I love how you totally misinterpret my posts and then spout the same view as me (but in a more distasteful way) and make it sound like you are disagreeing with me. You've got skillz.
Just an idea. Right now you have guys here saying they are just pocketing their fees and helps the top line, but does not provide real tangible insurance against failure if such were to occur. Furthermore, it is unlikely the insured party is fully protected in a worst case scenario, and certainly the trader with uncollateralized debt will not be off the hook either. By being transparent about how the money is spent, it can help crush some of that criticism, since they will be able to show they have some real insurance on to protect all clients, i.e. direct options positions that defined the risk of loss from certain clients. No matter what insurance you can buy from Lloyds, its still not real insurance, unless they directly bet against those specific positions. And what kind of insurance did they get anyway. I bet it is capped. Unless they buy a CDS on themselves. Its not going to be effective at all. They probably will cover some few billions. But if it is true some accounts with billions betting on futures go negative equity, their exposure could be higher than billions if markets gap on those leveragers. BTW, if you're going to have mistrust, then why would you trust when someone tells you they purchased insurance on your behalf? You wouldn't either with that personality so I don't get your point. If you really were all in bunkers over this, you'd probably be buying CDS against each broker you have money, held in cross-brokerages to distribute the risk. It is not YOU who holds the insurance anyway. It is your broker.
IB does not buy any insurance with this fee. They don't go out and purchase puts in the market or hedge any customer position in anyway. They are simply using this fee to get added revenues to compensate them for the extra tail risk hoping that many accounts will just reduce their tail risk. The alternative would be higher house risk rules that would restrict trading more. It really that simple. If you don't like it, speak with your wallet and move your account, reduce your risk or pay the fee. My only complaint is that lack of clarity in real time to give a client the opportunity to know what they will be charged if they keep this position overnight and what that fee would be in real time. 1245
We know they don't go buy puts or calls in the market, or purchase insurance from insurance markets, with the money they collect. Thats not what people are saying. Thats what they are suggesting. People are suggesting they do this, more specifically, with options to directly hedge out the risks of the over-leveraged. The point here is it really makes no sense. First of all, if they increase fees, in a free market economy, it will push those speculators to use other brokers, and so they lose business eventually. Further, if they just collect the fee that adds to their bottom line, but are not actually hedging out anything or buying protection with the money, then its just short sighted and does nothing to protect an eventuality they claim to fear. If those leveraged traders continue to make bad trades and lose, IB still loses even with the fee, since they are not actually using the money to do some real protection. Further, clients who lose money and go into negative equity, will still be sought after for the debt owing, so the fees did nothing. Its like trying to charge higher insurance premiums to try to encourage people to drive under the speed limit. It doesn't do anything. All it does is increase everyone's cost, while people still continue to speed. Instead, a real solution to fixing over speeding, is actually going out and designing cars that can't go over the speed limit (as a radical example). Theres three scenarios. Case 1 is get rid of the fee, and go back to what it was. In this case, when people's accounts go bust, IB at risk. Case 2 is they collect the fee and do nothing with it. In this case, they add mediocre revenue in the short term, but risk losing customers over the longer term to hit revenues even more. And if some clients put on a temporary risky position, and the trades move against them, IB still at risk. So the outcome is similar to Case 1 but they collected some short term revenue gains. Case 3 is they collect the fee and buy real insurance like puts/calls or buys CDS on themselves. Same scenario with having short term revenue gains from over-leverages, but suffer long term revenue loss when those guys move their accounts elsewhere. But the difference from Case 2 and Case 1, is they are actually protected against loss, which is really the whole point. Overall, I think you either go with Case 1, or you go with Case 3. Case 2, which is what it is right now it seems, does nothing. Its a short sighted move that yes, like you say, helps with revenues, but only for the short term..
your whole post dealt with whether IB already charges the fees or only sent out notifications. I dealt with the issue why IB actually goes this route and full-heartedly support such exposure/risk charge. Our views, post content, and how we argue could not be more divergent. Point made.
I agree with your overall stance and suggestions, I am all in for more transparency, but please keep in mind that * you won't succeed in having a broker prove to you how they use this exposure fee nor to what degree they are hedged or what they exactly do should the ice caps melt within seconds. In that I am afraid transparency has to come from somewhere else. * It is much safer to assume that an insurance firm/re-insurance firm covers event risk that they offer insurance for. The insurance industry is much more tightly regulated than the brokerage industry and statistically this point is supported: Hardly any insurer ever failed despite many extreme events in the past 100 years, yet you can probably not count the number of brokerage firms that went under due to a host of reasons. * I do not trust that they purchase insurance at a given point, but I trust an audited broker statement more where the auditing company ensures that client funds are insured by insurance firm xyz at ANY GIVEN POINT IN TIME. This was actually the case with IB in the past, each and every client fund of IB was insured by IB way beyond the SIPC amounts. I would not be able to say when exactly IB did away with it and for what reason (other than reducing cost). Premiums probably went through the roof since 2008. 100% trust is very hard if not impossible to come by these days but an insurance such as suggested would go a much longer way than charging an exposure fee that nobody knows what it is ultimately used for.
Says who? You? What are your sources? Even more BS? Nobody claimed they buy puts in the market, but IB also did not state they use the revenues for the purposes you stated below. Provide proof for your statements or stfu.
It does make sense, it makes sense to deter those who run insane risk levels to reduce their risk, add funding, or cough up a penalty charge. If it was me I would vote to have this exposure fee increased 10 fold or better even, do not allow those would would be subject to this exposure fee to even build such positions. Simple as that. I do not want to carry the risk of some of the idiots on this website who believe they can get rich by betting the farm. As long as it is their own farm I do not care, but they put others at risk as well and I do not appreciate that at all. Make them pay and bleed. Bufferfacetrader, it does not make EVERYONE pay higher cost, it makes those who do not play by the rules to pay higher cost. Anyone who was ever caught drunk driving or speeding or those who cause accidents should pay higher insurance premiums, what is not logical about it? Fat people who occupy 1.5 or 2 airplane seats should pay 1.5 or 2 times standard fare. What is not fair about it? People who smoke, take drugs, live unhealthy life styles should pay higher health insurance premiums. Not fair? The problem why a lot of costs in our society are exploding is because there are so many free-riders who think they can socialize their cost that result from their irresponsible life styles. And funnily the very same free-riders and other assholes always argue the biggest reason is that companies just want to add to their bottom line. That argument would work if world-wide all brokers would collide and run a cartel and charge the same fees, which is hardly the case. If some of those guys think their broker charges too much they can go somewhere else. I honestly do not believe IB charges this fee just because they want to add to their bottom line. They have much simpler ways to do so. Plus keep in mind it only hits those who run at extremely high risk levels. I executed with IB year-to-date several BILLIONS in USD notional equivalent cash fx in aggregate and have not once seen such exposure fee on my statements nor have I been charged.
If they collect this small fee and do not insure themselves against the risk then they have not accomplished anything. The fee is not high enough to change the minds of most "over exposed" traders. The fee is not high enough to offset the potential huge losses IB would suffer if the market did decline as their worst-case model assumes. So what is the point? If they don't want clients to hold these "risky" positions then they should raise the futures margin requirements so it is not possible to build/hold the positions they don't like.