Indeed cdcaveman, indeed. There is always the risk that your assumptions get the better of you. History has shown us that hubris is the enemy of all traders.
We actually went through the exercise of examining a bunch of potential scenarios that were outside our risk framework. We tried to make contingency plans. Regardless, you are always going to miss something (i.e. the unknown unknowns)
Just as one example, we tried to imagine what would happen if a crazy market plunge transpired and IB decided to take extraordinary steps to protect itself by reeling in portfolio margin leverage. The problem is that, unless our portfolio was unwound correctly, portfolio risk could go up sharply as positions were trimmed.
So, something like this could - in theory - happen:
1. Market plunges "black monday" style.
2. IB decides to decrease allowable leverage on portfolio margin accounts.
3. We get a a margin call as a result.
4. IB acts quickly and begins to unwind our positions at their discretion by executing market orders to close some of our positions into a plunging market with huge bid/ask spreads.
5. Closing positions ends up decreasing our leverage and thus increasing our portfolio risk (see previous explanation). We also take massive losses since the market orders end up traversing a gapping bid/ask spread which further damages our portfolio.
6. IB sees that our portfolio's risk has actually increased and therefore the cycle restarts and continues going through step 3 to 6 until the risk is within IB's limits.
7. We cry ourselves to sleep every night henceforth because our portfolio has been decimated because of something outside of our initial comprehension.
This scared the crap out of me so much that we decided to bring down our leverage even though this caused our day-to-day market risk to increase.
The major lesson is that one can never forget that dangers abound everywhere in the world of trading.
