The short of it. IB's risk-engine was faced with prices that should not have printed, or NBBO showing a negative spread value. The bid/ask var exploded showing huge discount arbs. I imagine that at some point the OP's vertical printed/showed individuals that equated to a negative price on the spread when looking individual legs within a period of minutes. IB's auto-liq does not execute positions as spreads, AFAIK, which compounded the issue related to the intraday volatility we witnessed. It was not an issue of an errant FX or stock position, or IB's auto-liq would've liquidated the offending position. I have to conclude that IB's risk-engine saw individual trades, or was marking the trade to an NBBO which resulted in a negative-value with the OP's vertical when pricing the individuals; i.e., marking the bid on the long to .05 and the offer on the short to 2000 (extreme example). There is no reasonable defense for liquidating the OP's bear vertical, if the information provided is accurate. It's a open and shut win in arbitration. IB is best-served to settle the 10k debit and avoid arbitration and a mark on FINRA/SEC. It's my opinion that all brokers adopt a passive-aggressive approach with the logic that the client won't spend the time and money to take it to arbitration.
Atticus, an IB rep has already assured us, earlier in this thread, that options prices did not trigger the auto-liquidation. I believe that if you read and understand the IB website's criteria for triggering auto-liquidation, the same result is implied, that changes in option prices would not have triggered an auto-liquidation in this case. So I think there is no evidence supporting your suggestion that wacky option price quotes triggered the liquidation. IB's margin requirements and liquidation triggers, for put spreads and for naked short puts, depend on things like option strike prices, the available cash, the value of equity positions, etc., but not on options price quotes, and not on options trade prices. I have suggested that prior to liquidation of the OP's put spreads, perhaps he had other positions which caused the overall account to fall below the total margin required for all positions in the account taken together. I suggested that liquidation of those positions was not sufficient to bring the account in compliance with margin rules. I have suggested that the liquidation therefore continued with the put spreads, even though they did not initially trigger the liquidation. And an IB rep did state, in this thread, that there was another position involved with triggering the liquidation. You wrote that "It was not an issue of an errant FX or stock position, or IB's auto-liq would've liquidated the offending position." I don't think you understand how IB triggers liquidations. A margin requirement is determined for the account as a whole. If that requirement is violated, then positions are liquidated, not on the basis of which position is "offending", but for the purpose of reducing the account's overall total margin deficit. No one position is identified as "offending"; instead, the entire account is treated as offending, because total margin requirements exceed margin available. IB will generally liquidate one position after another, including positions not "offending", until the account's margin requirements have been reduced to a level complying with margin rules. IB's liquidation algorithm is not a surgical method, designed to excise the one "offending" position which broke the camel's back; because such a limited surgical measure would not usually be sufficient to bring an account back into compliance with margin rules. A person trading options should regard a margin call as a disaster to be avoided at all costs. Such a person should thoroughly understand the margin rules under which he trades options. The OP hasn't given us enough detail to determine whether he violated margin rules.
I read through the thread trying to gather all the comments, misunderstandings, genuine informational gaps, etc. As is often the case on long threads, there are a lot of posts based on poor/incomplete information and assumptions. Here is an attempt to clarify matters: (1) What caused the liquidations The liquidations were NOT caused by the valuation on the options, nor on option margin. As some posters have pointed out, there is no equity value for options in a regT account, and the margin for a long vertical options spread is zero. The OP/client had other positions in the account that caused the initial margin deficit. The liquidations were triggered by the client carrying a leveraged position many times the value of the account (measured in net liq) in a non-base currency. The long non-base currency fell 1.8% during the trading session creating a situation where his cash value (measured in his base currency) was less than the margin requirement for the currency position, thereby triggering a liquidation need. By the time the liquidations were done, the currency had moved 3.6%, a giant move. By example: * position at beginning of trading session: -100K USD, +103K XXX @ 1.00. This account has a margin requirement of 2500 USD, and is covered by the excess 3K measured in the base currency USD. * position at time of liquidations: -100K USD, +103K XXX @ 0.98 (XXX/USD). Now the value of XXX is only 100.9K expressed in USD, so total cash value is only 0.9K USD. Margin requirement is still 2.5% of the debit 100K USD, i.e. 2500. Margin requirement exceeds capital, so liquidation requirement is triggered. (2) Quality of liquidations The liquidations executed before the market began its serious melt at ~14:25 were fine. The ones executed during the freefall that began 2 minutes later and lasted ~45 minutes were not so good. To understand the execution quality, you have to look at the market data and it is pretty evident that the market was in chaos with option spreads 30X wider than normal (ex: 3.85 bid / 9.00 ask). Under these circumstances -- during arguably the most violent market moves in history -- execution quality for all orders was problematic, both for customer initiated and IB initiated orders. all asset classes were affected: stocks, options, futures, currencies, bonds. IB will address the execution points privately with the client (off this thread) as part of a normal complaint resolution. (3) Method of execution IB has a preferred liquidation sequence depending on the reason for the liquidation. For margin deficiencies, we typically look to futures/FOPs first, then other commodity segment derivatives, stocks and equity segment derivatives, then currencies. For money driven liquidations (certain accounts/segments are not permitted to have negative cash), the sequence is to sell instruments that generate cash. There are other algorithms and prioritization logic as well. We don't so far have algorithms that liquidate "strategies" using combos because many exchanges do not accept combination orders. In total, the question of which position to liquidate can be non-trivial as there may be conflicting priorities: do the thing that creates most margin benefit, or the one that has the tightest bid-ask spread (implying the smallest pnl-to-mid), or one that reduces risk the most (not the same as reducing margin the most), or the one that reduces leverage the most. There is no "right answer" for all situations. In this case, in hindsight, I can come up with a better liquidation process. Summary: 1) Maintain substantial excess financial capacity. The poster who always leaves 30% excess: yes. In volatile market conditions, even more because we saw moves on Thursday that are 1 in 2M types of events, and even 30% gets quickly eaten up in such situations. Having excess financial capacity is the best way to avoid liquidations. Unfortunately, the client/OP did not have substantial excess given the degree of leverage in the currency positions. 2) Last Thursday exposed several places where IB can improve its risk management systems. Liquidation processes will also be improved. I expect the first of these changes to start rolling out within a month. 3) IB's risk management system is expressly designed to automatically liquidate deficient accounts. While automation is key to our whole business model, we also have people 24x6 continuously looking at the risk systems and pending liquidations; they find situations where we feel it appropriate to interrupt the automated process. But when the markets are free-falling, IB personnel cannot manually supervise the close out transactions in individual portfolios because there simply is no time to evaluate and execute alternative liquidation methods. IB does not want to liquidate anyone's account. It is bad for the client, bad for IB (hence this thread). We do it because regulations stipulate how much leverage can be granted, and not doing so can often be far worse financially for both the client, IB, and ultimately, other customers (because they indirectly inherit the credit risk of failed accounts). To repeat myself, having sufficient capital for the degree of leverage in your account is the best way to avoid liquidation/close out risk.
IBj, thank you for your post. When you have addressed the two areas in point 2 of your summary, please consider explaining the changes in detail to clients. The more we know about the systems and processes, the better we are able to manage our accounts, which in turn helps limit IB's exposure.
I never stated, and quite to the contrary, that IB should apply haircut/risk in the method I outlined. It was a hypothetical given the information at-hand. Jim, the only position he carried with any variation-margin was a USDCAD long which was up on PNL for the day. And if it was losing, why didn't IB liq the FX? You're wasting your time here. IB is unlikely to admit on a message-board that their systems are shit. Your post is ironic, as I stated it, many posts before yours, that he must have had other positions that forced the call; long stock gapping >25% lower, FX, etc. The OP has outlined his positions: - Small USDCAD long which was well within his haircut and profitable on the day - SPY bear vertical - Another bear vertical, don't recall the ticker. The simple dissection leaves the USDCAD as the only position requiring a haircut, and it was not liquidated, nor should it have been.
IB certainly cleared that up. I felt bad for the guy so I was pretty concerned. I was wrong for being emotional about it without all the information. I took what he said at face value, probably a bad idea on the internet and considering his pain. Sorry to IB, truly mean that.
These threads as such a waste of fucking time. You try to add value and all you get is some bullshit from the thread-starter trying to game his broker out of $10k he lost in the market. To somedudetrader: Please kill yourself. To IBj: Thanks for elaborating on the positions. I know a lot of people who were ready to wire-out of IB due to this thread alone. Unfortunately, you should have acted sooner. My previous post about the "negative print/marks" were made on the assumption that the OP was not a first-class ass clown. I am glad to hear that IB is protecting their franchise and their clients with a robust risk-system.