Does IB take responsibility? An amazing story

[IBj]

Quote from sail:

IBj your response is well thought out.

There is however something that troubles me about auto-liquidation. If the programming to do so is well thought out everything seems reasonable.

Suppose however, an erroneous quote or closing price causes a low-risk well capitalized account to be auto-liquidated. Who bears the responsibility? We all acknowledge the possibility of auto-liquidation when accounts are first opened. Brokerage account agreements tend to be somewhat one-sided.

In theory it is possible for a large equity credit balance account to be auto-liquidated if it has even 1 share or contract short. (Should that contract be erroneously valued at some arbitrarily large number).

This is where human common sense would look at the account and know that there must be a bad quote.
IB's programming is generally excellent.
They could not have gotten to where they are today by being anything less than the best of the best.

Yes, any human common sense metric can be programmed into an auto-liquidation program. But has it been? If not, who would be responsible for damages caused by an unreasonable liquidation.

IB will take back improper liquidations. If a bad price or other transient gets through our filters, we will pay the bill. If there is a tick that is slightly off and that small difference results in a liquidation, then we don't. It is basically a "reasonableness" test. IB cannot be expected to realize that a 100 stock that prints at 99 is bad data. If it prints at 80, we should (and usually do) trap it.

 

[IBj]

Quote from Don87109:

I can't believe what I'm reading. IB takes a completely outrageous position to cut their customer's throat without notice and they are getting praise?

I was going to post a cartoon to illustrate the ridiculous stance that IB has taken, but now I worry it might inspire riots.

How much more programming would it take to flash an alarm on the TWS screen and give the customer a little notice before you willy nilly sell them down the river?

Okay market meltdowns or other unusual circumstances I might see IB's way, but treating your customer that callously as a routine function is unimaginable to me.

Don

P.S. I love IB otherwise.

The account window shows margin, both current and look-ahead. It also shows the GPV figures, day-trades, etc. It may not be the perfect information source but the information is displayed in a way that makes capital and risk mgmt quite straightforward. We have margin alerts on the queue as well as some other alert services but these won't prevent liquidation, just provide a 'louder' notice to the trader of information that is already displayed.

 

[LordMelbury]

I am a high volume trader,approx 2million shares monthly,and i have used IB for the last 3 years after being with 4 other brokers over a 2 year period....IB are an exemplary company.(and rock bottom commisions to boot)

I used to own a wholesale business and perhaps on 20 occasions recieved bad cheques,i dont think there was one time that the customer ever held there hands up and said "i did not have enough funds in my account",it was always the banks fault because "i was $20 short and they bounce a cheque for 2 grand".

Options trader, take responsibility,you should have monitored your account more carefully,IB are brokers not a member of your family.

 

[dis]

Quote from IBj:


For example:

1. lets consider an account with 46K in netliq and a gpv of 2.3M. The account holds short 1000 25-point boxes in some med-long dated european exercise US option. At a given (compliant) point in time, the box is worth (and is properly priced) at 23.
2. It is within the gpv 50:1 limit by a smidgen and there is plenty of excess liquidity for margin purposes as the entire position is in a box.
3. Now, due to marks on not-so-liquid contracts, the box gets a realtime value of 23.2. This doesn't take too much bad luck since there are 4 legs and the options have a bid-ask spread of 0.10-0.20 each leg.
4. The account's net liq gets hit for 0.20 on 1000 boxes, -2000 USD. With a new net liq of 44K, the maximum position value would be 2.2M so IB starts a close out process by submitting orders (automatically) in each of the 4 legs for positions worth 100K. So far, undesired but still OK.
5. The exchange market in each of the four options in the box get hit with market orders as liquidations are always market orders. This of course drives the prices even further against the position since closeouts always do. Quotes change and the new value of the box might be 23.4.
6. The process starts again and will continue until the market pricing stabilizes and absorbs the liquidation orders without further fading.
   [/list=1]

1. 
   While initial liquidations may indeed increase the box value and trigger additional liquidations, liquidations would cause the gpv/netliq ration to drop below the 50:1 threshold well before the entire position is liquidated. It looks like the automatic liquidation program checks the gpv only once and, if the gpv is out of range, liquidates the entire position.

 

[Don87109]

Quote from IBj:

The account window shows margin, both current and look-ahead. It also shows the GPV figures, day-trades, etc. It may not be the perfect information source but the information is displayed in a way that makes capital and risk mgmt quite straightforward. We have margin alerts on the queue as well as some other alert services but these won't prevent liquidation, just provide a 'louder' notice to the trader of information that is already displayed.

I don't understand why IB can't attempt at least one phone call. That doesn't seem like to much to ask before such drastic action.

Does this happen so frequently that a phone call is too burdensome?

Don (I still love IB)

P.S. On a different, but possibly related issue: I don't recall IB posting an alert when they have system problems, just when anther entity has problems (CBOE, etc). Last week I had four conversations with IB reps (including a call back to me) when they finally said "the programmers already knew about the problem". It took a few hours to get resolved and yet no alert was ever posted. I am sure that posting an alert would stop a lot of unnecessary phone calls and free up people to call customers before auto liquidating their accounts.

 

[mss]

Quote from IBj:

...We have margin alerts on the queue as well as some other alert services but these won't prevent liquidation, just provide a 'louder' notice to the trader of information that is already displayed.

Would it be possible to provide a ten minute warning before auto liquidation begins? I, for example, use some limit on open orders and I don't know before the open how many are going to get filled. As a result, I have to be extra conservative to avoid auto liquidation. If I knew I had ten minutes to comply, I would probably use market to limit orders to get into compliance immediately after the open and, perhaps, not take as big a hit as I would with IB using market orders to liquidate. I think a ten minute window might also mitigate some other problems associated with auto-liquidation.

 

[murray t turtle]

Quote from Option Trader:

To paraphrase, here are some of key theme questions relevant to my partner's misunderstanding with IB. I would love to here feedback.

Caption 1: "How a $2k intraday cash shortage led to $500,000 in option positions being broken down."

Caption 2: "Does a broker's right to reduce a client's position size exempt him from responsibility to liquidate in an orderly manner?"

Caption 5: "Must a client personally verify with upper management that the representations reported over to him by a broker representative are complete and can be relied on?

Caption 6: "Is a securities attorney needed before you open an account with a discount broker?"

=================
Option Trader/partner ;
Thanks for sharing that.
IB had some helpful comments also.

[Caption 2]That also confirmed again while the bank, i mean broker, doesn't want to hurt the client with liquidation,
speed -regulations are important to them.Market order was mentioned by IB, & reason for it /not being as orderly as preferred.

Hopefully your good experiences with them have/will far exceed this incident; persistence pays.
=============================================

[Caption 5] Most all of my dealings with IB heve been fine;
however do think they should back up thier '' recorded conversations'', by broker rep & SHOULD be able to be relied upon. Usually talk to 2 broker reps, think you said you did also.

Since I am not a securities lawyer;
so count on IB to explain if necessary their read on their rules.

Hope this helps.

 

[Option Trader]

Quote from wilburbear:

Hope you win. Imagine how the market-makers celebrated when they got a locked-in, instant, arbitrage profit of 11k as the box spread was unwound. Everybody recognizes IB has to protect themselves - but they've got this part of it wrong.

Anyone have an idea which market-maker stood to benefit from the manner the liquidation occurred?

 

[rrisch]

This thread makes me appreciate Ameritrade. They give me 4 business days to fix any margin call

 

[hajimow]

This thread makes me appreciate Ameritrade. They give me 4 business days to fix any margin call

You can not compare IB with Ameritrade. I had an account with Ameritrade. I can talk hours why Ameritrade is one of the worst brokers for active traders. When they give someone 4 days to solve his margin problem, actually they let him bleed to death. Actually one of the things that I love about IB is their strict rule on liquidation. It has happened to me and it has saved my ass.

Second Note to anyone who has an IB account:
If you want to set one or two positions as liquidate first, set the others as liquidate last. That will be like to set the those as liquidate first.

Third Note to Option Trader:
Now that you told everything, please tell us what would happen to those postions if IB did not liquidate them. Would you lose more money by holding them? I guess so.