What do you think of this? They base their insurance rate on how a 30% rise or fall in one day would effect of your account balance.
For example if you have 100k equity in your account, but a 30% fall will cause a deficit of 50k, (due to short options or leverage) they will charge you perhaps $1 a day. They do not take into account the volatility of your holdings nor if some would offset each other.
I.e. if you are short puts on sp500 and the 30 yr bond, they will not BOTH fall 30% in one day. In fact, neither will EVER fall 30% or rise 30% in one day. Yet you will have to pay the insurance "just in case". WTF?

https://www.interactivebrokers.com/e...ees&p=exposure

It is their right to manage their risk however they wish to. They've informed you of the change in terms. Change brokers if you don't like it.

This is the line I personally have a problem with:
I generally won't do business under these broad terms, I use multiple brokers where I need to be able to trade my full size for redundancy reasons so it's possible whereas I could feasibly go over some limit but in terms of my bankroll there's no way I'm even close to at risk.

There's plenty of trustworthy brokers I can do business with who clearly have the risk management technology to handle this better than IB, I'll be leaving. FWIW I would have no problem with it if they were explicit about it.

This is a pretty big sign of incompetence in my opinion, basically says they don't have the technology for day traders.

I feel exactly the same way about trying to get a steak at McDonalds.

Taking on million+ risk when you don't have that much money is a freeroll on IB and its customers. Why shouldn't you pay?

Looking at that language, I wouldn't be surprised if they're actually very competent, and their intention is to run out the traders who put the firm at huge risk. And bravo if they are - it's yet another reason to stay with IB. All of us longs and cash holders are in practice creditors of IB or any other broker. If the firm goes belly up in a black swan, we're not getting our money back. Risk mitigation is what a quality broker should do, and that involves running off people who introduce large magnitude highly unlikely losses into the system.

Interesting, seems like this policy could be a reaction to this?
http://www.mondaq.com/unitedstates/x...active+Brokers

Summary:
-IB liquidates an account based on an incorrect pricing
-FCMs cannot liquidate based on their own algos

I'll admit this isn't my strongest topic but from what I understand assuming you're trading equities at IB this really isn't true:
https://www.interactivebrokers.com/e...Strength&p=acc

Futures and options on futures are somewhat different story, they're generally backed by the exchanges for cash + contracts assuming your broker is a registered FCM (IB is). No customer has lost money from the bankruptcy of a registered FCM, even during the Great Depression to that extent that money was taken from segregated accounts ala MF Global. That's not to say that didn't have their positions massively ****ed with but assuming you're using minimal leverage this doesn't really affect you.

So this type of policy really is indicative of weak technology to me, plenty of registered FCM's that I use(d) have no problem taking on customers as low as $500/contract in futures for intraday positions because in 99% of situations their positions can be liquidated for no or minimal loss to the firm (and certainly mitigated by the amount of profit taking these accounts allows).

For myself, I'm talking specifically about putting about $20k margin for an intraday position on a $90-$100k ES contract (while I have another $20k margin with another registered FCM just in case MF Global happens to one of my brokers) falling under this rule. It's absolutely absurd.

Interesting. We haven't seen what happens in a derivatives disaster though; they're a unique form of risk that wasn't around until recently. The credit dry up of 2008 isn't the last we'll see of derivatives shocking entire systems and causing major players to fail.

It certainly looks like you're protected to $500K ($250K cash) by SIPC, but anything above that is at risk as the Lloyds insurance is useless, with a limit of $150m.

It'd be interesting to see IB's books (and those of other brokers) to know just how large their derivative risk is.

IB have always struck me as the best by far in risk management and technology use. If they're doing this, I assume it's because there's meaningful risk of substantial loss, at least for them. I certainly wouldn't want a client that has $100K in net worth, holding positions I'm guaranteed to cover that could cost me millions in a big market move. Multiply that by hundreds or more of clients, and risk/reward seems to favor getting rid of them.

I thought I figured out how the fee was charged from a -30% move, but I still got an anticipated fee today, even though my risk page doesn't show any excess exposure on a -30% move.

LiveChat told me that nothing changed, so it is a mystery computation.

Me as well, there's a reason why I'm frustrated by this. I can't fault you for wanting things to be setup well for you however I would like to challenge your assumptions. If they aren't capable of liquidating their clients accounts efficiently you're at greater risk, not less risk.

Mind you, your money should technically be in a segregated account, regardless of what I (the crazy leveraged day trader) do it shouldn't have any impact on you. The instances where this breaks down (ala MF Global) are fraud or technological failure. These are the two REAL risks to utilizing discount brokers like IB within SIPC limits and registered FCM limits.

Have you considered what happens in the event of a technological failure or extreme fraud? The real concern is how your current positions would be affected, would you be able to get out? Would you even know if you were actually flat or still in the position? I've read through some CTA accounts of having positions at MF Global during the bust and it's not pretty. Minimal access and conflicting information. No way to even get flat/re-open position through an unaffected broker if you don't know whether your positions were liquidated or not.

So the real concern is incompetence through poor business structure (lack of auditing, lack of responsible brokers overseeing account's risk metrics) or poor technology that prevents the business from accomplishing the same goals. So the reason this is a big deal to me is because the inability to handle anything remotely close to industry standard intraday margins ($5k/contract let's say industry standard as opposed to $33k/contract without fees under this rule).

To me this means there's a very poor business structure in place, in the event of problematic liquidation events IB would be at greater not lesser risk. It's not like they're actually avoiding the risk either, they still offer $2500/contract intraday margins on ES contracts. It's just some sort of weird disincentive that's likely to create a scenario where all the responsible day traders leave and the idiotic risky ones stay.

Funny but not really true, until you're at scale to pay your own CME/NYSE etc. membership fees there is no step up option that mitigates the risks that you incur working with someone like IB. That means you have to make the decision based on competence and trust in their business, this is a good indication of a poorly run operation to me. Better off going with a smaller, more efficiently run shop.

Last I checked a CME membership would cost me $80k for a year or $600k for life.

I sell puts on the sp500 index. IB will charge the fee based on a 30% sp500 fall at the open. This is impossible. there are circuit breakers in place at a fall of 7%, 13% and 20%. If 20% hit, then trading stops for the day.

Also, if my account does blow up and say I owe 100k more, I assumed the daily fee for insurance I was charged would cover my 100k shortfall, but no. they say I will still owe them the 100k as well. WOW! Total b.s.

What is your point here? It's not like the circuit breakers will prevent your position from losing 30% before you're able to liquidate. Do you think the circuit breakers offer some form of protection to IB, other than delaying the execution for a day or two?

The S&P 500 dropping at least 30% before you can liquidate your short puts is far from impossible. I'd estimate the odds somewhere between 0.4% - 2% a year, purely based on global risk of catastrophic events (ranging from political to financial to physical).

RedOak, your understanding of what the circuit breakers do is so horrible you should not trade. You should just mail a check to your counterparties and save everyone the effort.

This is one of the smartest things IB has ever done. Option tail risk is under-margined because the exchanges and their members/shareholders (mostly brokers) want to see volume. Everyone with even basic math skills knows it. IB's just decided to do something about it and put the cost of that risk where it belongs (on the people taking the risk) rather than on innocent victims (the non SIPC-insured account balances at IB). As one of those accounts, bravo!

Incidentally, IB's insurance cost that they pass on to you is about 1% of account balance per year. If your massive risk option selling strategy can't even cover that, well...

You don't get how this works. Customer money is supposed to be segregated from firm money (this is where MF Global **** the bed) but customer money is ONE POOL. The ******ed stuff you do in your account puts me at risk. My protection from that risk is (in order, I believe):

• Your capital
• IB's capital
• SIPC insurance (but only for money in the stock half of an IB account)
• IB's supplemental account balance insurance purchased from Lloyds

What's clearly going on here is the Lloyds informed them that the ******ed things going on in some customer accounts were going to raise the rates. And that cost has been passed on to said customers. Don't like it? Go to a broker than doesn't buy supplemental insurance and roll the dice.

It is not 1% of account balance. It seems to be ~1.1% of exposure.

So for example if my balance is 1M and my exposure is 4M, it is 1.1% of 4M, so ends up being 4.4% of account balance.

The supplemental insurance from Lloyds is worthless anyway, it tops out at $150m in aggregate. For comparison, IB have ~$30 billion in assets in their user's accounts, and about $5 billion in company assets.

Exposure and account balance are linearly related due to
- IB & CBOE's option margining policies
- The assumption of a 30% drawdown in the exposure calculation

In other words, it should be completely impossible to have an account with a $1M balance and $4M of index option exposure to a 30% drawdown. Although I'm sure some clown somewhere is trying to figure out how to do it.

My understanding is that aggregate limit is per-customer across all accounts.

Although for giggles I'll check, since $150M across all of IB would indeed be nearly worthless.

My exposure on a 30% decline has been at times in the last weeks 3x my account size (without maxing out my margin use, could probably be 4x).

This is using portfolio margin.

I think that index puts that are 10% OTM cause massive losses on a 30% drawdown without eating up the proportional margin use.

This doesn't make sense to me - my understanding was the portfolio margin was supposed to reduce margin for complex offsetting positions, but that if you had non-offsetting positions it was supposed to look like reg-T. Has that not matched your experience?

In a reg-T account, if I remember right that position's margin would be (option price = 10% + vol/time premium) + (20% - (in the money amount = 10%)) so the firm's exposure in a non-liquidating 30% drop would be 10% + whatever was made/lost on Vega - whatever was made on theta. In other words the exposure would be slightly more than 1.5x the margin.

For example (SPX ~1934),

1 naked SPX 2000 call, uses $15k margin, but has $32k exposure(at 20%)
1 naked SPX 1800 put, uses $13k margin, but has $45k exposure(at 30%)

I don't understand your post computations, but I am using the actual numbers from the TWS and the stress test pages.

As you can see, the margin use is quite a bit less then the exposure, and it probably gets worse as you get closer to the money.

My math comes from for example https://www.interactivebrokers.com/e...arginnew&p=opt (see the naked put section for example). CBOE has the same formula. To be clear, it is reg-T math not portfolio margin.

If you have both those positions in a portfolio margin account, they're partially offsetting so that's why it's less. If that's the margin for either one of those positions separately in an otherwise empty account, I'm baffled and concerned.

I have either both positions or similarly offsetting positions with SDS or SPY versus the SPX.