An Initial Public Offering, or IPO, is defined as the first sale of stock by a company to the public. As IB generally does not operate as an underwriter or selling agent of IPO shares, the first opportunity customers have to transact in such shares does not take place until the issue begins trading in the secondary market. Outlined below are key issues which customers should consider when transacting in shares on their first day of listing:
As IPOs are inherently subject to a high degree of uncertainty as to price and liquidity once secondary market trading begins, each new issue is subject to a review to determine whether initial and maintenance margin requirements above the minimum which is required by regulation is warranted. Current margin information is made available through the "Check Margin" feature on the trading platform. Customers should also note that IB reserves the right to change margin on an intraday basis and without advance notice when warranted.
2. Order Entry
IB monitors for upcoming IPOs and makes every effort to provide customers the ability to enter orders in advance of the day at which trading begins in the secondary market. In certain circumstances, either IB and/or the exchange may impose restrictions on the type of orders which may be accepted as well as the time in force conditions associated with such orders. It should also be noted that orders not direct-routed to the primary exchange may be subject to special auction handling and therefore may receive a different opening print from that of the primary exchange. In addition, as the price at which the issue trades once available in the secondary market may differ significantly from the IPO price, customers are strongly encouraged to use limit orders when.
3. Short Availability
Customers should assume that IPO issues will not be available for shorting immediately upon trading in the secondary market. This limitation is a function of regulations which require the broker to locate and make a good faith determination that shares are available to borrow at settlement coupled with the likelihood that such shares will not be available (due to underwriter lending restrictions and the fact that secondary market transactions have not yet settled).
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Provides information about multi-leg orders specifically relating to guaranteed vs non-guaranteed orders.
A multi-leg order, also known as combination order, is a special order type comprising two or more components or legs that execute as a single transaction. Each leg of a multi-leg order is defined with an asset, a leg side, and a ratio relative to other legs. IB currently supports multi-leg orders with legs that belong to the following asset types: stocks, options, futures, future options and US CFDs.
Guaranteed and Non-Guaranteed Multi-Leg Orders
A guaranteed multi-leg order is an order in which executions are guaranteed to be delivered simultaneously for each leg and in proportion to the leg ratio. This guarantee is fulfilled by IB or the exchange depending on the way the guaranteed multi-leg order is routed and executed.
Non-guaranteed multi-leg orders are not guaranteed to be executed proportionally to the required leg ratio although every effort is made to execute the order that way.
Guaranteed multi-leg orders can be SMART routed or directed to a specific exchange, while non-guaranteed multi-leg orders can only be SMART routed. See the table below.
Guaranteed Multi-Leg Order Support by Routing Type
Directed Multi-Leg Orders
A directed multi-leg order is an order that is routed to a specific exchange that has native support for such an order. Directed multi-leg orders follow the exchange’s rules in terms of allowed number of legs, permitted asset types, and allowed combinations of leg ratios and leg sides. IB never attempts to execute individual legs of a directed multi-leg order separately.
Directed multi-leg orders are guaranteed by the exchange to be executed following the specified leg ratio. IB does not accept non-guaranteed directed orders.
SMART Guaranteed Multi-Leg Orders
IB supports SMART routed guaranteed multi-leg orders of up to 4 legs. Based on the order marketability, these orders can be routed by the IB system to one of the competing exchanges that support them natively. In addition, 2-legged SMART routed guaranteed US stock/option and US option/option orders can be executed by IB on different exchanges, where each leg is routed separately. Any risk of resulting execution that does not satisfy the required order ratio is taken over by IB.
SMART Non-Guaranteed Multi-Leg Orders
IB supports SMART routed non-guaranteed multi-leg orders of up to 2 legs. Legs must trade in the same currency and must be stocks, options, futures, or futures options. Supported currencies are: USD, EUR, AUD, CAD, CHF, GBP, HKD, and JPY.
Non-guaranteed multi-leg orders can only be SMART routed. These orders may be executed natively on an exchange if supported there or executed by IB on one or more exchanges with each leg routed separately. The IB system makes every effort to execute the order according to the specified order ratio, but does not guarantee such an execution. Clients must acknowledge the inherent risk of non-guaranteed multi-leg orders upon order entry.
Clients are encouraged to consider the use of limit orders in lieu of market orders as market orders are susceptible to being filled at prices far lower/higher than the current displayed bid/ask particularly under volatile market conditions, in the case of large order quantities and/or orders involving illiquid products. To protect the client as well as IB from losses associated with significant and rapidly changing prices, IB may simulate client market orders as market with protection orders, establishing an execution cap percentage points beyond the inside bid/ask. While this cap is set at a level that is intended to balance the objectives of execution certainty and minimizing price risk, there exists a remote possibility that the execution will be delayed or may not take place.
In addition, it should also be noted that certain exchanges impose, as a protective measure, their own price caps or bands upon market orders, at levels which can be more or less restrictive than those imposed by IB and which may similarly affect the speed and certainty of order execution.
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:
The risk of such 'Non-Guaranteed' orders is illustrated through the example below:
Assume the following quotes for a Stock vs. Stock combination order to purchase shares of Microsoft (MSFT) and sell shares of Appl (AAPL).
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
Based on the current markets, the order would appear to be executable.
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.
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:
How to create an Adjustable Stop order
How to create a Pegged to Market order
How to create a Pegged to Midpoint order