I saw this option "overfill protection" while trying to make an "adjustable sell limit order" on Interactive Brokers TWS platform. What is the purpose of overfill protection? What are the risks if I do not enable overfill protection?
It's usually used in OCO order that ensures that you won't get filled with more than your order quantity in case one leg didn't get reduced in time after another got filled, something like that
Thanks. Sounds important. If that is the case, shouldn't overfill protection be enabled all the time by default? Why does IBKR leave it as an option?
While I can't say for sure, but consider a case where their order routing system is acting more aggressively. Possibly having orders exist, at least momentarily, on multiple exchanges such that it's in theory to get an overfill. This could increase your chance of getting a fill and possibly a better price, but also leaves open the possibility of receiving extra of your first leg. Or taking the other side, if their system is going to be more conservative, it should adjust the orders / only send them to exchanges when it can be relatively sure all legs will be filled. In this case, you could have potentially received a better price, but would have taken on the risk of not having all legs filled. So my suspicion is that if you enable the protection, then IB is going to take on the execution risk, which means their system is going to act less aggressively/more conservatively trying to get you a fill. By disabling this, you will probably get better fills some of the time, but you will get partial fills others, which may actually be worse overall. I'd be interested in statistical evidence supporting which technique is better overall, but I doubt IB is going to disclose that and there probably aren't many who have done it themselves in enough volume to know.
IB does not take any risk. When overfill protection is enabled, they only route one order to the exchange at a time. Clearly this will have a very negative impact on your ability to add liquidity. Source: https://www.interactivebrokers.com/en/index.php?f=617