Overview of SEC Fees

Under Section 31 of the Securities Exchange Act of 1934, U.S. national securities exchanges are obligated to pay transaction fees to the SEC based on the volume of securities that are sold on their markets. Exchange rules require their broker-dealer members to pay a share of these fees who, in turn, pass the responsibility of paying the fees to their customers.

This fee is intended to allow the SEC to recover costs associated with its supervision and regulation of the U.S. securities markets and securities professionals. It applies to stocks, options and single stock futures (on a round turn basis); however, IB does not pass on the fee in the case of single stock futures trades.  Note that this fee is assessed only to the sale side of security transactions, thereby applying to the grantor of an option (fee based upon the option premium received at time of sale) and the exerciser of a put or call assignee (fee based upon option strike price).

For the fiscal year 2016 the fee was assessed at a rate of $0.0000218 per $1.00 of sales proceeds, however, the rate is subject to annual and,in some cases, mid-year adjustments should realized transaction volume generate fees sufficiently below or in excess of targeted funding levels.1

Examples of the transactions impacted by this fee and sample calculations are outlined in the table below.

Transaction

Subject to Fee?

Example

Calculation

Stock Purchase

No

N/A

N/A

Stock Sale (cost plus commission option)

Yes

Sell 1,000 shares MSFT@ $25.87

$0.0000218 * $25.87 * 1,000 = $0.563966

Call Purchase

No

N/A

N/A

Put Purchase

No

N/A

N/A

Call Sale

Yes

Sell 10 MSFT June ’11 $25 calls @ $1.17

$0.0000218 * $1.17 * 100 * 10 = $0.025506

Put Sale

Yes

Sell 10 MSFT June ’11 $25 puts @ $0.41

$0.0000218 * $0.41 * 100 * 10 = $0.008938

Call Exercise

No

N/A

N/A

Put Exercise

Yes

Exercise of 10 MSFT June ’11 $25 puts

$0.0000218 * $25.00 * 100 * 10 = $0.545

Call Assignment

Yes

Assignment of 10 MSFT June ’11 $25 calls

$0.0000218 * $25.00 * 100 * 10 = $0.545

Put Assignment

No

N/A

N/A

 

1Information regarding current Section 31 fees may be found on the SEC's Frequently Requested Documents page located at: http://www.sec.gov/divisions/marketreg/mrfreqreq.shtml#feerate

 

 

FAQs - U.S. Securities Option Expiration

Overview: 

The following page has been created in attempt to assist traders by providing answers to frequently asked questions related to US security option expiration, exercise, and assignment.  Please feel free to contact us if your question is not addressed on this page or to request the addition of a question and answer. 

Click on a question in the table of contents to jump to the question in this document.

Table Of Contents:

How do I provide exercise instructions?

Do I have to notify IBKR if I want my long option exercised?

What if I have a long option which I do not want exercised?

What can I do to prevent the assignment of a short option?

Is it possible for a short option which is in-the-money not to be assigned?

What happens if I have a spread position with an in-the-money option and an out-of-the-money option?

Can IBKR exercise the out-of-the-money long leg of my spread position only if my in-the-money short leg is assigned?

What happens to my long stock position if a short option which is part of a covered write is assigned?

Am I charged a commission for exercise or assignments?

What happens if I am unable to meet the margin requirement on a stock delivery resulting from an option exercise or assignment?

 

Q&A:

How do I provide exercise instructions?
Instructions are to be entered through the TWS Option Exercise window. Procedures for exercising an option using the IBKR Trader Workstation can be found in the TWS User's Guide.

Important Note: In the event that an option exercise cannot be submitted via the TWS, an option exercise request with all pertinent details (including option symbol, account number and exact quantity), should be created in a ticket via the Account Management window. In the Account Management Message Center click on "Compose" followed by "New Ticket". The ticket should include the words "Option Exercise Request" in the subject line. Please provide a contact number and clearly state in your ticket why the TWS Option Exercise window was not available for use.

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Do I have to notify IBKR if I want my long option exercised?

In the case of exchange listed U.S. securities options, the clearinghouse (OCC) will automatically exercise all cash and physically settled options which are in-the-money by at least $0.01 at expiration (e.g., a call option having a strike price of $25.00 will be automatically exercised if the stock price is $25.01 or more and a put option having a strike price of $25.00 will be automatically exercised if the stock price is $24.99 or less). In accordance with this process, referred to as exercise by exception, account holders are not required to provide IBKR with instructions to exercise any long options which are in-the-money by at least $0.01 at expiration. 

Important Note: in certain situations (e.g., underlying stock halt, corporate action), OCC may elect to remove a particular class of options from the exercise by exception process, thereby requiring the account holder to provide positive notice of their intent to exercise their long option contracts regardless of the extent they may be in-the-money. In these situations, IBKR will make every effort to provide advance notice to the account holder of their obligation to respond, however, account holders purchasing such options on the last day of trading are not likely to be afforded any notice.

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What if I have a long option which I do not want exercised?
If a long option is not in-the-money by at least $0.01 at expiration it will not be automatically exercised by OCC. If it is in-the-money by at least that amount and you do not wish to have it exercised, you would need to provide IBKR with contrary instructions to let the option lapse. These instructions would need to be entered through the TWS Option Exercise window prior to the deadline as stated on the IBKR website.

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What can I do to prevent the assignment of a short option?
The only action one can take to prevent being assigned on a short option position is to buy back in the option prior to the close of trade on its last trading day (for equity options this is usually the Friday preceding the expiration date although there may also be weekly expiring options for certain classes). When you sell an option, you provided the purchaser with the right to exercise which they generally will do if the option is in-the-money at expiration.

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Is it possible for a short option which is in-the-money not to be assigned?
While is unlikely that holders of in-the-money long options will elect to let the option lapse without exercising them, certain holders may do so due to transaction costs or risk considerations. In conjunction with its expiration processing, OCC will assign option exercises to short position holders via a random lottery process which, in turn, is applied by brokers to their customer accounts. It is possible through these random processes that short positions in your account be part of those which were not assigned.

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What happens if I have a spread position with an in-the-money option and an out-of-the-money option?
Spread positions can have unique expiration risks associated with them. For example, an expiring spread where the long option is in-the-money by less than $0.01 and the short leg is in-the-money more than $0.01 may expire unhedged. Account holders are ultimately responsible for taking action on such positions and responsible for the risks associated with any unhedged spread leg expiring in-the-money.

 

Can IBKR exercise the out-of-the-money long leg of my spread position only if my in-the-money short leg is assigned?
No. There is no provision for issuing conditional exercise instructions to OCC. OCC determines the assignment of options based upon a random process which is initiated only after the deadline for submitting all exercise instructions has ended. In order to avoid the delivery of a long or short underlying stock position when only the short leg of an option spread is in-the-money at expiration, the account holder would need to either close out that short position or consider exercising an at-the-money long option.

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What happens to my long stock position if a short option which is part of a covered write is assigned?
If the short call leg of a covered write position is assigned, the long stock position will be applied to satisfy the stock delivery obligation on the short call. The price at which that long stock position will be closed out is equal to the short call option strike price.

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Am I charged a commission for exercise or assignments?
There is no commissions charged as the result of the delivery of a long or short position resulting from option exercise or assignment of a U.S. security option (note that this is not always the case for non-U.S. options).

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What happens if I am unable to meet the margin requirement on a stock delivery resulting from an option exercise or assignment?
You should review your positions prior to expiration to determine whether you have adequate equity in your account to exercise your options. You should also determine whether you have adequate equity in the account if an in-the-money short option position is assigned to your account. You should also be aware that short options positions may be exercised against you by the long holder even if the option is out-of-the-money.

If you anticipate that you will be unable to meet the margin requirement on a stock delivery resulting from an option exercise or assignment, you should either close positions or deposit additional funds to your account to meet the anticipated post-delivery margin requirement.

IBKR reserves the right to prohibit the exercise of stock options and/or close short options if the effect of the exercise/assignment would be to place the account in margin deficit. To protect against these scenarios as expiration nears, IBKR will simulate the effect of expiration assuming plausible underlying price scenarios and evaluating the exposure of each account assuming stock delivery. If the exposure is deemed excessive, IBKR reserves the right to either:

  • Liquidate options prior to expiration. Please note: While IBKR retains the right to liquidate at any time in such situations, liquidations involving US security positions will typically begin at approximately 9:40 AM ET as of the business day following expiration;
  • Allow the options to lapse; and/or
  • Allow delivery and liquidate the underlying at any time.

In addition, the account may be restricted from opening new positions to prevent an increase in exposure. IBKR determines the number of contracts that will be lapsed by IBKR/auto-exercised shortly after the end of trading on the date of expiration. The effect of any after hours trading you conduct on that day may not be taken into account in this exposure calculation.

While IBKR reserves the right to take these actions, account holders are solely responsible for managing the exercise/assignment risks associated with the positions in their accounts. IBKR is under no obligation to manage such risks for you.

For more information, please see Expiration & Corporate Action Related Liquidations

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Non-Guaranteed Combination Orders

A combination order is a special type of order that is constructed of multiple separate positions, or ‘legs’, but executed as a single transaction.  The legs of the combination may be comprised of the same position type (e.g. stock vs. stock, option vs. option or SSF vs. SSF) or different position types (e.g. stock vs. option, SSF vs. option or EFP).  It’s important to note that many combination order types, while submitted via the IB trading platform as a combination, are not native to (i.e., supported by) the exchanges and therefore may not be guaranteed by IB.  Accordingly, IB’s policy is to guarantee only Smart-Routed U.S. stock vs. option and option vs. option combination orders.

As combination orders which are not guaranteed are exposed to the risk of partial execution, both in terms of the quantity of legs and their balance, IB requires account holders to acknowledge the 'Non-Guaranteed' attribute at the point of order entry.  There are two methods for setting this attribute:

  • Method 1 - Users can select the Non-Guaranteed attribute in the Misc. section on the Order Ticket for a particular order
  • Method 2 - Users can add the Non-Guaranteed column to the Order Management section of the TWS

 

Notes:

  • Non-Guaranteed combination orders are not available for Financial Advisor allocation orders

 

The risk of such 'Non-Guaranteed' orders is illustrated through the example below:

Example

Assume the following quotes for a Stock vs. Stock combination order to purchase shares of Microsoft (MSFT) and sell shares of Appl (AAPL).

Current markets

MSFT - 26.30 bid, 26.31 offer
AAPL - 250.25 bid, 250.30 offer

A generic combination is created to buy 1 share AAPL and sell 1 share MSFT, the implied quote would be 223.94 bid, 224 offer.

The following order is entered:
Buy 200 AAPL, Sell 200 MSFT
Pay 224

Based on the current markets, the order would appear to be executable.

  • A buy of 200 shares of AAPL are routed with a 250.30 limit. Only 100 execute.
  • A sell of 200 shares of MSFT are routed with a 26.30 limit. No execution is received as the market moves to 26.29 bid.

With a Non-Guaranteed combination, the 100 shares of AAPL would be placed in the client account, even though no MSFT shares were executed.  The remainder of the combination order will continue to work until executed in its entirety or until it is canceled.

TWS Messages - Order quantity must be fully displayed for this instrument

Order types which provide privacy by either hiding the entire order quantity (i.e., Hidden Orders) or allowing the display of only a specified portion of the submitted order quantity (i.e., Iceberg/Reserves) are not supported for all product types and venues.

Examples of venues for which Hidden and Iceberg/Reserve stock orders are not supported are Pink Sheet and OTCBB.  Hidden or Iceberg/Reserve orders submitted to these venues will be rejected and will generate the following message: "Order quantity must be fully displayed for this instrument". Orders receiving this rejection message will require the removal of any hidden or display size attribute prior to resubmission.

Additional information regarding product types and venues for which these order types are supported is available through the links below:

Iceberg/Reserve:

http://individuals.interactivebrokers.com/en/trading/orders/iceberg.php?ib_entity=llc

Hidden :

http://individuals.interactivebrokers.com/en/trading/orders/hidden.php?ib_entity=llc

 

Equity & Index Option Position Limits

Overview: 

Equity option exchanges define position limits for designated equity options classes.  These limits define position quantity limitations in terms of the equivalent number of underlying shares (described below) which cannot be exceeded at any time on either the bullish or bearish side of the market.  Account positions in excess of defined position limits may be subject to trade restriction or liquidation at any time without prior notification.

Background: 

Position limits are defined on regulatory websites and may change periodically.  Some contracts also have near-term limit requirements (near-term position limits are applied to the side of the market for those contracts that are in the closest expiring month issued).  Traders are responsible for monitoring their positions as well as the defined limit quantities to ensure compliance.  The following information defines how position limits are calculated;

 

Option position limits are determined as follows:

  • Bullish market direction -- long call & short put positions are aggregated and quantified in terms of equivalent shares of stock.
  • Bearish market direction -- long put & short call positions are aggregated and quantified in terms of equivalent shares of stock.

The following examples, using the 25,000 option contract limit, illustrate the operation of position limits:

  • Customer A, who is long 25,000 XYZ calls, may at the same time be short 25,000 XYZ calls, since long and short positions in the same class of options (i.e., in calls only or in puts only) are on opposite sides of the market and are not aggregated
  • Customer B, who is long 25,000 XYZ calls, may at the same time be long 25,000 XYZ puts. Rule 4.11 does not require the aggregation of long call and long put (or short call and short put) positions, since they are on opposite sides of the market.
  • Customer C, who is long 20,000 XYZ calls, may not at the same time be short more than 5,000 XYZ puts, since the 25,000 contract limit applies to the aggregate position of long calls and short puts in options covering the same underlying security. Similarly, if Customer C is also short 20,000 XYZ calls, he may not at the same time have a long position of more than 5,000 XYZ puts, since the 25,000 contract limit applies separately to the aggregation of short call and long put positions in options covering the same underlying security.

 

Notifications and restrictions:

 

IB will send notifications to customers regarding the option position limits at the following times:

  • When a client exceeds 85% of the allowed limit IB will send a notification indicating this threshold has been exceeded
  • When a client exceeds 95% of the allowed limit IB will place the account in closing only. This state will be maintained until the account falls below 85% of the allowed limit. New orders placed that would increase the position will be rejected.

 

Notes:

Position limits are set on the long and short side of the market separately (and not netted out).
Traders can use an underlying stock position as a "hedge" if they are over the limit on the long or short side (index options are reviewed on a case by case basis for purposes of determining which securities constitute a hedge).
Position information is aggregated across related accounts and accounts under common control.

 

Definition of related accounts:

IB considers related accounts to be any account in which an individual may be viewed as having influence over trading decisions. This includes, but is not limited to, aggregating an advisor sub-account with the advisor's account (and accounts under common control), joint accounts with individual accounts for the joint parties and organization accounts (where an individual is listed as an officer or trader) with other accounts for that individual.

 

Position limit exceptions:

Regulations permit clients to exceed a position limit if the positions under common control are hedged positions as specified by the relevant exchange. In general the hedges permitted by the US regulators that are recognized in the IB system include outright stock position hedges, conversions, reverse conversions and box spreads. Currently collar and reverse collar strategies are not supported hedges in the IB system. For more detail about the permissible hedge exemptions refer to the rules of the self regulatory organization for the relevant product.

OCC posts position limits defined by the option exchanges.   They can be found here.
http://www.optionsclearing.com/webapps/position-limits

Non-Objecting Beneficial Owner (NOBO)

Overview: 

A NOBO refers to an account holder who provides its carry broker (i.e., IB) permission to release their name and address to the companies or issuers of securities they hold.  These companies or issuers request this information in the event they need to contact shareholders regarding important shareholder communications such as proxies, circulars for rights offerings and annual/quarterly reports.  IB, by default, classifies clients as a NOBO but allows client to have their classification changed to that of an Objecting Beneficial Owner (OBO).  To do so, clients are required to provide formal notice of their request to be classified as an OBO through a Message Center ticket available via Account Management.

ADR pass-through fees

Account holders maintaining positions in American Depository Receipts (ADRs) should note that such securities are subject to periodic fees intended to compensate the agent bank providing custodial services on behalf of the ADR.  These services typically, include inventorying the foreign stocks underlying the ADR and managing all registration, compliance and record-keeping services.

Historically, the agent banks were only able to collect the custody fees by subtracting them from the ADR dividend, however, as many ADRs do not regularly pay dividends, these banks have been unable to collect their fees.  As a result, in 2009, the Depository Trust Company (DTC) received SEC approval to begin collecting these custody fees on behalf of the banks for ADRs which do not pay periodic dividends.  DTC collects these fees from its participant brokers (such as IB) who hold the ADRs for their clients.  These fees are referred to as pass-through fees as they are designed to be then collected by the broker from its clients.

If you hold a position in a dividend paying ADR, these fees will be deducted from the dividend as they have in the past.  If you hold a position in an ADR which does not pay a dividend, this pass-through fee will be reflected on the monthly statement of the record date in which it is assessed.  Similar to the treatment of cash dividends, IB will attempt to reflect upcoming ADR fee allocations within the Accruals section of the account statements as well. Once charged, the fee will be reflected in the Deposits & Withdrawals section of the statement with the description 'Adjustments - Other' along with the symbol of the particular ADR it is associated with.

While the amount of this fee will generally range from $0.01 - $0.03 per share, the amounts may differ by ADR and it is recommended that you refer to your ADR prospectus for specific information.  An on-line search for the prospectus may be conducted through the SEC's EDGAR Company Search tool.

Glossary terms: 
ADR

Rule 611 of SEC Regulation NMS

Overview: 

Executions in equities will sometimes be listed as R6, which is short for Rule 611 of SEC Regulation NMS.  This condition code indicates that the execution(s) in question is not subject to trade-through rules.  R6 trades are given an SEC exemption.

Rule 611, which is the Trade Through Exemption of SEC Regulation NMS, is very lengthy to cover in detail.  Parties interested in reading the rule in its entirely should type "SEC Rule 611" into an internet search engine.  This is the portion of the document that is pertinent to IB traders, in a nutshell:

Typically the trades involved are a multi-component trade involving orders for a security and a related derivative, or, in the alternative, orders for related securities, that are executed at or near the same time.  The SIA (Securities Industry Association) notes that the economics of a contingent trade are based on the relationship between the prices of the security and the related derivative or security, and that the execution of one order is contingent upon the execution of the other order. 

The bottom line is that when a trade is ruled R6 the SEC has granted a trade-through exemption.  This means that these execution reports do not affect the resting orders in-between the market at the time, and the R6 execution.  For example, the real market is quoting 10.50 at 10.51, and an execution is reported at 10.90.  This execution was given an R6 exemption.  A sell limit order at 10.75, an an example, would not be executed because the 10.90 execution was given an R6 status. 

What is an "Odd Lot" in stocks?

Overview: 

Simply stated, an "Odd Lot" is a stock order comprised of less than 100 shares of stock.  So any stock order from 1 share to 99 shares is considered to be an odd lot. 

This is the pertinent information traders should know about odd lot orders:

  • An odd lot is a number of shares less than 100 (1-99)
  • A "Round Lot" is 100 shares of stock
  • Any number of shares that is a multiple of 100 is a round lot (i.e. 100, 600, 1,600, etc)
  • An order for a number of shares greater than 100, but not a multiple of 100 (i.e. 142, 373, 1,948, etc) is a "Mixed Lot" (AKA PRL, or partial round lot, order)
  • Odd-Lot orders are not posted to the bid/ask data on exchanges
  • Odd-Lot orders are taken into the order book at the exchange they are routed to.  When the exchange is able to match an order from the other side of the book with the odd-lot, it will be filled.  This could lead to delay on execution of an odd-lot. 
  • There are numerous guidelines for the routing of odd-lot orders:  Odd-Lot orders to initiate positions will not be routed to primary exchanges; Odd-Lot orders can be routed to primary exchanges, but only if the order in question is to close out a preexisting position; IB will not direct-route odd-lot orders which initiate positions to primary exchanges, therefore these type of orders should be Smart Routed so that IB's routing system can send the order to an ECN for execution.  The exception is that odd lots can be routed to NYSE/ARCA/AMEX, but only as part of a basket order or as a market-on-close (MOC) order.
  • A mixed lot or PRL (i.e. 257 shares) direct-routed to NYSE/AMEX will be submitted in whole to the exchange (applies to both market and limit orders).  If the order is direct-routed to NYSE/ARCA, only the round lot portion of the order will be submitted and, if it is executed, the IB system will cancel the remaining odd-lot portion of the order.  If the order is routed via IB Smart Routing, all market centers are eligible to receive the order according to the Smart Routing logic (including NYSE/ARCA, but only for the round lot portion of the order).
  • IB will not route odd-lot orders for HOLDRS.  The odd-lot portion of a PRL order for HOLDRS will be rejected by the IB system after the round lot portion of the order is executed.
  • Individual exchanges may impose certain restrictions on odd lot orders, in addition to any of the restrictions mentioned above
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