Partitioning a large account to limit operational risk

Discussion in 'Risk Management' started by tonyf, Sep 18, 2019.

  1. tonyf


    I flew too close to the sun a few days ago, shorting a large quantity of an illiquid stock that was not readily located. This trade would have created a large dent in my account had it gone wrong. (

    I am now much more concerned by operational and execution risks. I am seriously exploring "partitioning" my account into a multitude of smaller sub-accounts, as a fail safe solution to operational errors of this kind (fat finger errors, api order transmission failures, etc...).

    IB offers centralised management for multiple-accounts. Is anyone experienced with such a structure? What are the possible drawbacks?
    Last edited: Sep 18, 2019
  2. Robert Morse

    Robert Morse Sponsor

    Why not just set limits. $$ per order, shares per order, etc.

    To be fair, operational risk does not typically cover a traders ability to over trade. You will find a away.

    Having a second account at another broker would help with real operational risk, which would include your ability to close positions during times of outages.
    IAS_LLC likes this.
  3. tonyf


    Very true. Having a second trading account is most importantly a credit risk hedge as well (but segregation is a good mitigant in some cases).

    Fat finger risk is very real, when talking to other people. A big deal if involved with illiquid shares....
    Last edited: Sep 18, 2019
  4. Robert Morse

    Robert Morse Sponsor

    I'm sure your trading software has some type of setting in preference that would at least warn you of certain conditions like this.


    "Having a second is most importantly a credit risk hedge"
    As this is not a common occurrence, I'd be more concerned with short term system failures where you can trade. Having a "backup" account would help with "operational risk." That would require a second broker with a different setup software. This is obviously easier for larger accounts.
    Last edited: Sep 18, 2019
  5. tonyf


    Those filters are over-written when trading via an API. They would equally not cover the short selling risk I detailed in that other post.

    Let me ask the question differently: although unorthodox, is there anything to loose in partitioning a large account?
  6. Robert Morse

    Robert Morse Sponsor

    When you say "partitioning a large account", are you saying having more than one individual or corporate account at the same broker funded separately? E.G. Robert Morse#1 and Robert Morse#2 or Robert Morse LLC #1 and Robert Morse LLC #2? Each with their own cash and positions?
  7. tonyf


  8. Robert Morse

    Robert Morse Sponsor

    I only have one corporate account like that and it was compliance-related. The disadvances would be:

    • it is not margin efficient.
    • you have to make sure you do not trade with yourself.
    • if one account got a margin call, they might restrict the other account.
    A little over a year ago, an IB customer contacted me because IB was shutting down his 2 accounts. He had one Reg-T account and one PMA. Their claim was that he was "gaming" their margin system.

    I just do not see the advantage when you can either restrain yourself, set limits on the software or API or in your code.
  9. tonyf


    Perfect - thanks:
    • "it is not margin efficient."
    From what I understand it is "margin" neutral but not "portfolio margin" efficient. This is something true everywhere it seems.
    • you have to make sure you do not trade with yourself.
    Great point, but my only downside here would be transaction fees loss - which is OK by itself considering the bigger picture. A close to zero sum game as well.
    • if one account got a margin call, they might restrict the other account.
    Now that, I had no idea about. I thought sub-accounts are ring-fenced! (i.e. no cross guarantee). What makes you thing that they can legally do that?
  10. DaveV


    IB has a setting as to whether the transactions generated by the API override the filter limits.
    #10     Sep 18, 2019