Anyone used Interactive Brokers ? ?

  • Thread starter Thread starter teenie_weenie
  • Start date Start date
I wonder how IB reconciles selling order flow with "Best Execution" ? I found out about their selling order flow in an article that they link to from their site:
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2000/11/16/BU92011.DTL
From the article:
"Ascher acknowledges that Interactive Brokers, like most other brokerage firms, accepts payment for order flow. But he insists that it is not a big deal for his firm."

So, I guess that if you choose "Best Execution" , you may have your order sold off? How can that be best?

 
Xll,
Reporters do not always get the facts correct. First and foremost, IB is dedicated to best execution and getting the best prices available for client trades. The order flow that was supposed to be referred to in that article was related to OPTIONS. You may or may not be aware of the numerous comment letters and arguments made by IB to the various regulatory bodies against the sale of all order flow. It is a battle we lost. Exchanges and specialists are agressively paying for option order flow to direct option "traffic" to their pit or exchange. There are large firms/specialists that say - "even though we may not be showing the best price, we will match the inside market or route it to the best market". I call this a free option. Thus there is no incentive for market makers to show better prices and to tighten markets. The exchanges not only seem to tolerating this but encouraging this. (I.e the CBOE, PHLX, etc. actually pay firms to route orders to their exchanges). As a result the way the game has been played has changed. Unfortunately if we want to maintain our franchise we have no choice but to join it. If firm A and firm B are showing the same BEST price for a given market and we have a deal with firm B we will route to firm B. If firm A is showing a better price than firm B we will route to firm A.

We belive price time priority should be the determining factor on who gets a trade. However, it seems the regulators and exchanges have different ideas.
 
Hi Def. Got a question on options trading via IB.

I've bought call and put options in the past. But this week was my first covered call sale. What I'd like to know is how likely am i to get assigned considering that the option is $2 in the money. There's roughly 10 days till expiration.

Second, is there any way to preference being assigned. I know that the process is a random one, in which i might be assigned anytime as long as the strike price is below the current stock price. I was just wondering if there was a way to ask to be considered for assigned through IB if and when assignment calls come to IB.

Other thing I wanted to know was, when do assignments usually take place? During market hours, or over-night? When do my shares get called away, is what i mean.

Hope you can get to all the points. And if you have time, would you be so kind as to explain the assignment process as it pertains to IB.

Thanks.
RTS
 
rtsine,

It normally will not make economic sense to exercise calls before expiration unless the underlying stock goes ex-dividend beforehand. If a stock goes ex-div it may make sense to exercise a call after the close the day beforehand if it is in the money in order to collect the dividend. Typically only high delta options (the probability that it will expire in the money) will be the only ones that will be exercised when a stock goes ex-div. For a quick and very dirty guess on whether you will be assigned when a stock goes ex-div, take a look at the corresponding put option to check out it's value. If it is less than the dividend you will probably be assigned (again I repeat this is not a fool proof method and if you want more info, send me an e-mail and I'll refer you to a couple of readings). Put options are another story. Deep in the money puts may be assigned due to interest factors.

As far as preferencing assignments I am fairly certain that the clearing house determines who gets exercised randomly.

Option exercises are usually submitted after the market closes with a deadline a couple hours afterwards. Overnight the Options Clearing House processes them and assigns them randomly to opposing positions. Normally clients will find out that they are assigned before the market opens the following day.

You would never want to be preferenced for assignment as you would have a windfall if you are not assigned when a stock goes ex-div. (ie. if you are short you will not have to pay the dividend since you will not be short the stock)

hope the above answers your questions.
 
Thanks for the help. I appreciate you taking the time.

The point I got confused about was this line:

"You would never want to be preferenced for assignment as you would have a windfall if you are not assigned when a stock goes ex-div. (ie. if you are short you will not have to pay the dividend since you will not be short the stock)"

Could you expound on that?

You also mentioned that assignments take place after market hours. Is that the options market or the stock market? I ask because, as you know, IB's hours are 8 to 8. But options markets are the standard 9:30 to 4:00. In which hours do assignments take place.

Could you also tell me what literally happens in an assignment? Do I notice my stocks are called away as soon as I turn on the trading software? Or there a formality to it. Phone calls, emails... those sort of things. Or are they fully automated as with margin calls (i.e, no literal phone call, just a liquidation of assets)

Thanks.

RTS

 
rtstine,

I can answer your questions regarding assignment. Assigments are fully automated by the OCC (Options Clearing Corp.) and take place after the close of trading (4 pm) on the third Friday of each month. There is no notice or communication that takes place or is necessary, other than you knowing that if you hold an in the money option position past expiration day you will automatically be assigned. So if you sold covered calls against a long stock position, and on expiration day the stock closed above your call strike price, when you log into your account Monday, your stock will be gone, and your account balance will reflect the sale of your stock at the options' strike price.
 
Thanks Zboy. Appreciate your time. I am familiar with what is supposed to happen at the expiration date. My question was in regards to what happens when I am 10 days away from expiration, and several dollars in the money. I suppose I wanted to know the likelihood of assignment given my particular situation. And I also wanted to know how this all would take place within my account with IB.

In a perfect situation, I'd get assigned, sell the stock at the strike price, making money on both the stock and the option by keeping its premium. Then by the 12th or so of Dec, repurchase the stock and ride it up as the election issue is finally put to rest. Amen. :)

RTS
 
rstine,
what I mean about being preferenced about being assignments is that for all practical purposes the only reason you mathematically should be assigned before expiration is if a stock goes ex-dividend.

lets forget about covered calls and just look at the single leg of a short call option. If you are assigned a call you will be short stock. If you are short stock on the record date of a dividend you will have to pay the dividend to whom you are borrowing the stock from. If you are short a call and are not assigned, you will not have to pay the dividend. The windfall comes from the value of the call dropping by the amount of the dividend on the ex-date.

Since you are writing covered calls if this were to happen to you, you would be locking in a profit by the amount of the dividend.

For IB our exercise rules are:
The customer must issue written exercise instructions via e-mail to the ibclearing@interactivebrokers.com prior to 4:30 p.m. U.S. Eastern Standard Time to exercise an option for that day. The IB system is designed to automatically exercise any long call or put option at expiration that is in-the-money by 3/4 of a point or more. I believe our deadline to report to the OCC is about an hour later.
 
If Someone could clarify order routing I'd appreciate it.

If I place a limit order to buy a stock at the inside offer using "Best Execution", Will I automatically hit an ECN and if an ECN is not available will it then SOES a market maker? If still no execution(fast market), will my buy order then sit as a bid on an ECN(island) book until I cancel it?

Also, If I place a limit order outside the inside market using "Best Execution", will the order just automatically be placed on an ECN(island) book until I cancel it or executed? If so, isn't "best execution" limit order the same as placing an Island limit order outside the current market?

Finally, if the above is true, what's the disadvantage of using "best execution", if there is one?

thanks
matt
 
You must log in or register to reply here.
Back
Top