Interesting all the angst is against IB and none against the market structure. After you straighten out your Liquidate Lament, think about all the bot scum co-located , and otherwise, and how to prevent their market distortions. The only way to truly deal with this issue are automatic halts of some kind and 100% trade reversals in the case of error. that 60% band was ridiculous, and cause many people to have huge losses if they used stops.
Just saw this , echoing my always brilliant sentiments. http://online.wsj.com/article/SB10001424052748703338004575230600732737716.html?mod=rss_whats_news_us
Perhaps you should go to a thread where the topic is market structure and the OP wasn't directly questioning his broker (IB)'s handling of a situation.
Even if his puts is not perfectly matched, IB could just closed the missed match short calls. No reason the liquidate everything. IB liquidation robot has bad algo logic. Nothing more.
Yes the market was broken, many complaints about that. But, defined risk should be programed in. It can not be that hard for a broker of this size.
Absolutely +1. Let's give them a day or two but I'd really like to see a response from IB on this one. There's always at least an even money chance that we're being trolled (no offense, OP, just the facts) and that something is not being disclosed, but as a happy IB customer for 4+ years, I want to know that that's the case here.
We're not dealing with stocks here in this example. Options require a whole different risk management setup that has to account for their intrinstic risk protections. A vertical debit spread has no risk beyond the cash debit required to open the position, as long as it's not needlessly closed at extremely unwarranted prices as in this case. It's the fact that auto-liquidation got into the picture in the first place that's wrong. There's no reason to liquidate a debit spread if the debit spread was intact and fully paid for. The machine should ignore the debit spread unless the long leg gets accidentally closed making the short leg naked, which should only be done by the stupidity of the customer at their own expense, not the stupidity of the broker and its machines, which is what happened in this case as long as the story is correct. If anything, the risk machine should prevent legging out with the long first. If this story is real, the machine legging out the long first INCREASED the risk to IB by causing a naked put. And since it forced a loss larger than the initial debit by closing the short at a ridiculous price, that increased the risk to IB even more. What if the customer couldn't pay up? Not that they should, that would be backwards anyway.
I guess i'm looking for a new broker to go with after hearing this shit. Was just about the sign the papers next week after the other account holder finished his 1/2.
The auto-liquidation process makes one fundamental assumption that requires re-examination: that liquidation is always a risk-reducing activity. It is clearly not: - after hours (and before hours), when portfolio is evaluated on the basis of prices quoted by active market-makers (i.e. susceptible to gaming), - for portfolios containing offsetting positions, including: static hedges such as option debit spreads, and hedges established by the customer in temporarily closed markets or in temporarily halted securities, - under exceptional market conditions, when the risk of mistrades is very high, So here are some solutions that may deal with the above problems: 1) collecting a database of typical bid/ask spreads for most underlyings and their typical combinations (e.g. those 'buliding blocks' that can be entered using TWS tools such as Spread Trader) and preventing the auto-trading bot from making any trades when the current market spread is 'excessive' (e.g. exceeds a pre-defined multiple of the typical spread, volatility-adjusted via multiplication by the current volatility level over its median level), 2) when the current bid/ask spread is wider than the typical one, using limit orders initially pegged to the opposite-side price and gradually moved towards midpoint, or even better - towards 'fair value' price (which a market-making firm should be easily able to compute, not only for options); note that this requires starting the auto-liquidation process earlier than at the last moment, 3) starting the liquidation process with the most capital-intensive instrument first, using the 'Check Margin' functionality code to assess the post-liquidation margin requirements (in a special case when no liquidation can release liquidity, i.e. when the portfolio is optimally hedged, liquidating it in its entirety or better - leaving intact), 4) preserving the information about combination orders initiated via TWS tools such as Option Trader, Spread Trader etc. and their API equivalents, to subsequently treat such combos during the liquidation process in their entirety, evaluating their combined margin impact and liquidating with offsetting spread orders rather than legging out of them (which can create a 'margin cascade'), 5) when excessively wide spreads preclude liquidation, IB can use 'liquidation substitutes' such as: - dynamic hedging of the short option position (using the most liquid underlying available, and using IB's proprietary capital to offset the delta risk of the customer's position, of course at customer's expense, as an elective service, with commissions and hedging losses charged to his account afterwards; note that 'deficit' liquidations could be more risky for proprietary capital than such 'pro-active' hedging service), or - in case of liquid instruments, 'shorting against the box' i.e. opening a hedge in the same (or substantially the same) contract as the losing one (e.g. when the customer's hedging instrument is quoted on a temporarily closed exchange or has just been halted or cannot be shorted when used by customer for delta-heding, etc.), 6) customers usually open positions with adequate funds, and critical margin deficits are typically created by sustained periods of losses, so it is important for the auto-liquidation to become 'pro-active' , i.e. starting earlier than the last moment, i.e. when a rapid downward trend in available funds becomes apparent (e.g. when an average daily return over a 10-day moving window gets below -5% per day and yet the customer refuses to close the losing position), 7) please post other ideas than may improve IB's auto-liquidation process (just brainstorming, i.e. without evaluation).
An easy implementable solution by IB is setting specific liquidate flags for each of your positions. Right now theres just one flag avaible, the set liquidate last. Basically, if you are able to exactly specify which position to liquidate first, then which second, then which third, that would come a long way to help positions not liquidate in the wrong manner. People will use this option when volatility goes high like last week. That said, the liquidation machine of IB is still broken, even if this was implemented, because it cannot differentiate non dangerous option position. However this would fix that the long puts were liquidated before the short puts.