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

[wachtwoord]

"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.  ::)

 

1. Yes, I have experienced this. Tax rate was indeed 15%.

2. I have no idea what turbo tax is. I am European :)

[warrior]

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

Stahleyp,

Indeed, this is crazy, and not only 45% but also “shorts” have to compensate for dividends, assuming company pays them.

 

[muscleman]

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.

 

Correct.

But for IB's cash account, if they don't even allow clients to buy a stock immediately after selling a stock, then a good faith violation would never occur.

 

My point is, why does SEC Reg T rule exists? That is because most brokers allow clients to buy a stock immediately after selling a stock! But IB does not!

When I tried to register for IB's account, the default was Reg T margin, instead of cash. Perhaps IB doesn't want their clients to use cash accounts at all. ::)

 

I tested their web trader demo, and it was buggy.

https://cwt1.interactivebrokers.com/webtrader2/servlet/login?DEMOMODE=true&redirect=off

After I clicked login, a few seconds later, it says: "Your session has expired.

Return to IB WebTraderSM"

 

I hope the real client terminal isn't like this.  :)

[muscleman]

"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.  ::)

 

1. Yes, I have experienced this. Tax rate was indeed 15%.

2. I have no idea what turbo tax is. I am European :)

 

Are you using a cash account? Are you allowed to buy a stock immediately after selling a stock, or do you have to wait until the cash settlement?

[stahleyp]

wow, guys. thanks for the update. That is insane.  :o

[muscleman]

wow, guys. thanks for the update. That is insane.  :o

 

This is actually why I am still holding SHLD after the recent jump. Short interest is still very high, and they have to pay 45% interest. I think as long as there is no bad news to bash the stock down quickly, shorts have to cover. But if they cover, they don't have enough shares available in the market to buy, so stock price will jump up a lot. Longs are paid to wait but shorts are not. :)

 

Or let's think about it this way:

If SHLD stays flat, we collect the 22% interest, and we will do better than WEB.

If SHLD jumps up, we will certainly do better than WEB.

Only if SHLD goes down more than 22% a year will we lose money.

[LanceSanity]

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.

 

You're right. I think I was scared off by the free riding message that shows before using unsettled funds, so I never bothered trying. In that case, I don't know why IB's cash account has a restriction. IB has a separate Reg T margin account.

[ItsAValueTrap]

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

 

A few days ago I checked on IB and the borrow was around 25%.  Which is higher than credit card debt.

 

Some other ideas on this board like ATPG and STP came near 100% at some point in history.  (!!!)

[siddharth18]

How do you find the borrow rate in IB platform? My account is cash-based, NOT margin based. Do you have to "subscribe" to the borrow rate data or something?

 

[muscleman]

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.

 

You're right. I think I was scared off by the free riding message that shows before using unsettled funds, so I never bothered trying. In that case, I don't know why IB's cash account has a restriction. IB has a separate Reg T margin account.

 

Yeah. I am looking into that Reg T margin account. I can also just choose a portfolio margin account.

But I am not sure if I get any benefit from this. After all, all I need is a cash account that can buy immediately after sell, which is doable in most brokers.

I did some research online and heard some horror stories in IB for margin accounts, that their real time liquidation program went wrong and randomly sold people's holdings. So I definitely don't want that to happen to me.

[muscleman]

How do you find the borrow rate in IB platform? My account is cash-based, NOT margin based. Do you have to "subscribe" to the borrow rate data or something?

 

Great. Is your cash account in IB? Could you please confirm if you could buy a stock immediately after selling one, using the unsettle cash?

 

Their website said once you enroll in their yield enhancement program, you will see all loan rates.

[Guest hellsten]

How do you find the borrow rate in IB platform? My account is cash-based, NOT margin based. Do you have to "subscribe" to the borrow rate data or something?

 

Great. Is your cash account in IB? Could you please confirm if you could buy a stock immediately after selling one, using the unsettle cash?

 

Their website said once you enroll in their yield enhancement program, you will see all loan rates.

 

 

You Can Sell Your Loaned Shares At Any Time

Even though you have loaned your shares out, you can sell those shares at any time, just like any other shares in your IB account. You do not have to wait for the shares to be returned to sell them. Even if the shares are not returned on time to settle your sale of the shares, IB will be

responsible for settling the sale, not you, and you will receive the proceeds from the sale of the

shares on the normal settlement date for the sale.

https://gdcdyn.interactivebrokers.com/Universal/servlet/Registration_v2.formSampleView?file=SecuritiesLendingDisclosure.html

 

 

Is this the answer you're looking for?

 

[muscleman]

How do you find the borrow rate in IB platform? My account is cash-based, NOT margin based. Do you have to "subscribe" to the borrow rate data or something?

 

Great. Is your cash account in IB? Could you please confirm if you could buy a stock immediately after selling one, using the unsettle cash?

 

Their website said once you enroll in their yield enhancement program, you will see all loan rates.

 

 

You Can Sell Your Loaned Shares At Any Time

Even though you have loaned your shares out, you can sell those shares at any time, just like any other shares in your IB account. You do not have to wait for the shares to be returned to sell them. Even if the shares are not returned on time to settle your sale of the shares, IB will be

responsible for settling the sale, not you, and you will receive the proceeds from the sale of the

shares on the normal settlement date for the sale.

https://gdcdyn.interactivebrokers.com/Universal/servlet/Registration_v2.formSampleView?file=SecuritiesLendingDisclosure.html

 

 

Is this the answer you're looking for?

 

Thank you, but no. My question is can I use unsettled cash proceeds to buy another stock in a cash account in IB. It doesn't have anything to do with whether the stock is loaned or not.

I can do that with Fido and Scottrade, but IB's website said I am not allowed to do this.

[wachtwoord]

"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.  ::)

 

1. Yes, I have experienced this. Tax rate was indeed 15%.

2. I have no idea what turbo tax is. I am European :)

 

Are you using a cash account? Are you allowed to buy a stock immediately after selling a stock, or do you have to wait until the cash settlement?

 

I have a margin account so I don't have to wait for the 3 days it takes for a trade to settle.

[ERICOPOLY]

Options settle the next day.  So instead of selling your common shares you can write deep-in-the-money calls (lowest strike on the market).

 

Get your cash tomorrow.

 

Eliminates 2 out of the 3 days in the settlement period.

 

Bonus:  you might not have to pay tax because you didn't sell your common.  See "constructive sale" rules -- I said "might".  You have to play by the rules in order to avoid the tax.

 

I wrote deep-in-the-money FFH calls, used the proceeds to buy ORH calls.  Then when ORH popped, I sold ORH and bought back the FFH calls.  I didn't owe tax on the FFH.  But if I'd instead sold the FFH shares, I would have needed to pay tax.

[muscleman]

Options settle the next day.  So instead of selling your common shares you can write deep-in-the-money calls (lowest strike on the market).

 

Get your cash tomorrow.

 

Eliminates 2 out of the 3 days in the settlement period.

 

Bonus:  you might not have to pay tax because you didn't sell your common.  See "constructive sale" rules -- I said "might".  You have to play by the rules in order to avoid the tax.

 

I wrote deep-in-the-money FFH calls, used the proceeds to buy ORH calls.  Then when ORH popped, I sold ORH and bought back the FFH calls.  I didn't owe tax on the FFH.  But if I'd instead sold the FFH shares, I would have needed to pay tax.

 

Thank you Eric. But waiting for a day still sounds inconvenient to me. because in my Fido cash account, I can sell a stock and immediately use that unsettled proceeds to buy anything, be it option or stock.

 

Are you using portfolio margin? Aren't you worried about their instant liquidation policy?

 

[ERICOPOLY]

Options settle the next day.  So instead of selling your common shares you can write deep-in-the-money calls (lowest strike on the market).

 

Get your cash tomorrow.

 

Eliminates 2 out of the 3 days in the settlement period.

 

Bonus:  you might not have to pay tax because you didn't sell your common.  See "constructive sale" rules -- I said "might".  You have to play by the rules in order to avoid the tax.

 

I wrote deep-in-the-money FFH calls, used the proceeds to buy ORH calls.  Then when ORH popped, I sold ORH and bought back the FFH calls.  I didn't owe tax on the FFH.  But if I'd instead sold the FFH shares, I would have needed to pay tax.

 

Thank you Eric. But waiting for a day still sounds inconvenient to me. because in my Fido cash account, I can sell a stock and immediately use that unsettled proceeds to buy anything, be it option or stock.

 

Are you using portfolio margin? Aren't you worried about their instant liquidation policy?

 

I was terrified of the instant liquidation policy before I understood was portfolio margin is -- then I switched from Reg-T to portfolio margin and I don't worry anymore.

[matjone]

If you don't get a margin account you will have to wait 3 days, and if you are wanting to sell a holding and use the proceeds to buy something in a different currency, you'll have to wait for the cash to settle before you can convert the currency, and then you'll have to wait again for the currency trade to settle.  That's why I switched to Reg-T margin.  The way I understood it I shouldn't have to worry about being liquidated, hypothecated or anything else as long as I don't buy on margin.

[siddharth18]

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).

 

You can OPT OUT of this by going to "Manage Account" --> "Security"

[wachtwoord]

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).

 

You can OPT OUT of this by going to "Manage Account" --> "Security"

 

Don't disable two factor authorization! Seriously, you're dealing with a lot of money ...

 

You need a minimum amount of value in your account for one of the two electronic alternatives and I'm too poor for that :)

[muscleman]

Options settle the next day.  So instead of selling your common shares you can write deep-in-the-money calls (lowest strike on the market).

 

Get your cash tomorrow.

 

Eliminates 2 out of the 3 days in the settlement period.

 

Bonus:  you might not have to pay tax because you didn't sell your common.  See "constructive sale" rules -- I said "might".  You have to play by the rules in order to avoid the tax.

 

I wrote deep-in-the-money FFH calls, used the proceeds to buy ORH calls.  Then when ORH popped, I sold ORH and bought back the FFH calls.  I didn't owe tax on the FFH.  But if I'd instead sold the FFH shares, I would have needed to pay tax.

 

Thank you Eric. But waiting for a day still sounds inconvenient to me. because in my Fido cash account, I can sell a stock and immediately use that unsettled proceeds to buy anything, be it option or stock.

 

Are you using portfolio margin? Aren't you worried about their instant liquidation policy?

 

I was terrified of the instant liquidation policy before I understood was portfolio margin is -- then I switched from Reg-T to portfolio margin and I don't worry anymore.

 

Thank you Eric.  could u please tell me a bit more about portfolio margin?

I don't plan to actually use margin. I am just worried if ib platform would have a bug and force me to liquidate

[ERICOPOLY]

Options settle the next day.  So instead of selling your common shares you can write deep-in-the-money calls (lowest strike on the market).

 

Get your cash tomorrow.

 

Eliminates 2 out of the 3 days in the settlement period.

 

Bonus:  you might not have to pay tax because you didn't sell your common.  See "constructive sale" rules -- I said "might".  You have to play by the rules in order to avoid the tax.

 

I wrote deep-in-the-money FFH calls, used the proceeds to buy ORH calls.  Then when ORH popped, I sold ORH and bought back the FFH calls.  I didn't owe tax on the FFH.  But if I'd instead sold the FFH shares, I would have needed to pay tax.

 

Thank you Eric. But waiting for a day still sounds inconvenient to me. because in my Fido cash account, I can sell a stock and immediately use that unsettled proceeds to buy anything, be it option or stock.

 

Are you using portfolio margin? Aren't you worried about their instant liquidation policy?

 

I was terrified of the instant liquidation policy before I understood was portfolio margin is -- then I switched from Reg-T to portfolio margin and I don't worry anymore.

 

Thank you Eric.  could u please tell me a bit more about portfolio margin?

I don't plan to actually use margin. I am just worried if ib platform would have a bug and force me to liquidate

 

Scneario:

1) $100,000 cash balance initially. 

2)  I purchase $190,000 worth of common stock, and $10,000 worth of puts using a $100,000 loan.  $200,000 total invested

3)  The puts are at-the-money

 

Okay, under Reg-T margin the account could be liquidated in a flash crash.

 

Under Portfolio Margin they can see that the puts completely protect the value of the loan they've extended me.  So I'm safe in a flash crash.

 

From their perspective, it's the same as if I invested $90,000 into the common stock and just put $10,000 into at-the-money calls (without taking a loan).

 

But instead of doing that with calls, I have the outstanding margin loan hedged with at-the-money puts.  It's non-recourse leverage at this point -- they know that and I know that. 

 

In my example I'm assuming puts and calls are at the money, and there is pricing parity.

[siddharth18]

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).

 

You can OPT OUT of this by going to "Manage Account" --> "Security"

 

Don't disable two factor authorization! Seriously, you're dealing with a lot of money ...

 

You need a minimum amount of value in your account for one of the two electronic alternatives and I'm too poor for that :)

 

+1

 

I wish all other brokerages had it too, instead of the impotent "security questions" or worse - no 2-step authentication at all.

 

Disabling 2-step authentication is buying short-term comfort at the risk of acquiring a lot of long-term pain.

 

@Eric - I'm amazed by the attention to detail you include in all your comments/answers. It's no surprise your returns are way up there.  ;)  Thanks for being generous with your knowledge.

[siddharth18]

One more feature I loved in InteractiveBrokers was access to data from small hedge funds that use their platform: Their past performance, AUM, fees, holdings, client letters, etc. Believe it or not, there's a lot of good stuff to be had from that section, especially for those that are new to this game, and, at some point are hoping to work at or start their own fund down the road.

 

PS: This feature is FREE!

[thecynic]

One more feature I loved in InteractiveBrokers was access to data from small hedge funds that use their platform..

PS: This feature is FREE!

 

Would you know if this feature is available to IB's retail clients or only to their hedge fund clients?