I am thinking about switch my broker to IB. Any risks there?

[muscleman]

Exactly. Having a margin account and going on margin (i.e. a negative cash balance) are two different things! Just open a margin account but keep a positive (or zero) cash balance!

 

No, don't keep a zero cash balance, you might have some fees to be paid to IB and then you might get liquidated if excess liquidity is not enough  (IB do not issue margin calls, they just liquidate).  It's less of an issue with p.margin due to how excess liquidity is calculated but anyhow just play it safe if it's something you are worried about. You might also have payable interest from previous trades or on foreign currency etc.

 

I just had a conversation with IB regarding my concerns with the inconvenience of cash account and risks of a margin account, and they said on their back end server, they have a way to restrict my margin account such that it will only be borrowing against the unsettled cash.

I think that is exactly what I needed. I am very happy with that! :)

[thepupil]

Siddarth,

IB has two stock lending programs.

 

1.  Stock Yield Enhancement, which is managed by IB and automatically lends out your shares that it can do so profitably; they pass on some of this to you.

 

2. Stock Borrow /Loan is a self directed program where you transact directly with borrowers. For example, I own SHLD and I can see that the last rate agreed upon was about 14%. I go on to stock borrow loan and enter in a lend rate that I'm willing to lend shares; there is a bid and ask like a normal stock except far less liquid and not really transparent. I lend my SHLD at slightly below market rates because I don't want to keep having to re rate when my shares get returned to me if the. Market rate falls below where I am lending them ( also IB charges a $5 ticket fee for every trade, so I'd rather just get a less than optimal rate for my shares and transact seldom)

 

I presume that you are signed up for the stock yield enhancement one and are simply not being paid the full rate by IB or their estimate of borrow costs could be wrong.

 

If you don't want to direct your own securities lending I would suggest putting on a synthetic long via options market ( which should capture the cost to borrow)

[meiroy]

Exactly. Having a margin account and going on margin (i.e. a negative cash balance) are two different things! Just open a margin account but keep a positive (or zero) cash balance!

 

No, don't keep a zero cash balance, you might have some fees to be paid to IB and then you might get liquidated if excess liquidity is not enough  (IB do not issue margin calls, they just liquidate).  It's less of an issue with p.margin due to how excess liquidity is calculated but anyhow just play it safe if it's something you are worried about. You might also have payable interest from previous trades or on foreign currency etc.

 

I just had a conversation with IB regarding my concerns with the inconvenience of cash account and risks of a margin account, and they said on their back end server, they have a way to restrict my margin account such that it will only be borrowing against the unsettled cash.

I think that is exactly what I needed. I am very happy with that! :)

 

I do not understand it... could you explain?  First, I was under the impression IB immediately adds to the cash calculation the sold amount and adjusts the maint/int margins even if it is not settled yet. Is it not so? Second, even if that's not correct and it takes three days, so after three days you cover the borrowing with the settled cash but how does it change anything really? As I mentioned, with excess liquidity at 0 you do not have to borrow to get liquidated, it can come in the form of fees, payable interest or dividends etc.

 

The main issue is to understand how IB calculates margins and initiate liquidation, the algorithm is on their site. It will go into action even if it's just 1 cent. That's the only thing that matters. Of course, maybe I'm wrong...

 

 

[wachtwoord]

I presume that you are signed up for the stock yield enhancement one and are simply not being paid the full rate by IB or their estimate of borrow costs could be wrong.

 

 

Yes, but the yield enhancement program is supposed to share the profits 50/50.

[muscleman]

Siddarth,

IB has two stock lending programs.

 

1.  Stock Yield Enhancement, which is managed by IB and automatically lends out your shares that it can do so profitably; they pass on some of this to you.

 

2. Stock Borrow /Loan is a self directed program where you transact directly with borrowers. For example, I own SHLD and I can see that the last rate agreed upon was about 14%. I go on to stock borrow loan and enter in a lend rate that I'm willing to lend shares; there is a bid and ask like a normal stock except far less liquid and not really transparent. I lend my SHLD at slightly below market rates because I don't want to keep having to re rate when my shares get returned to me if the. Market rate falls below where I am lending them ( also IB charges a $5 ticket fee for every trade, so I'd rather just get a less than optimal rate for my shares and transact seldom)

 

I presume that you are signed up for the stock yield enhancement one and are simply not being paid the full rate by IB or their estimate of borrow costs could be wrong.

 

If you don't want to direct your own securities lending I would suggest putting on a synthetic long via options market ( which should capture the cost to borrow)

 

Thank you for the information! So for self directed lending, if you lend your shares out at rates slightly below market, then how often do you have to re-lend the shares? If it is not very often, then it is probably a good idea to use instead of the stock yield enhancement program.

[muscleman]

Exactly. Having a margin account and going on margin (i.e. a negative cash balance) are two different things! Just open a margin account but keep a positive (or zero) cash balance!

 

No, don't keep a zero cash balance, you might have some fees to be paid to IB and then you might get liquidated if excess liquidity is not enough  (IB do not issue margin calls, they just liquidate).  It's less of an issue with p.margin due to how excess liquidity is calculated but anyhow just play it safe if it's something you are worried about. You might also have payable interest from previous trades or on foreign currency etc.

 

I just had a conversation with IB regarding my concerns with the inconvenience of cash account and risks of a margin account, and they said on their back end server, they have a way to restrict my margin account such that it will only be borrowing against the unsettled cash.

I think that is exactly what I needed. I am very happy with that! :)

 

I do not understand it... could you explain?  First, I was under the impression IB immediately adds to the cash calculation the sold amount and adjusts the maint/int margins even if it is not settled yet. Is it not so? Second, even if that's not correct and it takes three days, so after three days you cover the borrowing with the settled cash but how does it change anything really? As I mentioned, with excess liquidity at 0 you do not have to borrow to get liquidated, it can come in the form of fees, payable interest or dividends etc.

 

The main issue is to understand how IB calculates margins and initiate liquidation, the algorithm is on their site. It will go into action even if it's just 1 cent. That's the only thing that matters. Of course, maybe I'm wrong...

 

I am currently using a cash account, and after I sell a stock, I cannot immediately use that proceeds to buy other stocks. My fidelity account can.

I complained to them about this, and told them that if I upgrade to Reg T margin, I will be able to use unsettled proceeds, but if I have a fat finger and mistakenly used margin, my account is not as safe as a cash account.

They said they can make my account pseudo margin, so that it works like a cash account except I could use unsettled proceeds to buy. :)

[muscleman]

Many retail brokers play games with your order to generate additional profits.  Etrade is awful

Can you please elaborate on this? I'd like to know what specifically is bad about Etrade.

Before placing a trade, I just view live quotes at atleast 2-3 brokers and then proceed to place a limit order.

 

I'm sure that they have a bag full of tricks and I don't feel that it's worth the time to point out all of them.  Regulations and markets are constantly evolving so the practices now are very different than the practices in the past.

 

The most salient practices:

1- Avoid market orders.  If you really need execution ASAP, use a limit order that is past the bid/ask spread by a little bit.  Or just use a limit order and slowly increase the price.

 

1b- All or none orders are prone to abuse.  That's why Canadian regulators banned them.

 

2- Most retail brokers will route your order to some internalization network (e.g. ATD, Knight, etc.)... there are 10-30 of these companies now.  If you are trading a liquid stock with a bid/ask spread of only 1 cent, you can't possibly lose more than 0.5 cents/share to this.  So maybe it's not a big deal.

 

2b- When you take liquidity with IB (you can set your order to "seek price improvement" too), you will sometimes get paid a negative rebate for many stocks.  Retail brokers simply pocket these rebates instead of passing them onto customers.

 

When you provide liquidity, you will often be entitled to a rebate.  IB passes this onto customers.

 

Ugh... I guess I will try to explain how the whole sub-penny front running and rebate game works.

 

When you bid for a stock at $3.00 for 100 shares, you might think that you are bidding at $300.00.  In reality, your order may be routed to some venue with rebates.  Somebody buying your shares on NASDAQ might have to pay $300.00 plus a rebate of $0.29.  Your bid is effectively $299.71.

 

Suppose that the spread is 1 cent.  The ask price on NASDAQ would effectively be $301.29.  There are a large number of market makers that will try to constantly collect the spread, making a 0.53% profit on each flip.  Due to competition among market makers (and other exchanges with different rebate structures), the effective spread is usually much smaller than this.  Sometimess there is a negative rebate- you get paid for taking liquidity.

 

The effective bid/ask might be $300.02 and $300.75.  It'll vary from day to day, and fluctuate depending on the time of day (spreads are wide when the market opens).

 

Retail and institutional investors aren't allowed to bid in sub-penny increments.  So market makers can continually front run every other order on the exchange by jumping in at the last second and bidding $0.01 higher.  (All this is computerized now.)

 

Retail orders will likely get posted to NASDAQ or some other venue with high positive rebates (e.g. Knight, ISE, NYSE ARCA, etc.).  It is likely that your order will only get filled if the rebate is paid.  So, you will likely be the last in line to get your order filled (especially when market makers front run you by a sub-penny increment).  Your broker will typically pocket the rebate.

 

2c- Many retail orders will have a split second delay... maybe half a second or less.  This is because your broker is polling something like 30-40 different venues to see which one offers the best price.  Maybe ATD is offering the highest negative rebate.  Your broker will route your order to ATD and pocket the negative rebate.

 

IB lets you choose.  Some people don't like that split second delay from seeking price improvement.  If you are providing liquidity, your order will go to an exchange.  It is likely that market makers will front run the order via subpenny price improvement.

 

Retail orders rarely go to an exchange.

 

3- NBBO rules are supposed to protect investors.  There are many exceptions to them.  I'm guessing that Etrade (or the company it routes orders to) exploits every one... because I ran into one of these exceptions with Etrade.

 

Value trap, do you choose IB's flat rate or cost plus commission structure? It sounds like choosing cost plus is the only way to get these rebates?

I have placed three limit orders with IB so far, but I got none price improvements. They all went through exactly at my price. It sounds a bit weird to me. ::)

[ItsAValueTrap]

I use cost plus.  I'm not sure why the flat rate commission would really make sense.

 

2- If you *take* liquidity, then you might get price improvement.  If you enable the "seek price improvement" setting, then you might get a better price than otherwise.  But there is a delay.

 

If you *provide* liquidity, then you will usually get a rebate.  SMART routing means that your order might end up on any number of different exchanges.  The major ones are NASDAQ, NYSE, and BATS.  The exchanges have different rebate structures.

 

3- I really wish the US regulators did a better job.  But the reason why things are so complex now is because they did something about the abuses of the past.  It's also partly because the SEC's rules has led to more competition, which makes order routing more complex as there are many places you can send order flow.  The other source of complexity is from people trying to game/play the current system.

[muscleman]

I use cost plus.  I'm not sure why the flat rate commission would really make sense.

 

2- If you *take* liquidity, then you might get price improvement.  If you enable the "seek price improvement" setting, then you might get a better price than otherwise.  But there is a delay.

 

If you *provide* liquidity, then you will usually get a rebate.  SMART routing means that your order might end up on any number of different exchanges.  The major ones are NASDAQ, NYSE, and BATS.  The exchanges have different rebate structures.

 

3- I really wish the US regulators did a better job.  But the reason why things are so complex now is because they did something about the abuses of the past.  It's also partly because the SEC's rules has led to more competition, which makes order routing more complex as there are many places you can send order flow.  The other source of complexity is from people trying to game/play the current system.

 

Thank you. What you do mean by "take" liquidity and "provide" liquidity? I assume if the bid is 10000 and ask is 100, and I place a sell order, I am providing liquidity, right?

I went through IB's examples of cost plus vs flat rate commissions, and it seems like in most cases, cost plus would win. I only have a relatively small account, so I am not sure if this applies to me as well?

 

In addition, could you tell me how to choose "price improvement"? At present, I just know how to place limit and market orders.

[ItsAValueTrap]

Let's say the bid is $5 and the ask is $7.

 

If you buy right away at $7, you are taking liquidity.  If you sell right away at $5, you are taking liquidity.  The other side of your trade is providing liquidity.

 

Usually if you use a limit order and your order doesn't fill immediately, you will likely be providing liquidity (if and when your order fills later on) and you will receive a rebate.

[muscleman]

Let's say the bid is $5 and the ask is $7.

 

If you buy right away at $7, you are taking liquidity.  If you sell right away at $5, you are taking liquidity.  The other side of your trade is providing liquidity.

 

Usually if you use a limit order and your order doesn't fill immediately, you will likely be providing liquidity (if and when your order fills later on) and you will receive a rebate.

 

Ok. Thank you!

So I will definitely give it a try. But even for taking liquidity, does cost plus give me better commissions than fixed rate?

[Spekulatius]

I have been customer with IB since about 2006. I had very few problems with them. I like their trading platform and their mobile platform. The webtrader is pretty basic though and sometimes buggy. The statements are hard to read And there is definitely a learning curve with their platform.

 

For international trading IB is hard to beat and their low commissions are great for traders. I have used Etrade, Wells Fargo investments and Fidelity and IB id by far my favorite.

 

I found the phone support OK but their online chat support pretty good. I use turbotax with IB as well and download their statements monthly, which seems to work OK. They don't have directconnect though.

[sswan11]

I have accounts w/ both IB and now ThinkorSwim.  IB is much cheaper, but harder to use and phone support is curt at best.  Agree with Spekulatius' comments...ps, how do you import statements into Turbotax - I thought IB discontinued that capability?

[muscleman]

I have accounts w/ both IB and now ThinkorSwim.  IB is much cheaper, but harder to use and phone support is curt at best.  Agree with Spekulatius' comments...ps, how do you import statements into Turbotax - I thought IB discontinued that capability?

 

They said their integration with turbo tax will be reenabled from this year on

[alpha231616967560]

I recently transferred a fair amount of BRK.B to IB and had almost zero cash in a margin account at the time of transfer. They liquidated 100 shares to cover the transfer fee. I thought that this was fairly ridiculous (seems like they could have at least pointed this out or had a system set up to alert their customers of this sort of thing), but I've been very happy with them otherwise. Their international trading fees are hard to beat.

[wachtwoord]

I recently transferred a fair amount of BRK.B to IB and had almost zero cash in a margin account at the time of transfer. They liquidated 100 shares to cover the transfer fee. I thought that this was fairly ridiculous (seems like they could have at least pointed this out or had a system set up to alert their customers of this sort of thing), but I've been very happy with them otherwise. Their international trading fees are hard to beat.

 

Wow, indeed. You say you didn't have cash in the margin account, but didn't you have holdings there as well? Otherwise I don't understand why you couldn't pay the fee on margin.

 

Also: why liquidate so much? Would''t a single share be more than sufficient?

[alpha231616967560]

I recently transferred a fair amount of BRK.B to IB and had almost zero cash in a margin account at the time of transfer. They liquidated 100 shares to cover the transfer fee. I thought that this was fairly ridiculous (seems like they could have at least pointed this out or had a system set up to alert their customers of this sort of thing), but I've been very happy with them otherwise. Their international trading fees are hard to beat.

 

Wow, indeed. You say you didn't have cash in the margin account, but didn't you have holdings there as well? Otherwise I don't understand why you couldn't pay the fee on margin.

 

Also: why liquidate so much? Would''t a single share be more than sufficient?

 

Apparently they will not pay fees from margin, and yes I asked the same question about one share. Apparently they only liquidate full lots.

[wachtwoord]

I recently transferred a fair amount of BRK.B to IB and had almost zero cash in a margin account at the time of transfer. They liquidated 100 shares to cover the transfer fee. I thought that this was fairly ridiculous (seems like they could have at least pointed this out or had a system set up to alert their customers of this sort of thing), but I've been very happy with them otherwise. Their international trading fees are hard to beat.

 

Wow, indeed. You say you didn't have cash in the margin account, but didn't you have holdings there as well? Otherwise I don't understand why you couldn't pay the fee on margin.

 

Also: why liquidate so much? Would''t a single share be more than sufficient?

 

Apparently they will not pay fees from margin, and yes I asked the same question about one share. Apparently they only liquidate full lots.

 

Well thanks for the info at least. Now I can try to prevent this ever happening to me.

[Spekulatius]

I have accounts w/ both IB and now ThinkorSwim.  IB is much cheaper, but harder to use and phone support is curt at best.  Agree with Spekulatius' comments...ps, how do you import statements into Turbotax - I thought IB discontinued that capability?

 

I was wrong. I import my monthly statements into quicken and import quicken into turbotax. That works without problems.

 

Another plus. - IB's ipad app is very good and quite intuitive and their Android app is decent as well. i find myself using the ipad app for 90% of my trading. It does not work for my complex order types, but. I never use those anyways.

 

If you have several accounts with (which I do), you pay the data feed fees only once.

[rmitz]

Apparently they will not pay fees from margin, and yes I asked the same question about one share. Apparently they only liquidate full lots.

 

Well thanks for the info at least. Now I can try to prevent this ever happening to me.

 

I believe they do pay fees from margin, this really seems like a tripped bug in the system given that it was a near-zero balance or something.  I mean, if you've got a margin, it is impossible to *not* pay fees from margin, and they certainly don't liquidate in those cases.

[alpha231616967560]

Apparently they will not pay fees from margin, and yes I asked the same question about one share. Apparently they only liquidate full lots.

 

Well thanks for the info at least. Now I can try to prevent this ever happening to me.

 

I believe they do pay fees from margin, this really seems like a tripped bug in the system given that it was a near-zero balance or something.  I mean, if you've got a margin, it is impossible to *not* pay fees from margin, and they certainly don't liquidate in those cases.

 

If I recall correctly, they wouldn't pay fees from margin because it was a transfer in. A different policy may apply once the account is established, but they definitely liquidated 100 shares to pay for the fees. 

[meiroy]

Apparently they will not pay fees from margin, and yes I asked the same question about one share. Apparently they only liquidate full lots.

 

Well thanks for the info at least. Now I can try to prevent this ever happening to me.

 

I believe they do pay fees from margin, this really seems like a tripped bug in the system given that it was a near-zero balance or something.  I mean, if you've got a margin, it is impossible to *not* pay fees from margin, and they certainly don't liquidate in those cases.

 

If I recall correctly, they wouldn't pay fees from margin because it was a transfer in. A different policy may apply once the account is established, but they definitely liquidated 100 shares to pay for the fees.

 

if I'm not mistaken ACATS is free on IB's side so there would be no fee, unless you didn't use ACATS? ACATS should also protect against a situation where the stocks would cause a margin violation -- the transfer would be rejected.

[DoddDisciple]

Since this thread seems to be the IB questions base, here are some lingering ones I'd really appreciate some feedback on:

 

(1) What additional services/data services are recommended? IB charges for data feeds. If you don't buy them, how old are the quotes? Are they selling level 2 quotes in these feeds or something else? Any free alternatives?

 

(2) Is securities lending or the alternative where you lend directly worth it for small international stocks, say $50M-$100M and lower? What's the demand and rates like?

 

(3) Is there any real difference between friends & family and family office accounts if you aren't a RIA and aren't charging fees? How does logins/security work with the USB 2-step authentication in either of these accounts?

 

 

[siddharth18]

Since this thread seems to be the IB questions base, here are some lingering ones I'd really appreciate some feedback on:

 

(1) What additional services/data services are recommended? IB charges for data feeds. If you don't buy them, how old are the quotes? Are they selling level 2 quotes in these feeds or something else? Any free alternatives?

 

(2) Is securities lending or the alternative where you lend directly worth it for small international stocks, say $50M-$100M and lower? What's the demand and rates like?

 

(3) Is there any real difference between friends & family and family office accounts if you aren't a RIA and aren't charging fees? How does logins/security work with the USB 2-step authentication in either of these accounts?

 

 

 

1. I have a TDAmeritrade account that provides free level 2 quotes. Based on the market price/order book I see, I place limit orders in IB.

2. Rates for securities lending mainly depend on demand and supply. IB will take 50% of the cut.

[DoddDisciple]

Are level 2 quotes only for domestic exchanges? Are you aware of any free international offerings or something that's maybe a few hundred a year (but still cheaper than IB, which I don't even know is level 2 quotes or not?)

 

Share lending seems too complicated for me, especially if I'm just going to be getting sleepy little sub $50M stocks anyway.