Shorting stocks with IB

Discussion in 'Retail Brokers' started by failed_trad3r, Jan 21, 2011.

  1. I just shorted a stock and I heard you have to pay an interest rate which is called "Current Indicative Rate". So I searched and looked it up for my stock and it's a negative number?? Its -80. It doesnt say whether this is annual or debit or credit. How do I know what interest rate I pay and how do I spot this? Does my cash in my IB account just disappear?
  2. another reason you have failed
  3. Roark


    Due to the interest charge, I don't like shorting stocks with IB and prefer to buy inverse ETFs instead to avoid the interest if I want to get short the market. I don't know how IB computes the interest charges from the information you posted, but if you look at your daily activity statement under interest accruals, you should see the charge listed there.
  4. def


    It is the cost of borrow. Here's from the IB knowledge base
    (also read for examples and additional info (not posted below) and )

    Interest credit on short stock proceeds
    How can I determine the interest credit or fee associated with a stock borrow position?


    When account holders initiate a short position, IB must borrow the shares on their behalf in order to satisfy its settlement obligation with the clearinghouse. The agreement through which these shares are borrowed requires that IB provide the lender with a cash deposit in an amount equal to or greater than the value of the loaned securities as loan collateral. The lender charges a fee for providing this service, generally expressed as the difference between the interest which accrues to the lender on the cash deposit and the agreed upon rate of interest which is rebated back to the borrowing broker (typically pegged to the Fed Funds overnight rate for USD denominated cash deposits).

    While many brokers will pass a portion of this rebate only to institutional clients, all IB clients are eligible to receive an interest credit on their short stock sales proceeds to the extent those proceeds exceed the equivalent of USD 100,000. When the supply of a given security available to borrow is high relative to it’s borrow demand, account holders can expect to receive an interest credit on their short stock balance equal the Benchmark Rate (e.g., Fed Funds Effective overnight rate for USD denominated balances), less a spread ranging from 1.25% on balances of USD 100,000 to 0.25% for balances over USD 3,000,000.

    When the supply and demand attributes of a particular security are such that it becomes hard to borrow, the rebate provided by the lender will decline and may even become negative. These factors will be passed on in the form of either a lower rate at which credit interest is paid or a rate at which interest is charged (i.e., a cost to borrow). As rates vary by both security and date, IB recommends that customers utilize the Short Stock (SLB) Availability tool accessible via the Tools icon within Account Management. Note that the indicative rate reflected in this tool is intended to correspond to the amount paid on Tier III balances, that is, short sale proceeds of USD 3 million or greater. For balances which are less, the rate is adjusted based upon the tier and the Benchmark Rate associated with the trading currency.


    Assume, for example, that the SLB tool reports an indicative rate of 3.00% for the hypothetical USD-denominated stock 'ABC'. This rate implies a Fed Funds Effective Benchmark Rate of 3.25% (as the rate paid on Tier III balances equals the Benchmark Rate less 0.25%); a rate paid on Tier I balances (amounts between USD 100,000 and 1 million) of 2.00% (Benchmark Rate less 1.25%); and a rate paid on Tier II balances (amounts between USD 1 million and 3 million) of 2.75%.


    Information provided within the SLB tool, particularly that relating to shares available to borrow and indicative rates, is offered on a best efforts basis without warranty as to its accuracy or validity. Share availability includes information from third parties which is not updated in real time. Rate information is indicative only. Trades executed in the current trading session typically settle in 3 business days and the actual availability and borrow costs are determined on settlement day. Traders should be aware that rates and availability can change significantly in the time between trade and settle dates, particularly in thinly traded stocks, small cap stocks, and classes of stock that have an upcoming corporate action (including dividends).
  5. You can't.

    (1) IB shows you an "indicative" rate... but "real" rate can be anything.

    (2) The rate and charges DO NOT appear on your statement.
    You just get a LUMP SUMP interest charge for 100s of trades...
    An individual Stock Loan RATE can NEVER be determined...
    It cannot be determined before, during, or after the trade...


    (3) IB can jack the rate from to 2% to 40% with NO NOTICE...
    They do it all the time on various stocks...
    And you are locked into your position for 3 settlement days.

    (4) IB's approach is unheard of in the Industry...
    It would fail any reasonable regulatory test...
    It is wide open to abuse...
    #3 is "bait & switch" by any reasonable definition.
  6. In addition IB applies the charges not on the opening position value of the shorted stock as any other broker does but on the current market value of your short position. So if it goes against you your charge increases.
  7. Actually this makes perfect sense. If the market value increases, the amount borrowed is higher so you should pay more in interest.
  8. Come on. You borrow just once, after that you own it not the lender. You don't borrow it every day. As I said this is IB's practice not the industry standard.
  9. def


    That's not industry convention and not how we are charged. If we are going to charge market rates (and pay market rates on interest earned), we need to price according to how we are charged. Perhaps other firms marking up the loans have a large enough buffer in place to absorb the differences (or like many other firms don't even offer interest on the short proceeds). I also don't see anyone complaining about the converse - ie. when the share price drops your are charged interest based on a mark to the lower price.

    Finally food for thought, say you are the lender of the shares at price X and the price of the stock goes up 2%. Would it make sense to recall the stock and lend it out again if your loan wasn't marked to that price?
  10. BobG



    You do understand that all short sellers have this cost right? Do you have some reason to believe that inverse ETF's cost of doing the short is less than IB's rate by more than the ETF's management fee?
    #10     Mar 3, 2011