IB or Cybertrader for E Minis?

I believe when RCG or any other broker give you $500 margin it is DAYTRADING MARGIN and not over night margin
For over night they changer you like 10 K requirment per car
I think $500 margin is preety good for daytrading futures cause for equities u need 25K while in future u can deposit 10 K and can scalp or trend trading but have to close all the position by 4.15
Well company like refco charges more then $500 a car but it still went bankrupt
 
Quote from BobG:

Jimrockford, I fully agree with most of your comments regarding the credit risk associated with accounts at FCM's. It was amazing during the Refco debacle to realize how many people who believed that they had no exposure because their margin at Refco was held in Tbills.

However, your comment, quoted above, regarding the reduction in credit exposure from using IB was incomplete in an important respect and could be misleading as a result.

I agree that IB's structure reduces the amount of credit exposure as compared to most futures accounts. However, this reduction may be *very small* for many people depending on the positions in the account.

In order to illustrate, I will use the terms "required futures margin" to mean the amount which required to be held in your futures account to support your futures positions, and "excess margin" to mean the amount which is surplus and could be withdrawn from your account. Few people are willing to transfer funds in and out of their futures account daily, so most people maintain some excess margin in their futures account.

At most futures brokers, this distinction is unimportant since both of these amounts are held in your futures account (either in cash or bills) and are then subject to the segregated funds regime and credit risk you described earlier. In a bankruptcy caused by a customer loss, the entire amount would be subject to a prorata credit loss.

At IB, by contrast, their computer system *automatically* transfers amounts in and out so that *only* the required futures margin is held in the futures account. It is important to recognize that the required futures margin is subject to credit risk in the same manner as with any other futures broker.

The benefit of the IB structure is that without any work by the customer, the "excess margin" is always held in the securities account and is covered by SIPC. A customer who has no excess margin will experience *no* reduction in credit exposure.

Suppose, for example, that you have 500k in tbills and have 400k of required futures margin. (At IB this would be in a securities account with 500k bills and a 400k margin loan, and a futures account with 400k in cash.) Suppose further that your futures broker (IB or some other broker) is bankrupt as a result of a giant customer loss.

At a typical broker, you would lose some portion of the 500k prorata with other customers. At IB you would lose some prorata portion of 400k. At IB, the 100k of equity in your securities account would be fully protected by SIPC. If the recovery rate were 0%, customers at IB would lose only 400k while those elsewhere would lose 500k.

After reading your comment I couldn't tell whether you understood that you would lose 400k in this example, or whether you were under the impression that you would somehow lose nothing.

One further note: although IB's structure reduces credit risk, it provides significantly less economic benefit from using tbills than does a typical futures account. In my example above, the trader is incurring the negative spread between the interest rate on the bills and the margin loan at IB. The trader should eliminate this by selling 400k of the bills. At most futures brokers, there wouldn't be any negative spread since the bills would directly be used as margin.
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I agree with only the last part of your post, BobG. If you are holding positions overnight, then yes, you must pay the spread between T-Bills and the margin interest rate, on that portion of your funds required to be transferred to your commodities sub-account in order to satisfy margin requirements. I would think these interest charges should be very small, compared to one's account size, unless one is a grossly overleveraged gambler. I would also mention that no such interest charge, not even a very small one, will result from positions held intraday and then liquidated, rather than held overnight.

I do not agree with your opinion about the bankruptcy risk. I believe that in the event of a bankruptcy, in your example, the Interactive Brokers customer would not lose anything. The customer would have received a margin loan of $400,000 against his T-bills in the security sub-account. The customer would owe this amount to IB. The proceeds of this loan would be automatically transferred to the commodities sub-account, as the minimum amount required to satisfy margin requirements. If IB went bankrupt, the loss of the margin loan proceeds would create a debt of $400,000 owed by IB to the customer. I believe that this debt would offset the customer's debt of $400,000 created by the original margin loan. The result would net to zero and the customer would lose nothing in the commodities sub-account; the commodities sub-account would hold only the house's money, so that it's loss would whack the house, not the customer. The customer's property would remain entirely within the securities sub-account, and receive full protection from SIPC and Lloyds' of London private deposit insurance, up the various policy coverage limits.

Perhaps you are right and I am wrong. I would appreciate it if you could post the source of your opinion. I am simply relying on my belief that the two debts, between house and customer, would cancel each other, thus protecting the customer. I would like to know the source or basis of your reasoning to the contrary. Thanks for the debate.
 
Interesting thread.

From what little I know of US bankrupcy law, who gets paid what and when in the event of a bankrupcy largely comes down to seniority of debt.
The IRS being the first cap off the rank, preferred debts next in queue, and obligations to clients somewhat down the list.

The end result is that you probably shouldn't assume that your debt to the broker would be cancelled out by their debt to you.


Getting back to the original topic of the thread. I'm currently with IB and I'm more than happy with the platform and service.

However, as an exercise in risk management, I've been looking to set up an account with a second broker.
So my question would be, who's the 'next best' after IB?
 
Despite the title, Virtually the entire thread has been devoted to a discussion of credit issues associated with FCM's, so I'm not really sure how off-topic this is.

Jimrockford, in my post I hadn't considered the case of someone who *never* holds futures positions overnight. If IB's procedure results in their never having a balance in the commodities portion of their account, then they would never have non-SIPC credit exposure. Additionally, without margin loans, there would be no negative carry.

(By the way, for those who do carry positions overnight I wouldn't consider the negative carry small. If your overnight futures margin is over 100k, you'd be borrowing at Libor plus 112 and investing at libor minus 60. That's a reduction in your return of 1.72%.)

Regarding credit exposure: I believe you are making unwarranted assumptions regarding what would happen in the event IB failed. I don't understand what led you to think that your receivable from your commodity account would be netted against your liability in your securities account.

Netting as you described it would be completely incompatible with the concept of separate regulations applying to the commodity and securities accounts. Additionally, it is incompatible with the idea that similarly situated creditors would receive an equal recovery rate.

Regarding SIPC: SIPC protection only applies to the "securities" account. (If this weren't the case, there would be no issue since the commodity account would be covered.) SIPC only insures your "net equity" which is defined as the value of your assets less your borrowing. In my example, that amount is 100k.
 
BobG,

I think you are mostly correct.

I think you are correct about SIPC only covering net equity. I think this reveals a basic flaw in my what I said, which forgot about the difference between net and gross position values. I now agree that the main type of SIPC coverage would be limited to 100K, as you said.

I still disagree with your calculation of overnight carrying costs. Your calculation assumes that the customer holds as many futures contracts as are permitted by margin requirements. Nobody can do this and last very long. I think you need to calculate carrying costs as a percentage of the far larger total account size, rather than as a percentage of the far smaller margin deposits for which carrying costs are incurred on overnight positions. If you calculate in this way, then the carrying costs are only a very small fraction of what you stated.

I also still believe (although you are making my doubts grow) that the receivable held in the commodity account would net against the liability owed in the equity account, because the receivable is owed by the same party to whom the liability is owed. I don't think this view conflicts with regulatory structures or treats similarly situated parties differently. I would appreciate more from you on this. Are you aware of any precedent or regulation, etc., specifically addressing this question?

I should, for the sake of those reading, acknowledge that even though I don't fully agree with you, I think you are more knowledgeable than I, so that anybody reading should listen to your opinion, not mine. Let me also thank you for the education. I hope you will continue to contribute such valuable info to this forum.
 
Someone please help with this. I am getting conflicting information regarding Refco’s futures customers’ accounts. My understanding was that no futures customers ultimately lost any funds but now I’m hearing otherwise. My searches on this reveal much conflicting information from posts but nothing from a reliable source that definitively states whether futures customers’ funds were lost and if so, exactly how much and with exactly how many customers. I find lots of sometimes-conflicting generalities but nothing with those specifics. If someone can point me to a business-publication article with this information I would be grateful.
 
Quote from jpatet:

Someone please help with this. I am getting conflicting information regarding Refco’s futures customers’ accounts. My understanding was that no futures customers ultimately lost any funds but now I’m hearing otherwise. My searches on this reveal much conflicting information from posts but nothing from a reliable source that definitively states whether futures customers’ funds were lost and if so, exactly how much and with exactly how many customers. I find lots of sometimes-conflicting generalities but nothing with those specifics. If someone can point me to a business-publication article with this information I would be grateful.
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Jim Rogers and other futures customers of Refco filed litigation stating that they together lost about one billion dollars in the Refco bankruptcy. They claim that Refco, without authorization, during the process of its own collapse in its final days, transferred their funds out of their futures accounts, which were regulated by the CFTC, and into different accounts at different Refco companies, which were not subject to the various protections which U.S. law gives to futures trading accounts. This lack of protection resulted in loss of the funds. Refco used the money to cover its other debts, went bankrupt, and then lacked the ability to reimburse its futures trading customers.

Refco admitted that they did, in fact, transfer the funds. Refco claimed that it had been authorized, by the losing customers, to make the transfers. The customers say that Refco was lying, and that the transfers were not authorized.

It is a fact that Refco had a long history of "borrowing" customer funds by making unauthorized transfers out of customer futures trading accounts, using the money to cover Refco's debts, and then paying the money back into the futures accounts, over and over and over again, on a routine daily basis. This always exposed customers to the risk that in the event of a Refco bankruptcy, futures trading customers could lose their entire accounts, if Refco collapsed before it could replenish the money it had "borrowed" from its customer futures trading accounts. Refco was repeatedly fined for this practice. This practice eventually did result in a loss of several hundred million dollars in the late 1990s, which Refco could not repay to its futures customers. Refco concealed the problem by transferring funds from other Refco entities to fill the hole, with the result that others doing business with those other Refco entities were defrauded. Refco eventually collapsed when it was revealed that the funds were missing from another Refco entity, and that the loss had been concealed by fraudulent accounting and sham transactions.

The question is, was Refco still doing this at the time of its collapse? Or did Jim Rogers and the other losers actually authorize Refco to drain one billion dollars from customer accounts, and to borrow it, and to lost it in the Refco bankruptcy?

Two very important things to remember are as follows.

If your broker decides to steal or to embezzle or to "borrow" funds from your futures trading account, and then the broker goes bankrupt, you can lose the entire value of your accont.

Your "segregated" futures account is segregated in that it is segregated from funds belonging to the broker. BUT IT IS NOT SEGREGATED FROM THE ACCOUNTS OF OTHER CUSTOMERS. If other customers incur large trading losses, which are not covered by their margin deposits, either because of a large market move, or because the broker allowed them to trade without depositing the required amount of margin, and which the customers are unable or unwilling to cover by way of a margin call, then you could be in trouble. Your entire account could be drained in order to cover uncovered losses incurred by other customers of the same broker. So you can lose your entire account, even though your broker did not steal from you, and even though all of your trades were winners. You can lose your entire account, because other customers of your broker were unlucky gamblers.

Lots of people have made false statements about these facts on ET. I have been subject to unbelievable amounts of harassment, abuse, and libel, on EliteTrader, because I have repeatedly communicated these facts (many of the harassing posts were deleted). Many ET members have also been posting links to a propaganda article by the Futures Industry Organization which falsely and deceptively hides these facts and gives a false impression that futures accounts are far safer than they are in reality. Some people don't want you to know the truth. A lot of money is at stake. Others themselves don't want to know the truth, and would rather behead the messenger than face reality.
 
Quote from jimrockford:

Jim Rogers and other futures customers of Refco filed litigation stating that they together lost about one billion dollars in the Refco bankruptcy. They claim that Refco, without authorization, during the process of its own collapse in its final days, transferred their funds out of their futures accounts, which were regulated by the CFTC, and into different accounts at different Refco companies, which were not subject to the various protections which U.S. law gives to futures trading accounts. This lack of protection resulted in loss of the funds. Refco used the money to cover its other debts, went bankrupt, and then lacked the ability to reimburse its futures trading customers.

Refco admitted that they did, in fact, transfer the funds. Refco claimed that it had been authorized, by the losing customers, to make the transfers. The customers say that Refco was lying, and that the transfers were not authorized.

It is a fact that Refco had a long history of "borrowing" customer funds by making unauthorized transfers out of customer futures trading accounts, using the money to cover Refco's debts, and then paying the money back into the futures accounts, over and over and over again, on a routine daily basis. This always exposed customers to the risk that in the event of a Refco bankruptcy, futures trading customers could lose their entire accounts, if Refco collapsed before it could replenish the money it had "borrowed" from its customer futures trading accounts. Refco was repeatedly fined for this practice. This practice eventually did result in a loss of several hundred million dollars in the late 1990s, which Refco could not repay to its futures customers. Refco concealed the problem by transferring funds from other Refco entities to fill the hole, with the result that others doing business with those other Refco entities were defrauded. Refco eventually collapsed when it was revealed that the funds were missing from another Refco entity, and that the loss had been concealed by fraudulent accounting and sham transactions.

The question is, was Refco still doing this at the time of its collapse? Or did Jim Rogers and the other losers actually authorize Refco to drain one billion dollars from customer accounts, and to borrow it, and to lost it in the Refco bankruptcy?

Two very important things to remember are as follows.

If your broker decides to steal or to embezzle or to "borrow" funds from your futures trading account, and then the broker goes bankrupt, you can lose the entire value of your accont.

Your "segregated" futures account is segregated in that it is segregated from funds belonging to the broker. BUT IT IS NOT SEGREGATED FROM THE ACCOUNTS OF OTHER CUSTOMERS. If other customers incur large trading losses, which are not covered by their margin deposits, either because of a large market move, or because the broker allowed them to trade without depositing the required amount of margin, and which the customers are unable or unwilling to cover by way of a margin call, then you could be in trouble. Your entire account could be drained in order to cover uncovered losses incurred by other customers of the same broker. So you can lose your entire account, even though your broker did not steal from you, and even though all of your trades were winners. You can lose your entire account, because other customers of your broker were unlucky gamblers.

Lots of people have made false statements about these facts on ET. I have been subject to unbelievable amounts of harassment, abuse, and libel, on EliteTrader, because I have repeatedly communicated these facts (many of the harassing posts were deleted). Many ET members have also been posting links to a propaganda article by the Futures Industry Organization which falsely and deceptively hides these facts and gives a false impression that futures accounts are far safer than they are in reality. Some people don't want you to know the truth. A lot of money is at stake. Others themselves don't want to know the truth, and would rather behead the messenger than face reality.
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WOW, thanks Jim for that thorough and concise response.
 
BogG,

I posted before that I thought you were mostly correct, with certain exceptions, about our previous areas of disagreement. I thought about it some more, and I now agree that you were even more correct than I thought. I think you were correct that I was wrong to assume that the broker's commodities sub-account debt, owed to the customer, would net against the customer's equity sub-account debt owed to the broker. Thank you again for making me re-think the matter and for the education. I don't need to see precedents or other support for your view anymore - I agree with your logic.
 
CORRECTION

The information I gave about Refco, a couple of posts ago in this thread, contains a mistake.

I said that Refco's loss of several hundred million dollars, in the late 1990s, from customer futures trading accounts, was due to Refco's practice, at times, of unlawfully "borrowing" customer funds, using them to cover Refco's debts, and then replenishing the "borrowed" customer funds, on a routine daily basis. This was not what I meant to say. Refco did engage in this practice, and was repeatedly fined for it by regulators, but this was not the practice which caused Refco's loss of several hundred million dollars in the late 1990s. The cause of this massive loss, which was concealed for years until its public disclosure triggered Refco's collapse in 2005, was NOT the practice of unlawfully "borrowing" customer funds. The cause was, instead, massive losses by Refco customers, which were not covered by their inadequate margin deposits, with the result that Refco was obligated to make good on the losing futures positions held by those losing customers. This was, in turn, a result of Refco's inadequate risk control regime, which exposed Refco, and therefore its customers, to elevated risk of loss.

This is an example of why I have recommended that people stay away from futures brokers who advertise low margin requirements, like $300 or $500 for E-minis. The lower a broker's margin requirements, the greater the danger that the broker will go bankrupt, and inflict partial or total customer losses, in an extreme market event causing unexpected losses by defaulting customers, which will not be covered by those razor-thin margins, so that property of other, non-defaulting customers will be seized from their futures accounts to cover the losses incurred by the defaulting customers of the same broker.

Interactive Brokers has conservative margin requirements, which helps make IB a safer place for your money. Another advantage of IB is that they have a rigorous risk management program, which automatically liquidates futures positions almost immediately when losses cause those positions to violate margin requirements. Other brokers are not so quick to limit customer losses, so that those other brokers are, in that respect, also in greater danger of bankruptcy in which other, non-defaulting customers lose their funds. IB also says it has more regulatory capital than most other futures brokers, relative to is level of risk, so this provides additional protection. This is because your futures account cannot be seized, to cover losses incurred by other futures customers, until after the broker's regulatory capital has first been exhausted in covering those losses, but was inadequate, so that the remaining losses are then assigned to the broker's customers on a pro-rata basis.
 
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