1.25% is a blended rate for 400 K margin. IB has tiered rates for margin interest. 100K and under 1.61% over 100 k to 1 MM 1.11% over 1 MM to 3 MM 0.61% over 3 MM to 50 MM 0.36% over 50 MM 1.36% (risk premium) IB is going after the customers already using margin at other brokers and paying much higher rates. For example, Fidelity charges 6.575% for 100K to 500K and 3.75% over 500K. TradeStation has rates from 6.25% to 7.75%. Margin users can save big bucks by switching to IB. Ramping up the leverage ramps up the risk, but those using margin should seek out the best rates.
I get that it's supposed to be more to pull in people to lower rates, but I think it smells of poor judgement for a reputable firm. How does IB compare to prop firms and their haircut rates? Say Bright or Echo?
I don't see poor judgement on IB's part. The leverage available to retail equity traders using margin is well below that of prop traders and retail futures and FX traders. IB has a business and marketing advantage in offering very low equity margin rates. Why not advertise the firm's advantages? After all, this ad was in Futures Magazine. No advantage to IB to advertising their much too high futures commissions rates.
Reminds me of those "equity repositioning" commercials I used to see on TV. I think it was 2006 or early 2007 when they were running them. These were ads urging people to take out a loans against your house to invest in mutual funds. They did a similar thing before the great depression, brokers were urging people to take loans and "bet the farm" in the stock market. Back then, one could get a 1:10 margin loan on stock purchases. I am not sure how IB is getting around the federal reserve's 1:2 margin limit. 1:5 > 1:2.
There is an exception to reg t for accounts over 100k if the broker has a real-time, risk-based margin system. The margin is based on your net exposure to certain % moves in the underlying instruments, similar to SPAN for futures options.
I too had a question about the ad. Doesn't IB apply Reg T requirements for all accounts for overnight? If so, how can they advertise the 5:1 for dividend stocks in the account? Do you have to liquidate to the Reg T limit and then buy again the next morning? If I'm wrong about the Reg T overnight requirement, then this strategy would work with a portfolio of Blue Chip utility stocks, each paying about 6%. That's 30% less 5% at 1.25% on the $400k margin. I'm new to portfolio margin, so be gentle. Danny PS - Didn't see "Travelers" response just above. I suppose I can submit my portfolio of stocks to IB and see what the overnight Reg T exception would be?