How are they going to eat losses when the instruments their customers trade can move $200-$500 in an hour and IB is getting $5 less exchange fees per turn (in the case of futures)? Even at $50 per round turn IB could lose money in the long run acting as an insurance agent. The economics just don't work out. The fact that they don't eat losses is clearly spelled out in the application / exam process.
If their systems reliability is high enough, then the amount they can lose will be less than the additional incremental income from higher commisions. Now that I think about it some more, all IB/Timberhill would have to do is perform an offsetting futures positions when their systems go down. This would minimize their losses. I'm sure they have the technology to do this. Or alternatively, they can purchase insurance to offset this risk (I'm sure Lloyd's would write such a policy at the right price), and pass the cost along to those clients who wish to have it. Yes, there's no argument here that they currently do not eat losses that are due to their failure to perform. The suggestions here is provide this additional guarantee to those who want it, and are willing to pay for it. -- ITZ
Most online brokers customer agreements state that any losses due to system failure belong t the customer. Yesterday when NYSE was down, you could stll route to island. I had multiple positions, and exited them all on island, and all at the best offer if short, best bid if long. I probably missed out on some price improvement, so the cost was a few cents a trade most likely. The hassle for me was setting up a new page with island routing lines while 5 short positions were ramping against me in unison- that cost me some time, and definitely a few more cents per trade. All in all, the outage definitely cost me money, but it was possible to exit position.
i can't really comment on the policy of compensation for system outages other than when we route to others on the prop side, we do not get compensated when they go down. The policy comes from the top and i doubt it will change. You are wrong to say that IB caters to the 1-5 lot guy. On the instiutional side you'd be surprised who are clients (No I will not reveal any but many are top i-banks). The firm does not have a complacent attitude and there are plenty of very active clients. on the institutional side, there are very few, if any firms offering the array of products that IB offers (think global) with a competing commission structure. As for reliability, the chairman sent out a mailing stating that there were switching problems and they will be replaced over the next week. The firm does not skimp on equipment - keep in mind the infrastructure is used by the Timber Hill prop side and these outages can affect them as well. Yes, the last couple of days have been poor. However, over the past 3 years I think IB's overall reliability will match up pretty well against anyone. For those who have been with the firm for a while, you know that things will be resolved. For those recently starting out, hopefully you'll understand that outages are not the norm and the firms top resources are being allocated to quickly resolve the routing problems of late.
Def, I appreciate your response on this issue. However a lot of the posts on this thread are about futures accounts? Is anything being done about the reliability of stock accounts? I can't remember the last trading day when I had a constant connection to IB for the whole day. Any thoughts?
Why don't you guys who are panicking about stock positions just open another account with another broker, and hedge the position with an opposing trade/option position when IB goes down? Seems to me it offers the best of both worlds - IB's cheap commission structure for most of your trades, and a lower overall cost of insurance when IB goes out.
The main problem is not being able to hedge the position when the system goes down. It is not knowing whether you have a position or not. You put an order in and the system freezes. Did you get filled or not? How can you hedge that?
I think Def's reply was very good. You just can't imagine the situation will be allowed to continue for too long. If it does, please stop crying, go elsewhere, use another broker you think is better. And I can be loud about this, because when I was not happy about IB's position (regarding having an API) I said so, encouraged others to say so, and eventually closed my account. IB is a business, it's supply and demand and profits. At one point, regardless of the reason, IB turned 180 and made breakthroughs and I am back again. If outages cost too much people will leave, it's as simple as that. They know it, we know it. If you can't take the heat, look elsewhere. I am always looking elsewhere too, just to know what is out there, it's a free market after all. But really bashing IB now is not really constructive imho. flawless growth does not exist. flawless improvements does not exist. flawless business does not exist. As long as IB is progressing on these issues, and take them seriously AND inform us about them, I can wait. I don't blame you though. In fact, it's good. It will encourage other brokers to try to compete with IB (like TS), and then encourage IB to improve in features, prices etc.. It's OK.
Def, a question for you: Does IB compensate its institutional clients for any losses that may result due to IB's system's going down? My guess is that IB does compensate its institutional clients, or else you'd lose their big volume order flow, which not only reduces commission flow, but would probably affect IB's prop desk as well. I look forward to your reply. Thanks. -- ITZ