Your experiences with being auto-liquidated by IBKR's strict risk management

H

helpme_please

I am a happy customer of Interactive Brokers. I have even started using margin in my portfolio with IBKR recently. IBKR has an auto-liquidation policy when margin requirements are violated. I am in favour of this auto-liquidation policy because it is like having an automatic risk manager even while I am asleep. However, this news article scares the hell out of me now.

http://www.reuters.com/article/us-arbitration-interactive-auto-liquidat-idUSKBN0LM23620150218

IBKR has to pay $667k to compensate a customer for its "flawed" auto-liquidation system.

Is this an exception rather than the rule? Can the elite traders here share their experience with IBKR's auto-liquidation system, particularly those who have actually experience being auto-liquidated? I think it will be helpful to newbies to margin trading at IBKR.

I don't trade options which can be illiquid. I have a diversified equity portfolio and each equity position is relatively liquid. Does that mean I am pretty safe from the auto-liquidation "flaws"?

Before the system starts auto-liquidation, does it give a pre-warning first, say around 10 to 30 minutes? Or does the system just liquidate without any warning?
 
My own personal risk management is far more conservative than IB's autoliq algo, so I've never been even close to this situation.

A colleague of mine who was impacted by an IB autoliq at one point told me about it. He said he got a warning about a half hour before it happened (although I don't think IB guarantees that you will get a warning ahead of time.) My colleague admitted his position was highly concentrated and that he was probably a bit over levered.
 
Ryan81 said:
My own personal risk management is far more conservative than IB's autoliq algo, so I've never been even close to this situation.

A colleague of mine who was impacted by an IB autoliq at one point told me about it. He said he got a warning about a half hour before it happened (although I don't think IB guarantees that you will get a warning ahead of time.) My colleague admitted his position was highly concentrated and that he was probably a bit over levered.
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From what I gather, the most dangerous portfolio would be one that is concentrated, illiquid and highly leveraged with low margin cushion. Those who hold concentrated positions in stock options with a low margin cushion are asking for financial trouble.
 
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Ryan81 said:
My own personal risk management is far more conservative than IB's autoliq algo, so I've never been even close to this situation.

A colleague of mine who was impacted by an IB autoliq at one point told me about it. He said he got a warning about a half hour before it happened (although I don't think IB guarantees that you will get a warning ahead of time.) My colleague admitted his position was highly concentrated and that he was probably a bit over levered.
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There is no half hour warning. The warning is typically 10 minutes. IB's margin system is primitive, it's not at all about risk. You can have a perfectly balanced portfolio (long/short, correlation 1) and it treats the positions same as long/long, how does that makes any sense?
I trade multiple strategies, no correlation and the margin system doesn't reward me in any way.
 
d08 said:
There is no half hour warning. The warning is typically 10 minutes. IB's margin system is primitive, it's not at all about risk. You can have a perfectly balanced portfolio (long/short, correlation 1) and it treats the positions same as long/long, how does that makes any sense?
I trade multiple strategies, no correlation and the margin system doesn't reward me in any way.
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I guess this is one of the reasons hedge funds would rather use more expensive prime brokerage services to execute sophisticated strategies rather than IBKR. However, IBKR still have one of the best margin interest rates.
 
helpme_please said:
i am in favour of this auto-liquidation policy because it is like having an automatic risk manager even while I am asleep.
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This is a pretty reasonable way to think about it.

helpme_please said:
I have a diversified equity portfolio and each equity position is relatively liquid. Does that mean I am pretty safe from the auto-liquidation "flaws"?
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Yes. If you get sold out of a liquid position when things were moving against you anyway, this may not be a bad thing. If I recall correctly, you don't even get charged commissions on those exiting trades. I used to have ES futures positions that would sometimes get liquidated overnight if I was maxed out and got unlucky. For stocks, you only have to worry about when the markets are open.

Illiquid stocks or options are where you have to be really careful. I had some fairly large stock holding that doesn't normally trade outside normal hours. One morning there was some dumb trade premarket for 100 shares at -20% and they had the whole position marked off that trade and things looked bad. I noticed because I wasn't able to trade premarket since with that mark my account had a margin deficit. Of course as soon as the market opened, everything was fine, the stock was trading at the same price as before, and nothing got liquidated.

helpme_please said:
Before the system starts auto-liquidation, does it give a pre-warning first, say around 10 to 30 minutes? Or does the system just liquidate without any warning?
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You definitely don't get that much warning. I forget but I think they won't trade equities right around the open, so you might get 10-15min before the auto liquidation kicks in if it was based on a gap move overnight. Otherwise, I seem to recall you get about a minute once things start flashing red to fix it yourself before they sell something. That said, there's some sort of margin buffer where you can be slightly negative intraday and it won't act (TWS balances look orange instead of red), but you have to get that resolved or have the market recover for you before the end of the day. It will close you out as it gets close to the close if you're still in that state 10-15min before the end.
 
Chubbly said:
Related discussion

https://www.elitetrader.com/et/threads/interactive-brokers-real-time-liquidation-madness.210359/

https://www.google.ca/amp/s/www.sec...ctive-brokers-for-flawed-margin-liquidations/
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In that thread, it was alleged that IB recomputes your positions values 24-7, in near real time, merely based on bid and ask spreads. IB takes the mid-point of the bid-ask spread. I would prefer that real price transacted be used instead of the mid-point of bid-ask spread.

Is this true? This can be quite scary because using the mid-point can lead to auto-liquidation at ridiculous prices. Once started, it can lead to a death spiral which causes an irrational crash which is characteristic of machines following instructions blindly and dangerously. It is not uncommon for some stocks to have ridiculously low bid price at certain time of the day for a brief period.
 
Professional hedge funds (and I am not talking about wannabe hedge funds using the term to describe their single or double digit million portfolios) are very much interested in margin efficiency/cash efficiency/cross margining efficiency. They would never use IBKR´s auto-liquidation functionalities. Way too dangerous and primitive logic....
 
Nighthawk said:
Professional hedge funds (and I am not talking about wannabe hedge funds using the term to describe their single or double digit million portfolios) are very much interested in margin efficiency/cash efficiency/cross margining efficiency. They would never use IBKR´s auto-liquidation functionalities. Way too dangerous and primitive logic....
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From the lawsuits that appeared from googling, IBKR's auto-liquidation algo works poorly on portfolios with options. ALL the lawsuits against IBKR regarding auto-liquidation has to do with options. For a simple long-only portfolio of liquid stocks, I think IBKR auto-liquidation works fine given the absence of complaints. IBKR auto-liquidation may not be sophisticated and safe enough to handle the more sophisticated strategies of hedge funds which use options.
 
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