Auto-liquidation is not a guaranteed failsafe. Markets do not trade continuously, nor do they trade in an orderly fashion in the face of black-swan events. Basically, if something bad happens, you can get a huge gap, and auto-liquidation does nothing but stop the bleeding. There's a _huge_ difference in a firm's risk in these instances between allowing someone to operate on 5% margin vs. 50% margin. IMHO, having seen a couple of black swans in my lifetime, I'm comfortable that IB has chosen appropriate allowed levels of risk.
IB - SIPC & Lloyd's Insurance
- Thread starter Trader_Herry
- Start date
Agree that auto-liquidation is a guaranteed failsafe, but who cares if it is a guaranteed failsafe? IB exisitng margin ploicy is not a guaranteed failsafe either, are you worried about it?
Even if you charge 50% margin, you may go near the maintenance margin. And then the market falls suddenly. The firm is not safe either.
So are you going to charge 100% to be absolutely safe? But then even if you charge 100%, it can go near to the maintenace margin again.
Then we may charge 150% margin reuiqrement. 100% maintenance margin to be more safe. But it is not a guaranteed failsafe either.
One should not trade if he is always seeking for "guarantees". As long as the risk is relatively low, it is okay to do.
Now we are talking about intraday margin only.
Also when the exchange set the maintenance margin, they have taken this into consideration. I don't see how frequent black-swan events will absorb all maintenance margin before the firm can close clients' positions. Remember we are just talking about intraday positions only, not overnights!
5% should NOT be the way to go. It is just an extreme example. What I point out is the risk of lowering intraday margin (say 33% or 25%) AND applying strict auto-liquadation will not REALLY increase risk, if any. It is still very safe, comparing with IB 50% intraday margin.
When I call IB staff every time about the details or terms and conditions of Lloyd's Insurance, they simply point me out to:
this link http://www.interactivebrokers.com/en/accounts/accountProtection.php
OR
that link http://www.interactivebrokers.com/en/general/education/faqs/accountProtection.php?ib_entity=llc
I start to wonder why details could not be supplied. No single person in IB seems to know anything more about Lloyd Insurance (other than what the website says)!
The only condition I know is just the aggregate limit. Other than that, nothing else.
If we do not know the details, the claims may just look good ($30m worth of claims). The claims are highly doubtful.
Better safe than sorry. I just assume I get $500k worth of money only unless I can get the details.
this link http://www.interactivebrokers.com/en/accounts/accountProtection.php
OR
that link http://www.interactivebrokers.com/en/general/education/faqs/accountProtection.php?ib_entity=llc
I start to wonder why details could not be supplied. No single person in IB seems to know anything more about Lloyd Insurance (other than what the website says)!
The only condition I know is just the aggregate limit. Other than that, nothing else.
If we do not know the details, the claims may just look good ($30m worth of claims). The claims are highly doubtful.
Better safe than sorry. I just assume I get $500k worth of money only unless I can get the details.
I'm not sure what you're argument is. You seem to say you disagree with me, but then you make my point again later. The exchanges/regulatory agencies set margin requirements based on risk parameters determined by various means, and these are considered reasonable by most. Cutting those in half must, necessarily, produce greater risk. Cutting them in half again must, necessarily, produce far greater risk. That increased risk is borne by the other account holders in the case of futures (the only type of instrument for which the broker has any latitude in setting requirements).
With regard to the supplemental coverage (a separate issue from the discussion above, since it does not apply to futures sub-accounts), have you asked any other brokerage for details and gotten anything more detailed? Lloyd's is the provider for most of these policies. Perhaps ask Lloyd's directly if the details are really that important to you. If you really are a potential institutional size account-holder, and this is not just an academic exercise, you might contact one of IB's institutional sales reps to get the info. If you can show that you are serious, they might be more willing to contact the (likely) one person responsible for it for the details. I doubt that this is any different than it would be at Goldman-Sachs, Merrill, or any of the other top-tier firms.
All IMO, if course.
With regard to the supplemental coverage (a separate issue from the discussion above, since it does not apply to futures sub-accounts), have you asked any other brokerage for details and gotten anything more detailed? Lloyd's is the provider for most of these policies. Perhaps ask Lloyd's directly if the details are really that important to you. If you really are a potential institutional size account-holder, and this is not just an academic exercise, you might contact one of IB's institutional sales reps to get the info. If you can show that you are serious, they might be more willing to contact the (likely) one person responsible for it for the details. I doubt that this is any different than it would be at Goldman-Sachs, Merrill, or any of the other top-tier firms.
All IMO, if course.
Sorry, my explanation is not clear enough.
As far as I know, the exchange standards are mostly for overnight margins. We are talking intraday margins. That is another issue, so this is a non-issue.
When you intraday, you won't see a huge gap unless you are trading very illiquid markets. Sure stricter margin should be required for these kinds of markets. Flexibility is the key.
Imgine that the maintenance margin is your stop. Once it falls below it, it will be liquidated (stopped out). I don't see how this type of management is risky unless your maintenance margin is so low that slippage can bring you into debit, not to say we are NOT going to set maintenance margin in such a dangerous level. They should be well above, so that even the extreme slippage will not bring us into debit.
We don't need such a large maintenance margin in order to ensure us a guarantee stop that can still get out with credit balance.
Remember we are talking about daytrading, not overnights!
A bit imagination should make you think of a looser but still very safe intraday margin scheme.
Looking at one of the most liquid contracts in the world - the ES - current overnight maintenance margin is $3150, or 63 points. Intraday reduced margin at 50% is 31.5 points - just a 2.5% move. 25% would be just a 1.25% move. $500 (like some firms advertise) is just 0.8%.
Picture a 9/11-type event, only this time directed at the CME, or perhaps just taking out bundles of communications circuits sufficient to prevent trading. Is there any doubt that, upon resumption, the market will gap -2.5%, let alone the lesser amounts mentioned above? Thinking specifically about IB customers, it doesn't matter that the NYSE/AMEX/NASDAQ or other futures venues might remain open if the big positions need to get to a phone to hedge (especially if their phones are affected by the disruption) - those markets could easily sell off by these figures by the time they get hedged. Were someone to take out NY at the same time, the scenario is even worse.
For the $500 margin case (16% of the normal overnight MM), you don't have to go anywhere near that extreme. The ES can (and does) move hard by 10 points occasionally on news, during which everyone piles on with sell orders, and one could easily imagine capacity issues at IB and/or CME causing delays long enough to cause trouble.
Extend these cases to far less predictable, stable, liquid markets and contracts, and you have a potential for serious trouble.
After all this, the question for the broker is risk/reward. Does IB get 10% more total income by taking on significant extra risk? I expect not. Can someone comment on whether these guys that swing 100-lots of ES, hundreds of times a day, are doing so with significantly less than $1500/contract cash?
Picture a 9/11-type event, only this time directed at the CME, or perhaps just taking out bundles of communications circuits sufficient to prevent trading. Is there any doubt that, upon resumption, the market will gap -2.5%, let alone the lesser amounts mentioned above? Thinking specifically about IB customers, it doesn't matter that the NYSE/AMEX/NASDAQ or other futures venues might remain open if the big positions need to get to a phone to hedge (especially if their phones are affected by the disruption) - those markets could easily sell off by these figures by the time they get hedged. Were someone to take out NY at the same time, the scenario is even worse.
For the $500 margin case (16% of the normal overnight MM), you don't have to go anywhere near that extreme. The ES can (and does) move hard by 10 points occasionally on news, during which everyone piles on with sell orders, and one could easily imagine capacity issues at IB and/or CME causing delays long enough to cause trouble.
Extend these cases to far less predictable, stable, liquid markets and contracts, and you have a potential for serious trouble.
After all this, the question for the broker is risk/reward. Does IB get 10% more total income by taking on significant extra risk? I expect not. Can someone comment on whether these guys that swing 100-lots of ES, hundreds of times a day, are doing so with significantly less than $1500/contract cash?
First of all, thanks for the discussion.
If it happens within the trading session, yes it is possible. Otherwise no as it becomes an overnight issue. However I think the positive (buying) big sharks are more worried than you and me since it is them who has huge positions.
Anyway, this is just an extraordinary case (I will discuss more in latter paragraphs).
Let's take a real suggestion (first attempt) in a real case. How about suggesting:
- $1300 (33%) min required margin with $1000 min maintenance margin?
[To me, I would accept even $1100 required margin (if a client with good past records requests), but the maintenance margin still remains at $1000. If you think it is unacceptable, forget it!]
- For people who are less aggressive, they may manually set more required margin (or maintenance margin) up to 3938 required and 3150 maintenace
- a warning is issued if it (nearly) reaches the mainenance level
- a focred auto-liquadation is executed immediately ONCE it falls below the caution level (set by IB).
- for people who have bad records in the past (ie being forced to auto-liquidation before they can resolve the problems), the margin level will be raised accordingly until their situation (eg their risk management) is improved for a certain period
If another 9-11 incident happened within the trading session, the losses would be minimal. We won't expect this thing would happen, say, for next 5-10 years.
So should just 1 exceptional loss for every 5-10 years frighten you not to lower the margin level by just a bit (I'm not asking for $500 margin
), not to say you may get more clients and more trades to more than cover this exceptional loss many times.
As a trader, we won't be frightened away just by exceptional cases and not to trade at all. Why a firm will?
Raise the margin level.
Flexibility is the key!
If it happens within the trading session, yes it is possible. Otherwise no as it becomes an overnight issue. However I think the positive (buying) big sharks are more worried than you and me since it is them who has huge positions.
Anyway, this is just an extraordinary case (I will discuss more in latter paragraphs).
Let's take a real suggestion (first attempt) in a real case. How about suggesting:
- $1300 (33%) min required margin with $1000 min maintenance margin?
[To me, I would accept even $1100 required margin (if a client with good past records requests), but the maintenance margin still remains at $1000. If you think it is unacceptable, forget it!]
- For people who are less aggressive, they may manually set more required margin (or maintenance margin) up to 3938 required and 3150 maintenace
- a warning is issued if it (nearly) reaches the mainenance level
- a focred auto-liquadation is executed immediately ONCE it falls below the caution level (set by IB).
- for people who have bad records in the past (ie being forced to auto-liquidation before they can resolve the problems), the margin level will be raised accordingly until their situation (eg their risk management) is improved for a certain period
If another 9-11 incident happened within the trading session, the losses would be minimal. We won't expect this thing would happen, say, for next 5-10 years.
So should just 1 exceptional loss for every 5-10 years frighten you not to lower the margin level by just a bit (I'm not asking for $500 margin
), not to say you may get more clients and more trades to more than cover this exceptional loss many times.As a trader, we won't be frightened away just by exceptional cases and not to trade at all. Why a firm will?
Raise the margin level.
Flexibility is the key!
Could IB resolve my following problem? If IB can, I'm satisified.
I do have sufficient amounts to offset even the most exceptional losses. But I don't wish to waste my fund by paying too much margin. Paying too much margin "just to protect the most extraordinary situations" is a waste.
I would like to use extra margin to buy stocks, bonds etc.
Say I have $1,000,000. I would like to spend max 50% of buyng power on futures, ie $500k buying power. Others go for stocks and bonds.
I daytrade. If the intraday margin is at 50%, I can only use $250k ($500k * 50%) on futures. The extra $250k is saved and can go for stocks and bonds. If it is at 25%, I can only use $125k, the rest $375k go for stocks and bonds.
Is it possible to use $125k only to buy $500k worth of futures? Note: I have sufficient amounts on stocks and bonds ($500k + $375k [saved from margin]). Even if I am out of margin in extreme cases (I have very strict stop-loss policy), I am able to cover my deficit.
<font color="blue">I wonder if the margin level / extra buying power offered in stocks/bonds can be used on futures. If so, what's the margin or leverage level? The same of different?</font>
Inside the Universal account are separate security and commodity sub-accounts since they are regulated by different entities. We make this process transparent for the client.
By default all unneeded cash stays in the securities sub-account to benefit from the SIPC/Lloyds protection.
Assuming there is sufficient financial capacity, the system will pull the necessary funds needed to meet margin requirements for futures from the securities sub-account into the commodities sub-account. Everything left is usable for securities trading as if that were the only balance in the entire account.
However, if the security account does not have enough money (due to reg-T, or adverse market movements, etc) it will pull back funds from the commodity account (sec acct takes priority for capital requirements over commodity acct). This usually causes a liquidation in the commodity account since there generally is no excess in this sub-account. Note that all we are saying here is that futures/fops liquidate before stocks when there is insufficient capital. The actual use of capital is quite optimized, and automated.
Lastly, there is no notion of buying power in commodity accounts. BP is strictly a securities concept, and hopefully will go away soon since it is an archaic method for determining allowable leverage. (SEC/NYSE just approved new margin guidelines which may come into effect later this year)