They had this thing called private mortgage insurance (PMI) before the financial crisis, still do I imagine. It was supposed to protect the mortgage lender from your default as the homeowner, and required you to pay them an extra amount every month that provided absolutely no benefit to you as the homeowner. The mortgage companies started "self insuring" their PMI, which translates to "just charged homeowners extra money and kept it as profits" Then the housing crisis came, and they all went bankrupt and the private mortgage "insurance" did nothing to prevent that. IB's exposure fees are exactly this. They aren't buying call options, just like the mortgage lenders weren't buying "insurance". They're just charging you an extra fee and insulting your intelligence by telling you they're doing it all for you. And the IB sheeple eat it all up, apparently not enough intelligence to insult. As I've said before, if IB want's to charge extra fees or increase margins it's their prerogative. If they think it's a good idea to treat their customers like idiots by telling them they're doing this all for the customer out of the altruism of their deep hearts, then the customers have the prerogative to tell IB how they feel about that and vote with their feet if IB ignores them.
Do you receive a notification of this fee or do you have to look at your statement v carefully to see if it's in there? Is it only if you have short crude oil contracts?
IB only sends you a notification once they have determined that your account is a risky account. The notification mentions that they will run a "stress test" every day and determine a fee every day based on the result of the stress test. You will not receive a notification each day they charge you this fee. In the monthly statement is this fee included in the category "other fees". In the online account management is it supposedly possible to get the outcome of the stress test for the last four days, one day at a time. However, trying this showed me that the software is broken and that the result is not displayed on screen. I have complained to IB about this and their lack of openness about this, but to no avail. No, the fee is not related to crude oil contracts. It is mainly about volatility products (both USA VIX and European V2TX futures) and also influenced by equity index products such as USA ES, NQ and European ESTX50 futures.
Yeah, they only send out the automated message to clients who's daily stress test yielded excess risk and has negative equity when subjected to 30% adverse price movement against each position. The first time you get hit with the warning, they give you like a week before fees kick in. Then thereafter they just charge the fee when your exposure is too high. Actually it's not just for volatility products. It's basically anything with high leverage, such as futures or options that can put you in this negative equity position most of the time. In normal stock or stock options, you're not likely to be hit with this, as even a 30% adverse price move isn't going to get you into negative equity that hits those levels to trigger the exposure fee. But things with extreme leverage, like futures with sometimes 50X multiplier on a high intrinsic value contract, that can do the trick pretty easily with even a smallish position relative to your NAV. This is house rules I guess. They can do whatever they want. And as a customer the only thing you can do is vote with your wallet. IB is still a good broker with a good platform, with international market access, etc. So it's still worth it to stay despite this.The trick to play around this playing field, is to cap off risk to all positions. It will of course cost you. So instead of selling a naked credit option, sell a spread instead. Things like that. So now the question is, is it worth it paying the exposure fee, or capping off a position with another trade.
Yes you are right. Eventually we will have to vote with our wallet when we realize that with these arbitrary daily exposure fees, inactivity fees, currency conversion fees, this fee, that fee added on top of their seemingly low commission, their commission and transaction charge isn't that low anymore especially when their platform is not that good of a platform with frequent outages, non-responsive and slow charts, repainting indicators and missing price feeds for options and not to mention non-intuitive non-trader-oriented conditional orders and algorithm trading. And the daily exposure fee is NOT just on volatility products or anything with high leverage. It could be on anything as long as they feel like slapping on this humongous 30% loss what they call "worst case scenario" that they apparently think would have 100% probability of happening. I think what we traders are upset about is not really the fee because to be fair, the fee is not big, just annoying, what we are most upset about is how they insult traders' intelligence with those BS statements like "in order to protect IB and traders..." when we all know these daily exposure fees does ABSOLUTELY nothing in either protecting IB or the trader if this Armageddon "worst case scenario" were to really occur. How is their couple of dollars, couple of cents per day is going to protect IB or the trader if according to their calculation, $millions of losses were going to occur and all they want to do is just to get a piece of the trader's profit knowing that the trader's position is low-risk. Because if they REALLY think that our position is high-risk and would have the 100% probability of incurring a 30% loss exposing firm's equity at risk, WHY let us do it? Like @Sig has pointed out, WHY don't they increase their margin on what they think are "high-risk" products so traders would be forced to trade less? That way, both IB and traders would be protected from a potentially large loss. So why don't they? Very simple, because traders would move their funds out of IB to invest with brokers with lower margin or the trader would be trading less and IB would lose business either way. And IB can't lose money. So now they change their strategy. They don't change margin but instead charge you extra fees for using more leverage. They don't care if you get into big risky positions but when you do, they get a piece of the action regardless whether you lose or win. So that way, they get to earn commission as before and at the same time gouge out more money from the trader. Ka Ching, Ka Ching, more money in their pocket at the end of the day. Is the firm really exposing their own equity to more risk especially when they've assumed 100% probability of those 30% loss happening? They don't know and they don't care. Is this practice really putting traders into worse-off position by eroding their trading capital? They care even less. As long as they make money, that's all that matters.
I don't believe this "stress test" bullcrap that they feed you because it is obviously not used to determine this daily exposure fee. I had contracts that reached the value of 0 while they stopped trading on 1 day before the expiration date and the expiration date itself and because it settles at EOD on expiration date, the position stayed in my portfolio for TWO days. And for these TWO days when the options value were absolutely ZERO, I was charged exposure fees on BOTH of these days. WHAT exposure of risk can IB possibly have on these two days when the value of those contracts are ZERO??!! If somebody is stupid enough to exercise these options against me, it would be even better for me as I would pocket the windfall of the profit between the strike and the market value. What kind of "stress" would IB possibly have in these two days to their firm equity? So WHY would I still be charged exposure fees when IB would have NO exposure? What are those exposure fees for? Just as I said before, those daily exposure fees' purpose is NOT to reduce risk; it's just another way for IB to extorting more fees from its clients, very much the same as a bookie taking a bigger cut from its betters. With these exposure fees added, my trading cost went from just the commission of just $20+ to $200+, a 10000% increase! Just one more way to extort more fees from us traders without increasing the fees on the surface. Next thing you know, they will be charging you for each click on their platform.
IB had a standard option cancellation fee for all options order cancelled but not executed. This was not inline with exchange policy for charging for cancellations that was based on the broker routes ratio of cancels to executions. It was never account based. It would make sense to charge an account if they were part of why everyone were then subject to fees as they had excessive cancels. IB no longer has that fee. The exchanges implemented that fee to penalize those that use excessive bandwidth. Sometimes when feeds were delayed, and there were bad quotes, you could see hundreds of thousands of small lots from automated systems trying to buy or sell a 10 lot that was not there. That sudden inflow of orders caused delays in trading all symbols until those orders stuck in the system at the exchange could be drained from the system. It was creating a situation where the exchanges had to constantly add servers and bandwidth to cover the stress. I’m not sure if the exchanges still charge for this. The fee made sense at the time.