Is it bad risk management practice to rely only on one broker?

Discussion in 'Risk Management' started by helpme_please, Dec 30, 2017.

  1. I am a happy customer of Interactive Brokers. IBKR is my only broker because I cannot find a better alternative for investing in international stocks. The interest rates for margin is also superb.

    Do members here think it is a bad risk management practice to use only one broker? How do you mitigate this single-point-of-failure risk?
  2. In my opinion IB does a damn good job mitigating risk. Almost too well to the point that it's annoying to deal with their excess margin requirements for a lot of stuff. Generally speaking I'd agree but would make an exception for IB.
  3. sle


    It certainly good to use at least two brokers (preferably more). There is a risk of a single broker systems going downs (happens more than you think), them not having borrow in specific stocks (happens A LOT), them shafting you on some corporate action because of "internal compliance reasons" etc. You want to have alternatives.

    As I said above, the requirements for multiple brokers is not really about the credit risk (since your securities are yours and the cash is insured up to some meaningful amount). However, if something will take down a big broker like IB, it most probably not going to be the customer behavior. It's going to be the little games the broker itself plays to increase the yield on your cash, such as buying sovereign bonds etc.
    MoneyMatthew and comagnum like this.
  4. Ive been using IB since before the subprime mess, never a big issue.
  5. Robert Morse

    Robert Morse Sponsor

    As an Investor, I don't see it as a big deal. As a trader that depends on income from trading or trades often, it makes sense to have a back up account as system issues can and do happen to every broker.
    MACD, sle, Gambit and 2 others like this.
  6. Handle123


    I believe it comes down to your net worth and your tolerance of losing an insane amount of money. Let's face it, beginning traders often under capitalized and lack knowledge, they to a broker is highest amount of risk and they often make huge issues of a dime cheaper elsewhere, they often only take long side and seldom sell short stocks and or commodities, they often are the biggest pains in the arses, but being brokers really can't see who they dealing, they take almost anyone as a client and hoping they deposit more funds. They do a few trades a day praying they do no worse than breakeven and when they mess up or using inferior computer, meaning they play games, email, download music/porn and their brokerage account, their computer crashes or hacked while in a one lot of Corn, they more likely going to reboot and pray they can get back into IB and exit and not lose more than a tick cause they don't want to call IB as it is at times twenty minute wait and $35 bucks extra to get out.

    The well funded client has several accounts for different timeframes and systems, a dime more a side might not matter to this client as his broker might be offering a rebate or another way to recover whereas broker would not do so with less funded clients. But the hugest reason of paying more is that twenty minutes waiting on phone, went long on 14:46 bar in 10 lots ES at 2681.50 and your stops are sitting on your computer- HAAAA, power goes out on your entire block including cable internet, you finally get a hold of IB twenty minutes later and IB says you still long and price is at 2669.00 WTF? And broker says there be a margin call as you don't have enough funds as it is now past 15:00 WTF does that mean and broker directs you to a web page you can't get to, doesn't this clown hear me when I said power was out? Where the hell am I, India? What margin call? And right about now, you didn't notice you didn't recharge your cell phone and click, OH "screw me royal", but hey, you saving two dimes. The well funded client has 2 backups including generator, might have cable, DSL and satellite to monitor off site server holding their trading software or automation, and they might call brokerage and escape with a few ticks of loss per.

    It only takes once to be nailed to the wall then go overboard with backups, but the backups are but very small costs as opposed to losing brand new Lexus.
    beginner66 likes this.
  7. comagnum


    I think its good to diversify across several brokers, at least on larger accounts. The advantages far outweigh the extra hassles. It can save you a great deal of $, gives you more platform technology, and redundancy. Every broker seems to have a thing or two they do better than others and/or at a lower price. A recent example is with Bitcoin futures - one broker requires $200k to sell it short, whereas another broker required $10k. Your trading choices improve -and your trading costs will go down. You can run trading strategies across 2 or more brokers that defeat some of the trading rules you could not do on a single broker.
    Last edited: Dec 30, 2017
    ironchef and MACD like this.
  8. ironchef


    Yes, SIPC insurance takes care of $500K but it takes time to get the money back and what if you have > $500K?

    Brokerages do go out of business: Lehman Brothers for example, so if you have your substantial net worth invested in a trading account, like comagnum said, it is prudent to diversify at least into two brokerages. You also need to watch out for outright frauds by brokers or customers that could take a brokerage down.
    Last edited: Dec 30, 2017
    comagnum likes this.
  9. dealmaker


    Solely depends on the size of your account.
  10. Robert Morse

    Robert Morse Sponsor

    But did any one at LB that was a customer lose any money? I'm not aware of any that did, even over the SIPC limits. In fact, and I could be wrong, I'm not aware of any brokerage accounts protected by SIPC that lost any money at any time in the last 35 years even over the SIPC limits.

    Of course that is not a guarantee of the future.
    #10     Dec 30, 2017
    rb7 likes this.