Partitioning a large account to limit operational risk

[tonyf]

I flew too close to the sun a few days ago, shorting a large quantity of an illiquid stock that was not readily located. This trade would have created a large dent in my account had it gone wrong. (https://www.elitetrader.com/et/threads/ib-close-out-advisory.335975/)

I am now much more concerned by operational and execution risks. I am seriously exploring "partitioning" my account into a multitude of smaller sub-accounts, as a fail safe solution to operational errors of this kind (fat finger errors, api order transmission failures, etc...).

IB offers centralised management for multiple-accounts. Is anyone experienced with such a structure? What are the possible drawbacks?

 

[Robert Morse]

Why not just set limits. $$ per order, shares per order, etc.

To be fair, operational risk does not typically cover a traders ability to over trade. You will find a away.

Having a second account at another broker would help with real operational risk, which would include your ability to close positions during times of outages.

 

[tonyf]

Why not just set limits. $$ per order, shares per order, etc.

To be fair, operational risk does not typically cover a traders ability to over trade. You will find a away.

Having a second account at another broker would help with real operational risk, which would include your ability to close positions during times of outages.

Very true. Having a second trading account is most importantly a credit risk hedge as well (but segregation is a good mitigant in some cases).

Fat finger risk is very real, when talking to other people. A big deal if involved with illiquid shares....

 

[Robert Morse]

Fat finger risk is very real, when talking to other people. A bid deal in illiquid shares....

I'm sure your trading software has some type of setting in preference that would at least warn you of certain conditions like this.

"Having a second is most importantly a credit risk hedge"
As this is not a common occurrence, I'd be more concerned with short term system failures where you can trade. Having a "backup" account would help with "operational risk." That would require a second broker with a different setup software. This is obviously easier for larger accounts.

 

[tonyf]

I'm sure your trading software has some type of setting in preference that would at least warn you of certain conditions like this.

View attachment 209339

Those filters are over-written when trading via an API. They would equally not cover the short selling risk I detailed in that other post.

Let me ask the question differently: although unorthodox, is there anything to loose in partitioning a large account?

 

[Robert Morse]

Let me ask the question differently: although unorthodox, is there anything to loose in partitioning a large account?

When you say "partitioning a large account", are you saying having more than one individual or corporate account at the same broker funded separately? E.G. Robert Morse#1 and Robert Morse#2 or Robert Morse LLC #1 and Robert Morse LLC #2? Each with their own cash and positions?

 

[tonyf]

When you say "partitioning a large account", are you saying having more than one individual or corporate account at the same broker funded separately? E.G. Robert Morse#1 and Robert Morse#2 or Robert Morse LLC #1 and Robert Morse LLC #2? Each with their own cash and positions?

yes

 

[Robert Morse]

yes

I only have one corporate account like that and it was compliance-related. The disadvances would be:

• it is not margin efficient.
• you have to make sure you do not trade with yourself.
• if one account got a margin call, they might restrict the other account.

A little over a year ago, an IB customer contacted me because IB was shutting down his 2 accounts. He had one Reg-T account and one PMA. Their claim was that he was "gaming" their margin system.

I just do not see the advantage when you can either restrain yourself, set limits on the software or API or in your code.

 

[tonyf]

I only have one corporate account like that and it was compliance-related. The disadvances would be:

• it is not margin efficient.
• you have to make sure you do not trade with yourself.
• if one account got a margin call, they might restrict the other account.

A little over a year ago, an IB customer contacted me because IB was shutting down his 2 accounts. He had one Reg-T account and one PMA. Their claim was that he was "gaming" their margin system.

I just do not see the advantage when you can either restrain yourself, set limits on the software or API or in your code.

Perfect - thanks:

• "it is not margin efficient."

From what I understand it is "margin" neutral but not "portfolio margin" efficient. This is something true everywhere it seems.

• you have to make sure you do not trade with yourself.

Great point, but my only downside here would be transaction fees loss - which is OK by itself considering the bigger picture. A close to zero sum game as well.

• if one account got a margin call, they might restrict the other account.

Now that, I had no idea about. I thought sub-accounts are ring-fenced! (i.e. no cross guarantee). What makes you thing that they can legally do that?

 

[DaveV]

Those filters are over-written when trading via an API. They would equally not cover the short selling risk I detailed in that other post.

IB has a setting as to whether the transactions generated by the API override the filter limits.