IB's 4% Intraday Initial Margin Req. for Index Futures

[gov]

Oh, just a final thought. Assuming you can trade, the high volatility environment is what we wait for, and can be the source of a huge amount of money in a short period of time. I don't want a broker that "protects" me from myself in the best environment in years. Bottom line: IB's daytrade margins were already among the highest before the adjustment. After, they are simply out of the futures game, in my opinion. Maybe they want it that way?

I like them for other things, as I've mentioned.

 

[gnome]

Quote from gov:

Margin (really performance bond is what we are talking) under a regular FCM being too low is what would drive the FCMs insolvency. At IB, my point is that one futures customer cannot seemingly affect another futures customer, and hence the margin increase is to the sole benefit of IB, and not in an individual account holder's best interest. Is there an error in my reasoning?

I hope this helps.

"... # Investors eligible for SIPC help. Although not every investor is protected by SIPC, SIPC aids most customers of failed brokerage firms who are owed cash and securities missing from customer accounts.

"# Investments protected by SIPC. The cash and securities – such as stocks and bonds – held by a customer at a financially troubled brokerage firm are protected by SIPC. Among the investments that are NOT protected by SIPC are commodity futures contracts and currency, as well investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933...."

I copied the above directly from SIPC site... the part about "SIPC aids customers of failed firms WHO ARE OWED CASH AND SECURITIES MISSING FROM CUSTOMER ACCOUNTS"... If money or securities are "missing" from customer's account.. and the broker has custody... there must be either a criminal act (or, I suppose they could have just been inexplicably lost)...is exactly what I said before. That's what they insure.

The SIPC function does NOT insulate IB customers from other IB futures customer losses and debits. That your cash may have been swept into a SIPC account has NO BEARING WHATSOEVER on your obligations or risks as a FCM customer.

Your statement,... "my point is that one futures customer cannot seemingly affect another futures customer"... is incorrect.

Of course you know that FCM customers are proportionately liable for the debits of other futures customers of the firm once the capital reserves of the FCM have been exhausted. Having your money in a SIPC account would not protect you. In fact, if during the turmoil of an FCM failure... and you were quick enough to wire your funds out "before the spam totally hit the fan", you would likely STILL be held liable for your portion.

 

[gnome]

Quote from gov:

"... the margin increase is to the sole benefit of IB, and not in an individual account holder's best interest. Is there an error in my reasoning?

I hope this helps.

Yes. The margin increase benefits the FCM only in it gives (1) you increased cushion against going into a debit balance, and (2) that cushion increases the likelihood the FCM will not have to bear "uncollectible debits".

It benefits the FCM in no other way.

Not in your best interest? Well, I think it is. When markets are more volatile, there's greater chance of getting into trouble for a number of reasons.

For every person whose leverage is reduced and misses profit opportunity, there is another one who is saved from losses in similar proportion. The FCM is in the middle of both arguments. Besides, it's a whole lot easier for the FCM to "require more margin and for traders to use less leverage", than to sue customers for debits they refuse to pay or cannot pay.

From the point of view of commission income to the FCM, they would prefer smaller margin to generate more trades. From a "capital risk" point of view, larger margins help prevent them from taking unnecessary losses.

I don't know whether IB's margin change was "too much". You might want to check other brokers on this.

And as a side note... once you have significant capital, you'll find yourself checking out the financial reserves of your FCM just as much as its costs and services.

 

[danoXP]

Some perspective on the merits of increasing margin requirements:

Lets rewind the clock back to an event like 9/11. What happens to all those "daytrading" accounts trading close to margin that were long ... lets pick the NQ ... long NQ intraday, when all of a sudden - TRADING HALTS.

Halts for lets say ... oh .... A WEEK.

Then NQ reopens, lets say 100 points down.

Yes, 100 points down per contract or $2000 gap loss on NQ (see attached chart).

As an additional note: In the historical case of 9/11 ... if those losing positions weren't liquidated quickly at the -$2000 gap ... they would have experienced several thousand dollars more loss per contract of the next few days (~ `$5000 per NQ).

ps. 1987 crash experience a similar "killer gap down" between close of trading Friday and the futures markets open Monday (however, this was not "intraday").

 

[OldTrader]

Quote from gov:

Now here's a thought, try this one on for size. I think we all agree that there is some risk to funds held at FCMs, and so it seems to me that from a customer standpoint, being able to trade the largest number of contracts per dollar on deposit--dollar at risk--makes some sense, so long as the risk isn't crazy big. So I like lower margins, since I have less cash at risk.

But, now IB's model is different. From my understanding, the deposit is swept into a SIPC insured account, and near as I can see IF DAYTRADING FUTURES ONLY the only amount at risk to the customer is the amount of profit on the day. The rest of the bond never makes it out of the insured area.

IB or others please feel free to correct me if I am wrong.

So, the key point here is that IB and IB alone is very quickly the last man standing in a market melt. IOW, a normal FCM will lose any funds in excess of required deposit, and thereafter the other customers will shoulder the burden. In IBs case, this mechanism is disallowed, adding more risk to IB, hence the margin increase.

Additionally, OldTrader (I think and whom I respect) and other posters have said (I think) that the increase in margin is actually a customer benefit since it protects our funds. But if the funds are already swept into a SIPC protected segregated account, where is the _additional_ protection to the customer? If the above is correct (and please don't flame me because I am not sure it is) then the only afforded increase in protection is in IBs corner, while the customer is actually afforded the identical protection as before the margin increase, but is actually disadvantaged by it.

I don't know if I said that the increase in margin is a "customer benefit" or not. But I think in general an increase in margin gives additional protection to the firm, which in turn makes it more likely that the firm will not be shut down in a melt down of some type. I think that benefits the financially solid clients, because while their assets in the SIPC accounts may well be protected, they probably won't be available for a period of time, perhaps a significant period of time. I for one don't want to see the firm I'm trading with shut down.

On the other hand, I think the margin situation is a fine line to walk for a brokerage firm. You want to be protected, but on the other hand, you also want to allow customers to sufficiently leverage themselves if they choose to do so.

Right now, I think IB has overleveraged the day trade side of things, using ES as an example. 70 points of margin is more than what they need for protection in a day trade, in my opinion, provided their software mechanism detects margin situations fairly rapidly.

But as an aside, I would personally never trade with $3500 margin on the ES. That's way too leveraged for me, and in my opinion is a way to lose your money. It's important in this business that no matter what happens, to be able to stay in the game. Frankly, I think under $10K per contract is too leveraged. But we're not concerned here about what I think a trader should be using....we're concerned about what protects IB. And again, my opinion is that for an intraday ES trade, $3500 is more protection than they need even in a volatile climate.

But regardless of where IB sets their intraday margins, I don't intend to shift my account. Some of that decision is that I think financially they are considerably safer than the competition, both from the standpoint of capital, and from the standpoint of providing the SIPC insured account where you margin stays unless you hold overnight futures.

OldTrader

 

[gov]

Quote from danoXP:

Some perspective on the merits of increasing margin requirements:

Lets rewind the clock back to an event like 9/11. What happens to all those "daytrading" accounts trading close to margin that were long ... lets pick the NQ ... long NQ intraday, when all of a sudden - TRADING HALTS.

Halts for lets say ... oh .... A WEEK.

Then NQ reopens, lets say 100 points down.

Yes, 100 points down per contract or $2000 gap loss on NQ (see attached chart).

As an additional note: In the historical case of 9/11 ... if those losing positions weren't liquidated quickly at the -$2000 gap ... they would have experienced several thousand dollars more loss per contract of the next few days (~ `$5000 per NQ).

ps. 1987 crash experience a similar "killer gap down" between close of trading Friday and the futures markets open Monday (however, this was not "intraday").

Well, I was of course sitting there that very morning, and as I recall the 9/11 thing happened at around 15 to5 minutes until six am pacific time, which is to say the market never opened that day. Remember, I am strictly speaking of daytrades, that is, open and closed during market hours, since these are the ones I feel fairly confident in saying that IB never moves your money out of your SIPC protected account. This is the point that gnome STILL doesn't seem to comprehend. There were still a few minutes of trading after the initial hit; I don't now recall whether those trades were busted. I was flat at the time.

 

[Bitstream]

stunning that folks would say it's a plus to have margin increased....

go ask any prop trader if he'd be happy to have his BP cut in less than half and see what he tells you...

 

[gov]

Quote from OldTrader:

I don't know if I said that the increase in margin is a "customer benefit" or not. But I think in general an increase in margin gives additional protection to the firm, which in turn makes it more likely that the firm will not be shut down in a melt down of some type. I think that benefits the financially solid clients, because while their assets in the SIPC accounts may well be protected, they probably won't be available for a period of time, perhaps a significant period of time. I for one don't want to see the firm I'm trading with shut down.

On the other hand, I think the margin situation is a fine line to walk for a brokerage firm. You want to be protected, but on the other hand, you also want to allow customers to sufficiently leverage themselves if they choose to do so.

Right now, I think IB has overleveraged the day trade side of things, using ES as an example. 70 points of margin is more than what they need for protection in a day trade, in my opinion, provided their software mechanism detects margin situations fairly rapidly.

But as an aside, I would personally never trade with $3500 margin on the ES. That's way too leveraged for me, and in my opinion is a way to lose your money. It's important in this business that no matter what happens, to be able to stay in the game. Frankly, I think under $10K per contract is too leveraged. But we're not concerned here about what I think a trader should be using....we're concerned about what protects IB. And again, my opinion is that for an intraday ES trade, $3500 is more protection than they need even in a volatile climate.

But regardless of where IB sets their intraday margins, I don't intend to shift my account. Some of that decision is that I think financially they are considerably safer than the competition, both from the standpoint of capital, and from the standpoint of providing the SIPC insured account where you margin stays unless you hold overnight futures.

OldTrader

OT, you are usually a breath of fresh air, so thanks for that. At any rate for me it isn't about 500 or 1K or 2K or 10K/car. I personally prefer to have 500 or at most 1K performance bonds, with my cash spread around as I see fit, for my own purpose, rather than having to deposit between 4 and 8 times that amount simply to trade the same number of cars. As a simple example, say I have a couple million I devote to trading. I want to trade a maximum of 100 cars ER2, and sometimes I may need to reverse the position. Now, I can find a broker whose financials satisfy me, and I can put just 50K up and trade this position. That leaves me a million 9-5 to do with what I will and I have plenty to back me up, and I only have a total risk from FCM death of 50K.

IB's current way, I need 400K on deposit due to their overnight rules, and I might need 800K to issue the 200car order to accomplish the reverse. I never seemed to figure out when they would allow the order and when not; it seemed to vary. Additionally, the slippage would be at leat 500 but usually a couple thou to reverse even a 50 car position. Now I know IB is retail, and retail guys don't usually do 50 cars, but all I'm saying is there are points to consider here. I think IB's position is IB first, customers later, if at all, in this margin issue. For daytrades, as I keep asking, where is the marginal increase in customer safety for the increase in margin??

I am with you on the safety issue, of course. I too believe they are likely to be the last one standing should a big one hit.

 

[OldTrader]

Quote from gov:

OT, you are usually a breath of fresh air, so thanks for that. At any rate for me it isn't about 500 or 1K or 2K or 10K/car. I personally prefer to have 500 or at most 1K performance bonds, with my cash spread around as I see fit, for my own purpose, rather than having to deposit between 4 and 8 times that amount simply to trade the same number of cars. As a simple example, say I have a couple million I devote to trading. I want to trade a maximum of 100 cars ER2, and sometimes I may need to reverse the position. Now, I can find a broker whose financials satisfy me, and I can put just 50K up and trade this position. That leaves me a million 9-5 to do with what I will and I have plenty to back me up, and I only have a total risk from FCM death of 50K.

IB's current way, I need 400K on deposit due to their overnight rules, and I might need 800K to issue the 200car order to accomplish the reverse. I never seemed to figure out when they would allow the order and when not; it seemed to vary. Additionally, the slippage would be at leat 500 but usually a couple thou to reverse even a 50 car position. Now I know IB is retail, and retail guys don't usually do 50 cars, but all I'm saying is there are points to consider here. I think IB's position is IB first, customers later, if at all, in this margin issue. For daytrades, as I keep asking, where is the marginal increase in customer safety for the increase in margin??

I am with you on the safety issue, of course. I too believe they are likely to be the last one standing should a big one hit.

I see the point you're making regarding the lower margins. Just a couple of comments though. First, you don't just risk your margin. You risk your market loss. If you don't have it there in margin, you still owe it.

Second, I've rarely found that the interests of the customer and the firm did not at some point coincide. When you think they don't, you usually haven't looked hard enough. Let me give you an example to illustrate. Let's assume that IB suddenly decides that they need even more protection, and raises intraday margin to $10K per an ES. The chances are they would start to lose a decent number of clients if they did this. The point is, there is a number at which they lose customers....so that in the end, it is in IB's interest to consider the interests of their customers when they set intraday margins. Likewise, if intraday margins are set at let's say $500, I think that hangs the firm out there too much. And presuming that it is in the traders interest to not see his firm go out of business, then that margin is too low.

So there's always a spot at which the firm is adequately protected, and the customer can leverage himself sufficiently for most. I don't think that spot is $3500, I think that number is too high and gives IB more protection that it truly needs for all the reasons I've cited. However, I doubt that number is going to drive away alot of clients, because I don't think most people are trading with ultra low margins.

To go one step further, my personal opinion is that small margins don't give enough room for adequate risk levels. Your timing has to be too exact for it too work...and over time I don't think most people have that type of timing. Further, I don't think the big money is made pursuing that type of exact timing. And so for the trader who is truly trying to build wealth, I think the argument becomes moot because he's not trading in a way to make $500 margin an advantage.

And finally, I like to hold some positions overnight at times depending on what I think the market is doing at that time. That means the capital of the firm becomes important because my margins are in the futures account, and further, it becomes important how well protected the firm is, just how much of their capital is exposed by their client positions.

Just a few thoughts to think about.

OldTrader

 

[roadstar4]

Quote from gov:

Oh, just a final thought. Assuming you can trade, the high volatility environment is what we wait for, and can be the source of a huge amount of money in a short period of time. I don't want a broker that "protects" me from myself in the best environment in years. Bottom line: IB's daytrade margins were already among the highest before the adjustment. After, they are simply out of the futures game, in my opinion. Maybe they want it that way?

I like them for other things, as I've mentioned.

very well said.