Quote from stock777:
hey jimrockford, since you've done these , how about a breakdown on whats actually happening to your account, interest earned, buying power, etc.
I'm still finding the published explanations lacking in gory details, and I don't want to open a trade to find out what really happens.
So if you had 100k in the acct, how would you maximize interest earned and still retain buying power?
You can't use the same funds to earn interest, and to margin positions overnite at the same time, so what you ask is impossible. If you want to earn interest on the full 100K, at a higher rate than any broker will pay, including the first 10K, then you sell EFPs totalling 100K worth of stock. If you earn interest on your entire account's value of 100K, then your overnite buying power will be reduced from 2:1 down to about 1:1, and your intraday long buying power will be reduced from 4:1 down to about 3:1, and your intraday short buying power will be reduced from 10:3 down to 7:3. The colon notations refer to the ratio of a position's value to its margin requirement.
If you are using an EFP to earn interest on your entire 100K, but then you also enter into additional positions held overnite, then you will be charged margin interest on the value of the additional positions. If you are going to hold, say, 20K in positions overnite, then you should reduce your EFPs to a notional amount of 80K, in order to free up the cash so that you can finance your additional overnite positions. This is because the amount you will be charged in margin interest, on the 20K, exceeds the amount of interest you can earn by keeping it in EFPs.
If you are going to hold intraday positions in addition to your EFPs, you don't need to worry about paying margin interest on them, provided you close those positions before the market closes, so that they do not become overnite positions. You aren't charged margin interest on intraday holdings that you close by the end of the day you entered them.
Be wary of selling an EFP of such long duration that you might need to exit the position before it expires. IB provides an ECN book called IBEFP, where IB, as market maker, competes with IB customers to provide liquidity on EFPs, and you can expect that such liquidity will enable you to exit an EFP prior to its expiration, but THERE IS NO GUARANTEE THAT SUCH LIQUIDITY WILL ALWAYS BE AVAILABLE. Sometimes, bids and asks for particular EFP symbols disappear from the ECN book for brief periods of time throughout the trading day. So be prepared for the possibility that you might need to hold your EFP until it expires, at which time your EFP's short SSF leg will be exercised so as to sell your long stock, thus closing both legs of the EFP.
It is very important to remember that in buying and selling EFPs, you will not be paying the huge spreads which normally exist on SSFs. This is because IB acts as market maker for EFPs, making very tight bid-ask spreads on the EFPs, far tighter than what is available on SSFs outside the EFP context.
I am responding to your question about maximizing interest earned on a cash balance, and avoiding the lack of interest paid on the first 10K, but keep in mind that EFPs can also be used for other purposes, to minimize the cost of financing long and short stock positions. IB's explanations might be difficult for many traders to understand, but those explanations are well worth the trouble to study, and really are essential for most traders. The smaller your account, the more important it is for you to understand EFPs, because you will be more affected by the lack of interest paid on the first 10K in cash, and so you will have a greater need to use EFPs in order to get around that lack of interest on the first 10K.
IB, in its new features poll, has rejected strong customer support for payment of interest on the first 10K, but it really isn't such a bad situation at all. Customers can simply use EFPs in order to get around the lack of interest on the first 10K, and in fact, the EFP technique will allow customers to earn greater interest than any broker will pay.
Another tip is to be skeptical about the interest rate quoted on an EFP, where the underlying stock is expected to pay dividends prior to the EFP's expiration. Sometimes IB has erroneous information about the existence or amount of dividends expected to be payed on a particular symbol, in which case the interest rate quoted on TWS will be erroneous. You can eliminate this problem using the "edit dividends" functionality, whenever you find a mistake in IB's list of dividends expected for a particular symbol. You can an also cause TWS to quote EFPs using actual EFP prices, as for any other type of spread or combination order, rather than expected interest rates. Quotes on actual EFP prices are immune from any errors in IB's database of dividends. Keep in mind that you need to know what dividends will be paid on a symbol, in order to evaluate the price you are getting on an EFP transaction.
