Indeed cdcaveman, indeed. There is always the risk that your assumptions get the better of you. History has shown us that hubris is the enemy of all traders. We actually went through the exercise of examining a bunch of potential scenarios that were outside our risk framework. We tried to make contingency plans. Regardless, you are always going to miss something (i.e. the unknown unknowns) Just as one example, we tried to imagine what would happen if a crazy market plunge transpired and IB decided to take extraordinary steps to protect itself by reeling in portfolio margin leverage. The problem is that, unless our portfolio was unwound correctly, portfolio risk could go up sharply as positions were trimmed. So, something like this could - in theory - happen: 1. Market plunges "black monday" style. 2. IB decides to decrease allowable leverage on portfolio margin accounts. 3. We get a a margin call as a result. 4. IB acts quickly and begins to unwind our positions at their discretion by executing market orders to close some of our positions into a plunging market with huge bid/ask spreads. 5. Closing positions ends up decreasing our leverage and thus increasing our portfolio risk (see previous explanation). We also take massive losses since the market orders end up traversing a gapping bid/ask spread which further damages our portfolio. 6. IB sees that our portfolio's risk has actually increased and therefore the cycle restarts and continues going through step 3 to 6 until the risk is within IB's limits. 7. We cry ourselves to sleep every night henceforth because our portfolio has been decimated because of something outside of our initial comprehension. This scared the crap out of me so much that we decided to bring down our leverage even though this caused our day-to-day market risk to increase. The major lesson is that one can never forget that dangers abound everywhere in the world of trading.
now your gettting technical on me.. haha you still have correlation risk.. i hope i have the sense to manage the risk correctly when i do get pm. more money doesn't always translate into more opportunity..
This gets more fun when you realize that Timberhill in this scenario will do a fair percentage of the auto liquidated trades.
umm.. oh this cycle of madness is exactly the kind of thing i wanna be on the opposite side of .. i figure this is my only way up the elevator from 20k to 200mil haha.. that just sounsd like your starting up a chainsaw and cutting your own neck with it in a senerio like that.. gosh thats the kind of thing i would be waking up in the middle of the night about
I certainly think there is some risk added to the overall system because of PM, albeit it is hard to tell how much. I had some back and forth with a professor who co-wrote a paper about this topic. He said that the regulators have basically dismissed his ideas though. Anyhoo, you can see what he says in the comments of my blog post about the subject: http://www.themargininvestor.com/2/...red-reading-for-brokerage-firm-employees.html
Timberhill is the trading/market maker arm of Interactive Brokers Group, Inc. When you enter a "smart" order in equities, they get first look. When you enter any option order, they get first look. All auto liquidation orders go through smart route.
When you compare the total value of PM accounts with other account types, it is not a big percentage.
ahhhoohhh hmmm they get first priority to jack some one up in margin liquidation.. boom they gotta love tail events..
well think when things jet down and liquidity is low... institutions might hold.. while pm's get liquidated.. basically at that point the pm liquidation might be the majority of the market participation.. ? ! @#%#$%^ just thinking