Interactive Brokers and Interest

Discussion in 'Forex' started by axcel, Sep 6, 2005.

  1. axcel



    Could anybody please explain me how the IB charges interest when it comes to FOREX and Intraday trading.

    In particular, I would like to know at what exact time should I exit my positions in order to avoid the interest charge?

    P.S. I use IDEALPRO

    ... and yeah, I tried to get that information out of the IB phone and internet support team, but they can't explain it ....

    Any replies would be appreciated
  2. Steve_IB

    Steve_IB Interactive Brokers

    There's a detailed explanation of how interest is charged and credited on our website under Fees >> Interest and Margin Rates.

    Bear in mind that spot FX settles on T+2.
  3. an interesting take from from a competing market maker

    Effects of Continuous Interest Rate Payment

    *****makes continuous interest rate payments second by second. This is in contrast to other financial markets, where interest rate payments are made at daily intervals with the shortest increment of one business day. To illustrate the traditional convention is comparable to an electricity company that bills on the basis of lights being used at 7 PM in the evening and charging for a usage of electricity of 24 hours based on the usage at 7 PM only. If an electricity company would actually do this, it would create an uproar.

    So far, the public press and academic literature has failed to draw attention to the fact that the convention of daily interest rate payments in financial markets has a negative impact on exchange and interest rate stability. With the growth of international capital flows and the increased speed at which financial transactions are executed the negative impact has become a serious issue. Just remember the exchange rate crisis in Turkey that started in November 2000 and continued on in February and March 2001, or the Asian and Russian crisis in 1998. Intraday trading is an important source of market liquidity for the capital movements of long term investors. The OANDA FX Trade platform has been designed to support this type of trading opening the market to transactions of any size starting at 1 USD and charging 0.02 percent spread (2 pips) in the common case, with no commissions.

    For exchange and interest rate stability, it is important that intraday trading does not introduce unnecessary instability into the system. Unfortunately, the convention of daily interest rate payments does exactly that. To give you an indication of the importance of introducing continuous interest rate payments, lets analyze the USD/JPY exchange rate.

    If we assume that an intraday trader is able to assume a yearly Sharpe ratio of 1, where the Sharpe ratio is a direct measure of reward-to-risk with the following definition:

    Sharpe ratio = (return - rfree) / (standard deviation of return)
    return: is the average rate of return on investment for a given period
    rfree: is the best available rate of return of a "risk-free" security

    If for instance the yearly standard deviation of the trader's P&L is 10%, and if we neglect his cost of capital, and set therefore the risk-free rate of return to 0 (rfree = 0), his yearly return will also need to be 10% for the Sharpe Ratio to be equal to 1.

    If the trader does not have any overnight positions, his cost of carry is zero.

    On average, for each of the 250 business day in a year, the trader earns 4 basis points of interest: 10% / 250 = 4 (3.8 basis points if you assume compounding of return), and has a daily standard deviation of 60 basis points: 10% / sqrt(250) = 60.

    If the trader in question had to pay an average intraday carry of 2 basis points (it is about 1.5 basis points a day in USD/JPY), his Sharpe ratio would have to be 0.5 a year (assuming the standard deviation of his P&L remains the same). Because every trader has the conviction that he can outwit the market, he will definitely prefer a scheme with continuous interest rate payments, because he can use the interest rate differential in his favor to earn additional income on the interest rate carry.

    With the introduction of continuous interest rate payments, the yield curve will extend to a shortest increment of one second - today, the shortest term interest rate is one day. In the same way, as central banks can influence the daily interest rate, they will be able to intervene on the micro yield curve.

    The ability to set intraday interest rates will give a central bank defending its currency a powerful weapon. In fact intraday interest rates will play the role of a 'tax' on intraday sales of the currency under attack.

    Continuous interest rates can have similar effect on the Tobin tax (the proposal, which we do not support, by Tobin, to tax all financial transactions, such as FX deals, to curb speculation), but one that can be tuned according to market conditions.

    Paying intraday interest requires real-time gross settlement. It is incompatible with deferred net settlement. If the idea of paying intraday interest catches on, it will cause a major rethinking (or more likely a revolution) in money markets/treasury operations, and also central bank operations. Central banks would have to learn how to manage/set intraday rates without causing interbank settlement systems to hang for lack of liquidity.

    FXTrade pays continuos interest rates on currency trading accounts!

    See Interest Payment Calculation for details on how interest is calculated and paid on FXTrade accounts
  4. Steve_IB

    Steve_IB Interactive Brokers

    It's an interesting article but not very relevant to the thread.
    Just a few points...
    - IB is not a market-maker in FX.
    - The article is an academic article and explains an argument for continuous interest payments being benficial for the stability of the currency and interest rate markets. This may or may not be true. The example presented is also not relevant to any real-life scenario. All the assumptions regarding the cost of capital and an intraday traders sharpe ratio are hightly suspect. I will not comment further, it looks as if the article on the website is a dumbed down extract from a more thorough paper.
    - The article does not suggest that an individual trader benefits in any way by continuous interest rate payments. It could be positive or negative and would vary by currency pair traded and by type of trading engaged in. For most traders the effect would be negligible.
  5. axcel


    Steve, here is a quote from your web-site (Interactive Brokers)

    "At the end of every day, IB look at the following balances in each currecy"

    1. Is there any way you could define the exact time in respect to "the end of day".

    2. If I enter and exit the position before the end of day, my settlement is t+2, and I will pay the interest for those 2 days, correct?

    3. What if I enter the position before the end of day, and exit the position after the end of day, will I have to pay 1 additional day of interest?

    Sincerely ....
  6. Steve_IB

    Steve_IB Interactive Brokers

    End of day is 1700EST for IDEAL-Pro.

    I'm not sure if you followed the links from the above link( that I provided you, but you can check here for examples of how interest is calculated:
    This gives a thorough overview and also discusses the importance of settlement dates.

    You don't necessarily pay interest - you may receive interest depending on the currency pair you are trading.
  7. axcel


    Thnx Steve,

    Your Reply is Appreciated.
  8. just21


    Why do I have negative accrued interest on a short options postion with IB?
  9. Steve_IB

    Steve_IB Interactive Brokers

    Please read the above links. If you are still unsure please complete a Trouble Ticket on your Account Management or go to and the Help and Contacts Session.