IB Margin Changes

[jayre]

Quote from Options12:

What Jayre really seems to be missing here is that IB's auto liquidations are likely a gift to ALL market makers and not just TH.

Options12, I'm allways open to admit that I made a mistake if that's indeed the case.

While you are definetly right that auto liquidations are a gift to all market makers, it seems that TH would have an edge over other MM because of the following.

If 2 MM, one of TH both have them posted the exect same bid on an option, each of them on a seprate exchange. Now that option is being auto liquidated so it would be sold for the bid price, which MM would get the trade?

(Its my clear understanding that in that case IB would route the trade to the exchamhe that has the TH bid).

 

[stock777]

shmuck, why would it be an automatic gift to a mm? what if the stock is tanking and there's no way to unload it higher?

go away, you waste our time.

 

[stg]

Quote from Options12:

I'm not certain this is correct, stg, since if TH makes a market in the security being liquidated from your account, and therefore holds inventory on both the long and short sides of the security, then the transaction they execute against YOUR liquidation will result in a profit or loss.

The IB statement highlighted by Jack earlier in this thread seems to say as much; that a profit or loss may be realized and that such details may be disclosed to the customer upon request.

This all seems to contradict IBsoft's assertion, however, that the profit or loss from TH against liquidated trades is simply not tracked. But I think IBsoft will explain this best themselves in an upcoming post.

What Jayre really seems to be missing here is that IB's auto liquidations are likely a gift to ALL market makers and not just TH. IBKR, however, has a special duty of disclosure in this scenario for many reasons including just simply to help make sure that the Chinese Wall develops no cracks due to rogue employees.

But the regulators are hopefully working on better enforcement of certain rules that may reduce the value of the auto liquidation gift to market makers by working to narrow the bid / ask spread.

Check out:

http://www.nanex.net/Research/StubRuleViolations/StubViolations.html

which is a link someone posted on the active ET thread entitled:

"Is IB designed to just feed liquidity to Timber Hill?"

An options market maker typically maintains both synthetically long (long call/short put) and short (short call/long put) positions at any one time as they have an affirmative obligation to both buy and sell at their posted quotes, but in the aggregate are either net long delta or net short delta. If, for example, your liquidation results in the sale of your long calls or the buy in of your short puts to the proprietary side and they are already net long they are simply increasing their long position and it can't be said with any certainty whether they will make a profit or not when that long position is ultimately closed.

In any event, a market maker generally profits by buying at the bid and selling at the ask and not taking directional bets and in the case of IB's proprietary trading this strategy seems to be supported by their public filings. More to my point of the the gain or loss on any one transaction being 'indeterminable', a broker making a market in multiple securities classes is likely hedging a long position in one security with a long or short positions in different securities based upon their correlation (on a diversification or long/short basis). To suggest that the proprietary trading side is: 1) violating the Chinese Wall rules by monitoring and acting upon liquidations from the brokerage side; and 2) has the capacity/desire to manage its proprietary book so with the objective of realizing profits from those liquidating trades seems quite a stretch to me.

As for the language in the customer agreement, lawyers are always going to word such agreements to recognize what could happen (a profit from liquidations) for purposes of full disclosure and to minimize lawsuits, but to assign a probability of that happening seems difficult at best. Moreover, I doubt the reference to stub quotes is relevant here as those typically exist prior to the underlying opening at the primary market. Rarely does that that opening not take place by 9:40 ET which is what I understand to be the start of margin liquidations by IB each day.

I'd be interested in understanding why you believe liquidations (or any other order for that matter) is of greater benefit to market makers than it is to another market participant particularly due to the priority customer orders receive.

 

[jayre]

Quote from stock777:

sorry , but in my old age I have very little patience with the of inbred bastard sons of siblings. welcome to my ignore list. (hint, you'll have to create another nick)

Stock777, I'm not wasting any time here, I had quite an acomplishment, I went down from your ignore list.

I really would encourage you to keep writing posts here, so you can reach your milestone of "15 thousand useless posts".

 

[stg]

Quote from Options12:

I'm not certain this is correct, stg, since if TH makes a market in the security being liquidated from your account, and therefore holds inventory on both the long and short sides of the security, then the transaction they execute against YOUR liquidation will result in a profit or loss.

The IB statement highlighted by Jack earlier in this thread seems to say as much; that a profit or loss may be realized and that such details may be disclosed to the customer upon request.

This all seems to contradict IBsoft's assertion, however, that the profit or loss from TH against liquidated trades is simply not tracked. But I think IBsoft will explain this best themselves in an upcoming post.

What Jayre really seems to be missing here is that IB's auto liquidations are likely a gift to ALL market makers and not just TH. IBKR, however, has a special duty of disclosure in this scenario for many reasons including just simply to help make sure that the Chinese Wall develops no cracks due to rogue employees.

But the regulators are hopefully working on better enforcement of certain rules that may reduce the value of the auto liquidation gift to market makers by working to narrow the bid / ask spread.

Check out:

http://www.nanex.net/Research/StubRuleViolations/StubViolations.html

which is a link someone posted on the active ET thread entitled:

"Is IB designed to just feed liquidity to Timber Hill?"

An options market maker typically maintains both synthetically long (long call/short put) and short (short call/long put) positions at any one time as they have an affirmative obligation to both buy and sell at their posted quotes, but in the aggregate are either net long delta or net short delta. If, for example, your liquidation results in the sale of your long calls or the buy in of your short puts to the proprietary side and they are already net long they are simply increasing their long position and it can't be said with any certainty whether they will make a profit or not when that long position is ultimately closed.

In any event, a market maker generally profits by buying at the bid and selling at the ask and not taking directional bets and in the case of IB's proprietary trading this strategy seems to be supported by their public filings. More to my point of the the gain or loss on any one transaction being 'indeterminable', a broker making a market in multiple securities classes is likely hedging a long position in one security with a long or short positions in different securities based upon their correlation (on a diversification or long/short basis). To suggest that the proprietary trading side is: 1) violating the Chinese Wall rules by monitoring and acting upon liquidations from the brokerage side; and 2) has the capacity/desire to manage its proprietary book so with the objective of realizing profits from those liquidating trades seems quite a stretch to me.

As for the language in the customer agreement, lawyers are always going to word such agreements to recognize what could happen (a profit from liquidations) for purposes of full disclosure and to minimize lawsuits, but to assign a probability of that happening seems difficult at best. Moreover, I doubt the reference to stub quotes is relevant here as those typically exist prior to the underlying opening at the primary market. Rarely does that that opening not take place by 9:40 ET which is what I understand to be the start of margin liquidations by IB each day.

I'd be interested in understanding why you believe liquidations (or any other order for that matter) is of greater benefit to market makers than it is to another market participant particularly due to the priority customer orders receive.

 

[JamesL]

Guys, give it a rest. You're arguing with a wall.

 

[Options12]

Quote from stg:

More to my point of the the gain or loss on any one transaction being 'indeterminable', a broker making a market in multiple securities classes is likely hedging a long position in one security with a long or short positions in different securities based upon their correlation (on a diversification or long/short basis).

This is not about TH's net delta position. This is about the profit or loss on specific IB customer transactions in which TH acts as a principal.

Quote from stg:



As for the language in the customer agreement, lawyers are always going to word such agreements to recognize what could happen (a profit from liquidations) for purposes of full disclosure and to minimize lawsuits, but to assign a probability of that happening seems difficult at best.

Here's what IB says. There is nothing in this discussion about assigning a probability of a profit or loss. IBsoft will clear this up soon.

"In such cases IB's affiliate may act as principal in the resulting transaction and may earn a profit or incur a loss in connection with the transaction. The source and nature of any compensation received by IB in connection with any transaction is available upon written request of the customer. For further information, check the IB website or email help@interactivebrokers.com"

Quote from stg:

Rarely does that that opening not take place by 9:40 ET which is what I understand to be the start of margin liquidations by IB each day.

Has IB stated this previously? This is interesting news. IBsoft, will you address whether or not IB has a "start" time for auto liquidations each day?

Quote from stg:

Moreover, I doubt the reference to stub quotes is relevant here as those typically exist prior to the underlying opening at the primary market.

The stub quote rule applies all day. The rule actually gives MORE leniency toward wider spreads in the first and last 15 minutes of the day.

See: http://www.sec.gov/news/press/2010/2010-216.htm

Quote from stg:


I'd be interested in understanding why you believe liquidations (or any other order for that matter) is of greater benefit to market makers than it is to another market participant particularly due to the priority customer orders receive.

Customer orders get filled and then the market makers get the rest. The more illiquid the security, the better the fill for the market makers during the auto liquidation. Check out this example: http://www.futuresmag.com/Issues/2009/4/Pages/Bad-fill-or-bad-rule-.aspx

 

[jayre]

Quote from Options12:


Has IB stated this previously? This is interesting news. IBsoft, will you address whether or not IB has a "start" time for auto liquidations each day?

I will answer this one for IB. For stocks & options IB will generally wait 10 minutes from the open to start liquidating, (they have the right not to wait & even liquidate AH) After 9:40 if at any given point you have a margin deficit liquidation will start in around 60 seconds.
For futures liquidations can hapen 24 hours.

 

[Options12]

Quote from jayre:

After 9:40 if at any given point you have a margin deficit liquidation will start in around 60 seconds.

Jayre, where did this information come from? Why 9:40?

 

[newwurldmn]

Quote from Options12:

Jayre, where did this information come from? Why 9:40?

9:40 seems to be generous to me on IB's part. There's no worse time to put a margin call order than at 9:30. Especially in options. So if IB were trying to fuk you on a auto liquidation, they could take a lot more money out of you if they did it at 9:30 .