I had read warnings on this board about IB's auto-liquidation policy before I opened and account with them, but hadn't taken them too seriously as I keep very conservative margins. Then the following happened: In order to benefit from the appreciation of the Chinese yuan, I opened RMB futures long positions on the CME Globex futures exchange during the course of Spring 2010, which I kept open for months. The yuan appreciated and my position values kept increasing. The Globex RMB market is very illiquid but open for trading 23 hours per day, so at certain times during the day it could happen that there was no bid and/or ask at all. One day when this happened, someone suddenly came in with a bid of 0.14000 USD for the September 2010 contract (at that time, the underlying exchange rate was about 0.14750). Now IB recomputes your positions values 24-7, in near real time, merely based on bid and ask spreads. There was an ask of 0.14787 on the market when the 0.14000 bid came in; therefore IB re-evaluated the position as 0.143935 (based on the mid-price). Despite of me having kept a margin of more than two times of what I was required, this crazy evaluation immediately brought me into margin violation. Within minutes IB started to auto-liquidate my positions at fire-sale prices. Within an hour, the market had become more liquid again, with realistic bids, and my margin was fine again. That day the yuan closed higher, and so did all the yuan futures, but I had lost thousands of dollars due to IB's auto-liquidation of my positions based on a single rogue bid. All this within one hour while I was asleep. I was actually lucky that things came back to normal so quickly, otherwise my whole portfolio might have been wiped out. Needless to say that I never received any compensation and just wasted my time dealing with their customer service in the aftermath of all this. IB is the only broker that I'm aware of that autoliquidates within minutes (most brokers give you at least a day, and more importantly, calulate your margin based on closing prices). Most people know that, but what they don't know is that IB recomputes your portfolio value purely by taking the mid-point of bid and asks. If you trade illiquid futures, IB is a ticking bomb! There is simply no way one could be expected to provide for an excess liquidity that reflects the kind of intraday price movements reflected by their method of calculation, which is completely prone to manipulation by low bids.
Not true, this is your invention... IB does it in a MUCH more sophisticated manner... There are probably the world's largest Market Maker in illiquid options... And, therefore, also futures. Your Portfolio, on the other hand... Is very simplistic and very concentrated... If you wanna trade illiquid securities with IB... You will have to diversify into many positions... And make allowances for this type of bid/ask gapping... And be actually trading professionally and watching the market. I trade a Portofolio of about 100 illiquids... I've never had a position liquidated... And I'm always red-lining my Buying Power at 99.5%... And get liquidation warnings almost every day. You have to adapt 100% to IB Culture... Or go trade somehwere else.
It's unfortunate you had that experience, but I sincerely thank you for sharing it here. I remember when another poster had raised this issue in the past and it made me seriously consider re-evaluating IB as a source of risk itself. I'd since forgotten about it, since it was specific to the flash crash, which was a unique event. Circumstances where you can't anticipate auto-liquidation are definitely worth keeping a closer eye on.
@DeeDeeTwo: I should have said: "/sometimes/ merely based on bid and ask spreads" (namely, whenever there is no sufficiently frequent trading in any of the instruments of the respective underlying). I admit that RMB futures were a large proportion of my portfolio (not because I'm crazy but because I have accounts with five different brokers). If people need to be diversified into 100 different positions in order to safely hold illiquid positions with IB, then hopefully this thread will help raise that awareness. Note though that even with only 1% of my assets in RMB, a sufficiently low rogue bit could have gotten me into margin violation according to their mid-point method. Not sure if there's a lowest acceptable bid on the CME Globex or if in principle someone could bid 0.00001. I'm attaching the reply that I had gotten from them after my inquiry into the incident: At the time of the liquidations (Fri Jul 9 15:37:37 EDT), the market reflected in our system for the RMB SEP10 FUT (lead month) was 0.140000 / 0.14787. This resulted in a mark price of 0.143935 (based on the midpoint). Since the other RMB FUT positions did not reflect a bid/ask, these mark prices were derived from the lead-month price, based on our algorithm, which utilizes the most recent offset amounts (lead-month futures vs. non-lead-month futures), per IB policy. As such, since this was based on existing market data and the non-lead month futures were marked correctly based on our methodology, the resulting deficit and liquidations are deemed valid. Please manage your risk accordingly.
Why do you think IB's Market Making algorithms are ultra-sophisticated... But their retail risk management algorithms are primitive? They use much of the same code across the board. For example... When I get a liquidation warning... The IB algorithm is clearly looking for action on my part... And since I immediately liquidate some least important stuff... They know there is trader on the job. In contrast... The OP puts on a highly concentrated. illiquid position... Then goes to the Freaking Beach... IB gets no response from liquidation warnings... So their algorithm will be far less patient. I traded illiquid stocks right thru May 6th Flash Crash... Probably made 100 trades between 14:30 and 15:00... When there was effectively no market for a lot of stuff.. And had no concerns about liquidation whatsoever. ALSO... Concentration and whether Market Neutral is a BIG issue... Right now I have > 100 positions and have used 98.5% of Buying Power... And I have 350 LIVE ORDERS out there... And have received one Warning today and had maybe 2-3 orders cancelled... But there is no chance of liquidation as long as I keep managing in real-time.
Does IB provide a document that clearly outlines how the liquidation algorithm functions? This would clarify things.
Looking at it from IB's side, they seem to be doing everything correct. If you trade illiquid futures, it is not IB that is a ticking bomb. It is your positions. I have been auto-liquidated before. I do understand that when it is your first time, you are shocked, in denial, and targeting much of the blame on the other party. In time, if you are to succeed, you will change your line of thinking and your way of trading. As far as your situation goes with IB, I think taking the mid-point is reasonable and sometimes generous. As futures traders, we know that we don't get filled at the mid-point on average, we get filled much closer to the bid or ask if we are even able to cut the spread at all. How else is IB to calculate margin? I am surprised other brokers allow even greater leverage than IB and give you more than a day to liquidate as you are implying. Brokerages must be taking alot of losses and having to seek compensation after the fact with over-leveraged traders if this is the case.
This market is not illiquid, it's not even a "market"... It seems to exist so that large players can cross size... It looks like there was one 250 contract trade today. This is not meant for retail traders, but for institutions... That have a ** clear arrangement ** with their Clearing Firm... In terms of exactly how positions will be maintained. To trade this via IB Retail is basically crazy... period. http://www.cmegroup.com/trading/fx/emerging-market/chinese-renminbi_quotes_globex.html Professionals that know what they are doing... Do not get hurt by IB's risk management policies... But actually benefit from them. Their risk management is so fabulous... That I can float 300-400 orders with 2% of Buying Power left... And those orders amount to 40-50 times Buying Power left... That is incredible... 5 years ago IB would have let me float maybe 10 orders, not 350-400... Under the same circumstances.