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

[muscleman]

I currently use fido. I like the nice integration with turbo tax, and I like the flat commission.

What makes me not so happy are:

1. international trading is quite expensive. Commission is high, plus Forex fee is 1%.

2. They give very low rates for lending out securities. For example, if I allow them to lend my SHLD shares, they get paid 40% a year, and I get paid 5%. In IB, it will be 50/50 split.

 

Do you know any specific risks with IB? They seem to be pretty aggressive in terms of technological improvement. If their systems get a mistake, something like what happened with Knight Capital, then will we get affected? Or will they get bailed out by the SIPC, and clients will be fine?

 

For lending securities, they will give cash collateral. But if a VW or FFH type of squeeze happens, will the cash collateral be sufficient?

 

Last question, how do you file tax if you trade with IB?

 

Also I saw this:

https://www.interactivebrokers.com/en/index.php?f=shortableStocks&p=stockyield&ib_entity=llc

When you lend stocks, you receive the full equivalent of all dividends. However, because you have loaned the stock, the cash you receive "in lieu of" dividends may be taxed as ordinary income instead of at the qualified dividend rate of 15%.2 IB will try to return shares to you prior to a dividend to reduce or avoid any potential negative tax consequences.

 

Does this always work, or will there be any problem in getting back the shares on time?

 

Another question:

Do you use its yield enhancement program, or use the Self-Directed Fully-Paid Securities Lending Program?

[scorpioncapital]

My observation for several years holding the same stock is that you almost always tend to get some proportion as a payment in lieu. I'd say around 30% of the total.

[ItsAValueTrap]

2. They give very low rates for lending out securities. For example, if I allow them to lend my SHLD shares, they get paid 40% a year, and I get paid 5%. In IB, it will be 50/50 split.

 

You can also use options to "collect" the full borrow fee, assuming that there is a liquid options for that particular stock.  (Obviously SHLD has lots of liquid options.)

 

The order execution with IB also tends to be very good.  Many retail brokers play games with your order to generate additional profits.  Etrade is awful; I don't know where Fido stands.

 

Do you know any specific risks with IB?

1- The interface has a learning curve.  I've made some misclicks before...

2- If securities are sold in a margin call, they may sell the most illiquid securities first. 

2b- Their margin rules can change, so you only have a few days to avoid a margin call.

[muscleman]

2. They give very low rates for lending out securities. For example, if I allow them to lend my SHLD shares, they get paid 40% a year, and I get paid 5%. In IB, it will be 50/50 split.

 

You can also use options to "collect" the full borrow fee, assuming that there is a liquid options for that particular stock.  (Obviously SHLD has lots of liquid options.)

 

The order execution with IB also tends to be very good.  Many retail brokers play games with your order to generate additional profits.  Etrade is awful; I don't know where Fido stands.

 

Do you know any specific risks with IB?

1- The interface has a learning curve.  I've made some misclicks before...

2- If securities are sold in a margin call, they may sell the most illiquid securities first. 

2b- Their margin rules can change, so you only have a few days to avoid a margin call.

 

I only stay with a cash account, so I don't need to worry about margins. I heard IB's instant liquidation policy, which sounds scary, but indeed protects itself.

I don't want to use options to collect the borrow fee, because that means I have to setup a margin account and sell some options. I would like to be simple and hold for the longer term.

[siddharth18]

@Muscleman: I feel like Etrade, Tradeking, , TDAmeritrade, Fidelity, etc are all "basic" compared to the level of sophistication you receive at IB. This is assuming that what you want to buy is available at all brokers. For most US listed stocks, if you're trading in small quantities, the only variable to compare is the final commission. If you buy 100 shares @ $10/share, you'll just pay $1 in commission at IB, compared to $5-$10 at flat-pricing brokers.

 

If you buy AWLCF (Awilco Drilling on OTC), IB and TradeKing won't allow it at all. Fidelity will tack on a $50 foreign fee and Etrade/TDAmeritrade will just charge you the regular $9.99/trade.

 

But at the end of the day, each will have it's strengths/weaknesses. For me, Fidelity lets me purchase stocks in countries where IB won't (for example: Norway). But for purchasing stocks on Toronto Stock Exchange, IB is better than Etrade/Fidelity because of the competitive forex rates.

 

While IB has lots of bells and whistles, its UI takes getting used to, and yes, there's a learning curve.

 

Bottom line is that not everyone will have same needs, and not everything will be equally priced. In order to get the best of everything, you may have to understand pricing for each transaction at each broker and then pick the best option at your disposal.

 

 

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.

[abcd]

If you are away from your desktop/laptop and are likely to trade from your mobile phone, I find their login process cumbersome. They give a credit card sized card with random codes assigned to numbers from 1 to 256 and at login time you are presented with 2 numbers and you are supposed to enter the 6 character code (by looking up your card), which bothered me a lot. It takes more than 45 seconds for me to login (I am old).

 

There is an electronic alternative to the physical card, which may give you a better experience (I have not tried it).

[constructive]

2- If securities are sold in a margin call, they may sell the most illiquid securities first. 

 

You can set your more illiquid securities to liquidate last. I only have ~160% gross exposure and have never faced a margin call, but I do this just in case.

[ItsAValueTrap]

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.

[ItsAValueTrap]

There is something like 20-30 companies dedicated to making money from retail orders.  They just play the bid/ask spread game all day long (buy at the bid and sell at the ask).  I could be wrong though because I don't have first-hand information.

[Guest wellmont]

i don't have a lot of luck with IB on thinner stocks with my bid in-between the bid and ask. seems to get ignored. and most brokers hate AON orders and simply ignore them until they need to dump something.

[ItsAValueTrap]

Did you get better execution with another broker?

 

With IB, execution for OTCBB and Canadian stocks has been so-so.  I don't really know a lot about it and where the orders get routed though.  For Canadian stocks, TD Waterhouse seems to fill faster... maybe because IB doesn't post orders onto the major Canadian exchanges (???).  But TD has higher commissions and will charge multiple commissions if the order fills over several days (and even if the fill is only 500 shares).

[Guest wellmont]

I think I got better fills at tda when it's in the middle of the spread. for thin names. I like the lower commish at ib. but I don't like the data fees. still deciding how I feel about it all.

[LongHaul]

I love IB.  Switched ~2 yrs ago. 

 

My impression is that the company is generally very well run and transparent as opposed to much of the competition that rips their customers off by shaving off a small percentage off of lots of  money. 

 

I think the biggest risk is some type of horrible event (nuclear bomb in NYC) that takes stocks down immediately and wipes out their shareholders equity from margin loan losses.  Probably would have to be greater than 50% immediate crash.

Perhaps the market maker could fail too, but I have heard that is in a separate corporate entity.

 

For stock lending my understanding is that IB is the counterparty for the managed portion.

I generally will not lend stock when it is paying a dividend because of the higher tax rate on payments in lieu.

 

Overall I find IB transparent and honest.  Super low FX and commissions, borrowing rates and other fees.

I have found very good service.  I really like the algo's where you can sit on the bid/ask which can save a lot.

 

Con's are there is definitely a learning curve on the system.  I have made some mistakes so be careful and try trades in small lots first.

 

 

 

"Do you know any specific risks with IB? They seem to be pretty aggressive in terms of technological improvement. If their systems get a mistake, something like what happened with Knight Capital, then will we get affected? Or will they get bailed out by the SIPC, and clients will be fine?

 

For lending securities, they will give cash collateral. But if a VW or FFH type of squeeze happens, will the cash collateral be sufficient?

 

Last question, how do you file tax if you trade with IB?

 

Also I saw this:

https://www.interactivebrokers.com/en/index.php?f=shortableStocks&p=stockyield&ib_entity=llc

When you lend stocks, you receive the full equivalent of all dividends. However, because you have loaned the stock, the cash you receive "in lieu of" dividends may be taxed as ordinary income instead of at the qualified dividend rate of 15%.2 IB will try to return shares to you prior to a dividend to reduce or avoid any potential negative tax consequences.

 

Does this always work, or will there be any problem in getting back the shares on time?

 

Another question:

Do you use its yield enhancement program, or use the Self-Directed Fully-Paid Securities Lending Program?

[muscleman]

I asked IB about the yield enhancement program, but two different reps gave different answers.

One of them said it is possible to select which stocks to be lent out and which not to, but the other said once I enroll, all stocks would be allowed to lent out, which doesn't seem to make sense to me.

Does anyone know?

 

I just called another guy, and he said that with the cash account and yield enhancement program, I would not be able to select which stocks to lend and which not to. So potentially they could get my dividend stocks lent out. ::)

[boilermaker75]

I just thought of something with IB that I don't recall anyone mentioning lately. If you are short an option and it is in-the-money and exercised, you are not charged a commission for the stock transaction. I am charged for the stock transaction at Schwab and I would guess that is the case at other brokers as well.

[siddharth18]

Thanks ItsAValueTrap, for the detailed answer! Here's an article that also explains how market makers front run the retail buyers/sellers: http://online.wsj.com/article/SB952617717976527487.html

 

 

One thing I've learned: Cognizance of shark-like behavior is vital to becoming an intelligent player in the fish-bowl.

[muscleman]

I am above to give up now..... Spent a few hours using the internet in my office, but IB's site for registration seems to be buggy. It kept redirecting me to wrong places and kept saying my session has expired just 10 seconds after I log in.

I doubt if their platform is this buggy.

Perhaps I should just stay with Fido and collect that 5% share lending rate on my SHLD. ::)

[wachtwoord]

I asked IB about the yield enhancement program, but two different reps gave different answers.

One of them said it is possible to select which stocks to be lent out and which not to, but the other said once I enroll, all stocks would be allowed to lent out, which doesn't seem to make sense to me.

Does anyone know?

 

I just called another guy, and he said that with the cash account and yield enhancement program, I would not be able to select which stocks to lend and which not to. So potentially they could get my dividend stocks lent out. ::)

 

Yes, you give them permission to lend out all your stocks (I investigated this in detail before I started using it). However:

 

1) You will receive cash collateral in your account to protect against non-delivery, this collateral will be updated every night based on the market rates. So the collateral can be off one day of trading max. It is highly unlikely for non-delivery ever to occur though.

2) They try not to lend out dividend stocks on a ex-dividend day. However, if they do lend it out, you will receive payment "in lieu of dividend" and this amount is taxed the same amount as the dividend tax rate (15% for US stocks). I have had this happen to me and the information was accurate.

 

If you have more questions, please ask. 

[muscleman]

I asked IB about the yield enhancement program, but two different reps gave different answers.

One of them said it is possible to select which stocks to be lent out and which not to, but the other said once I enroll, all stocks would be allowed to lent out, which doesn't seem to make sense to me.

Does anyone know?

 

I just called another guy, and he said that with the cash account and yield enhancement program, I would not be able to select which stocks to lend and which not to. So potentially they could get my dividend stocks lent out. ::)

 

Yes, you give them permission to lend out all your stocks (I investigated this in detail before I started using it). However:

 

1) You will receive cash collateral in your account to protect against non-delivery, this collateral will be updated every night based on the market rates. So the collateral can be off one day of trading max. It is highly unlikely for non-delivery ever to occur though.

2) They try not to lend out dividend stocks on a ex-dividend day. However, if they do lend it out, you will receive payment "in lieu of dividend" and this amount is taxed the same amount as the dividend tax rate (15% for US stocks). I have had this happen to me and the information was accurate.

 

If you have more questions, please ask.

 

"you will receive payment "in lieu of dividend" and this amount is taxed the same amount as the dividend tax rate (15% for US stocks)."

 

Is this true? If this is true, then I would be fine to lend out all of my shares. My only concern was that their website said this is treated as ordinary income instead of dividend, so the tax rate is higher than 15%.

 

Do they have integration with turbo tax? Again, one of their reps said yes and the other said no.  ::)

[muscleman]

http://ibkb.interactivebrokers.com/article/674

 

I just came across this.

This is a bit weird. I used Scottrade and Fido, and for both cash accounts, I could sell a stock and immediately buy another stock.

Could anyone please confirm that this info in the article is still up to date? It would be awkward to sell a stock and not able to buy another one for 3 days.

[LanceSanity]

http://ibkb.interactivebrokers.com/article/674

 

I just came across this.

This is a bit weird. I used Scottrade and Fido, and for both cash accounts, I could sell a stock and immediately buy another stock.

Could anyone please confirm that this info in the article is still up to date? It would be awkward to sell a stock and not able to buy another one for 3 days.

 

I use Scottrade cash account. I need to wait 3 days for it to settle. Margin accounts have cash available on the same day.

[muscleman]

http://ibkb.interactivebrokers.com/article/674

 

I just came across this.

This is a bit weird. I used Scottrade and Fido, and for both cash accounts, I could sell a stock and immediately buy another stock.

Could anyone please confirm that this info in the article is still up to date? It would be awkward to sell a stock and not able to buy another one for 3 days.

 

I use Scottrade cash account. I need to wait 3 days for it to settle. Margin accounts have cash available on the same day.

 

Are you sure? I remember that for Scottrade, even if I make a deposit from my bank, I could immediately use it to buy stocks that are $5 or more, and that is also before the money transfer actually settles.

For stocks, I clearly remember that I don't need to wait. Only for options, if I sell a stock to buy options, I have to wait for a few days because options have shorter settlement period than stock.

 

 

Let's think about it this way, if selling a stock and immediately buying a stock in a cash account is generally not allowed, what is the point of SEC Regulation T? That good faith violation would never happen.

[stahleyp]

this might be a really stupid question (I've never shorted anything...and I'm

ashamed I don't know!) but if someone shorts sears, are they paying 45%? How does that work? If the stock stays flat, people are down 45% after a year or something? That seems crazy to me.  :P

[cubsfan]

this might be a really stupid question (I've never shorted anything...and I'm

ashamed I don't know!) but if someone shorts sears, are they paying 45%? How does that work? If the stock stays flat, people are down 45% after a year or something? That seems crazy to me.  :P

 

Yes, that is what can happen to high short interest stocks that are hard to borrow.

If the broker can not short the stock easily, with your permission they will arrange a

borrow and inform you of the rate to borrow. And the rate may change.

That is the chance you take.

 

It seems crazy - but it's the going rate - and you agree you want to short it.

[abcd]

I have noticed the good faith violation occurs when you sell a stock and use the funds immediately to buy another and sell the second stock before the settlement date of your first sale. As long as you don't sell your second purchase before the settlement date of your first sale, you are fine.