Tag: IBKR

Interactive Brokers (Nasdaq: IBKR) is the best brokerage out there that is available to the retail level. They give me a degree of comfort that simply doesn’t exist in any other brokerage firm that I have dealt with. One of the reasons for their superiority is their founder, Thomas Peterffy, continues to push the innovation curve in such a manner that makes the firm cutting-edge.

The company is publicly traded and has been on an unsual uptrend over the past few months:

The only reason why I have never put money in them is because the publicly traded entity is essentially a minority slice (12.4%) of the “true” asset and this creates all sorts of perversions of incentives that are not necessarily in shareholders’ best interests. It is a classic case of the underlying business being fantastic but the stock not necessarily being a good investment.

Anyhow, they have a tool that is relatively easy to utilize that highlights potential option strategies given the differences between the market’s implicit probability distribution and your own personal expectation of outcomes. Although I do not trade options very often (indeed, it is very rare that I do so simply because trading options is quite costly in terms of spread), this tool and this explanation is quite intuitive. If you do not understand how options are priced, this is a pretty good tutorial that avoids math.

Clearly understanding the math helps and I would highly recommend people learn some option pricing theory before considering trading them. Putting it mildly, options are a fantastic way of losing money if you don’t know exactly what you are doing. Options also appeal to gambler-types that love seeing huge rewards in total disproportion to the amount risked.

Interactive Brokers is the best accessible brokerage with respect to margin. They are also exceedingly inexpensive (for Canadian currency, their rates are currently 2.5% between $0 and $100k, 2.0% for $100k-$1M, and 1.5% above that). I have not employed margin for quite some time, but others can borrow money at low rates. Considering the prevailing interest rates, others see it suitable to leverage by borrowing very cheap money and investing it into income-yielding securities, while skimming the few percentage points. That said, the securities that are now available to leverage from now has a market cap limitation of US$250M or above, as they announced today:

As a result of recent market volatility, please be advised that IB is increasing the margin rates on low capitalization stocks (currently defined as companies with less than $250 million in market capitalization). The margin increases will occur in three steps beginning on Wednesday, September 21, 2011 and ending on Friday, September 23, 2011. The margin rates will increase to 50%, 75% and 100% at the open of business on 9/21/2011, 9/22/2011 and 9/23/2011, respectively.

The current list of stocks which are subject to this margin increase is subject to change. The current list can be found on the following page:

http://ibkb.interactivebrokers.com/node/1788

Upon implementation, any of the incremental margin increases may result in a margin deficit in the account. A margin deficit implies that an account becomes subject to automated liquidation. Please carefully review the current positions within your account and adjust the portfolio accordingly.

I suspect the brokerage firm has done some risk analysis on customer profile accounts and has determined that the concentration within these low capitalization stocks has reached a point where they could not spontaneously liquidate the securities at an acceptable price in the event the stock market crashes. In such an event, the brokerage would be left to cover the remaining shortfall in the customer’s account (as presumably the customer will not be cutting a cheque back to cover such a deficit).

Interactive Brokers (Nasdaq: IBKR) is a very well-run operation and they probably did not make this decision lightly as it will be costing them some money.