I'm going to preface this post by saying that I fully understand the risk with maintaining a short position and that I still very much prefer using IB over other trading services for my PA. That said, I thought I'd share my experience with a close-out advisory in hopes that others are made aware of the procedure as I understood it, and to mind share on potential improvements and risk mitigation.
Shortly after 5pm (EST) a couple of days ago, I received a close-out advisory related to a short position I had in my PA. This stock has a pretty tight float and a looming corporate action brought in a lot of additional short interest. Going into this trade, the limited borrow was always a risk I was aware of, and I was comfortable taking it. In fact, I was paying 20% annualized borrow cost when I entered into the trade. The advisory notice (shared below) effectively stated that the borrow was no longer available and IB was being forced into closing out my position should they not be able to locate the borrow by 9am (EST) in the pre-market on the following day.
As part of the close-out advisory, I was directed to read and review IB's support page on close-out procedures: https://ibkr.info/node/845.
A few comments:
- I felt that the advisory notice (provided below) did not sync up well with the support page. My understanding is that the notice specifically refers to the "Fail to Deliver" provision in the support page, but it took some head scratching to understand the trigger for the actual advisory and how IB intended to manage the position.
My recommendation for IB: make sure that these notices clearly sync with the support page - e.g. "additional information regarding this close-out advisory is indicated in S3. Fail to Deliver in our support page <link>."
- I was a little surprised to receive the notice an hour after the close, especially considering their article indicates they have systems in place to measure the likelihood of being able to meet their settlement obligations. In particular, they will provide notice on their likely inability to settle a trade at 2:30pm (EST), 3:15pm (EST), and 4:50pm (EST) on T+2. I would think this kind of predictive notice is applicable to my situation regarding IB's overall settlement and delivery obligation, and their ability to meet it on a day-to-day basis. Though exposing the precise likelihood could create room for manipulative squeezing, I do feel there should be more advanced notice, closer to the close. A lot of shares traded that day, so it's possible they wouldn't have a clue until the very end of the trading session, but I would feel more comforted if the "3. Fail to Deliver" trigger were also subject to similar notification procedures.
My recommendation for IB: clarify if there are any notification procedures for the other close-out provisions and when they may occur.
- This one stole the show. If the close-out is enforced, IB will execute a VWAP order at the start of the session over the course of the day. Let's spell out a couple concerns:
Firstly, the VWAP order cannot be cancelled even if you purchase the shares in after-hours on T - 1 or in the pre-market on the day of the close-out. This was confirmed via support and by visiting https://www.interactivebrokers.com/en/software/tws/usersguidebook/ordertypes/VWAP.htm. In conditions where you might be squeezed on very tight float, the inability to self-manage risk is really concerning. I actually flattened my position less than an hour after receiving the advisory by purchasing shares in after-hours and was told by support that they do not recommend my series of actions to clients because the clearing system may still enforce the close-out on my account. This is a serious flaw, in my view. The system should be designed to enforce a close-out for anyone that maintains a short position just prior to the open. Anyone trading on IB is a big boy. I don't mind taking market risk, but I do mind not being able to manage my risk, particularly when I'm releasing my broker of its own obligations. As far as I was concerned, the moment I flattened my position in the after hours, I was cleansed of my obligation and it's IB's responsibility to deal with all the nasty settlement issues. My risk is my business and their settlement obligations are theirs, and that's a healthy relationship for me. This kind of order type could represent a slaughter: auto buy on a short squeeze with no discretion whatsoever.
My recommendation for IB: 1) clarify your support article to indicate that the VWAP order cannot be cancelled; 2) clarify your support article to minimally indicate that the close-out may be enforced even if a trader closes their position prior to the open of trading when the close-out would otherwise be enforced; and (more effectively) 3) design your close-out procedure to enforce forced execution for accounts that retain a net short position in the impacted stock just before market open.
Secondly, I was a little surprised by the shortcoming on the support team in explaining how risk associated with this close-out could be mitigated within the boundaries laid out in the support article. When I asked for clarity on my trading restrictions if the close-out were enforced, support first said that I would not be subject to any trading restrictions, despite the article clearly indicating otherwise. Further, when I pressed about my options on counter trading the enforced VWAP order, I was simply told that IB does not provide advice. That's fine, I don't need someone to hold my hand on what risks I want to or don't want to take. What I needed in that moment was clarity on what orders or products might be available within the rules of the trading restrictions to deal with an order that might cause me to go net long a stock I had no interest in owning in the first place! My plan of action was to enter into a VWAP sell order on the day for (n-1) shares to remain a net purchaser and limit my exposure to really bad bid/ask spread (better than a freak squeeze event...). Fortunately, I received a notice 10 minutes prior to the open on the following morning that IB was able to locate borrow and resolve the close-out.
My recommendation for IB: perhaps some additional training for this edge case or internal documentation that support can reference so that traders can get better color on available options. Again, my problem is being told that I cannot manage my own risk and being told that I just have to "understand how the system works" is not acceptable for a broker of your caliber. Your support is not at fault for how the systems are designed, but they could use some investment so that clients can be presented with better options.
General question for anyone who knows: have you used a VWAP over the day to execute a trade? If so, what was your experience? Additionally, how would you have reversed the trade in a way that would minimize price exposure?1
Final comments: I have no hard feelings for IB or their support staff. But having that "oh, what the..." moment during this experience was uncomfortable. The trading platform is otherwise superb for my needs, and I will continue to short, albeit more carefully. Like I said, I can handle a bad trade, but I was very thrown off by how the procedures are enforced in a way that really limits your ability to act. It felt as though I received a notice late in the day, after market hours, while being told, "sorry bro, we're taking over your risk, and even if you try to manage and resolve it, you might just make it worse." I would say I learned a rare, near-free lesson this time around, and I thought I'd share it more broadly. Call me generous.
Advisory Notice Message:
As a result of short sale transactions executed two or more business days ago, your acount (sic) XXXXX has a delivery obligation in the stocks listed below and/or has borrowed shares from IBKR to make delivery on a short position that has not yet been closed. IBKR is issuing this advisory to inform you that we were unable to borrow the shares necessary to meet our delivery obligation in these stocks today. A final attempt to borrow will be made on the morning of the next settlement date, however, if the shares cannot be borrowed by 09:00 ET then, we are obligated per SEC Rule 204 to close-out these positions(s). A list of these positions is provided below. Additional information regarding the close-out process may be found in KB845. Positions Subject to Close-Out XXXX Interactive Brokers Risk Management
(1) I'm considering testing this out on a liquid stock just to get a better feel for this order type and how I might respond in the future if I ever end up in a situation like this on IB. Will share results if I have any to share.
Submitted March 14, 2019 at 02:12AM by thomastjp https://ift.tt/2TNmfx4
