Well, Citadel won't be getting much order flow in penny stocks from IB with this new policy -- that's for sure.
Yes, I noticed this just recently as well and I agree with OP 100%. This is a very bad decision and very customer unfriendly, especially to implement it with no warning and with no provision for closing existing positions. I have many small positions, long and short, that I now have no way to exit except crossing the large spreads. Even their manual trade desk says they won't place closing limit orders for these positions. When I talked to IB about why this happened, they claimed Knight, the other big market maker besides Citadel, had been complaining they didn't want these orders and "forced" them to make this change. For background, IB used to use Citadel as their main OTC market maker and only just switched to Knight about a month ago. I think this is what brought on the change in policy since apparently Citadel never complained but I was personally called by IB twice in the past month where IB relayed Knight's complaint that I was trying to close my small position with a limit order and that I "had" to stop it or IB would close my account for trading! Apparently the threat was that if IB didn't do Knight's bidding, Knight would stop taking any orders from IB customers altogether, large or small. I can only assume that IB got paid a lot to switch their order flow for OTC stocks to Knight from Citadel, but it seems that this policy change is really selling out IB's customers in favor of their own pocketbook and putting a third party's profit (Knight's) ahead of their obligations to get good customer execution. Remember that market makers trade for their own account against you, so forcing you to pay them a big spread is taking money out of your pocket and putting it in theirs. My suspicion is that IF the market maker accepts the order, they're stuck with it and have to treat it fairly under FINRA / Manning rules, and hence this is why they try to get these perfectly legitimate orders blocked on the brokerage side rather than doing it themselves. I agree this seems like a gray area legally, at best, and will take it up with FINRA regulators if it isn't resolved in due course. It seems to me that Knight and Citadel may be colluding to avoid their market making responsibilities by disadvantaged retail orders, or are paying off IB to do so. Either way looks bad and smells worse.
2,500 shares at 40¢ is a thousand bucks. If that's a "big" position, you shouldn't be trading OTCBB. Heck, probably no one should be.
As an example of the various problems this new policy causes, suppose you want to buy 2500 shares, the minimum required for some penny stock trading $0.38 x $0.42. So you put in a limit order for 2500 bid at the mid $0.40 and get filled for 2000 shares. Now what? You can't offer to sell the 2000 with a limit order under the new IB rules. You can't even offer to sell 2500 either (going net short 500), because they break it up into a long sell of 2000 and a short sell of 500 and reject both of them under the new rules. Even trying to sell 4500 won't work (net short 2500), since the long sell portion for 2000 will cause the whole thing to get rejected. Your only choice is to sell the 2000 shares at the current bid, and likely taking a loss from the spreads plus incurring extra commissions. Alternatively, you could try to buy another 2500+ shares with a limit order, and if you got filled in full, then you'd be able to try to sell them later with a limit order. In short, you have to be willing to buy at least 2x their minimum amount of some illiquid OTC stock, which could be up to $30k worth depending on the price, just to expect any reasonable treatment of your orders. And odd lot fills will be a big headache in any event. I will also note that no other retail brokers to my knowledge have any such restrictions.
This doesn't just apply to penny stocks. 100 shares at $150 is $15k. What's your point? OTC execution under the new rules is much worse than it was before.
That's true, but this change effects all OTC stocks. The required positions for higher priced stocks are much bigger. This is especially bad since IB used to be a good place to trade "real" stocks, not just penny stocks, that happened to be OTC. Now it's not. Also, even if you're offering to buy 20,000 shares of some penny stock, you can still get filled for 2,000 shares and end up with the same dumb problem. At the VERY least, IB should push back on the market makers to allow closing limit orders regardless of size.
You really are grasping at straws. They are routing to the best price unlike the others who route to a the payment providers who gets first look before deciding what to do with the order.