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

Margin Requirement on Leveraged ETF Products

Leveraged Exchange Traded Funds (ETFs) are a subset of general ETFs and are intended to generate performance in multiples of that of the underlying index or benchmark (e.g. 200%, 300% or greater). In addition certain of these ETFs seek to a generate performance which is not only a multiple of but also the inverse of the underlying index or benchmark (e.g., a short ETF). To accomplish this, these leveraged funds typically include among their holdings derivative instruments such as options, futures or swaps which are intended to provide the desired leverage and/or inverse performance. 

Exchange margin rules seek to recognize the additional leverage and risk associated with these instruments by establishing a margin rate which is commensurate with that level of leverage (but not to exceed 100% of the ETF value). Thus, for example, whereas the base strategy-based maintenance margin requirement for a non-leveraged long ETF is set at 25% and a short non-leveraged ETF at 30%, examples of the maintenance margin change for leveraged ETFs are as follows:

1. Long an ETF having a 200% leverage factor: 50% (= 2 x 25%) 

2. Short an ETF having a 300% leverage factor: 90% (= 3 x 30%) 

A similar scaling in margin is also in effect for options. For example, the Reg. T maintenance margin requirement for a non-leveraged, short broad based ETF index option is 100% of the option premium plus 15% of the ETF market value, less any out-of-the-money amount (to a minimum of 10% of ETF market value in the case of calls and 10% of the option strike price in the case of puts). In the case where the option underlying is a leveraged ETF, however, the 15% rate is increased by the leverage factor of the ETF. 

In the case of portfolio margin accounts, the effect is similar, with the scan ranges by which the leveraged ETF positions are stress tested increasing by the ETF leverage factor.  See NASD Rule 2520 and NYSE Rule 431 for further details.

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

VWAP

VWAP, or Volume-Weighted Average Price, is a measure of the average price at which a stock traded over a given timeframe (typically one day).  Assume, for example, the aggregate trades for stock ABC on day ‘T’ equals 100 shares at $21.00, another 100 shares at $22.00 and 300 shares at $24.00. The calculation for the VWAP of ABC for day ‘T’ is as follows: 

(100 * $21.00) + (100 * $22.00) + (300 * $24.00)/(100 + 100 + 300)  = $23.00

                         

 

Overview of Accumulate / Distribute Algorithm

Overview: 

Accumulate/Distribute is a sophisticated trading algorithm which allows one to buy or sell large orders by splitting the trade into multiple orders with the goal of reducing visibility and market impact.

When to Use
This order type is geared towards traders of large position blocks as well as high frequency traders and is intended to run unattended while logged into the TWS.
 
How to Locate
The Accumulate/Distribute algorithm can be accessed from the TraderWorkstation by selecting the Trading and then Accumulate/Distribute menu options at the top of the page or it can be added to the trading tool bar menu by clicking on the Add More Buttons icon.
 
Order Set Up
Once the trader has defined the instrument and action (buy or sell), the following parameters are to be specified:
 
  1. Total Quantity – defines the aggregate order size (e.g., shares, contracts);
  2. Trade Increment – defines the unit (e.g., shares, contracts) size for each component order;
  3. Time Increment – defines the period of time (seconds, minutes or hours) between the submission of a component order and the submission of the following order;
  4. Order Type – may select from market, limit or relative. A market order will be executed at the ask price and should only be used where, for example, a stock is highly liquid with significant bid-ask sizes. Limit and Relative order types require that the trader specify additional order relationships and the choices are numerous. The execution price, for example, may be specified as being relative to a fixed value, bid, ask or last price, VWAP, moving average or last trade. These choices may be increased or decreased by an offset factor and multiple conditions may be established. For example, one may wish to create a relative order type to match the bid price plus an offset factor of $0.01 and to ensure that they don’t lift the ask if the spread is $0.01, add a condition that the bid be no less that $0.02 beneath the ask price.
  5. How to Operate – if the trader does not check the box titled “Wait for current order to fill before submitting next order” then orders which do not meet the price conditions will continue to accumulate in accordance with the established time increment, the unexecuted orders will be aggregated into one or more potentially sizable orders at the exchange. If this box is checked, then the more restrictive the buying conditions, the greater the likelihood that the algorithm will fall behind its schedule of buying or selling at every ‘X’ interval.  If this box is checked the trader may then check the box titled “Catch up in time”. When that box has been checked and should the algorithm fall behind, the next orders will be placed immediately after their predecessor fills until such time the algorithm has caught up.
  6. Randomization – check boxes are provided to allow for a +/- 20% randomization in the time increment and a +/- 55% randomization in the trade increment. Accordingly, in the case of a 30 second time increment, this would allow for randomization of between 24 and 36 seconds between orders and in the case of a 500 share trade increment, this would allow for randomization of between 200 and 800 shares (rounded to the nearest round lot) per order. Randomization serves to minimize the likelihood of others detecting your order.
  7. RTH – a check box is provided which will allow the order to be filled outside of regular trading hours.
  8. Take up Offer Size – if a limit or relative order type is selected, the trader may input an order size which if bid (in the case of a sell order) or offered (in the case of a buy order) the trader would be willing to take in its entirety, up to the remaining portion of the total order quantity (satisfies the price conditions).
Managing the Trade
The Accumulate/Distribute algorithm also allows for conditions to be established which, if not met, will cause the algorithm to either stop permanently or resume when the conditions are again satisfied. These include the following:
 
  1. Price Range - traders may specify a price range outside of which they do not want to buy the stock;
  2. News – the trader may stop the algorithm for some period of time if there is news on the stock, for example;
  3. Position - traders may stop the algorithm based upon their position in the stock; For example, a trader running multiple algorithms one to buy the stock and another to sell in an attempt to trade the stock back and forth for a profit may decide to suspend one side if the position becomes substantially imbalanced;
  4. Stock Path – a trader, for example, may wish to suspend the algorithm if a given moving average, say the 10-minute VWAP is not at least as high as another average, say the 50-day moving average. This feature enables you to set up algorithms to trade chart points even when you are not looking at the chart at that moment;
  5. Stock Path for Multiple Symbols – this condition is similar to the last except that it calls for two symbols. Here you can put in any symbol and compare some data point regarding that symbol (e.g., 10-minute VWAP, etc.) to the same or a different data point regarding the second symbol. These comparative conditions can apply to different symbols or to the same symbol.   For example, you could specify that you want to buy a certain stock only if it has been in a continuous uptrend. So in addition to the 10-minute VWAP being higher than the 50-day moving average, you would also like the 10-day moving average to be higher than the 30-day moving average on this stock.
Other Considerations
Acceptable inputs for this algorithm include:
  1. Products – any product offered by IB (stocks, options, ETFs, bonds, futures, Forex) other than mutual funds;
  2. Order Type – market, limit or relative.

IMPORTANT NOTE

This algo will only operate when the trader is logged into the TWS.  If the trader has been logged out prior to the algo completing (either by user action or by the automated nightly restart), a message will appear upon the next log in which will allow for re-activation of the algo.

Overview of the Scale Trader Algorithm

Overview: 

The ScaleTrader is a sophisticated trading algorithm which allows one to enter a large quantity order that is executed in a series of increments or components, with each component being executed at a progressively better price.

When to Use
The use of this algorithm is well suited to situations where a stock is trading at or near the bottom of a trading range and the trader is looking to average down, buying into a declining market. Alternatively, it may be used on the opposite side when the trader is looking to sell into the top of the trading range, perhaps scaling out of a long position. In either situation, the Scale Trader algorithm also allows the trader to scalp the market, submitting opposite profit taking orders against the original order.
 
How to Locate
The Scale Trader can be accessed from the TraderWorkstation by selecting the Trading and then Scale Trader menu options at the top of the page or it can be added to the trading toolbar menu by clicking on the Add More Buttons icon.
 
Order Set Up
Once the trader has defined the instrument and action (buy or sell), five parameters will need to be specified. Traders will also need to define the order type and time in force. These five parameters for a stock purchase (sale) would be as follows:
 
  1. Total Order Size (TOS) – the total number of shares the trader is willing to purchase (sell) as the price falls (increases);
  2. Initial Component Size (ICS) – the number of shares to be purchased (sold) at the Starting Price;
  3. Subsequent Component Size (SCS) – the additional number of shares to be purchased (sold) at each Price Increment (at successively lower prices in the case of a purchase and higher in the case of a sale). If a SCS is not entered, the ICS will be used for all component orders.
  4. Starting Price (SP) – the price at which you are willing to purchase (sell) the Initial Component Size
  5. Price Increment (PI) – in the case of a purchase (sale), this is the decrease (increase) in price at which each successive component order is to be executed.
Based upon the inputs provided to those parameters, the Scale Trader application will calculate a Top Price (TP) and a Bottom Price (BP) which, depending upon the buy or sell action selected, will either determine the price at which the last order will be executed (BP for purchases and TP for sales) or be relevant only if the same scale is used to close or restore the size of the position (TP for purchases and BP for sales). Adjustments made to either of these two factors will be reflected in the PI and their calculations are as follows:
 
  1. TP = (((ICS/SCS) -1) * PI) + SP
  2. BP = SP – (((TOS - ICS)/SCS) * PI
Note that once a product symbol has been entered a price chart will be displayed to assist in specifying the parameters. The algorithm will not be activated until the Transmit button has been clicked and once transmitted will run indefinitely until stopped or changed or it encounters conditions where it stops. It's important to note that this particular algo will continue to run even if the trader is not logged in to the TWS.
 
Example
Assume a GTC limit order is entered into the Scale Trader to buy 1,000 shares of hypothetical stock ABC having a NBBO of $19.95 - $20.00 at a starting price of $20.00 with 500 more shares purchased at every $0.05 down, resulting in a maximum position of 4,000 shares. The five parameters for this order would be as follows:
 
  1. TOS = 4,000;
  2. ICS = 1,000;
  3. SCS = 500;
  4. SP = $20.00
  5. PI = $0.05
This order would be then be scaled into 7 components consisting of one at 1,000 and 6 at 500 each. The first component is submitted at $20.00 and after it fills the next component (500) would be submitted at $0.05 lower. That order would wait until marketable and once it has been filled the next component will be submitted. This pattern continues until all components have been filled or the order has been cancelled.
 
Managing the Trade
  1. Profit taking orders – the Scale Trader may be set to send an offsetting order to take advantage of periodic price surges or if the trader has reached a specified profit objective. This feature may be enabled by checking the box titled “Create profit taking order” and specifying the Profit Offset. Using the example above and a Profit Offset of $1.00, once the ICS was filled at $20.00 and an SCS submitted at $19.95, two profit orders would also be submitted, one for 500 shares at $21.00 and another for 500 shares at $21.05. It should be noted that profit orders are scaled to the SCS regardless of the size of the ICS and that if the ICS > SCS then the profit order price is determined using the PI along with the Profit Offset. 
  2. Restore size after taking profit – if using the profit taking orders feature, the trader can enable the repurchase of shares sold at a profit at the price they were originally bought at by checking the box titled “Restore size after taking profit”. This feature remains active whenever the price is within the range of TP + Profit Offset and BP. Using the example above, if order to sell 500 shares at $21.00 was executed this fill quantity would be put back into the original order at $20.00 and the order submitted at $19.95 would be cancelled.
  3. Restart Scale Trader & Restart Scale Trader with Filled Component Size – these features allow traders using the profit taking order and restore size features to restart the algorithm if stopped, helping to resume the order starting from the point at which the scaled sequence left off.
  4. Auto Price Adjustment – selecting this check box allows for an increase or decrease in the starting price automatically at stated time intervals (e.g., increase $0.01 every hour)
  5. Scale Trader Page – provides a view of the real-time status of scale orders, including filled and total quantity, filled, remaining, and total value, and the percent filled for each scale. Accessible via the Page and then Create Scale Trader Page menu options.
  6. View Scale Progress - right-click on the scale order line and select View Scale Progress. This will open a window displaying the complete scale price ladder, the Open/Filled component list for the parent scale order, and the Open/Filled component list for the child profit orders.
Other Considerations
Acceptable inputs for this algorithm include:
  1. Products – any product offered by IB other than mutual funds (e.g., stocks, options, ETFs, bonds, futures, Forex);
  2. Order Type - limit or relative (relative not offered for combination orders)
  3. Time in Force – Day, Good-til-Cancel or Day-til-Cancel. May also specify if order is allowed to be filled outside of regular trading hours, if executions may be routed and executed during pre-open session and whether to ignore opening auction.

 

Assets eligible to be transferred through ACATS

Instruments handled by the ACATS system include the following asset classes: equities, options, corporate bonds, municipal bonds, mutual funds and cash. It should be noted; however, that ACATS eligibility does not guarantee that any given security will transfer as each receiving broker maintains its own requirements as to which asset classes as well as securities within a particular asset class it will accept.

Account holders are encouraged to use the Contract Search link on IB’s homepage to assess transfer eligibility prior to initiating a full account transfer request.  In the case of mutual funds, please click here for a list of fund families and funds offered by IB.

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