Quote from def:
Stocks settle T+2 but this does not mean you can buy at stock after T date and have it settle on T+2. Ditto for options, just because they "officially" settle on the Saturday after expiration doesn't mean you have the right to exercise them until then. The official cut-off time is 5:30 PM. However, brokers need to process client instructions and pass them the clearing house before their deadline. There is nothing nefarious going on here. Outside of the auto-exercise options, there might be thousands of additional exercise or lapses instructions that need to be processed. A buffer needs to be built in to process and confirm receipt of the instructions. IB's procedures are in line with industry practice.
Thanks for taking the time to reply Def
I can think of no reason why option exercises need to be done by 4:30P CST (they are located in Chicago I believe) on Friday other than it is to the market makers advantage to have the limit in place for an item that has not yet expired. This is especially so considering that trading is not yet done for Friday.
IB I believe is a clearing firm so does this allow IB to not use OCC if IB so wishes? If IB has customers on both sides (long and short ) options that are not ITM before 4:30 and then go in the money at some point before &P CST what would actually stop IB (or any other firm actually that clears) from trading the stock and at the same time giving anyone short the option an exercise notice?
This would seem like a no risk no brainer. Of course some options may once in a while get exercised that are OTM at < 4:30but that would be rare and a small amount compared to the profits that could be made with all the ITM options that the clearing firm has between 4:30P and 7P CST.
Def, I really mean no disrespect to you personally but the argument of "...there might be thousands of additional exercise or lapses instructions that need to be processed. A buffer needs to be built in to process and confirm receipt of the instructions" gives you less creditability for me.
These are done electronically and with the use of computers I would expect that the match up of 100K contracts would take no longer than 60 seconds and I would guess the time is closer to 5-10 seconds for the computers to do. Its not like we have old ladies with glasses hanging off their necks by a cord going through a file folder manually matching up the orders.
If C can trade 1.3Billion shares on Friday without so much as a hiccup I am pretty sure the OCC can handle a few hundred thousand orders or even a lot more over the course of the weekend.
There is no question in my mind that there is something going on here and there is way to much money involved for me to be the first person to figure out what a difference it would make if the time was Friday night at midnight.
My first guess is that the time is artificially held back because market makers are more often call writers than call buyers. What I think of IB in this greatly depends on the ability of IB to clear the trades without the use of the OCC. If IB must go through the OCC than beyond TimberHill influence I would not think IB is doing anything wrong or improper.
So unless I find that IB does not have to go through OCC I will assume that IB is on the level and that all the money for the buyers of the options is left on the table as a result of another influence.
I will add for the IB broker dealer retail side of the business it would seem to be a VERY big competitive advantage if the time was moved to a later time as IB is already fully automated and most other brokers I have looked at require a phone call to the trading desk to exercise. I would think that if everything remained the same but the exercise time was moved to midnight that IB would gain a lot of business especially from companies like TOS OE due to the huge price advantage IB has over the others for manual exercising.
