One of the nice features of IB is that they allow you to short OTCBB penny stocks. Obviously, when trading these stocks, the spread is typically about 10% wide, so you would never want to cross it unless desperate or chasing a move. Place your limit orders and wait to get filled. Worked fine for at least 10 years. Now (within the last couple weeks) they claim they are "forced" to make users adhere to the min. quotation order sizes for all orders as outlined here: http://finra.complinet.com/en/display/display_main.html?rbid=2403&record_id=14724. I.e., no non-marketable orders allowed smaller than these min sizes. This is total BS, as these rules are strictly for registered market-makers, not for inidivdual traders. Anyway, it wouldn't be a deal-breaker if there were exceptions made for partial fills and for closing out positions. But there aren't any. If you put 2,500 shares (min. size) of a $0.40 stock on the offer and get filled on only 2,000 of it, you are now screwed. You can either lift the offer for 2,000 shares (if that size even exists) and take a huge loss, or you can place an order to short no fewer than 2,500 more shares and then, if filled, place an order to buy back the whole 4,500 shares on the bid, hoping again that you do not get a partial fill and are forced to lift the offer with the remainder. What a joke. They say that Citadel kept complaining to them about small limit orders, and they gave in. With the risk of partial fills, they essentially have made all OTCBB penny stocks untradeable -- long or short. I've defended IB several times in this forum, but this is one of the most client-unfriendly policies I have seen. Does anyone think there is a chance they will reverse this decision? Also, what other brokers are good for shorting penny stocks ($0.10-$1.00)? This is not my core strategy, btw, but it is part of what I do.
Damn. How phucked up is this ? I rarely trade this junk but yet another reason to consider a new line of work
Is it even legal to force retail clients to take liquidity when closing out a position that falls below some arbitrary minimum size?
I have no idea, but if IB isn't being paid by Citadel, then I'd agree with your assessment as far as why would IB care? Perhaps Citadel has made it a requirement for access to Citadel's trading system and IB believes that access to Citadel's trading system is beneficial to IB. What I wonder though is why couldn't Citadel just drop orders that don't meet their requirements if that's the case. Why would it be up to IB to implement such restrictions unless that gets in to a legal gray area where IB implementing the limits is OK, but Citadel enforcing them on their side is not. I'm just speculating. I don't have any specific knowledge on this, but it does seem odd and I'd like to know more.
From their latest quarterly order routing report ( https://www.interactivebrokers.com/download/1Q_2017_IB_ORDER_ROUTING_REPORT.pdf): "Payment for Orders: IB receives payments for certain orders in varying amounts from U.S. options exchanges, specialists and/or market makers pursuant to the mandatory marketing fee programs that have been adopted by the exchanges and approved by the SEC. If multiple exchanges are quoting at the NBBO for an option order and IB has discretion as to where to send the order or a portion of it, IB generally will “break the tie” by sending the order to an exchange where it will receive the most payment for the order, or to an exchange designated by a firm from whom IB will receive the most payment at that market." and "As specialist on various options exchanges, IB’s affiliate Timber Hill LLC may be responsible for allocating payments for orders that are generated in its assigned option classes, depending on the design of the applicable exchange’s SEC-approved payment plan. As much as consistent with these plans, Timber Hill pays such funds to Interactive Brokers." They may not be paid by Citadel, but Peterfy's full of shit if he said they don't get payment for order flow. TH is gone now, but directing transactions to your wholly owned subsidiary was always functionally identical to paying for order flow, and Peterfy was being underhanded and less than fully open and honest at best if he ever claimed IB didn't get paid for order flow.