IB "Concentration Minimum" maintenance margin question

P

persistence

Hello!

I'm in the middle of opening an account with IB, but I'm also evaluating other options. I'm going to trade stocks and stock CFDs.

I've noticed this while browsing.

Concentration Minimum - We stress the portfolio by applying a 30% adverse move on the two largest positions and a 5% adverse move on the remaining positions. The total loss is applied as the maintenance margin requirement if it is greater than the standard requirement
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Let's say initial margin is 12.5% and maintenance margin is 10% for AAPL. I'm exempt from ESMA ruling, by the way.

For the sake of simplicity, let's assume I'm all cash and my balance is $300K. Does this mean I can open a position worth $2.4 million and it won't get auto liquidated till it hits $720K?

Thank you!
 
Hi , I too trade stock cfd's with interactive and sent a few queries about margin req's , it seems to vary a lot , highly volatile stocks needing more etc , but to try and work it out before hand , well I don't bother ( I generally change stocks everyday).
 
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persistence said:
Hello!

I'm in the middle of opening an account with IB, but I'm also evaluating other options. I'm going to trade stocks and stock CFDs.

I've noticed this while browsing.



Let's say initial margin is 12.5% and maintenance margin is 10% for AAPL. I'm exempt from ESMA ruling, by the way.

For the sake of simplicity, let's assume I'm all cash and my balance is $300K. Does this mean I can open a position worth $2.4 million and it won't get auto liquidated till it hits $720K?

Thank you!
More...

First of all, the initial margin is the opposite of what you think it is; it is not leverage rate. It's the % of the purchase price of the security, i.e. the money that you have to put up first in order to trade. Right off the bat, if you have $300K, the amount you can trade will not be 300K/12.5% = 2.4 million. At IB, it's minimum $2K or 30% of the security value (in your case maybe 12.5% if you are ESMA ruling) whichever is greater. So with AAPL at the price of $208.87 and let's say you want to buy 300K/208.87 = 1436 shares, your initial margin is 1436 X 208.87 X 12.5% = $37,942.16. So the available money that you have to invest in AAPL is $300K - 37,942.16 = $262,507.XX

Second, No the concentration limit is the way that IB further restricts the margin on your portfolio and increases your chance of your portfolio of being auto-liquidated just because IB believes that you are trading too much on one or few particular securities. It overrides the initial maintenance margin of the security when you first trade it. How it works is like this:

Let's say you in a trade of AAPL which has a maintenance margin of 10% as in your example. Let's say you decide to invest $200K worth of your portfolio in AAPL or $200K/208.87 = 957 shares. With this concentration minimum, what IB does is test to see what happens if the 2 biggest position in your portfolio loses 30% of its value, in your case since you only have 1 position and no remaining positions, it will test what happens AAPL all of sudden loses 30% of its value and how much would that loss be and if it's bigger than the 10% maintenance margin then it would override the 10% maintenance margin and becomes your new maintenance margin. So in your example, a 30% loss in AAPL would result in a loss of 0.3 X 208.87 X 957 = $59,966.58, larger than 10% maintenance margin so this would become your new maintenance margin. At all times, you would need to make sure you have at least $59,966.58 in your account besides your position otherwise your position would be auto-liquidated.
 
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To me, this is just how IB micromanages its traders by imposing its own arbitrary rules and policies when they are totally clueless about the nature of the market nor the quality or behaviour of the security itself nor the trading skill and prudence of the traders themselves. I have opened up an account at IB to trade, not to be babysat. It's both draconian and baseless. What's this "30%" based on? Why not 20%? Why is not 50% or 100%? Why don't they the security will drop in value 100% while they are at it? Why stop at 30%? If you are able to find other brokers, I strongly suggest you go with other brokers. Take it from a former client of IB who has been with IB for many years, trust me when I tell you IB is NOT what it makes itself out to be. It's neither the lowest-cost nor the best quality broker out there. Their advertised commission charge might be low but they have all kinds of mechanisms and hidden fees/charges to make sure your commission charge that you end up paying is higher, much higher than what is advertised. Your experience with them will be a very frustrating one. You can ask many of the Elite Trader members here who are truly IB's clients and they will tell you the same thing. They are many many many brokers out there that are either lower cost or deliver much better quality of platform/service/execution or both or all of them or at least 2 or 3 of the criteria. IB is really a high-end bucketshop that just dwindles right on the edge of the legal side. If you still want to try them out, go right ahead but you will arrive at the same conclusion as us.

Good luck!
 
IB's rules maybe arbitary , but it's a business transaction , if we don't like their rules we don't have to trade with them, most brokers will have some rules, I just find I lose the will to live trying to work out margin reqs every day so don't bother, I bet even if you follow all your advice on margin you'll still occasionally find differences where IB have changed the reqs etc.) (especially with more obscure stocks etc)
 
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henry76 said:
IB's rules maybe arbitary , but it's a business transaction , if we don't like their rules we don't have to trade with them, most brokers will have some rules, I just find I lose the will to live trying to work out margin reqs every day so don't bother, I bet even if you follow all your advice on margin you'll still occasionally find differences where IB have changed the reqs etc.) (especially with more obscure stocks etc)
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Exactly and this is why I strongly suggested the OP to find other brokers to trade with instead of wasting his/her time with IB as he/she is only in the middle of opening an account with IB.
 
henry76 said:
Hi , I too trade stock cfd's with interactive and sent a few queries about margin req's , it seems to vary a lot , highly volatile stocks needing more etc , but to try and work it out before hand , well I don't bother ( I generally change stocks everyday).
More...

Thanks! I was planning to use their API for this, but that 30% thing scared me off.

JSOP said:
First of all, the initial margin is the opposite of what you think it is; it is not leverage rate. It's the % of the purchase price of the security, i.e. the money that you have to put up first in order to trade. Right off the bat, if you have $300K, the amount you can trade will not be 300K/12.5% = 2.4 million. At IB, it's minimum $2K or 30% of the security value (in your case maybe 12.5% if you are ESMA ruling) whichever is greater. So with AAPL at the price of $208.87 and let's say you want to buy 300K/208.87 = 1436 shares, your initial margin is 1436 X 208.87 X 12.5% = $37,942.16. So the available money that you have to invest in AAPL is $300K - 37,942.16 = $262,507.XX

Second, No the concentration limit is the way that IB further restricts the margin on your portfolio and increases your chance of your portfolio of being auto-liquidated just because IB believes that you are trading too much on one or few particular securities. It overrides the initial maintenance margin of the security when you first trade it. How it works is like this:

Let's say you in a trade of AAPL which has a maintenance margin of 10% as in your example. Let's say you decide to invest $200K worth of your portfolio in AAPL or $200K/208.87 = 957 shares. With this concentration minimum, what IB does is test to see what happens if the 2 biggest position in your portfolio loses 30% of its value, in your case since you only have 1 position and no remaining positions, it will test what happens AAPL all of sudden loses 30% of its value and how much would that loss be and if it's bigger than the 10% maintenance margin then it would override the 10% maintenance margin and becomes your new maintenance margin. So in your example, a 30% loss in AAPL would result in a loss of 0.3 X 208.87 X 957 = $59,966.58, larger than 10% maintenance margin so this would become your new maintenance margin. At all times, you would need to make sure you have at least $59,966.58 in your account besides your position otherwise your position would be auto-liquidated.
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Thank you for your comment.

Well, that makes trading CFDs pointless if you can't go beyond 1:3 leverage.

I'll be looking for alternatives, then.
 
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Maybe true , but I think with cfd's in particular their commissions are much much less than other brokers, especially U.S. stocks , certainly Uk based cfd's are I believe twice the commission atleast (I'd be happy to be corrected on this ) probably the thing that comes closest would be portfolio margin with other US brokers.
 
henry76 said:
Maybe true , but I think with cfd's in particular their commissions are much much less than other brokers, especially U.S. stocks , certainly Uk based cfd's are I believe twice the commission atleast (I'd be happy to be corrected on this ) probably the thing that comes closest would be portfolio margin with other US brokers.
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Ah, I forgot that part. You're right. CFDs are also exempt from stamp duty.

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Guys, I have one more question for you. This rule applies even though you don't hold the position overnight, right?
 
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US stocks don't have stamp duty , atleast not in the way /amount uk shares have . ( I don't think the difference in commission on cfd's is to do with stamp duty)( I don't think there's stamp duty on UK share cfd's either ( a reason they gained popularity)
 
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