Should you close your IB accounts now?

[Ghost of Cutten]

Quote from dandxg:

Advantage Futures is good. There is only a few instances to go with IB, IMO. 1. Extremely tight risk mngt.

The whole point of this thread is that reason 1. you cite may no longer apply. Auto-liquidation can bust you out despite having a 100% hedged position with virtually no market risk, as in the example I gave at the start of this thread. Thus, any broker with a flawed auto-liquidation that does that, is actually MORE risky than one without.

This thread was a question "Should your close your IB accounts now?". Until IB can confirm that there is zero risk that a long SPY short ES position would be liquidated at 0.01 bid SPY and 1150 offer ES, then they are a risky broker, more so than one without flawed auto liquidation.

 

[Ghost of Cutten]

Quote from Optionpro007:

If all else fails, IB will probably be the last to fall. Which broker do you use? or suggest...?

This thread is not about credit risk. It is about the risk of blowing out because IB liquidates your stocks at 0.01 during a market crash, whilst ignoring the fact you are hedged in futures. It is about IB treating a risk-reducing hedge as a risk-increasing position. It is about a brokerage being too lazy to properly assess risk in real time and/or trying to cut corners and costs by delegating it to flawed algorithms designed by people who haven't fully thought through the implications of a true market crash.

 

[stock777]

Why would you bother to be 100% hedged? It's a waste of capital.

 

[Specterx]

Quote from Ghost of Cutten:

This thread is not about credit risk. It is about the risk of blowing out because IB liquidates your stocks at 0.01 during a market crash, whilst ignoring the fact you are hedged in futures. It is about IB treating a risk-reducing hedge as a risk-increasing position. It is about a brokerage being too lazy to properly assess risk in real time and/or trying to cut corners and costs by delegating it to flawed algorithms designed by people who haven't fully thought through the implications of a true market crash.

The problem here is that you're asking IB to make a judgment call as to whether a certain market price is "valid" or not. In extreme cases (like the price of a blue-chip stock or index ETF falling to one cent) the call might be easy to make, but there will be plenty of similar cases where the hedge isn't as straightforward as SPY vs. ES, or where the price of the security falls by, say, 60% rather than 99.9%. Personally, I don't want my broker to stand around with his dick in his hand during a market crash while some joker is racking up massive negative equity, in spite of "hedging."

The safest course is for IB to do what it does now, i.e. auto-liquidate your positions regardless of your "hedging," after a suitable delay to come back into compliance. Now, perhaps the grace period needs to be longer - say twenty minutes. But there's no way around the fact that violent moves on the order of 60-90% in a few minutes, or similarly severe market dislocations, run the risk of blowing you out. Everyone needs to manage their own risk, and lobby the SEC to enforce better regulations (like the issues with NBBO last Thursday).

As for the options stuff, I have no experience with that.

 

[walterjennings]

A simple solution would let traders submit a group of positions (with limited risk) as a 'hedged or risk controlled basket' with IB. IB would have an internal 'expert' review it and flag those positions as immune to auto-liquidate until one of them change. Of course this would only work with positions where the lower extreme of risk is well defined.

In fact for many option / ETF hedges, I'm sure an automated review process could be created.

 

[hippie]

Quote from ids:

We never auto-liquidate instantaneously. You always have 10 minutes to deal with a problem.

If a portfolio is hedged, there is no reason why an investor can be away for 10 min or more! No everyone here is a day trader!

 

[hippie]

Quote from Ghost of Cutten:

The whole point of this thread is that reason 1. you cite may no longer apply. Auto-liquidation can bust you out despite having a 100% hedged position with virtually no market risk, as in the example I gave at the start of this thread. Thus, any broker with a flawed auto-liquidation that does that, is actually MORE risky than one without.

This thread was a question "Should your close your IB accounts now?". Until IB can confirm that there is zero risk that a long SPY short ES position would be liquidated at 0.01 bid SPY and 1150 offer ES, then they are a risky broker, more so than one without flawed auto liquidation.

Very true!

 

[jem]

I have told numerous high new worth people to consider using IB for some of their money. (I negotiate loan workouts for people with assets - so asset protection is a frequent topic.)

Cutten's points are powerful.

For now IB is a great broker only for pea shooters like me.

 

[Ghost of Cutten]

Quote from Specterx:

The problem here is that you're asking IB to make a judgment call as to whether a certain market price is "valid" or not. In extreme cases (like the price of a blue-chip stock or index ETF falling to one cent) the call might be easy to make, but there will be plenty of similar cases where the hedge isn't as straightforward as SPY vs. ES, or where the price of the security falls by, say, 60% rather than 99.9%. Personally, I don't want my broker to stand around with his dick in his hand during a market crash while some joker is racking up massive negative equity, in spite of "hedging."

The safest course is for IB to do what it does now, i.e. auto-liquidate your positions regardless of your "hedging," after a suitable delay to come back into compliance. Now, perhaps the grace period needs to be longer - say twenty minutes. But there's no way around the fact that violent moves on the order of 60-90% in a few minutes, or similarly severe market dislocations, run the risk of blowing you out. Everyone needs to manage their own risk, and lobby the SEC to enforce better regulations (like the issues with NBBO last Thursday).

As for the options stuff, I have no experience with that.

Yes there is a balance to be made, I agree with that. I just don't think the current rapid, mindless auto-liquidation is anywhere near that balance. Obviously it's up to each customer to decide, and vote with their feet. Since I run an equity portfolio along with index or short stock hedges, it's an issue for me. It might not be an issue for someone who just sits in cash and trades long stock.

I would just point out that if you ever use leverage, or ever have a short on, you are also at the mercy of this auto-liquidation problem.

If the SEC introduces price limits/circuit breakers then this issue will become relatively less important. But still, it would be nice to get more information and clarity from IB. For example, how long it takes for the auto-liquidator to start running.

 

[Ghost of Cutten]

Quote from Random.Capital:

So the original question boils down to something like...

"If I have leveraged positions, what is IB doing to protect me when things go really goofy?"

Is that about right?

Isn't the correct free-market answer to that question "Absolutely nothing"...?

Lol what makes you think there is a "correct" free market answer? Also, why is paying for "protection" or good risk-management contrary to free market principles?

IB does things its way, other firms do it differently - every trader has the choice of selecting the broker who does it the way they prefer. The answer depends on the needs and preferences of each trader, there is not a single one-size-fits-all answer. IB is also free to decide whether to stick with their system or alter it to make it more attractive to risk-conscious customers.

However, I suspect that many IB customers and prospective customers were not aware of the risks they were running. Knowing that fact may change their choice of broker. That's a free market in action.