IB Auto-Liquidation (Hypothetical Senerio)

T

thesniper

Assume I want to buy some DEC 2013 QM if oil prices crash this summer because I think oil makes a big recovery next year due to inflation and a potential strike on Iran. I want to buy QM rather than CL because it gives me more control over leverage.
Now QM Dec 2013 currently has NO BID or OFFER even though the equivalent CL contract is pretty liquid. But this lack of liquidity in QM is actually an ILLUSION because if you create an even small arb. opportunity with the equivalent CL contract then you can buy and sell all the contracts you want at competitive prices. So there is a vast amount of UNDISPLAYED HIDDEN LIQUIDITY out there waiting for an arb opportunity.
So if I buy some QM today at 90 then as I'm sleeping someone posts a bid for 100 contracts at $5 and some untested bot recently programmed by an amateur mistakes the bid for an offer and sells one contract at $5. Then will the IB auto-liquidation engine kick in and sell my whole position at market at $5 wiping me out even though I could have easily gotten out at around 90 if I had created a small arb opportunity with CL? Or if there is a bid at $5 and an offer at $92 will IB calculate the price at the midpoint of around 51 and liquidate the position?
Its hard to know exactly what would happen since there is no document that specifies exactly how this liquidation engine works.
 
Quote from thesniper:

Assume I want to buy some DEC 2013 QM if oil prices crash this summer because I think oil makes a big recovery next year due to inflation and a potential strike on Iran. I want to buy QM rather than CL because it gives me more control over leverage.
Now QM Dec 2013 currently has NO BID or OFFER even though the equivalent CL contract is pretty liquid. But this lack of liquidity in QM is actually an ILLUSION because if you create an even small arb. opportunity with the equivalent CL contract then you can buy and sell all the contracts you want at competitive prices. So there is a vast amount of UNDISPLAYED HIDDEN LIQUIDITY out there waiting for an arb opportunity.
So if I buy some QM today at 90 then as I'm sleeping someone posts a bid for 100 contracts at $5 and some untested bot recently programmed by an amateur mistakes the bid for an offer and sells one contract at $5. Then will the IB auto-liquidation engine kick in and sell my whole position at market at $5 wiping me out even though I could have easily gotten out at around 90 if I had created a small arb opportunity with CL? Or if there is a bid at $5 and an offer at $92 will IB calculate the price at the midpoint of around 51 and liquidate the position?
Its hard to know exactly what would happen since there is no document that specifies exactly how this liquidation engine works.
More...


The exact scenario you describe will not happen, at least in options, because for deferred months, IB uses a proprietary pricing model that does not look at bid and ask (in the case of deferred months).

I have found that the model itself can be flawed at times, though. but not in the way you mention. Sometimes it *should* be looking at bid and ask when it is not.

I think the same is true of straight futures contracts too in deferred months, but am not sure.

I am making a similar trade in CL - it may be easier to just buy a vertical option spread out of the money. That way there is no margin. If you do it out many months, it will decay very slowly.
 
IB system can be nuts sometimes. I have a number of OTM puts that are all almost worthless according to IB's models
 
Can one give more information on how the margin is calculated when long the front month and short the deferred contract in currency futures - highly leveraged ?

When both contracts have live quotes with a reasonable spread, the margin of one roughly cancels the margin for the other, but what happens if the deferred contract is inactive overnight and there's a strong movement in the market. Hence the front month value changes much more than the deferred month where there's no new quote. Is the IB autoliquidation mechanism safe in those situations ?
 
Quote from comintel:

The exact scenario you describe will not happen, at least in options, because for deferred months, IB uses a proprietary pricing model that does not look at bid and ask (in the case of deferred months).

I have found that the model itself can be flawed at times, though. but not in the way you mention. Sometimes it *should* be looking at bid and ask when it is not.

I think the same is true of straight futures contracts too in deferred months, but am not sure.
More...

Can someone confirm it works the same for futures as for options ?
 
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