Discount brokers and my frear of broker insolvency

BobG · Apr 18, 2010

If your account is less than 500k of equity and you don't plan to hold more than 100k in free credit balances, then you're in luck. The SIPC covers you in full. You don't really need to waste a lot of time looking into the financials of your brokers. I can assure you that you will NOT be able to do an adequate job of judging the financial condition of securities firms.

SIPC is generally pretty creditworthy due to its ability to assess the entire industry to cover losses.

I completely agree with you on how worthless the excess insurance generally is. It's pretty cynical of brokers to even have trivial amounts of insurance so that customers get a warm feeling when the brokers know that the insurance is a drop in the bucket if there's a problem.

Businessman · Apr 18, 2010

Quote from ToSubu:
.we have 100 million additional from LLoyds of London.." mean nothing IF there are half a million clients each having 100,000 extra !!.

if your broker already has additional insurance in place, then you should be able buy additional protection from the same insurance firm to cover your specific funds. this will obviously cost you.

ToSubu · Apr 18, 2010

Quote from BobG:

If your account is less than 500k of equity and you don't plan to hold more than 100k in free credit balances, then you're in luck. The SIPC covers you in full. You don't really need to waste a lot of time looking into the financials of your brokers.

Thanks Bob.
Are ADRs, ETFs considered stock ? Request BOB or others to please reply.

Quote from BobG:I can assure you that you will NOT be able to do an adequate job of judging the financial condition of securities firms.

agreed

Quote from BobG:SIPC is generally pretty creditworthy due to its ability to assess the entire industry to cover losses.

I see . That is at least one good feeling

Quote from BobG:I completely agree with you on how worthless the excess insurance generally is. It's pretty cynical of brokers to even have trivial amounts of insurance so that customers get a warm feeling when the brokers know that the insurance is a drop in the bucket if there's a problem.

yeah. That is the situation.

birdman · Apr 19, 2010

Quote from ToSubu:

Which ONLINE brokers offer the best bargain between

Subu

I'm not up-to-date on who accepts internationals, but my advice is you will want to check out ...

Ameritrade
Schwab
Fidelity

Hope it helps,
birdman

BobG · Apr 20, 2010

I think you may have misinterpreted my response. When I referred to "equity" in your account, I meant "equity" in the sense of the difference between the market value of your long positions and the market value of your short positions and margin debit. I think you may have read "equity" in the sense of stocks versus bonds.

For purposes of SIPC it doesn't matter what your account is invested in. Stocks, bonds, mutual funds, options are all the same. The only exception is that cash is limited to 100k of insurance.

As long as you are below the 500k/100k insurance limit, you're covered.

BTW, many people do not realize that brokers which are not self clearing expose them to two credit risks. If either their own broker, or that broker's clearing firm fails, the customer would be exposed and looking to SIPC for coverage. Consider someone with two 500k accounts at different brokers which both clear through Penson. If one of their brokers fails, the SIPC has them covered. However, if Penson fails, they aren't fully insured.

ToSubu · Apr 21, 2010

Quote from BobG:

I think you may have misinterpreted my response. When I referred to "equity" in your account, I meant "equity" in the sense of the difference between the market value of your long positions and the market value of your short positions and margin debit. I think you may have read "equity" in the sense of stocks versus bonds. For purposes of SIPC it doesn't matter what your account is invested in. Stocks, bonds, mutual funds, options are all the same. The only exception is that cash is limited to 100k of insurance. As long as you are below the 500k/100k insurance limit, you're covered.

Thanks for the clarification... So hypothetically speaking for the purpose of SIPC I could be invested in 500 K worth Government / semi government bonds OR 500K in equity and IF the broker defaults, I am still covered ? right ?

Quote from BobG: BTW, many people do not realize that brokers which are not self clearing expose them to two credit risks. If either their own broker, or that broker's clearing firm fails, the customer would be exposed and looking to SIPC for coverage. Consider someone with two 500k accounts at different brokers which both clear through Penson. If one of their brokers fails, the SIPC has them covered. However, if Penson fails, they aren't fully insured.

Thanks again

I realised it recently. There are two , sometimes three introducing brokers use the same clearing broker and we run the risk you mentioned

Best regards
Subu

ToSubu · Apr 21, 2010

Quote from birdman:

I'm not up-to-date on who accepts internationals, but my advice is you will want to check out ...

Ameritrade
Schwab
Fidelity

Hope it helps,
birdman

Thanks

Will check

Ghost of Cutten · Apr 26, 2010

Quote from ToSubu:

Thanks for the clarification... So hypothetically speaking for the purpose of SIPC I could be invested in 500 K worth Government / semi government bonds OR 500K in equity and IF the broker defaults, I am still covered ? right ?

Yes, you are covered.

Beware though, if you own $500k face value in ES futures or ZB futures, then you are not covered AFAIK, you would just be covered up to the $100k cash limit.

I have started a similar thread to yours but in a bit more detail, you might want to check/post there for more info - http://www.elitetrader.com/vb/showthread.php?s=&postid=2817211#post2817211

The safest approach for someone like yourself is probably to have two accounts - one at a futures/stock brokerage that allows margin trading & short-selling, and another cash-only account at somewhere like Schwab or Ameritrade, where you take delivery of the stock in certificate form. If you own the stock certificates and have them to hand, or own the bond certificates and have them to hand, you are 100% safe against any broker insolvency. So for larger/long-term investments, this is the way to go to get rid of credit risk. It just sucks for liquidity and margin, but from your posts it sounds like this is less of an issue.

By the way, if IB is a problem to open an account, can I ask which country you are resident/citizen of?

gorix89 · Apr 26, 2010

looking for companies that are able to trade on a platform of laser

ToSubu · Apr 26, 2010

Quote from Ghost of Cutten:

Yes, you are covered.

Beware though, if you own $500k face value in ES futures or ZB futures, then you are not covered AFAIK, you would just be covered up to the $100k cash limit.

I have started a similar thread to yours but in a bit more detail, you might want to check/post there for more info - http://www.elitetrader.com/vb/showthread.php?s=&postid=2817211#post2817211

The safest approach for someone like yourself is probably to have two accounts - one at a futures/stock brokerage that allows margin trading & short-selling, and another cash-only account at somewhere like Schwab or Ameritrade, where you take delivery of the stock in certificate form. If you own the stock certificates and have them to hand, or own the bond certificates and have them to hand, you are 100% safe against any broker insolvency. So for larger/long-term investments, this is the way to go to get rid of credit risk.

Good idea. Thanks

Quote from Ghost of Cutten:

It just sucks for liquidity and margin, but from your posts it sounds like this is less of an issue.

I hardly do any margin trading so that is a not a problem

Quote from Ghost of Cutten:

By the way, if IB is a problem to open an account, can I ask which country you are resident/citizen of?

IB a/c opening was a problem because
(a) they were wanting some proof of my street address
while
(b) all my mail was going to the post box and nothing to a street address
so it was a catch 22 I never got out of. Any idea on how to solve such address related problems ?
I'm NOT phony !! but have all mail to a PO box and hence this problem ..