He didn't say penny stocks, just large positions. I paid $130 on 24k shares recently, low vol ETF. It's ridiculous.
Uh, not exactly, that's what Jsop wrote, ridiculous but nothing too surprising from that dude : "If you trade 1000 shares, for example, of stocks at IB, IB will either charge you up to several hundred $'s of commissions whether it's on fixed or tiered basis" Besides you are right D08 the per share pricing (in the US) or percentage of the order value in other markets, can get very expensive with IB, on some markets it's even worse than in the US. But 1000 shares in the US is within the range where IB is competitive price wise.
Right. I read it as "1000s of shares" somehow. I've never paid $100s for a 1000 share order in any market.
I trade larger amount of shares than that and I don't trade penny stocks. For me, TOS is way cheaper. Anyway I don't want to sidetrack the thread to be a discussion about IB's commissions. This thread is about IB losing $42 million to Chinese scam companies which in my opinion is due to IB's lack of due diligence and its flawed margin policy.
I noticed there is a phenomena called racing to the bottom: Brokerages are beating one another to reduce commissions. I have two different brokers, one gives me 100 free trades a year, the other charges a flat fee of $2.95, for any number of shares traded. I really don't know how they can make money charging 0-$2.95 fees when I used to pay several hundreds per trade just a few years ago using a full service broker. Why is this relevant to IB's Chinese scam? To make up, they have to reduce cost and perhaps risk management/control takes a back seat to preserve profit.
There are numerous ways to get scammed on the stock market, including all kind of pump and dump schemes, boiler rooms, off-shore trustees, etc, etc.. but I never faced before such kind of scam like this one using reverse mergers. Now I know they were not that rare. Unfortunately, fabricated and fake accounting is nothing uncommon in the world of public companies. Even seasoned investors can fall in this trap. I remember a case in 2015 when Phill Town, Guy Spier, and Mohnish Pabrai, all very popular value guys lost a lot of money betting on Horsehead Holding (ZINC), a zinc recycling company. I believe they renamed to American Zinc Recycling, but anyway. On paper, it was a very promising undervalued deal, but in reality, the management team wanted to screw all minor shareholders by taking advantage of everyone else on board, filed bankruptcy and tried to take over the entire new-build billion dollar plant. You can learn more about this case from the Interview with Phill Town. In general every time there's debt involved and management team, motivated to act in their own interest there is a risk of default sooner or later. It is totally ridiculous to see such exaggerated valuations of companies when there is no profit on the line at all, but we see it all the time, especially in biotech companies, but in many other industries as well. I am curious why IB didn't do proper due diligence of their balance sheet. Most often this kind of frauds can be prevented if accessed properly, but they are not. I found an article saying that according to the Global Economic Fraud and Crime survey 49% of the businesses worldwide were impacted over the last two years, which is a huge uptick from the previous reading of 36%. Seems that despite the better information flow we have more and more companies fail to recognize the potential fraudulent partners or customers.
Can you expect a broker to vet every company? what about the regulators, accounting firms and auditors. This firm had a $4B market cap that dropped overnight. IB lost ~42mm. Where’d the other billions go? I suspect there are other firms losing large and perhaps even more.
Even average investors vet companies when we invest. You are telling me that a brokerage company that's been in business for 40+ years should not be expected to do more due diligence on companies that it lends money on margin to? Ridiculous! Well I guess you don't vet, you lose.
IB didn't lend to this firm ("Yangtze"). Instead IB lent to some customers who used the money (e.g.margin) to buy the stock of this firm and used the stock as collateral. Normally if the stock drops, IB will sell the collateral (e.g.stock) to cover the margin. But the stock dropped so quick as a result of some short-seller's research, IB could not sell quickly enough and incurred losses. This happened to IB before when the swiss franc spiked overnight in 2015 and IB probably considered it a part of its business costs.
agree with you. JSOP has his axe to grind and will kick IB whenever he can. They gave 50% margin if I recall, and we have no idea on the collateral or cash the clients put up initially. I highly doubt the stock got bid up to the levels it did w/o serious margin being used elsewhere and hence my belied there are large and perhaps larger losses at other firms.