Let's say you are 100% long a portfolio of blue chip stocks worth $1 mill, with no margin. A market crash happens like yesterday, so you sell an equivalent amount of ES futures to completely hedge your exposure. Then, due to stop-loss selling on electronic markets, the bids for all your stocks go to 0.01 and trade on a 1 lot. Your account equity is now about $1, and you are short $1 mill worth of ES futures - IB's system works out you don't have the margin requirements to cover your ES hedge, so it auto-liquidates you. It sells all your stocks at market, which could easily be 0.01 per share, and exits your ES hedge at the same time. If the exchanges don't bust your liquidation sales, then IB has just wiped you out, despite you being fully hedged and having very little risk. It appears to me that until IB removes its auto-liquidation system, or adjusts it to avoid ALL such dangerous, risk-increasing auto-liquidations at crazy quotes in fast markets, that it cannot be used safely by any trader for anything other than pure cash-only long stock transactions. Using even $1 of margin risks you getting blown out. Using even $1 of hedge risks you getting blown out. IB is dangerous in its present state.
Please excuse me if this is a really stupid question. You sell the futures hedge before the crash or after?
+1 I use IB and dont use margin on purpose, but occassionally go over say 5-10% just because of rebalancing/etc for a few days at a time.. the possibility i could be autoliquidated during an event like yesterday is disturbing. In addition, what if your hedged using options, the front month es options were completely illliquid (I would say ATM but ATM was moving around quit a bit!) so I dont know how they computed how much leverage you had.
That has not been my experience. Its not instantaneous but whenever I exceed margin IB starts liquidating within 60 seconds.
Very good points, Cutten. Can you possibly compare IB's policy to another large broker, say, MF Global?