IB just emailed everyone another pitch for these EFP's. sellvol posts that this indeed earns you a better interest rate and gets around the 10k problem as well. Is that 80k buying power at 4X margin? At 100k cash you'd have 400k buying power. Needs clarification. If someone could do a serious breakdown of how this actually works it would be good. From the email "When holding an EFP to earn money on your excess cash, you will be charged the standard Reg T margin and a maintenance margin of 5% on the stock." So what does the complete math look like in the Goog example?
Thanks for that, sellvol. So you would have 100k gaining interest at 5.4% using 20k. But if the 80k is still available to trade would that 80k also be gaining interest at IB's current ~5% rate?
My experience with trying to sell efps to earn interest on excess cash is that the one with the best return aren't really for sale. You get an error when you try to enter the order in TWS "can not value this this contract at this time". It doesn't matter whether you put the order in at the bid or between bid and ask. The other probem I have is you can't use this strategy in a cash account.
I have done many EFP trades. Sometimes, the "cannot value contract" error is given and an order is rejected, but usually, if you immediately resubmit the rejected order, it will be accepted and either execute or sit on IB's EFP ECN book.
hey jimrockford, since you've done these , how about a breakdown on whats actually happening to your account, interest earned, buying power, etc. I'm still finding the published explanations lacking in gory details, and I don't want to open a trade to find out what really happens. So if you had 100k in the acct, how would you maximize interest earned and still retain buying power?
You can't use the same funds to earn interest, and to margin positions overnite at the same time, so what you ask is impossible. If you want to earn interest on the full 100K, at a higher rate than any broker will pay, including the first 10K, then you sell EFPs totalling 100K worth of stock. If you earn interest on your entire account's value of 100K, then your overnite buying power will be reduced from 2:1 down to about 1:1, and your intraday long buying power will be reduced from 4:1 down to about 3:1, and your intraday short buying power will be reduced from 10:3 down to 7:3. The colon notations refer to the ratio of a position's value to its margin requirement. If you are using an EFP to earn interest on your entire 100K, but then you also enter into additional positions held overnite, then you will be charged margin interest on the value of the additional positions. If you are going to hold, say, 20K in positions overnite, then you should reduce your EFPs to a notional amount of 80K, in order to free up the cash so that you can finance your additional overnite positions. This is because the amount you will be charged in margin interest, on the 20K, exceeds the amount of interest you can earn by keeping it in EFPs. If you are going to hold intraday positions in addition to your EFPs, you don't need to worry about paying margin interest on them, provided you close those positions before the market closes, so that they do not become overnite positions. You aren't charged margin interest on intraday holdings that you close by the end of the day you entered them. Be wary of selling an EFP of such long duration that you might need to exit the position before it expires. IB provides an ECN book called IBEFP, where IB, as market maker, competes with IB customers to provide liquidity on EFPs, and you can expect that such liquidity will enable you to exit an EFP prior to its expiration, but THERE IS NO GUARANTEE THAT SUCH LIQUIDITY WILL ALWAYS BE AVAILABLE. Sometimes, bids and asks for particular EFP symbols disappear from the ECN book for brief periods of time throughout the trading day. So be prepared for the possibility that you might need to hold your EFP until it expires, at which time your EFP's short SSF leg will be exercised so as to sell your long stock, thus closing both legs of the EFP. It is very important to remember that in buying and selling EFPs, you will not be paying the huge spreads which normally exist on SSFs. This is because IB acts as market maker for EFPs, making very tight bid-ask spreads on the EFPs, far tighter than what is available on SSFs outside the EFP context. I am responding to your question about maximizing interest earned on a cash balance, and avoiding the lack of interest paid on the first 10K, but keep in mind that EFPs can also be used for other purposes, to minimize the cost of financing long and short stock positions. IB's explanations might be difficult for many traders to understand, but those explanations are well worth the trouble to study, and really are essential for most traders. The smaller your account, the more important it is for you to understand EFPs, because you will be more affected by the lack of interest paid on the first 10K in cash, and so you will have a greater need to use EFPs in order to get around that lack of interest on the first 10K. IB, in its new features poll, has rejected strong customer support for payment of interest on the first 10K, but it really isn't such a bad situation at all. Customers can simply use EFPs in order to get around the lack of interest on the first 10K, and in fact, the EFP technique will allow customers to earn greater interest than any broker will pay. Another tip is to be skeptical about the interest rate quoted on an EFP, where the underlying stock is expected to pay dividends prior to the EFP's expiration. Sometimes IB has erroneous information about the existence or amount of dividends expected to be payed on a particular symbol, in which case the interest rate quoted on TWS will be erroneous. You can eliminate this problem using the "edit dividends" functionality, whenever you find a mistake in IB's list of dividends expected for a particular symbol. You can an also cause TWS to quote EFPs using actual EFP prices, as for any other type of spread or combination order, rather than expected interest rates. Quotes on actual EFP prices are immune from any errors in IB's database of dividends. Keep in mind that you need to know what dividends will be paid on a symbol, in order to evaluate the price you are getting on an EFP transaction.
I forgot to mention certain things. Like I said, if you are going to hold positions, in addition to your cash, then you should liquidate enough EFPs to cover those additional positions, so that you will not be charged margin interest on the additional positions. Margin interest charged by a broker will generally always be greater than any amount of interest you can earn on the same money, via an EFP or any other vehicle. BUT there is an important exception. If your additional position is a short or long of a stock which has a corresponding SSF, THEN you can use an EFP to finance your additional long or short position, and be in a better position than you would otherwise. If you are going long a stock for which there is an SSF, then you need not liquidate your EFPs to free up cash. You can instead first purchase the stock, and then buy EFPs. The result will replace your long stock with long SSFs, until the SSFs expire, at which time your long stock will be replaced. The amount of money you lose on the EFP spread, between shorting your stock at a lower price and buying the SSF at a higher price, will be less than the amount any broker would have charged you for a margin loan to finance the stock purchase. So you can use the EFP to avoid paying margin interest to your broker, and instead pay a substantially lower equivalent interest rate using EFPs as a financing mechanism instead of a margin loan extended by your broker. A reverse technique will allow you to earn better interest on any cash resulting from a short stock position, than any broker will pay you, if an SSF covers that particular stock, and if you use an EFP to capture a market rate of interest instead of the much less favorable interest which your broker might choose to pay you. Remember that EFP equivalent interest rates are set by the market, rather than by your broker, and that this is why you generally receive more interest and pay less interest when you use EFPs.
I think you are making this seem less of a problem than it really is. There have been times when I have resubmitted multiple times with no luck. Then when I select an efp with a lower return it worked fine.
Another problem with this strategy is that the ssf gets marked to market daily so if you put all your cash into efp's and the value of your short ssf increases(with the stock) you could wind up paying margin interest for the mtm loss. Of course if the stock goes down you'll wind up with extra cash.
One other little issue is if the stock goes up, you get a short term gain, but the offset is a 60/40 loss on the regulated futures contract.... On the other hand, the implied dividend yield on the long underlying probably does not account for the preferential tax rate for dividends. Of course if the stock goes down, this works in your favor, assuming the MTM margin requirements do not put you into a net debit position.