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interactive-brokers real-time liquidation madness
- Thread starter rationalmind
- Start date
Quote from rationalmind:
I had read warnings on this board about IB's auto-liquidation policy before I opened and account with them, but hadn't taken them too seriously as I keep very conservative margins. Then the following happened:
In order to benefit from the appreciation of the Chinese yuan, I opened RMB futures long positions on the CME Globex futures exchange during the course of Spring 2010, which I kept open for months. The yuan appreciated and my position values kept increasing. The Globex RMB market is very illiquid but open for trading 23 hours per day, so at certain times during the day it could happen that there was no bid and/or ask at all. One day when this happened, someone suddenly came in with a bid of 0.14000 USD for the September 2010 contract (at that time, the underlying exchange rate was about 0.14750). Now IB recomputes your positions values 24-7, in near real time, merely based on bid and ask spreads. There was an ask of 0.14787 on the market when the 0.14000 bid came in; therefore IB re-evaluated the position as 0.143935 (based on the mid-price). Despite of me having kept a margin of more than two times of what I was required, this crazy evaluation immediately brought me into margin violation. Within minutes IB started to auto-liquidate my positions at fire-sale prices. Within an hour, the market had become more liquid again, with realistic bids, and my margin was fine again. That day the yuan closed higher, and so did all the yuan futures, but I had lost thousands of dollars due to IB's auto-liquidation of my positions based on a single rogue bid. All this within one hour while I was asleep. I was actually lucky that things came back to normal so quickly, otherwise my whole portfolio might have been wiped out. Needless to say that I never received any compensation and just wasted my time dealing with their customer service in the aftermath of all this.
IB is the only broker that I'm aware of that autoliquidates within minutes (most brokers give you at least a day, and more importantly, calulate your margin based on closing prices). Most people know that, but what they don't know is that IB recomputes your portfolio value purely by taking the mid-point of bid and asks. If you trade illiquid futures, IB is a ticking bomb! There is simply no way one could be expected to provide for an excess liquidity that reflects the kind of intraday price movements reflected by their method of calculation, which is completely prone to manipulation by low bids.
One way to prevent IB from doing this is to have a low-bid on yourself when u are long, this prevents the auto-liquidation. E.g - I am long /mgc (micro gold futures, very illiquid) for a swing position, I have a buy order at 1000 or at a price I don't adding, this would keep IB form closing my position if someone puts in a bid for $1.
IB auto-liquidation is idiotic. I am moving my futures account to OEC - low commission.
Quote from Rodney King:
What's openecry's policy / procedure for margin liquidation?
They have 24-hr phone support. I don't think they use auto-liquidation robot like IB. Clal them to get the details. I do have a work-around for IB idiocy. However, I don't think I should have to to resort to it to prevent an illiquid position from getting liquidated when I am away from the screen. They micros I am using for swing trades.
For micro futures, IB should really look at the spot price or the bigger contracts for the actual price, and not have a use auto-liquidation robot acting mad.
Quote from hippie:
One way to prevent IB from doing this is to have a low-bid on yourself when u are long, this prevents the auto-liquidation. E.g - I am long /mgc (micro gold futures, very illiquid) for a swing position, I have a buy order at 1000 or at a price I don't adding, this would keep IB form closing my position if someone puts in a bid for $1.
Also make sure that your "safety order" is GTC order that is far away enough from the market that is not likely to get executed, but not so far form hte market that it would trigger the auto-liquidation. I don't waht else one can do to prevent IB auto-liquidation idiocy.
@comintel: I had asked them in why they based their calculation on the mid-point of this crazy bid-and-ask spread rather than the extremely liquid Hong Kong forward market, and all I got back was this:
"Your concerns regarding our methodology are appreciated. However, it is not feasible to second-guess every piece of market data that is reported, in order to determine if periods of illiquidity are rational based on recent price action. If illiquidity, as reflected in correct market pricing, is real, then the mark prices should and will reflect that, and the resulting risk valuation will be deemed accurate."
@hippie: That self-bidding strategy is exactly what I did in the days after that incident to give myself time to slowly get out of my still remaining illiquid futures positions while avoiding IB valuation calculation to go crazy again from another rogue bid. The fact that we find ourselves forced to game the system by placing *buy* orders to protect our long positions should make clients pause who think that IB's price valuaton methodology really protects their assets from other risky clients' actions: Suppose a lunatic like me (from their point of view) buys one illiqid futures contract and places a bid for one more to keep IB's mid-point calculation in check. Then suppose the underlying really does go down and someone else sells into my bid. Oops, I'm long another unwanted futures contract now and thus my excess liquidity is likely to be low. In two minutes, at the next IB valuation time point, a lower bid (since mine is not on the market anymore) will be taken into account, likely resulting in a margin violation and subsequent fire-sale of my two futures contracts (assuming there's nothing else in the portfolio), probably resulting in a negative net asset value.
"Your concerns regarding our methodology are appreciated. However, it is not feasible to second-guess every piece of market data that is reported, in order to determine if periods of illiquidity are rational based on recent price action. If illiquidity, as reflected in correct market pricing, is real, then the mark prices should and will reflect that, and the resulting risk valuation will be deemed accurate."
@hippie: That self-bidding strategy is exactly what I did in the days after that incident to give myself time to slowly get out of my still remaining illiquid futures positions while avoiding IB valuation calculation to go crazy again from another rogue bid. The fact that we find ourselves forced to game the system by placing *buy* orders to protect our long positions should make clients pause who think that IB's price valuaton methodology really protects their assets from other risky clients' actions: Suppose a lunatic like me (from their point of view) buys one illiqid futures contract and places a bid for one more to keep IB's mid-point calculation in check. Then suppose the underlying really does go down and someone else sells into my bid. Oops, I'm long another unwanted futures contract now and thus my excess liquidity is likely to be low. In two minutes, at the next IB valuation time point, a lower bid (since mine is not on the market anymore) will be taken into account, likely resulting in a margin violation and subsequent fire-sale of my two futures contracts (assuming there's nothing else in the portfolio), probably resulting in a negative net asset value.
Quote from rationalmind:
it is not feasible to second-guess every piece of market data that is reported
I agree with them. What are they supposed to do, run a statarb model on your behalf, to try to estimate prices?
The core problem is autoliquidation. If you don't like it, trade with a broker who gets you on the phone prior to.
Quote from Eight:
Venturing into illiquid markets is just silly. The ability to rig is just too obvious and in some markets the rules practically invite it.. It could be friends of IB on the other side of your trade, forget that shit...
IB offers cut-rate execution. If you want quality execution -- and <i>speaking with the client before liquidating</i> is a critical component (maybe <i>the</i> most critical component) of quality execution -- then you have to pay a bit more. That's how life works. Quality goods cost more than shoddy goods. You don't go into Per Se or Le Bernardin and complain they don't offer a dollar menu like McDonalds.