IB Price Caps - Need Advice

[qwerty11]

So I red your post, some feedback:

1) It could be that this is different for futures (compared to my experience from options). As you say feedback from IB is that "the price cap is to comply with exchange & regulatory requirements of maintaining a fair and orderly market". For (equity) options this is probably not the case, there the price caps are IMO just to protect the customer. I.e. maybe they are less flexible with (some) futures.

2) So they removed the price cap temporary for you. What do you mean with (in your last post) "price caps WILL not be removed for any particular instrument or for the account under any circumstances or conditions.". You mean they are not willing to remove them entirely and forever?

3) Assuming you have to work with a temporary solution if it happens again: in this case you had to wait long but in a more normal market you could maybe just contact them by chat and if they remove immediately it is workable (if it happens only sometime)?

4) Why didn't you try an alternative instrument? I know there can be lots of stress in above scenario but couldn't you offset the position with other futures or future options or even an ETF? On other products the price cap was probably different or non-existing.

 

[narafa]

So I red your post, some feedback:

1) It could be that this is different for futures (compared to my experience from options). As you say feedback from IB is that "the price cap is to comply with exchange & regulatory requirements of maintaining a fair and orderly market". For (equity) options this is probably not the case, there the price caps are IMO just to protect the customer. I.e. maybe they are less flexible with (some) futures.

2) So they removed the price cap temporary for you. What do you mean with (in your last post) "price caps WILL not be removed for any particular instrument or for the account under any circumstances or conditions.". You mean they are not willing to remove them entirely and forever?

3) Assuming you have to work with a temporary solution if it happens again: in this case you had to wait long but in a more normal market you could maybe just contact them by chat and if they remove immediately it is workable (if it happens only sometime)?

4) Why didn't you try an alternative instrument? I know there can be lots of stress in above scenario but couldn't you offset the position with other futures or future options or even an ETF? On other products the price cap was probably different or non-existing.

Thanks again and sorry for a long reply.

1) The price caps/order filters IB does are volume and price filters based on an algorithm. Several exchanges & regulators worked on enforcing such pre-submission order filters at the broker level before orders hit the exchange in order to prevent fat-finger mistakes. Some exchanges might also have their own order checks for very extreme cases. For example, a stock is trading $150/$150.10 and an order hits the exchange trying to hit the bids for like 1m shares with a limit price of $10, the broker can actually reject the order (Based on exchange/regulators guidelines for order filters, average liquidity, current liquidity, estimated order effect on the price, etc...) and even if the broker passed that order through, the exchange will probably reject it at it's level as well.

To protect customers, every broker have another set of filters (Which are usually editable by the trader) to warn the trader from potentially large orders (which can eventually go to the exchange & get executed), for example, IB warns you before submission if your order total value exceeds a certain amount (You can change it in order settings) or if the your order price is 10% higher/lower than the last price (Again, you can change it in order settings). If there is no clear guidance/regulation from exchanges/regulators, they will not cap you, they will only warn you, because they want you to trade, right?

So no, price caps are not primarily to protect customers.

2) They remove price caps only on a case by case basis for a particular order after calling their support so that you can execute your order, however, requesting to switch off price caps is an absolute NO, so everytime you experience a price cap, you will have to call them, case by case, very unfeasible in this age and especially with fast moving markets

3) Correct. In normal market conditions, one would probably not have any issues with price caps, however, when volatility increases, here you start seeing them. In other words, you get them exactly when you don't need them, in some cases, they are legitimate, in other cases with IB, they are not and they shouldn't be imposed the way IB are doing it

4) Well, this is tricky, it can work with some instruments, others won't. For example, the Palladium example, it won't work, because when I tried shorting the next expiry, I got price cap limitation, so I wasn't able to square the position by doing so. IB doesn't offer future options for Palladium, so that was not possible as well. I couldn't do ETFs quickly, because I would need time to exaclty calculation how much I need to short a correlated ETF and then need to check if shares are available for short or not and then I will have to pay interest, on top of that, correlations are not perfect and they usually break or deviate at times of high volatility. By the time I do this, I would have been slaughtered already

 

[qwerty11]

Thanks for your reply. regarding point 1, I don't think there are strict limits with equities (a bit at $10 is same as market order).

Regarding point 4, you maybe could have tries all futures (there are 7 others (with precious metals the advantage is that price almost the same)). With equity options I see total random behaviour of price caps so 1 of the 7 futures might have worked. Understand that there was too much stress to do ETF quickly (and you didn't know the move on beforehand).

But this is all talking after the fact, I also had a problem with closing a butterfly because of a price cap (my solution is then to just do it next day but that's because it's only a small exposure).