Interactive Brokers Naked Shorts Beware

Discussion in 'Retail Brokers' started by Roman Candle, Jul 17, 2009.

  1. ChatSys: This chat is associated with ticket #809621. Please record this number for use in future inquiries. You are currently in room 'General '.
    Aimee: Hello, this is Aimee, how can I help you?
    XXX: Hello, I am going to get a buy in on my account of ddrx shares, on 90 mins notice
    XXX: I am going to take a big loss on this forced buy in and i am not happy about it
    Aimee: Please let me transfer you to our trade group
    ChatSys: Transferring ChatSession from 'General ' to 'Trade Problems'
    ChatSys: Megan C has joined the chat.
    Megan C: Hello, this is 'meganc'. How may I help you?
    XXX: I am getting abuy in on ddrx at a nice loss
    Megan C: I apologize for the transfer. Unfortunately, we have no further details about the potential buy-in other than what is already stated in the notification you were sent.
    Megan C: Remember that when you short stock, you are at risk for being bought in at any time, with or without notice.
    XXX: Where is that notice?
    Megan C: the notice you received warning you of the potential buy-in.
    Megan C: NOTICE OF POSSIBLE BUY-IN Based upon information available through 14:30 today, we remain unable to locate and borrow / re-borrow the shares necessary to meet delivery obligations on certain short stock positions in your account. As current SEC regulations now strictly enforce delivery obligations, these short stock positions will be subject to forced buy-in by IB should our continued efforts to borrow or re-borrow the necessary shares today be unsuccessful. A list of stocks in your account UXXXXXX that may be at risk to a forced buy-in, based on current settlement information is provided below. You may wish to consider repurchasing your position(s) in these stocks in order to control your portfolio/risk at any time prior to the end of the current regular trading session (16:00 EST). Transactions occurring after 16:00 cannot be considered against the delivery obligation. DDRX (500 shares) As noted above, we will continue to make every effort to locate and borrow the shares necessary to allow you to maintain these short positions, however, given the limited time available in the current trading session we will be unable to provide any further updates as to your account status until delivery of your daily activity statement. Please refer to the following web page and the related tabs detailing various operational details for additional information: http://www.interactivebrokers.com/en/trading/shortableStocks.php Interactive Brokers Risk Management
    Megan C: that notice.
    XXX: You were not able to locate the borrow for two weeks????
    XXX: Were you selling shares that you did not have a chance of borrowing?
    Megan C: Sir, please review our buy-in procedures and policies located on our website www.interactivebrokers.com---->trading--->shortable stocks. I understand your frustration, however, when you short stock you are at risk for being bought in at anytime. We are having difficulty locating the stock to borrow today and that is why you received this notice. Our policy is outlined in detail on the link above
    XXX: I am not talking about today. The rules are very specific about stock lending.
    XXX: Lending a stock that you do not have is naked short selling
    XXX: And I am not the one who should be taking this loss if you are selling stocks that you do not have.
    Megan C: If you have a compliant about our buy in procedures or our lending practices, feel free to voice those through a problem ticket from account management--->message center. In regards to the notice, that does stand at this time so please manage any risk you have with this potential buy in as you see fit.
    XXX: The settlement rules are promulgated by the SEC, not account management. You do not have an unlimited amount of time to locate a borrow.
    XXX: The stock has been run up in the time that had sold it.
    XXX: And because you lent shares that you did not have a chance to borrow, in violation of SEC rules, I am taking a loss.
    Megan C: Yes, I am aware of where the rules are determined. I stated that if you have a complaint regarding how IB handles the buy-in procedures, the best venue to voice that would be through a ticket from account management.
    XXX: I have one hour before you give me a nice trading loss. I do not have time to go to account management tickets.
    XXX: Correct htat, I have 34 minutes.
    Megan C: The buy-in notice stands, that is not something that will be rescinded and you need to manage the risk associated with that as you see fit.
    XXX: I will contact the SEC, as well as Chris Dodd at Senate Banking and the office of Barnery Frank at the House. Ok?
    XXX: You lent shares that you did not have and that you did not have a resonable chance to borrow. That is naked short selling.
    Megan C: Once again, this notice still stands and you need to manage any risk associated with that as you see fit. If you want to file a complaint regarding this feel free to do so through a problem ticket. Our buy in procedure and lending practices are outlined in DETAIL on the link provided in the notification as well as in the link I provided above. The practices and buy in procedures are all in line with the SEC rules regarding delivery put in place in 2008. If you have any additional questions or complaints, feel free to send in a problem ticket. Please manage the risk as you see fit
    ChatSys: This chat session is being terminated by the CSR
     
  2. I understand what you are saying, but why didn't you have a stop?
     
  3. jsmith

    jsmith

  4. Maybe it didn't hit the stop yet.
     
  5. I'm just passing on the info. It was not me in the position.
     
  6. ecritt

    ecritt

    I don't see the problem. When you short individual stocks you are subject to the supply (inventory) of those shares held in margin accounts at the brokerage firm. The fact that the shares were called back isn't evidence of a naked short sale.

    This is why I don't short individual stocks...hard to quantify liquidity risk. It doesn't mean the brokerage firm did anything wrong.
     
  7. Are you aware of the new SEC rule?
     
  8. nebulous

    nebulous

    First, let me say that I'm not condoning how IB handled your situation, just commenting on the changes in how buyins are handled.

    The SEC rules changed about a month ago. I agree that it sucks getting buyins with little notice, but there's also more to understand about this. Now when a trade is 'at risk' of being bought in here is what typically happens:
    1) The borrow fails (for whatever reason - failed locate, called away, etc)
    2) The failure notice is sent (risk of buyin notice) on the third day (when it should settle).
    3) The trader is then responsible to cover with a cash transaction (special terms of cash / 1 day settlement) or be bought in the following morning (from my experience this happens close to, but not usually during the open).

    The lending group used to be able to talk with the opposing broker when a short was failing and ask for extra time to cover, giving you enough time to cover for yourself or extra time for them to locate more shares. The new rules suck for everyone (I work for an IB and I get bought in this way too). The only ones who don't get too effected are traders at firms with major asset management businesses and a large natural inventory.
     
    #10     Jul 17, 2009