges.
There is a risk of operational problems occurring in connection with the execution systems and other electronic equipment utilized by the members of the firm and the risk of other mechanical and system failures, both within the firm and without (including the firm's clearing firm, and the execution and quotation systems included as part of the services provided to the members and of the national securities exchanges), which are unrelated to market conditions, and which are beyond the control of the firm. A member may incur losses resulting from such failures for which the member will not have any recourse against the firm, other members or third parties. Member interests will not be sold in jurisdictions where such sale is prohibited by law.