PUT options liquidated at worst possible prices

[stefan_777]

Quote from jimrockford:

I want to apologize to the OP for my being too quick to accuse him of lying. I accused him of lying, because I was angry about all the abuse I had taken for correctly diagnosing the trigger for his liquidation, and also because I couldn't believe a guy trading options at IB would honestly be as stupid as his presentation indicates. But on further consideration, I wonder if perhaps he honestly really is that stupid. If he honestly really is that stupid, then I owe him an apology.

You never correctly diagnosed anything.

You went on and on about naked puts in a cash account, and had to be told multiple times that you can't do american style spreads in a cash account.

Then finally back to square one with suspecting he had other positions. We were doing that since the start of the thread, genius.

There still isn't a clear explanation, the OP's story and IB's explanation don't go together completely yet. Atticus still has a point about the Canadian base currency not necessarily influencing the liquidation.

From my perspective, it's still too opaque to place the blame.

 

[jimrockford]

Quote from stefan_777:

You never correctly diagnosed anything.

You went on and on about naked puts in a cash account, and had to be told multiple times that you can't do american style spreads in a cash account.

Then finally back to square one with suspecting he had other positions. We were doing that since the start of the thread, genius.

There still isn't a clear explanation, the OP's story and IB's explanation don't go together completely yet. Atticus still has a point about the Canadian base currency not necessarily influencing the liquidation.

From my perspective, it's still too opaque to place the blame.

Anyone who reads through this thread can see you were wrong from the very beginning, and I was right from the very beginning, especially about positions other than the puts triggering liquidation of the puts. Anyone who reads it all can see that you used extremely abusive, profane, and dishonest tactics throughout much of the thread, that your conduct was utterly shameful, and that you are lying about it now, because you would rather save face than apologize.

I think anybody can see that you aren't even worth debating, so forgive me if I might choose to let some of your lies and abuse go unanswered.

 

[Ghost of Cutten]

Ok I haven't read all the new posts yet, but I will just say that liquidating the spread by legging out at the market (long leg first! and liquidating *below* minimum theoretical value) is still insane, even if the guy had -$1 million in his account due to market losses.

 

[Ghost of Cutten]

Quote from jimrockford:

This isn't true. If an option spread is American style exercise, and the short leg is assigned prior to expiry, and then the underlying subsequently moves against the long leg before it can also be exercised, then there can be a loss far greater than the premium paid + commissions.

Really? Could you explain that with some examples?

 

[Ghost of Cutten]

Quote from hanabi418:

hehe...at 2:52pm...when IB was flashing a margin warning message, my mind was in a blur... I don't really care its -20k or -200k bcos its impossible..and i can't do anything about it..there was just no price available for me to take off my verticals. Within 2 mins all my stocks were liquidated.

So IB liquidated an ETF with a S&P 500 correlation of like 0.99 at >10% below the equivalent S&P price. Good job! Sounds like a really efficient risk-reducing measure there, lol.

 

[Ghost of Cutten]

Quote from def:

Given how this thread is full of innuendo I do want to point out the liquidations were not due to option pricing. Keep in mind the currencies were and are extremely volatile and if you hold a portfolio of currencies, those do get marked real time and if such movements put an account into deficit, the portfolio could be subject to liquidation.

Thursday was indeed a black swan event. While our system is far from perfect, the fact that there seem to be only a handful of cases that need to be dealt with, the system performed remarkably well given the volumes and extreme volatility. Of course we'll learn from this, adapt and make prudent adjustments. The liquidation system is designed to protect IB as well as client funds.

It's "full of innuendo" because of IB's silence - plenty of ppl asked for an IB post here and waited patiently.

Thursday was NOT a black swan event. A black swan event is unpredictable, not something which you *know* will happen every so often. Market crashes happen frequently, every few years. We had 9/11, Jan 2001 (upward crash), Sep 2008 short-sale ban, Oct 1987, Oct 1989, numerous crashes in foreign markets etc. A 10% down move intraday is in no way whatsoever a black swan event. A 50% S&P crash would not be a black swan event. A true market black swan would be something like the S&P going from 1200 to 600 intraday, then going up to 5000, then to 77. Not a mere 10% mini-crash.

Second, the main issue is what is IB's auto-liquidation policy. Even the most prudent IB margin-account customer can't manage their risk and avoid margin call risk without knowing how the algos work. Things like what is the minimum warning you get before auto-liq starts; can one prioritize which positions get liquidated first (not just either/or; but "this one first, this one second, this one third" etc); if there are clearly crazy quotes on the open, how long until IB starts auto-liq based on them; do limited risk options spreads get ignored for margin call reasons, or do they get liquidated too, if the latter, are they legged out with a 5 min delay between legs, and long leg going first? Etc etc.

Reading through the suggestions about trying to estimate fair value, and not liquidating things that are clearly way above or below fair value, would also be a good idea. E.g. liquidating VTI down 25%+ while the ES is down 10% is clearly negligent.

 

[Ghost of Cutten]

Quote from Daal:

I agree. It seems that commissions saved work as sort of premiums you receive for shorting fat tails, which historically is not a good bet. IB better fix this

What's ironic is that IB portrays itself as the "long fat tails" broker. They claim, and maybe even think, that their auto-liquidation is protecting them from fat tails. Whereas so far it looks like the auto-liq not only shorts fat tails, but actually helps to create them by crashing thin markets with insane market orders.

And lo and behold, the day this insane risk-increasing policy is revealed as inadequate, what happens? They say it was a "black swan" day in the markets. Just like LTCM and every other moron who blew up in a humdrum market crash. LOL!

 

[Ghost of Cutten]

Quote from Rodney King:

Thanks.

To take it to the next level: It's the petal-to-the-metal / no-money-down custs who make cheap commish for everyone else possible. Their losses from autoliquidation lubricate the gears at the brokerages that use that procedure. In that sense, those custs are a public good, to use the economics term.

Many traders use IB because historically they have been the "paranoid"/long gamma broker that won't blow up because of a market crash. It has nothing to do with commissions, which I can get lower elsewhere on every single market I trade with IB.

Obviously this thread and the events of last thursday call into question IB's risk management capabilities, in a serious way.

 

[newguy05]

Quote from somedudetrader:

Only out of the benefit of the community am I giving what you requested. Here it is. I have already stepped over the comfort level in the exposure of my account, and now I find myself proving that I'm not lying. I stand by what I said and am not going to prove to you again. If you still think that it was the right action for a broker to sell positions at these prices when even just exercising the options without accounting for its IV and time value would be much much more appropriate, be my guest.

I believe when IBj mentioned FX positions, he meant my cash I kept in Canadian dollars, because my only FX position at the time was the short CAD/USD in small amounts. Yes, I agree that it does have an effect as CAD was going down at the time, but I'm waiting for the final verdict and calculation to see if that was really the case. I would expect that verdict would come privately, where I will try to let the community know about it without sacrificing my privacy.

Whatever the justification, I don't see how the approach taken by IB was even close to the correct one that should have been taken.

I do think you got fucked by IB, but seriously WHAT IS THE BIG DEAL of posting your EXACT positions + cash at the time of liquidation.

1) IB already knows who you are
2) Noone here knows who somedudetrader is
3) By blanking out your account # and post your exact position it will not risk your privacy but can clear all of this up instantly.

It is frustrating going through dozen pages playing the guessing game when a single post from you will clear everything up, instead of 1 screenshot here 1 screenshot there all with partial info, just post exactly what you have in the account at the time of liquidation.

What is the top secret fucking deal about posting your position and blanking out your account #, or just type them out.

 

[Ghost of Cutten]

Quote from IBj:



Summary:

1) Maintain substantial excess financial capacity. The poster who always leaves 30% excess: yes. In volatile market conditions, even more because we saw moves on Thursday that are 1 in 2M types of events, and even 30% gets quickly eaten up in such situations. Having excess financial capacity is the best way to avoid liquidations. Unfortunately, the client/OP did not have substantial excess given the degree of leverage in the currency positions.

2) Last Thursday exposed several places where IB can improve its risk management systems. Liquidation processes will also be improved. I expect the first of these changes to start rolling out within a month.

3) IB's risk management system is expressly designed to automatically liquidate deficient accounts. While automation is key to our whole business model, we also have people 24x6 continuously looking at the risk systems and pending liquidations; they find situations where we feel it appropriate to interrupt the automated process. But when the markets are free-falling, IB personnel cannot manually supervise the close out transactions in individual portfolios because there simply is no time to evaluate and execute alternative liquidation methods.

IB does not want to liquidate anyone's account. It is bad for the client, bad for IB (hence this thread). We do it because regulations stipulate how much leverage can be granted, and not doing so can often be far worse financially for both the client, IB, and ultimately, other customers (because they indirectly inherit the credit risk of failed accounts). To repeat myself, having sufficient capital for the degree of leverage in your account is the best way to avoid liquidation/close out risk.

Thanks for the explanation.

1. "Maintain substantial excess financial capacity." The problem is, everything that is not cash could conceivably be trading at 0.01 bid for a while intraday. Holding >100k cash exposes us to IB bankruptcy risk, and we end up like the Lehman hedge fund clients, years of litigation to get back 5 cents on the dollar etc. If we hold our assets in anything else, even t-bills, they could be trading at 0.01 in a market crash and then we are at the mercy of IB's auto-liquidation process. So, carrying excess financial capacity does not solve the risk problem.

2. It's not just flaws in the design. It's the lack of transparency. Customers need to know how the auto-liquidation works, otherwise they have no clue what their risk is.

3. There are some simple ways to see "crazy" quotes which could be almost fully automated. Even if it was just a case of a 10 minute extra delay, that would be a lot better.

Ultimately, the main problem is that any auto-liquidation engine has the risk of liquidating off crazy quotes during a temporary market dislocation. Without human judgement, you risk auto-liquidating at these insane prices. At that point, either IB or the customer is at the mercy of exchange trade bust committees. Both IB and customer face much higher risk due to poor auto-liquidation.

If the auto liquidation has poor design, it needs improving - nice to know you are working on it, but more transparency would be good. If auto liquidation is inherently dangerous, then it needs a manual component. If you don't have enough staff for that, hire more. If it goes against your business model, then your choice is to either change your business model or to risk losing customer business.