IB Margin requirements

[OldTrader]

Quote from osorico:

There was something that slammed IBs pocketbook, unknown whether or not directly related to raising intraday margins. Read the 10Q... there was a 30M+ loss (which was off-loaded to a non-public, but affiliated entity). Of more importance, it seems there is parsimonious effort being made across all IB divisions to increase equity capital and reduce margin-related borrowings. fwiw; fully secured margin balances helped IB increase interest income 59%.

Heres the link to the 10Q...
http://www.nasdaq.com/asp/quotes_sec.asp?symbol=IBKR&selected=IBKR&page=filings

Osorico

LOL! A detective you aren't. Better keep your day job. That "$30mm loss" was a loss purchased by Petterfy as a means of reimbursing the IB shareholders for a trading loss taken on some German options which IB claims was as a result of manipulation, and which was much discussed here on ET. Obviously this did not "slam" IB's pocketbook since it was reimbursed by Petterfy. As I understood it the loss had to be individual to file a lawsuit. Also any excess return from the filing of the lawsuit after costs will be paid to IB. Again, all of this was much discussed in the news and here on ET. Evidently you missed it.

By the way, interest income is up, but it doesn't appear to be up as much as you think....either for the 3 months or 6 months ended June. Likewise, offsetting this, interest expense is also up. Maybe the average rate was up over the period?

OldTrader

 

[rayl]

Quote from OldTrader:

LOL! A detective you aren't. Better keep your day job. That "$30mm loss" was a loss purchased by Petterfy as a means of reimbursing the IB shareholders for a trading loss taken on some German options which IB claims was as a result of manipulation, and which was much discussed here on ET. Obviously this did not "slam" IB's pocketbook since it was reimbursed by Petterfy. As I understood it the loss had to be individual to file a lawsuit. Also any excess return from the filing of the lawsuit after costs will be paid to IB. Again, all of this was much discussed in the news and here on ET. Evidently you missed it.

By the way, interest income is up, but it doesn't appear to be up as much as you think....either for the 3 months or 6 months ended June. Likewise, offsetting this, interest expense is also up. Maybe the average rate was up over the period?

OldTrader

For what it is worth:

On the quarterly conf call, Petterfy explained the purchase of the claim. His side of the story (paraphrased) was that the effort, distraction and likelihood of recovery are such that the economics make it inappropriate for IB to pursue, but out of a sense of going after the bad guys, he was willing to take it on personally.

 

[OldTrader]

Quote from rayl:

For what it is worth:

On the quarterly conf call, Petterfy explained the purchase of the claim. His side of the story (paraphrased) was that the effort, distraction and likelihood of recovery are such that the economics make it inappropriate for IB to pursue, but out of a sense of going after the bad guys, he was willing to take it on personally.

Thanks for that info.

OldTrader

 

[abxs]

Quote from OldTrader:

Personally I think a $3800 requirement for a day trade in ES is too much. If a trader wants to leverage himself in a way that may well heighten risk too much, in the end that is still the traders decision provided these decisions don't threaten to bring the firm down.

OldTrader [/B]

To me it's just seems their margin requirements are not based on anything objective. Although they post their "formula" on the website, they are not following their own rules.

The best example is the FTSE (Z):

4% rule would mean we have about 6200 (current score on the futures) x 4% x 10 GBP = 2480 GBP

What do they state on their website? A whopping 3500 GBP !! It used to be 1313 and they didn't change that over the last year. So is this really meant for compensation for the increase in volatility? Last Friday the daily range of the FTSE was a mere 50 points, which is exactly what is used to be for the last 6 months and more. Apart from a handful of extraordinary wide days the FTSE isn't doing much spectacular.

Last couple of days the ES and other US markets have returned to normal trading ranges too. But will IB adjust their margin requirements to the downside as quickly as they decided to raise them? I doubt it...

 

[FutureScalper]

Thanks. I couldn't have stated it more clearly ! FS

 

[jimrockford]

The reason IB's margin changes don't make sense to the people complaining about them is that IB actually does know something about how much margin is needed in order to protect the firm from going bankrupt and causing customers to lose money as a result of the bankruptcy; but the people complaining just do not know anything. They don't know enough to know that they don't know enough, and so they assume that the fault is with IB. The only problem is that the people complaining just have no understanding as to why margin is required at all, and how much margin is required in order to accomplish the purposes of margin.

The problem is with the people complaining, not with IB.

IB doesn't require margin in order to protect you from yourself. IB requires margin in order to protect itself from reckless gambler customers. If IB fails to protect itself, then IB puts its responsible customers in jeopardy as well. If reckless gambler customers have large trading losses, which they can't cover, and if IB goes bankrupt because it can't cover the deficit, then IB's other customers will suffer losses when their assets are taken in order to cover the losses generated by the gambler customers.

Margin protects each futures customer from losing his account as a result of the foolishness of other customers at the same broker.

A broker who only requires $300 margin for an intraday ES contract is putting all of its customers at risk for losing all or part of their accounts.

 

[FutureScalper]

Huh? Isn't that giving IB more credit than it's poorly managed intraday margin nuking maneuver really merits? After all, don't you think $3500 INTRADAY margin is too much margin for ES, as you feel $300 margin is too little margin for ES (with which I would surely agree) ? FS

 

[OldTrader]

Quote from jimrockford:

The reason IB's margin changes don't make sense to the people complaining about them is that IB actually does know something about how much margin is needed in order to protect the firm from going bankrupt and causing customers to lose money as a result of the bankruptcy; but the people complaining just do not know anything. They don't know enough to know that they don't know enough, and so they assume that the fault is with IB. The only problem is that the people complaining just have no understanding as to why margin is required at all, and how much margin is required in order to accomplish the purposes of margin.

The problem is with the people complaining, not with IB.

IB doesn't require margin in order to protect you from yourself. IB requires margin in order to protect itself from reckless gambler customers. If IB fails to protect itself, then IB puts its responsible customers in jeopardy as well. If reckless gambler customers have large trading losses, which they can't cover, and if IB goes bankrupt because it can't cover the deficit, then IB's other customers will suffer losses when their assets are taken in order to cover the losses generated by the gambler customers.

Margin protects each futures customer from losing his account as a result of the foolishness of other customers at the same broker.

A broker who only requires $300 margin for an intraday ES contract is putting all of its customers at risk for losing all or part of their accounts.

Rockford:

It sounds like you've got the purpose for margin down pat. But let's face it, we could easily set ES margin at $5K, or $10K. They too will "protect the firm from bankruptcy".

So clearly Rockford there is a little more to all of this than you set forth in your post.

Clearly the level of margin is rooted partially in the volatility of the market. We have many examples of this to look at. The exchanges in fact change overnight margin periodically depending on the volatility of the underlying instrument.

So let's take ES as an example. $3500 margin for an intraday trade is where it stands now. Maintenance is $2800. So a move to $2800 triggers a liquidation if you are fully margin. The risk here is whether that $2800 covers what the market may do before IB liquidates the position. That's a 56 handle move BEFORE we are into IB's money, let alone bankrupting them. Now, I suggest that you review the INTRADAY price history of the ES, and then let us know whether you really think that IB needs this type of protection.

Now, I'll go one step further and say that in my opinion if they do really need this type of protection, there must be something haywire with their margin liquidation software, and perhaps we all ought to be concerned with that.

I'm not suggesting that people trade with $3500 per contract or less for that matter. I don't do it, and I don't recommend that people do it. But that's my opinion. My point is that this is more than what is necessary to protect the firm. During the height of volatility the ES over the course of one hour might move 25-30 points. That at most $1500 Rockford....not even close to jeopardizing IB. The margin could be set $1000 less and it still wouldn't be close. And keep in mind that we're talking about a 1 hour period. I'm assuming IBs margin liquidation software surely kicks in quicker than that.

OldTrader

 

[abxs]

Quote from OldTrader:

Rockford:

It sounds like you've got the purpose for margin down pat. But let's face it, we could easily set ES margin at $5K, or $10K. They too will "protect the firm from bankruptcy".

So clearly Rockford there is a little more to all of this than you set forth in your post.

Clearly the level of margin is rooted partially in the volatility of the market. We have many examples of this to look at. The exchanges in fact change overnight margin periodically depending on the volatility of the underlying instrument.

So let's take ES as an example. $3500 margin for an intraday trade is where it stands now. Maintenance is $2800. So a move to $2800 triggers a liquidation if you are fully margin. The risk here is whether that $2800 covers what the market may do before IB liquidates the position. That's a 56 handle move BEFORE we are into IB's money, let alone bankrupting them. Now, I suggest that you review the INTRADAY price history of the ES, and then let us know whether you really think that IB needs this type of protection.

Now, I'll go one step further and say that in my opinion if they do really need this type of protection, there must be something haywire with their margin liquidation software, and perhaps we all ought to be concerned with that.

I'm not suggesting that people trade with $3500 per contract or less for that matter. I don't do it, and I don't recommend that people do it. But that's my opinion. My point is that this is more than what is necessary to protect the firm. During the height of volatility the ES over the course of one hour might move 25-30 points. That at most $1500 Rockford....not even close to jeopardizing IB. The margin could be set $1000 less and it still wouldn't be close. And keep in mind that we're talking about a 1 hour period. I'm assuming IBs margin liquidation software surely kicks in quicker than that.

OldTrader

Good points made there... sure make me wonder why this excess is necessary. They are also increasing margin on other European futures contracts which they first said they wouldn't do...

 

[jimrockford]

Quote from OldTrader:

I'm not suggesting that people trade with $3500 per contract or less for that matter. I don't do it, and I don't recommend that people do it. But that's my opinion. My point is that this is more than what is necessary to protect the firm. During the height of volatility the ES over the course of one hour might move 25-30 points. That at most $1500 Rockford....not even close to jeopardizing IB. The margin could be set $1000 less and it still wouldn't be close. And keep in mind that we're talking about a 1 hour period. I'm assuming IBs margin liquidation software surely kicks in quicker than that.

OldTrader

How much margin do you think would be enough, and how meaningful will price history be toward answering this question, the morning after terrorists, who infiltrated the U.S. thru its unenforced Mexican border, detonate the first nuclear or radiological attack ever to occur on American soil? Do you think that IB's auto-liquidation algorithm will save the day?

Did you ever hear the disclaimer, that past performance is no guarantee of future results? Price history is of only limited value in determining how much margin is needed. The amount of margin needed can increase enormously and without warning. The possibility of radiological attack is only one extreme example. Other events could also trigger market behavour which unexpectedly deviates from recent price history, or perhaps even from all price history.

Nobody can say, with confidence, that price history tells us all we need to know, about how much margin is needed in order to establish safety.

Markets are not what mathematicians call a series of identical trials. Your way of thinking is more suited to identical trials. You can, for example, monitor the behavour of dice or coin flips over time, in order safely to estimate the future limits in which their behavour will fall. You can't do this with markets. Every roll of the market dice involves a different set of dice, with a different number of faces, and with different weightings on them, than the last roll. Every flip of the market coin involves a different coin, with a different probability of heads or tails, than the previous flip.

Don't make the mistake of treating markets like coin flips or dice throws. Markets are far more treacherous, and risk control in trading is far more difficult, than in series of identically distributed dice throws or identically distributed coin flips.