you guys have to realize, they will blow you out, when the bid offer spread opens up like it did without a second thought, your position is a threat to the firm. now it is your problem to take it to abitration. how do you like computer trading now. so if it opens up for 1 minute will they blow you out or what are there guidelines.
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Should you close your IB accounts now?
- Thread starter Ghost of Cutten
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Some people here need to read up alot on debit spreads.
If you think they can liquidate you for a debit spread you've already paid for, you probably should close your account with IB anyway.
If you think they can liquidate you for a debit spread you've already paid for, you probably should close your account with IB anyway.
Quote from Ghost of Cutten:
There is no risk beyond the premium paid in a debit spread. Just like there is no risk beyond the price paid for a share. If someone sells MSFT for -$100 per share, should IB liquidate all MSFT longs?
According to IB's own website, under trading --> margin ----> options, the margin requirements for a put debit spread is "Maximum (Short Put Strike - Long Put Strike, 0)) "
By liquidating the position, IB violated its own rules on margin.
Quote from Ghost of Cutten:
Let's say you are 100% long a portfolio of blue chip stocks worth $1 mill, with no margin. A market crash happens like yesterday, so you sell an equivalent amount of ES futures to completely hedge your exposure. Then, due to stop-loss selling on electronic markets, the bids for all your stocks go to 0.01 and trade on a 1 lot. Your account equity is now about $1, and you are short $1 mill worth of ES futures - IB's system works out you don't have the margin requirements to cover your ES hedge, so it auto-liquidates you. It sells all your stocks at market, which could easily be 0.01 per share, and exits your ES hedge at the same time.
If the exchanges don't bust your liquidation sales, then IB has just wiped you out, despite you being fully hedged and having very little risk.
It appears to me that until IB removes its auto-liquidation system, or adjusts it to avoid ALL such dangerous, risk-increasing auto-liquidations at crazy quotes in fast markets, that it cannot be used safely by any trader for anything other than pure cash-only long stock transactions. Using even $1 of margin risks you getting blown out. Using even $1 of hedge risks you getting blown out. IB is dangerous in its present state.
Actually I think it would have been hard to assemble a "portfolio of blue chip stocks" all of whom went to $.01 the other day. And clearly the exchanges did bust the trades of stocks that made some of these huge moves (and they have a history of doing so, as much as I hate that tactic).
That said, it seems to me that IB has an auto-liquidate function that has some unacceptable features in it that need to be addressed.
For example, this idea of liquidating options that are part of a spread by single option really is ridiculous....especially under the conditions that we experienced last week. We had the ES for instance moving 10+ points per minute. Imagine taking 1-3 minutes to first liquidate one leg of a spread, then another as one poster seems to indicate happened. This is a recipe for disaster. Further, IB owes some duty to the client, even if they are liquidating. In this case it would seem that duty would include liquidating spreads as spreads, not one options at a time. Anyone with experience recognizes that legging into or out of spread positions, or just lifting one leg of a spread takes on large additional risk. IB should not be liquidating in a manner that exposes the client to large additional risk just to minimize it's own risk.
Further, rapid changes in account values, or rapid changes in VIX levels should serve as red flags to IB that perhaps something is amiss. If a stock that was $40 suddenly shows up as a $.01 stock this account should be red flagged and looked at by a human being, not simply liquidated.
Hopefully IB will address some of the concerns with their auto-liquidate program soon.
OldTrader
Quote from ids:
We never auto-liquidate instantaneously. You always have 10 minutes to deal with a problem.
I was aware of this 10 minute period from some posting somewhere in the past. In fact, I think I might have proposed a ten minute delay at some time in the past.
I have been in the situation where too many of my opening orders were executed and I exceeded my margin limits. Presumably because the market was so volatile and I had so many orders on and positions active, my screen froze for an extended period -- perhaps more than ten minutes. This has only happened to me a few times but 10 minutes now sounds much too short to me. I suspect allowing an hour or two would not significantly increase the losses IB might incur in these circumstances.
Quote from mss:
I was aware of this 10 minute period from some posting somewhere in the past. In fact, I think I might have proposed a ten minute delay at some time in the past.
I have been in the situation where too many of my opening orders were executed and I exceeded my margin limits. Presumably because the market was so volatile and I had so many orders on and positions active, my screen froze for an extended period -- perhaps more than ten minutes. This has only happened to me a few times but 10 minutes now sounds much too short to me. I suspect allowing an hour or two would not significantly increase the losses IB might incur in these circumstances.
ah hour or two would be courting disaster as traders are leveraged.
Quote from Ghost of Cutten:
Let's say you are 100% long a portfolio of blue chip stocks worth $1 mill, with no margin. A market crash happens like yesterday, so you sell an equivalent amount of ES futures to completely hedge your exposure. Then, due to stop-loss selling on electronic markets, the bids for all your stocks go to 0.01 and trade on a 1 lot. Your account equity is now about $1, and you are short $1 mill worth of ES futures - IB's system works out you don't have the margin requirements to cover your ES hedge, so it auto-liquidates you. It sells all your stocks at market, which could easily be 0.01 per share, and exits your ES hedge at the same time.
If the exchanges don't bust your liquidation sales, then IB has just wiped you out, despite you being fully hedged and having very little risk.
It appears to me that until IB removes its auto-liquidation system, or adjusts it to avoid ALL such dangerous, risk-increasing auto-liquidations at crazy quotes in fast markets, that it cannot be used safely by any trader for anything other than pure cash-only long stock transactions. Using even $1 of margin risks you getting blown out. Using even $1 of hedge risks you getting blown out. IB is dangerous in its present state.
Yes, close now,, quick now and open up with RefCo.
Quote from Random.Capital:
Yes, you are, and yes, it can.
I don't how to make this any clearer - if nobody wants to buy your long leg, then you do NOT have a spread, you have a naked short.
And that's a big part of what happened yesterday - there were no-bids all over the place.
If you want to argue that such a thing can only last for "a little while" and automated systems should somehow build that assumption into their behavior, that's fine, we can have that discussion, too.
No, I don't have a naked short. For European options I can always hold until expiration, when both the long and short options are guaranteed to be worth their intrinsic value. The worst that can happen is that my debit put spread is worth 0. For American options there is the complication that the short puts could be exercised, but then the long puts could also immediately be exercised. Note that I am not talking about theoretical value (whether with Black Scholes or any other model). I am talking about the terms of the contract.
Quote from rew:
A auto liquidation program should know that debit vertical spreads can't be worth less than 0, credit vertical spreads can't be worth less than the negative of the difference between the strikes (e.g., short the NDX 1825 put and long the NDX 1800 put can't be worth less than -2500), and long calendar spreads can't be worth less than 0 so long as it's before the expiration of the shorter maturity option.
if you have many options, IB's margin calculation doesn't always assemble the options into the ideal combinations. so even if their auto-liquidator possessed this type of intelligence, i wouldn't trust it unless it involved only 1 type of options combo.
not to mention their auto-liquidator will give you the worst possible price (market prices). their auto-liquidator makes me very nervous.
I think what happened is inexcusable and they had no justification to liquidate, but all of you are missing the point.
Their autoliquidate function is not programmed to asses the trader's maximum risk, it is designed to assess <i>their</i> maximum risk.
Like any other shop, they only want to protect themselves and taking into account the portfolio margin is not their goal. They calculate their maximum risk if/when things go sideways. If one position looks out of whack to their algos, they will get rid of it. It is obviously a mistake in the programming, but they will find a way to justify it.
And for those who are suggesting arbitration, the NFA is more crooked then the FCMs. You literally have to catch a provider stealing before they will give you any relief. It is the same thing as the SEC. They are there for appearance's sake and to protect the large firms, not the consumer.
Their autoliquidate function is not programmed to asses the trader's maximum risk, it is designed to assess <i>their</i> maximum risk.
Like any other shop, they only want to protect themselves and taking into account the portfolio margin is not their goal. They calculate their maximum risk if/when things go sideways. If one position looks out of whack to their algos, they will get rid of it. It is obviously a mistake in the programming, but they will find a way to justify it.
And for those who are suggesting arbitration, the NFA is more crooked then the FCMs. You literally have to catch a provider stealing before they will give you any relief. It is the same thing as the SEC. They are there for appearance's sake and to protect the large firms, not the consumer.
Quote from blackjack007:
if you have many options, IB's margin calculation doesn't always assemble the options into the ideal combinations. so even if their auto-liquidator possessed this type of intelligence, i wouldn't trust it unless it involved only 1 type of options combo.
not to mention their auto-liquidator will give you the worst possible price (market prices). their auto-liquidator makes me very nervous.
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