The legality of Crossing an order depends on the position the firm in acting in the transaction. As an Agent or Principal. In a Agency trade the broker is simply acting as an agent in the transaction. When the firm is acting as Principle the buy or sell is accommodated through the firms inventory as a market maker. The role of the broker in the transaction is disclosed on the conformation. Now even if the broker is acting in the role as Principal in a transaction it is a violation for the broker to fill the order at anything but the best available price.
PUT options liquidated at worst possible prices
- Thread starter somedudetrader
- Start date
The legality of Crossing an order depends on the position the firm in acting in the transaction. As an Agent or Principal. In a Agency trade the broker is simply acting as an agent in the transaction. When the firm is acting as Principle the buy or sell is accommodated through the firms inventory as a market maker. The role of the broker in the transaction is disclosed on the conformation. Now even if the broker is acting in the role as Principal in a transaction it is a violation for the broker to fill the order at anything but the best available price.
I'm not positive that this is relevant, but perhaps your forced liquidation/sell-off was related to or influenced by the "wild market swings" as described in the news report below?
http://www.foxnews.com/politics/2010/05/07/obama-authorities-investigating-wild-market-swing/
http://www.foxnews.com/politics/2010/05/07/obama-authorities-investigating-wild-market-swing/
Yes, please fight this one. I am angry and frustrated for you. I can only imagine how upset you are.
i would first call a really good class-action lawyer. There must be other IB traders that this happened to yesterday. Convince the lawyer that there are potentially hundreds of millions of ill-gotten losses, and he'll kiss your ass for the next two years.
Also, try writing letters to Matt Taibi, the entire CNBC crew, or any other journalist who might want to take this opportunity to soapbox against the automated financial world.
i would first call a really good class-action lawyer. There must be other IB traders that this happened to yesterday. Convince the lawyer that there are potentially hundreds of millions of ill-gotten losses, and he'll kiss your ass for the next two years.
Also, try writing letters to Matt Taibi, the entire CNBC crew, or any other journalist who might want to take this opportunity to soapbox against the automated financial world.
First my background: I have worked in the industry for almost 30 years. As a broker, as a Sr. Reg. Options Principal/Supervisor. I have held many compliance positions. I've worked on the trading desk. I've worked in the margin dept and was responsible for making decisions as to when and what to sell-out or buy-in on customer accounts to meet margin requirements. I worked this position during the tech bubble bust in 2000 and the post 9/11 market decline. I have served as a expert witness in arbitration hearings concerning option trading. I have also worked as a business analyst in the design and functionality for margin and complex option systems development. I provide this information so one can asses the validity of my opinions and statements here.
There are 3 main organizations for the rules and regulations in the financial services/Security Investment industry. The Exchanges, FINRA , and The SEC. The Security industry is highly regulated primarily for the purpose of maintaining investor confidence.
There's an old saying in the legal arena... "You can't sign away your liability." Or put another way , you can't post a sign on your car that says "Warning: Reckless Driver! Not responsible for any accidents or injuries."
It has been said that on the new account agreement there's a statement that reads something like. "The Broker-Dealer is not responsible for computer failures, system errors or the inability for customers to access the online system interface, or third party systems yada yada yada.... "
I'm sure this is true. You can't expect the broker to be held responsible for you not being able to access your account due to a failure of systems they may, or may not have control. Otherwise, every time their internet provider went down or failed to have sufficient secure connection ports, some people would be calling to say they woulda... coulda... bot xyz @ x..... That said, it's not ok to just blame a the computer every time the customer is disadvantaged. All the brokerage firms I worked for had to have contingency plans to accommodate customer orders in the case of system failure. For example: I personally was responsible for writing and presenting to a represenitive of the SEC our document for Y2K with contingencies for any system failures. This not only included computers but phone systems, building access etc. etc.
Now the margin agreement, " We reserve the right to take action in the account to restore or maintain minimum margin requirements without notice. " or something along those lines. That's true. The broker must be able to take action when necessary to protect the firm's capital and return the account to the minimum house requirements and/or the Exchange minimum requirements. The worst thing in the margin department was an account that went "Liq-to-Def" that was to say you could liquidate the entire account and still have a deficit. Many broker-dealers went out of business after the crash of '87 who failed to control risk on accounts with naked puts. The Broker-Dealer is ultimately responsible to the street to make good on all trades. If unable to collect the required funds from the client, it's a charge to the firm's net capital. Falling below Net Capital requirements requires a infusion of funds or closure and SIPC. That being said, it is the margin depts. responsibility to document all margin requirements,(you have no idea how many reports are generated each day) Reg. T, Day Trading, or house and document the resolution of same. Documentation for regulators and if action was taken, for the possibility of arbitration. No system that I have worked with had the capability to correctly handle every contingency. Corporate actions that would cause an adjustment in the options would sometimes effect the proper pairing of the options and produce a false call. Now I can not speak to the policies and procedures at IB, I never worked there. However for several years I would handle from 80 to 180 margin calls per day, fast markets and slow. When required to take action and do a sell-out or a Buy-in to meet a margin call I was required to return the account to margin compliance with as few transactions and as little pain as possible. It was very vary rare that I would have to take action without any attempt of contacting the customer and provide the opportunity for the customer to make the choice of what position to close or to deposit funds. When it did happen in was under very unusual circumstances, a concentrated position that was getting hammered for example. 5/6 was an unusual market. But We would Never every liquidate a position that was moving in favor of the customer, whenever possible our choice of what position to close was based on the position that was causing the pain.
I would speculate that the circumstances of the May 6th market, either buy human intervention, or a systemic search for all short put position and auto-liquidation revealed short comings. Under no circumstances would the regulatory bodies allow a customer to suffer monetary loss not in accordance Rule 431 due to system or human errors on the part of the broker dealer. The new account and margin agreements clients sign are written by lawyers, even so there's no way to write up an agreement that states that if we totally screw-up, your screwed.
There are 3 main organizations for the rules and regulations in the financial services/Security Investment industry. The Exchanges, FINRA , and The SEC. The Security industry is highly regulated primarily for the purpose of maintaining investor confidence.
There's an old saying in the legal arena... "You can't sign away your liability." Or put another way , you can't post a sign on your car that says "Warning: Reckless Driver! Not responsible for any accidents or injuries."
It has been said that on the new account agreement there's a statement that reads something like. "The Broker-Dealer is not responsible for computer failures, system errors or the inability for customers to access the online system interface, or third party systems yada yada yada.... "
I'm sure this is true. You can't expect the broker to be held responsible for you not being able to access your account due to a failure of systems they may, or may not have control. Otherwise, every time their internet provider went down or failed to have sufficient secure connection ports, some people would be calling to say they woulda... coulda... bot xyz @ x..... That said, it's not ok to just blame a the computer every time the customer is disadvantaged. All the brokerage firms I worked for had to have contingency plans to accommodate customer orders in the case of system failure. For example: I personally was responsible for writing and presenting to a represenitive of the SEC our document for Y2K with contingencies for any system failures. This not only included computers but phone systems, building access etc. etc.
Now the margin agreement, " We reserve the right to take action in the account to restore or maintain minimum margin requirements without notice. " or something along those lines. That's true. The broker must be able to take action when necessary to protect the firm's capital and return the account to the minimum house requirements and/or the Exchange minimum requirements. The worst thing in the margin department was an account that went "Liq-to-Def" that was to say you could liquidate the entire account and still have a deficit. Many broker-dealers went out of business after the crash of '87 who failed to control risk on accounts with naked puts. The Broker-Dealer is ultimately responsible to the street to make good on all trades. If unable to collect the required funds from the client, it's a charge to the firm's net capital. Falling below Net Capital requirements requires a infusion of funds or closure and SIPC. That being said, it is the margin depts. responsibility to document all margin requirements,(you have no idea how many reports are generated each day) Reg. T, Day Trading, or house and document the resolution of same. Documentation for regulators and if action was taken, for the possibility of arbitration. No system that I have worked with had the capability to correctly handle every contingency. Corporate actions that would cause an adjustment in the options would sometimes effect the proper pairing of the options and produce a false call. Now I can not speak to the policies and procedures at IB, I never worked there. However for several years I would handle from 80 to 180 margin calls per day, fast markets and slow. When required to take action and do a sell-out or a Buy-in to meet a margin call I was required to return the account to margin compliance with as few transactions and as little pain as possible. It was very vary rare that I would have to take action without any attempt of contacting the customer and provide the opportunity for the customer to make the choice of what position to close or to deposit funds. When it did happen in was under very unusual circumstances, a concentrated position that was getting hammered for example. 5/6 was an unusual market. But We would Never every liquidate a position that was moving in favor of the customer, whenever possible our choice of what position to close was based on the position that was causing the pain.
I would speculate that the circumstances of the May 6th market, either buy human intervention, or a systemic search for all short put position and auto-liquidation revealed short comings. Under no circumstances would the regulatory bodies allow a customer to suffer monetary loss not in accordance Rule 431 due to system or human errors on the part of the broker dealer. The new account and margin agreements clients sign are written by lawyers, even so there's no way to write up an agreement that states that if we totally screw-up, your screwed.
Another thing I don't understand is that all trades on stocks between 2:40PM - 3:00PM yesterday were reversed by the exchange. This includes the underlying stocks of my options. Why aren't my option trades reversed?
How can you bust the trades of the underlying without busting the options as well? How can we make the option exchanges be aware of this and reverse the trades there as well?
How can you bust the trades of the underlying without busting the options as well? How can we make the option exchanges be aware of this and reverse the trades there as well?
Thanks, stoic. It is very helpful.
All stock trades from yesterday were not busted. The general response was that only those trades that went up for greater or less than 60% of the 2:39 Eastern consolidated sale price were busted. A suprisingly small amount of trades were busted considering to the crazy conditions.
Serious fortunes were exchanged yesterday.
Stoic, thanks for the great feedback!
Serious fortunes were exchanged yesterday.
Stoic, thanks for the great feedback!
OHHHH I GET IT NOW
You have to forgive me, I am only since last week interested in options.
I mean he should make $500 an option, not lose $500 an option with the drop yesterday since its a bearish bet. Well thats weird.
Did you have portfolio margin? I was short a large amount of OTM SPY puts at IB and got hit hard on excess margin but never had any liquidation because the margin requirements do not update until the following day for portfolio margin. My excess margin obviously declined because they subtract liquidation value from the intraday static portfolio margin requirement. That could have triggered a margin liquidation but I also had a diverse portfolio of long/short calls and puts on other stable (relatively) stocks (KO, WMT, XOM) that didn't have .01 bids. I had time to send a wire in this morning which posted this morning and I entered margin reducing trades right at the market open this morning, took loses and settled in. I'm ok because I have enough cash to cover when they put SPY to me in two weeks but I feel portfolio margin may have helped, it gives you at least a day to react and wire to cover any shortfall.
They didn't bust trades on the underlying from the options that you owned and they didn't say anything about busting option trades although there were obviously many option trades that were 90% off the last price before the meltdown.
I do hope you keep fighting and I'd put calls into the SEC and try to get help from them if IB screws you.
Also I do find it odd they closed your long position first as that would add to your margin ...