Park spare cash in IB account

Discussion in 'Trading' started by sheepsucker, Jun 19, 2012.

  1. ...and what could ever go wrong? LOL

    Pretty much the worst and most unprofessional advice I have EVER seen at ET for a first time reply by a sponsor without mentioning about any issues and risks that may return you anything but the accrued yield stated. Wow, this is such a perfect example of where the financial industry as a whole has come to.

    And that written by a "CEO" (really?") of a securities exchange to a user at ET. Wow, financial distress wherever you look...

     
    #31     Jul 10, 2012
  2. and you send your kids to Harvard for having done NOTHING (not even discussed possible risks in execution among many others) in exchange for a whopping 20%+ (!!!!!!!!!) bid offer spread.

    Question: If this transaction is close to riskless why do you charge clients a 20% bid-offer spread? LOL. I should send this thread to your regulator. (Did you make a risk disclosure, did you discuss risk whatsoever? Heck, did you even used the term "risk" at all in any of your previous posts?)

     
    #32     Jul 10, 2012
  3. def

    def Sponsor

    I've known DGD for years and he's about the straightest shooter I know (of course in this current environment that means nothing). However, he isn't hiding any links to what seems to be a fairly comprehensive web site. It would be prudent for anyone to review the site and math behind the products before trading. From my perspective, the exchange is offering innovative products that were previously only be available to those with access to a structured products desk.

    You've added a ton of insight to this site and have been quite good at calling a spade a spade but in this case I suspect if you point out the pitfalls or ask a few leading questions, it could lead to a productive, lively, and informative discussion.
     
    #33     Jul 10, 2012
  4. Sorry if this came across as being a personal attack, it certainly is not , especially in light of the fact that I do not know the individual at all.

    But one thing that gets me is that an executive level member of a securities exchange advises on an unsolicited basis without making the slightest disclosures regarding risk while the instruments he recommends are quoted at insane bid-offer spreads, basically preventing anyone from unwinding the same trade. Hence my comment re "what could ever go wrong"? Please take a look at the reputation money market funds have lost. Wasn't that a bullet proof way to park funds? Must have been, even the big guys were invested to the tune of billions. Only punitive punishment, law suits and the like have caused JPMorgan, Goldman and Co to close some of their euro denominated money market funds to new investors because it may harm existing investors' performance. Would this have happened years ago, that the very same banks closed their funds to new investors because existing ones may suffer? No way. The only difference is that regulators and the investing public looks at things more closely and with more suspicion.

    Recommending EFPs to a guy who wants to inflation protect and "park" his funds without the slightest disclosure to risk and what could potentially go wrong while pointing to products with insane bid-offer spreads is only one thing: Highly unprofessional and negligent. I could come up with other terms but I try to tone it down here.

    I am open to a lively and fair discussion and yes, I do sometimes jump the gun prematurely, so far the occasions I got burned are countable on one hand. But I admit I cast sometimes premature judgement. Its just in this case I comment after the fact, or have you seen a risk disclosure, have you seen an explanation of how slippage, execution related costs, the settlement, price volatility close to settlement may reduce the expected yield? There are probably a dozen other investments that are way less complex to put on, more cheaply to get out, while modeling a very similar pay-out. Am I missing something here? Or am I too long in the market and have heard too much "bs" to be so overly suspicious?


     
    #34     Jul 10, 2012
  5. Nym

    Nym

    i am interested in the discussion except that i would like to be a bit long in EUR. Unfortunately IB does not provide many options
     
    #35     Jul 11, 2012
  6. ________________________________________________________________________
    Please understand I am not offended in any way. However I would like to clarify a couple of points.

    OneChicago is not a securities exchange. We are a Designated Contract Market for the trading of Securities Futures under the joint regulation of both the SEC and the CFTC. Subtle distinction but very important.

    The quote you refer to in ONXX was actually not something that I recommended. I did respond to a question that used that name as an example. I am not even sure if the market he quoted was correct. What is of interest is the bid/ask is meaningless unless you convert to an interest rate like we do on our website which I pointed to multiple times. On that page there are descriptions of trade flows in GC and HTB EFPs; a link to pricing of an EFP; a link to additional information on EFPs with multiple additional links and links to our Calculator which compares outright positions in Stocks vs SSF.

    In addition they display currently tradeable (during normal trading hours) EFPs with a default sort by highest bid rate as people looking to create yield on idle cash would want to sell EFP as I have explained several times. You will note the bid/ask are not wide at all. They are rather tight while looking at the outright market (bid/ask) or the translated interest rate (bid rate/ ask rate).
    In the below example which I pulled from our website today you can see the EFP for KGC1D (NoDivRisk contract) is 66 hundredths of a penny bid and 84 hundredths of a penny offered. 100 up or 10,000 share equivalent.
    What is most important however is to look at the interest rate implied. Again using KGC on the top line you will see that the bid translates into a 78.5 basis point bid and the offer a 99.9 basis point offer.

    The spread is 21.4 basis points. Not anywhere near the 2000 basis point (20%) that you point to.

    With that said customers looking to create yield would be interested in only the bids that generate the yield and not necessarily the spread...however small it actually is.



    Dividend Size Bid Rate Bid Ask Ask Rate Size
    KGC1D 2012-08 OCX.NoDivRisk 100 0.785% 0.0066 0.0084 0.999% 100
    KOG1D 2012-08 OCX.NoDivRisk 15 0.765% 0.0070 0.0094 1.028% 15
    NUVA1D 2012-08 OCX.NoDivRisk 5 0.740% 0.0195 0.0235 0.892% 5

    As to execution risk....this is precisely why you would execute the EFP and not leg into the trade. Since the two legs are executed simultaneously at a basis differential there is no execution risk. The legs go up as one transaction.

    When the contract expires the trader needs to do nothing but let the back office process work as the long stock is used to satisfy the short SSF obligation and the position becomes null. I repeat what I have stated before . Transaction costs friction must be taken into account when doing these types of financing trades.

    I would like to address this following sentence in some detail:

    "Its just in this case I comment after the fact, or have you seen a risk disclosure, have you seen an explanation of how slippage, execution related costs, the settlement, price volatility close to settlement may reduce the expected yield? "

    Each customer, prior to placing a trade, must be given a Risk disclosure document for Security Futures by their clearing firm. You can also find it on our website at:
    http://www.onechicago.com/?page_id=91

    I cannot explain slippage as I can't observe it. The quotes above were pulled 45 minutes ago. Looking at the screen now the markets are exactly the same despite movement in the market. Each of the quotes are hit/lift eligible. The markets will be the same all day long as it has nothing to do with price movement and everything to do with interest rates which don't really move for purposes of trading EFPs.

    I did in fact explain, repeatedly, that transaction costs must be considered carefully.

    I did in fact explain the settlement as the stock gets delivered to satisfy the short SSF obligation and the position becomes null.

    Price volatility has absolutely nothing to do with the EFP. Nothing. At expiry the Stock and the SSF will be exactly equal to each other. Prior to expiry they will move point for point with each other and as you are long one and short the other you are delta neutral which implies you have no exposure to the price movement. Interest rates may move and the EFP price may go up or down but once you enter into the delta neutral transaction and carry through expiration you will have the interest rate you wanted at trade_date (less transaction cost) as a result.

    I welcome any question anyone has regarding the process.



    Best.
     
    #36     Jul 11, 2012
  7.  
    #37     Jul 11, 2012
  8. David,

    I disagree with you on several points and like to clarify and ask couple additional questions.

    Would you mind telling all of us here how you derive profits for your firm from such transactions? Whatever we transact in life we all like to understand how our counter party stands to profit in order for us to better understand our cost.

    Following that I respond to couple points you made in your previous post:

    1) bid/offer is meaningless? Its certainly not meaningless to you, right? Its the money you stand to make by transacting as many trades as possible on both sides with your clients and hedge out the remainder in the market (if done at all). Let me ask you a similar question: Let's assume I am a institutional bank trader and I just traded an index option in huge size with a client and we initially covered our delta. But I feel uncomfortable with some my gamma profile and like to offload some. I call up my inter-bank dealer and he quotes me 78.5bps/99.9bps. You are telling me I should not be concerned because I only conduct one trade to hedge my position? I should not be concerned about the (99.9 - 78.5) / ((99.9+ 78.5)/2) = 24% spread? Nothing to worry? All good?

    2) See calculation above, I was generous by using the midpoint as basis. Let's not pull the wool over eyes. Obviously we always need to talk in terms of relative percentage spread for comparison purpose. Even in my wildest days on the rates exotic desk (and those are truly illiquid transactions) have I never quoted a 20% bid offer spread, the customer would have called up my boss and I would have been fired instantaneously.

    3) "transaction costs friction"? Care to elaborate what you mean with "friction"? I am familiar with transaction costs, generally they are clearly defined and there should be zero "friction". Execution related slippage I am also familiar with but transaction cost friction? Not trying to play with words here but I am seriously confused how you relate friction and transaction costs. Care to exactly elaborate what part is friction and how high it can be?

    4) Hmm, this is exactly my point. Isn't that what government bonds and especially money market funds promise as well? An in-advance known payoff at expiration, no money lost. Right? What could go wrong with Spanish yields at 6.8%? What could go wrong with yields on Greek bills at 20%? You point out that one stands to yield the return "locked in" at trade day if one held to expiration. I see things in a slightly different light here: First of all you yourself even pose a credit risk to anyone lending money to you, which is not the case when I transact with a recognized exchange that is counter party to my trades. There are several other underlying-related risks here I am happy to identify in a follow-up post if desired.

    My other point here is that anything can happen in between. The OP nowhere pointed out he wanted to hold until "expiration". Your wide spreads make it impossible to unwind the trade as I have clearly shown you in point 1 above. That is ok as long as I know clearly what I get into, when I buy a new car, the second I drive off the lot I can also only resell it at a min 10-20% discount hours later. But people should be aware of how wide your spreads are. Talking in absolute spreads is like saying that "hey look I make markets in Google stock I quote you 572.05/573.5 which is only 145 cents wide". This translates into 25 basis points (percent spread) and would be about 5x wider than what the spread would look like during active trading hours on Nasdaq.

     
    #38     Jul 11, 2012
  9. In a previous post you have asked:
    "Would you mind telling all of us here how you derive profits for your firm from such transactions?"

    Of course. We post it on our website. It's the first item under the "Trading@OneChicago" titled Trading Fee Schedule. You can find it here:
    http://www.onechicago.com/?page_id=17

    Just to be very clear OneChicago is NOT a counterparty to any transaction. All transactions and subsequent positions are cleared (and novated) at the OCC which is a AA+ rated clearing house. Any time you trade on a regulated contract market that clears OCC you will be upgrading your counterparty.

    Transaction cost friction is a term of art. Nothing more and I did not mean to confuse you or play with words. I have repeatedly explained that when doing financing transactions the costs are critical as they are a friction on profits.

    As to your enumerated points:
    I think you again misunderstand something fundamental. I do not transact. My clients are the clearing members of the OCC. They make money off their clients (such as the individuals in this forum) by charging transaction fees and financing the customer's activity by providing leverage (extending loans at a rate of interest) and utilizing the resulting position to either repo or lend in the Sec Lending space to earn profits for the firm. What Security Futures do is compete with this activity by allowing customers to carry equity delta exposure out to time on more favorable interest rate terms and to synthetically participate in the Sec Lending profits themselves on their positions. You will notice that I do not anywhere indicate this is a day trader's world. This is for people who are investors over time and the cost of carrying that position is a friction on potential profits. If they can reduce that cost then the chances of earning a profit increases. Can you agree to that concept?

    Your gamma question is irrelevant here. The topic here is financing not hedging. The OP was looking to Park spare cash. I assumed, perhaps wrongly, that they wanted to earn some return. The choices are zero or 50bp. Which would you choose if you had a choice? My presponses here are simply to introduce the concept that there are choices.

    When I want a bank to lend me money I do not care what they are paying on deposits. I want to know where they will lend me money. The local bank is paying 7bps for deposits and are offering equity loans at 400bp. You can drive a truck through that spread but I don't care about the spread. I care where they will loan me money. An EFP transaction is similar. If you are looking to invest cash for a term to create yield why would you be interested in where you could borrow? Ah...when you need to get flat before the day ends? Do not day trade EFPs. Do not borrow money to trade EFPs. If you want to carry equity delta out to time or you want to invest spare cash in a regulated environment with a AA+ counterparty then maybe the EFP is an appropriate option.

    Your point 4 is not relevant either. Buying Stock/ Selling SSF in the proper ratio (which is a given in an EFP) does not expose the parties to price risk as the bond example you gave does. Think of it this way: What is the risk of buying a 500 point European style index box spread at 498? No matter what happens to the index that box spread is going to expire at 500. It's a pure financing transaction similar to the EFP example.

    Best.
     
    #39     Jul 12, 2012
  10. Hmm, so I am currently a little confused:

    - you do not transact
    - you are not a counter party to any transaction
    - you are not an exchange (which is contrary to statements on your website)
    - you are not a clearer

    So, you describe yourself as a financier? A financier who does not actually finance anything but borrows from others. Hmm, that is getting a little confusing here.

    And to add to that, with all that absent credit risk, zero delta, I mean you pretty much told us there is zero risk to those transactions except "transaction friction" (which I still fail to understand), so, I mean, could you explain to us once again why you show 20% relative wide spreads on many of your products when most of the underlyings of your SSFs trade at about 4-5 basis point spreads?



     
    #40     Jul 12, 2012