IB close-out advisory

[tonyf]

I have just learned that what IB shows in shortable positions is not necessarily what is available.

"Clients should be aware that based on the manner in which IBKR is required to execute a close-out [...] may be especially pronounced in the case of illiquid securities. Clients should be aware of these risks and manage their portfolio accordingly" https://ibkr.info/article/845

Does anyone know how the IB algo works? at what time does it liquidate positions and is there a possibility of asking them to delay this to do it manually?

Does the algo liquidate indiscriminately, lifting wide bids and offers if less liquid markets at the expense of their clients?

 

[dcwriter2]

I've only been closed out by IB on short volatility ETF trades. Seemed unexplainable to me at the time and I let it go.

 

[MoreLeverage]

What part did you not understand of the risks they describe, in the link given? The regulations governing short selling require the brokers to buy back shares if they can’t be borrowed (no “naked shorting”).

IB will give you a warning, if they can, via the “close out advisory”, and you can close your short position that day. If you don’t, and they can’t borrow shares by the next morning, you’ll get bought in. If you’re short an illiquid security and that happens, don’t expect a good price, but that’s not IBs fault, that’s a risk you took.

“I have just learned that what IB shows in shortable positions is not necessarily what is available.”

You seem to be confused regarding the above statement. What do you mean?

 

[jasonc]

I have just learned that what IB shows in shortable positions is not necessarily what is available.

"Clients should be aware that based on the manner in which IBKR is required to execute a close-out [...] may be especially pronounced in the case of illiquid securities. Clients should be aware of these risks and manage their portfolio accordingly" https://ibkr.info/article/845

Does anyone know how the IB algo works? at what time does it liquidate positions and is there a possibility of asking them to delay this to do it manually?

Does the algo liquidate indiscriminately, lifting wide bids and offers if less liquid markets at the expense of their clients?

I believe it is effectively market orders similar to any type of margin breach. If cant find the shares they may have a cut off of say 3:30pm before doing it themselves but would need to ask them.

 

[def]

I have just learned that what IB shows in shortable positions is not necessarily what is available.

"Clients should be aware that based on the manner in which IBKR is required to execute a close-out [...] may be especially pronounced in the case of illiquid securities. Clients should be aware of these risks and manage their portfolio accordingly" https://ibkr.info/article/845

Does anyone know how the IB algo works? at what time does it liquidate positions and is there a possibility of asking them to delay this to do it manually?

Does the algo liquidate indiscriminately, lifting wide bids and offers if less liquid markets at the expense of their clients?

Tonyf, you are jumping to conclusions without fully understanding the stock loan market.

I'll start with very simple basics.

• If you want to short, you need to borrow.
• Someone long the stock needs to be willing to lend to you.

Assume you have borrowed shares and the lender of the stock decides to sell their stock. What happens?

Your broker will check their inventory and/or go to the street to see if anyone else is willing to lend their shares
If Yes,
- they borrow from the new lender
- this allows you to keep your short shares and enables the broker to settle the sale of shares.

If No,
- the broker must recall the shares lent to you to deliver to the seller so they can settle the shares.
- as you are recalled and can't find any shares, you must get bought in unless you close the position yourself.

This is called a close-out and now let's use common sense. If you get bought in and the underlying stock is not liquid and your short must be closed by day end the closing executions "may be especially pronounced in the case of illiquid securities. Clients should be aware of these risks and manage their portfolio accordingly.

Seems straight forward to me and thus if you get a close out notice, it would be best to manage it yourself.

Now more practical - how do you know a stock is going to be bought in ?

You don't. However, a pretty good rule of thumb is the borrow rate. The higher the rate, the harder it is to borrow, the harder to borrow, the less on the street, the less on the street, the increased likelihood of getting a recall.

IBKR has an excellent inventory, access to pretty much all the major lenders and an active SLB desk seeking to locate stock in the event of a recall. I think we do it better than most and on part with most institutions. Odds are if you are getting a recall from us, you will have a hard time finding the stock available elsewhere.

 

[tonyf]

Tonyf, you are jumping to conclusions without fully understanding the stock loan market.

I'll start with very simple basics.

• If you want to short, you need to borrow.
• Someone long the stock needs to be willing to lend to you.

Assume you have borrowed shares and the lender of the stock decides to sell their stock. What happens?

Your broker will check their inventory and/or go to the street to see if anyone else is willing to lend their shares
If Yes,
- they borrow from the new lender
- this allows you to keep your short shares and enables the broker to settle the sale of shares.

If No,
- the broker must recall the shares lent to you to deliver to the seller so they can settle the shares.
- as you are recalled and can't find any shares, you must get bought in unless you close the position yourself.

This is called a close-out and now let's use common sense. If you get bought in and the underlying stock is not liquid and your short must be closed by day end the closing executions "may be especially pronounced in the case of illiquid securities. Clients should be aware of these risks and manage their portfolio accordingly.

Seems straight forward to me and thus if you get a close out notice, it would be best to manage it yourself.

Now more practical - how do you know a stock is going to be bought in ?

You don't. However, a pretty good rule of thumb is the borrow rate. The higher the rate, the harder it is to borrow, the harder to borrow, the less on the street, the less on the street, the increased likelihood of getting a recall.

IBKR has an excellent inventory, access to pretty much all the major lenders and an active SLB desk seeking to locate stock in the event of a recall. I think we do it better than most and on part with most institutions. Odds are if you are getting a recall from us, you will have a hard time finding the stock available elsewhere.

Thank you for your reply. I was actually hopping you would comment on my post.

"Tonyf, you are jumping to conclusions without fully understanding the stock loan market."

I am not experienced in short selling, but have done all the required reading and seminars on your site to say the least. But I still have a lot to learn.

Now I entered a large short on Wednesday in a relatively illiquid stock listed on Nasdaq - BUT only after checking on TWS (and the socked based IB excel API) that at least 3x the size of my trade was available to borrow. I erroneously was under the impression that I could trust those figures.

I received a Close-Out Advisory email on Friday evening (I am based in the UK) and was not in a position to close the position before market closes. A second email followed that the position will be liquidated by 9.00 ET next working day if no borrow is located.

"This is called a close-out and now let's use common sense"

There is no common sense in this market, at least not out of hours. Daily var is 0.5% intraday but jumps to 1m% (bids of 0.01 and offers of 1m) out of hours.
Now sit tight here: the IB help desk could not confirm that my position would not liquidate between 9 am and 9.30 am, i.e. before the market opens. The IB trade desk was of no help neither. Furthermore, I could find no info whatsoever on the IB website regarding the algo (just court cases of disgruntled customers asking IB to share their methodology).

I am happy to pin this down to untrained help desk in this instance. Luckily, borrow was located yesterday morning just 10 minutes before market opened.

I couldn't but think that my account could have been wiped out by (i) believing IB when IB said there was borrow when there wasn't any, (ii) trusting that the IB help desk can intervene and over-write the algo (I offered to post a large cash guarantee to take control of the liquidation but they could not do anything) and (iii) being under the impression that IB is always acting in the best interest of their clients, as defined by MiFID II here in Europe.

Now this is not a rebuke of IB, I am a very happy customer. But going back to "getting experienced with short selling", how would I protect myself from liquidations resulting from stray prints? (i.e. IB marking by holdings on the back of erroneous prints and liquidating subsequently)? How can I comfortably short illiquid securities in such instances (even a small short would blow up my account if it is recalled in a wide market)

I see what I call stray prints perhaps once a week in the portfolio of 50 illiquid shares or so I am invested in. Those are prints up to 50% away from the T-1 closing price. I was under the impression until yesterday that they were all due to fat finger human errors. I am now wondering how many of those are actually forced liquidations by algos....

Thanks again for your advice on this matter.

 

[def]

The figures for availability are updated but do note hard to borrows do get taken up and w/o knowing your size, I'll have to venture a guess that the size you actually sold wasn't that large in relative terms and thus it would be understandable the limited availability was used up or the counter-party bought in the following day.

As for the buy-in, I'll have to double check but I suspect the buy-in would have occurred MOO or shortly thereafter and within a price that would not have moved the market substantially as our price filters shouldn't allow such large moves (which is a regulatory issue all by itself). I'll have to get back to you on the timing for US orders if not closed out during the prior day T session. The good thing, which goes back to my first post is that we have an active SLB team behind the scenes looking to source stock and prevent buy-ins which fortunately occurred in this case.

 

[MoreLeverage]

Now I entered a large short on Wednesday in a relatively illiquid stock listed on Nasdaq - BUT only after checking on TWS (and the socked based IB excel API) that at least 3x the size of my trade was available to borrow. I erroneously was under the impression that I could trust those figures.

The available shares to borrow change from day to day. There is no guarantee that shares available today will be there tomorrow, or that shares you short will be either. IB’s figures reflect their information at the time, but that can change and sometimes quickly.

How can I comfortably short illiquid securities in such instances (even a small short would blow up my account if it is recalled in a wide market)

If you’re shorting stuff that illiquid, you should not be comfortable. You say you have about 50 such positions, but worry that a single buy-in would wipe out your account. For that to be true, assuming equal sized positions, your stocks would have to be something like bid $1 ask $50, and you shorted at the bid. Now you could lose $49 on a buyin. I would certainly not advise shorting something like that, especially to someone who is just learning about short selling.

 

[MoreLeverage]

I'll have to get back to you on the timing for US orders if not closed out during the prior day T session.

I’d be happy to hear something definitive also. My impression was that US buy-in were handled via VWAP starting 10-15 minutes after the open (not via MOO). this seems quite reasonable compared to some other brokers.

 

[tonyf]

The figures for availability are updated but do note hard to borrows do get taken up and w/o knowing your size, I'll have to venture a guess that the size you actually sold wasn't that large in relative terms and thus it would be understandable the limited availability was used up or the counter-party bought in the following day.

As for the buy-in, I'll have to double check but I suspect the buy-in would have occurred MOO or shortly thereafter and within a price that would not have moved the market substantially as our price filters shouldn't allow such large moves (which is a regulatory issue all by itself). I'll have to get back to you on the timing for US orders if not closed out during the prior day T session. The good thing, which goes back to my first post is that we have an active SLB team behind the scenes looking to source stock and prevent buy-ins which fortunately occurred in this case.

Thanks for that. It would be great if you could address the rest of the points I have raised in my reply as well. All very important in my view.