How to not get screwed with a broker than pay bad interest
- Thread starter Sky123987
- Start date
Think about the mark to market risk and the interest you might have to pay if the stock goes up. This theard can help u i guess.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=102119
http://www.elitetrader.com/vb/showthread.php?s=&threadid=102119
NOTAn EFP is a spread consisting of 100 shares short stock, against a long single stock future (SSF) for the same underlying stock.
If you short an EFP (long stock, short SSF), then the proceeds from the short SSF will be greater than the purchase price of the stock, by an amount roughly corresponding to interbank market interest rates, after you take into account dividends expected to be paid by the stock. The spread will gradually decay toward zero by the time the SSF expires, at which time the SSF will cause your stock position to be sold, leaving you flat, and with a little extra cash earned as the equivalent of interest on your cash.
A short EFP position allows one to earn the rough equivalent of interbank interest rates on the entire account balance, which is more than IB or any other broker will pay on cash balances.
IB makes very tight markets on EFPs on IB's IBEFP electronic execution facility. It is essentially an ECN. IB customers can both take and add liquidity on IBEFP. You can even make your own markets if you want. The spreads on IBEFP are far narrower than one would pay by separately legging into each side of an EFP's spread.
EFPs can also be used to reduce the cost of financing a long stock position, or to earn the equivalent of interest on the proceeds from a short stock sale (far more than any broker will pay), and they can also be used to increase leverage beyond that permitted for stock trading.
No, it isn't a problem at all. I invest free cash in zero-dividend EFPs only, and it is not a problem at all. I do this because it is a convenient way to avoid the risks and inconveniences of erroneous or changing dividend information.
IB's documentation has been contradictory on this point. I believe that IB actually requires whatever initial margin would be needed for the stock leg of an EFP position.
It all depends on whether you are holding your futures positions overnite. If you are not, then you can sell $10K worth of EFPs, thus earning interest on the full $10K.
If you are holding futures overnite, then the answer is as follows. You have $5K in free cash in your securities sub-account. You sell $5K in EFPs, in order to put that money to work. You don't get paid interest on your overnite performance bond requirements for futures positions held in your futures sub-account. It is standard for the retail futures industry that your futures account does not pay interest. Interest is only in securities accounts.
Selling EFPs at IB will get you the equivalent of more interest, on your free cash, than any broker will pay.
The risk is extremely small if you structure and manage your EFP portfolio wisely. The small amounts of margin interest paid to the broker, when your EFP stock legs increase in value, will, on the average, be balanced out by the small profits you will make when your EFP stock legs go down in value.