I agree. It isn't a scam. IB is sacrificing some of its interest income, because it wants to promote SSF trading and to enjoy the resulting income stream from SSF commissions and from IB's investment in the SSF exchange, Chicago One. This provides customers a good deal. SSFs enable customers to earn higher interest on cash balances and short sale cash balances than any broker will pay, and to finance long stock positions at lower margin interest rates than any broker will charge.
How is this a scam? They disclosed to you everything you need to know about EFPs, including the caveats (the fact that they charge commission, and the fact that the futures may be slightly less liquid then the underlying stock). If they just said the positives and didn't tell you the downsides to it, then it might be a scam. The OP is just a fucking moron who can't read, that's all.
I don't understand why this mailing generated the original concern voiced. But if one must ponder what the ulterior motive(s) are, then they're in my opinion: 1. Timber Hill is an SSF market maker 2. IB gets commissions if you trade SSFs and not too many other brokers offer SSFs today, so it generates lock-in This does not mean SSFs are bad instruments. They're a cheaper way of going long with leverage and a much cheaper way of going short (financing and also w/o nasty tax treatment for payments in lieu of dividends if you are not treated as a professional trader). So you win, IB wins.... shouldn't we all be smiling?
This is a post from a trader who is clearly upset and not a good trader. No need to label this sincere email from Mr peterffy.
Which way is the EFP transaction? Ask = buy SSF, sell stock Bid = sell SSF, buy stock or vice versa? ie is the ask/bid on SSF terms or stock terms.
If you sell an EFP, you are shorting an SSF, and buying long stock of the same symbol underlying the SSF. If you buy an EFP, then you are doing the reverse.
Please look better : http://www.interactivebrokers.com/en/trading/pdfhighlights/PDF-ExchPhysical.php?ib_entity=llc
If doing this with cash, isn't there a dividend risk if the holding period crosses the dividend payment date? The expected dividend is factored into the interest rate? If the dividend is less than expected it affects the interest received, even to a great extent?
You don't receive interest when selling an EFP. You receive the spread created by selling the SSF for a higher price than you pay for the long stock. This spread gradually decays to zero by the time of expiration. The amount of this spread, and its decay, are set by the marketplace, as an equivalent to interest. If the stock is expected to have any ex dividend dates prior to expiration of the SSF, then yes, these expected dividends will, by the market, be deducted from the spread you would otherwise receive in selling the EFP. Yes, there is a risk that a dividend, expected by the marketplace, might not actually be paid, in which case the EFP has been mispriced. You can avoid this risk, as to dividends, by selling only short-maturity EFPs on stocks which will not pay any dividends prior to expiration of the EFP's SSF.