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Interactive Brokers lack of transparency

I have been having problems with Interactive Brokers recently, I have been with them for almost 4 years now.

I had some suspicions and asked for basic information how some of their algorithms worked and they release no information at all. I got something like it is not any of your business lol. I said the algorithms are dealing with my money why can't I know.

I had the feeling some of IB algorithms were not behaving accordingly or at least on my interest with my money. I contact them via phone and was shocked with their reaction. I was almost sure I would get a link to a doc describing how things work but people were rude / arrogant.

You guys have any plans at all to support other brokers like thinkorswim TD Ameritrade?

Does anyone know what is happening to IB? Did management change or something?

6 responses

Can you give an example of one of their algorithms that you think is suspicious?

Sure:
Recently I went over margin and I had a position liquidated. Despite the fact that what caused the extra margin were european options that would not expire till a week later anyway. Not to argue about the liquidation but the algorithm used.
As a software engineer if I had to design a liquidation algorithm I would check all open positions check the best performing positions pick the best performing position compute the number of contracts needed to cover the overdrawn and liquidated, take my own commission and inform the customer Of course I would also warn the user before but not to get into the warning details.

But what IB does from what I experienced and heard from customer support is:

if you are -1 or -2 in your margin they will liquidate 100 contracts regardless from ANY position, whichever pleases them.

From all open positions I had I the position with the biggest realized loss was liquidated 100% 2 days later it would have been a profit. when I look at the chart right after the liquidation the price jumped up. Actually I even have to check if the priced used for liquidation really matches.

The order was not liquidated using an external exchange but bought by IB with their Interactive Brokers exchange or dark pool whatever.

So my question how come a "high-tech" broker has such as stupid, I mean Naive liquidation algorithm?
I called them to ask how it works, and I was introduced to their reputation of a terrible customer service. They in an extreme arrogant manner told me they pick any position they want and liquidated 100 contracts regardless if the violation and it is my fault for letting the margin violation happen. Which is right but one would expect then to act on my interest. I did some googling and was shocked by what people call their Liquidation Madness lol

So with those rules could we think how this could be used in favour of the broker?

Say we have 10k people that needs liquidation, check our internal books dark-pool for attractive orders and pick the most common position.

In my view this is playing against my interest. The fact they refused and were even offended by my request to see documentation on how it works made it even more suspicious.
If they have this behaviour with liquidation, would they act in my favour on other situations? if they act like that in thinks I can actually experience would anyone here trust them to act in my interest when I don't have any hint of what is going on?

The main reason I have been with IB so far is their API and the ability I have to plug my software. But for a long time they are not the only decent broker offering an API out there.
Better brokers with better API, API using FIX protocol not proprietary are available. That is why I thought to ask if you guys will ever consider maybe going FIX protocol and not be attached/dependent to a single Broker?

I think Ninja Trader is a good example of the importance of supporting multiple brokers.

I have heard of people being dissatisfied with IB's margin liquidation policy for years, there's a huge (hundreds of pages?) thread on Elite Trader about it.

It sucks, but to be honest, if I were them, I would liquidate whatever was most liquid. That's the only strategy which gives them the best chance of recovering their margin in a distressed scenario. This, by the way, is the definition of 'contagion'.

Liquidity is a good argument, but another open position I had was Apple with a profit after earning reports. I guess one cannot get more liquid then that. So the liquidity does not seems to be the most important parameter in their liquidation. And the reason to liquidate more then needed I don't understand at all. The customer service said they will get better price in lots of 100. Better price for me or for them? Are they trying to use it to improve their within black-pool Options transactions.

Anyway Interactive Brokers report its earnings today I guess, let's see how they are doing.

Interesting I am going through their earning report and as the reason for the Market Making business loss they say

"Market Making segment loss before income taxes was $112 million, for ... and a trading error that resulted in a loss of approximately $16 million during the quarter. " What kind of automated Market making algorithm there is? What exactly it does?

Ref: http://www.businesswire.com/news/home/20141021006739/en/Interactive-Brokers-Group-Announces-3Q2014-Results#.VEeZz_5gZqQ or https://investors.interactivebrokers.com/ir/main.php

Most automated market making algorithms generally try to buy at a bid, sell at an ask, and try to avoid adverse selection. In options market making, one might set the bid and ask some distance away from the fair value of the option, given what it would cost to practically replicate it, adjusted for current inventory (in order to save on costs by trying to maintain a balanced book).