Perhaps you don't understand how it works. Let's say you have a leveraged position and some news hits the market (or overnight) that causes enough of a move against you that your account goes into deficit.... 1. The Broker has to make up YOUR deficit out of his own pocket, immediately, at the close of business that day.... while he waits for you to answer the margin call notice he gave you. 2. If you are unable or unwilling to deposit more money, the broker is out the deficit loss until he sues you for what you owe. 3. If you have no assets and he can't get enough money out of you to cover the deficit, then the broker is stuck permanently with paying for your loss. Raising margin requirements has nothing to do with the financial health of the broker. It's a logical and sensible response to increased volatility.
They do not use your money to trade their own account. Doing so would be a violation of the rule against "commingling"... a very serious violation.
Gnome: While some brokers do in fact give margin calls, and give some time to deposit additional funds, this thread is about IB, and that's not how IB operates. They do not give margin calls....they simply liquidate a position sufficiently to restore the account to it's proper position. Therefore, with IB we're not talking about waiting a few days, and the attendant risk of doing so. We're talking about real time monitoring of an account, and liquidation thereof if it gets into trouble. In order for that to lead to a problem for IB, during that process the ES would have to move in excess of 70 points. Unlikely over the course of a day, let alone over the course of an hour lets say. If the ES did in fact move in excess of 70 points intraday, then IB would have to deposit the funds as you say. And in addition they would have to request said additional funds from you. But all these brokers, to include IB, are supposed to "know their customer", and therefore shouldn't be allowing customers to take risks that are inappropriate for their financial conditon. Increased volatility does warrant increased margin. But in my opinion IB had increased them too much for the given volatility. Now, another issue is how safe does a trader want his account to be at any particular time. I'm as conservative as they get, and therefore I don't trade even close to that type of margin. But from the standpoint of IB, they are over margined given the volatility. OldTrader
1. Yes, they monitor position and liquidate BEFORE getting into a deficit. I was just giving an example of why a larger margin might be necessary and what a broker was protecting against as the rationale for the higher margin. 2. Most brokers are overleveraged. To trade with $500 or $300 margin is ludicrous to my old, conservative bones. (I guess they figure customers can work within 6-10 points, total and exercise stops before wiping out... ?? )
Now here's a thought, try this one on for size. I think we all agree that there is some risk to funds held at FCMs, and so it seems to me that from a customer standpoint, being able to trade the largest number of contracts per dollar on deposit--dollar at risk--makes some sense, so long as the risk isn't crazy big. So I like lower margins, since I have less cash at risk. But, now IB's model is different. From my understanding, the deposit is swept into a SIPC insured account, and near as I can see IF DAYTRADING FUTURES ONLY the only amount at risk to the customer is the amount of profit on the day. The rest of the bond never makes it out of the insured area. IB or others please feel free to correct me if I am wrong. So, the key point here is that IB and IB alone is very quickly the last man standing in a market melt. IOW, a normal FCM will lose any funds in excess of required deposit, and thereafter the other customers will shoulder the burden. In IBs case, this mechanism is disallowed, adding more risk to IB, hence the margin increase. Additionally, OldTrader (I think and whom I respect) and other posters have said (I think) that the increase in margin is actually a customer benefit since it protects our funds. But if the funds are already swept into a SIPC protected segregated account, where is the _additional_ protection to the customer? If the above is correct (and please don't flame me because I am not sure it is) then the only afforded increase in protection is in IBs corner, while the customer is actually afforded the identical protection as before the margin increase, but is actually disadvantaged by it.
If I'm reading you correctly, sounds like you're talking about the risk of loss through theft from your account... that's different. Margin has nothing to do with that. If you run into a deficit, you're 100% liable for the loss, regardless.
Personal story... FWIW. In the '87, crashette, I of course got nervous about the risk to my broker (was Refco), so I wired my funds out ASAP. About a week later, I called and asked "you guys still in business?". He laughed and said, "no problem". He said, "it looks like we might have about $300,000 in uncollectable debits... but it's no big deal as we have $20 Million in capital reserve." There was a case where the FCM didn't get all customers' accounts liquidated in time, "for their own good", and they ran into deficit before they could stop the bleeding... Refco had to bear that loss. By raising margin requirements, there is more of a cushion to prevent such a thing in the future. In my view, raising margins is a good thing... it adds a margin of safety for all concerned, and it's likely just temporary anyway.
Gnome, no, now it is possible that I am completely wrong, but I am not talking about theft. In fact, your FWIW post is exactly what I am talking about. Now, I am asking you to explain, given the workings of IB, how exactly the individual customer (not IB) benefits from the margin increase??
"... that the increase in margin is actually a customer benefit since it protects our funds. But if the funds are already swept into a SIPC protected segregated account.." The increase in margin helps to protect against customer deficits. SIPC is all about insurance against theft and fraud. These concepts are completely non-related.