## 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

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.

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.

## ACATS Rejections - Most Common Causes

The rejection of an ACATS transfer request is typically initiated by action of the delivering broker once that broker has had an opportunity to review the request and confirm the details of the account to be transferred.  In the case of certain rejection notices (i.e., categories 1-5 and 10 below), the ACATS process affords the receiving broker (IB) a 24-hour window within which revised information may be transmitted and after which time the transfer request will require resubmission by the client.  During this 24-hour window, IB will attempt to contact the transferring client in an effort to reconcile any discrepancies causing the initial rejection notice. Rejections generally fall into the following categories:

Rejections by the Delivering Broker:
1. Social Security Number/Tax ID Mismatch - the client taxpayer identification number as provided by the receiving broker does not agree with that of the delivering broker’s records.
1. Account Title Mismatch - the client account title as provided by the receiving broker does not agree with that of the delivering broker’s records.
1. Documentation Needed – the delivering broker requires additional account documentation in order to process a transfer request (e.g., death or marriage legal documents).
1. Account Flat – account holds no transferable assets.
1. Invalid Account Number – the client account number as provided by the receiving broker is not on delivering member’s books.
1. Duplicate – delivering broker is already in receipt of a transfer request involving the same receiving broker and client account..
1. Account in Distribution or Transfer – another ACATS transfer or other distribution of account assets directly to client is already underway.
1. Client Rescinded – client has submitted written request to cancel transfer request.
1. Missing Authorization Signature – transfer request requires an additional client and/or custodian signature.

Rejections by the Receiving Broker:

10. Credit Violation - the result of the transfer if effected would be to place the account in margin deficit and subject to forced liquidation.

Glossary terms:

## Dividend Tax Rates

Overview:

Virtually all countries apply withholding taxes when local companies seek to distribute dividends to externally based shareholders (whether those shareholders are corporate or not).  The rate at which IB is obligated to withhold for a given payment depends largely upon whether there is a tax treaty in place between the US and the country of residence of the dividend recipient.  .

The table below depicts certain the rates of withholding as applied by IB effective 6-1-2012.

Dividend Withholding Rates

Per Indian regulations, trading access to the Indian financial markets for individuals residing outside India is currently restricted to "Non-Resident Indians" ("NRIs") and "Financial Institution Intermediaries" ("FIIs") only.

NRI

NRIs are defined in the Indian Foreign Exchange Management Act of 1999 and the Indian Foreign Exchange Management Deposit Regulations of 2000.

In short, to qualify for NRI status you must:

a. Reside outside of India for more than 182 days per year, and;

b. Hold Indian citizenship, or;

c. Be a Person of Indian Origin as defined in the Indian Foreign Exchange Management Deposit Regulations of 2000.

Please note that applicants must satisfy criteria (a) and criteria (b) or (c) and will be prompted to review the aforementioned legislation and confirm their status at the point of application.  To trade Indian products as a NRI, new or existing customers may apply for an account through the IB website.

FII
Currently not supported.

## Dividend Considerations - US Extended Trading Session

An account holder who purchases a US stock outside of normal or regular trading hours (i.e., 9:30 a.m. to 4:00 p.m. Eastern time) but during the extended trading hours session (i.e., 4:00 p.m. to 8:00 p.m. Eastern time) on the day prior to that stock going ex-dividend is entitled to receive that dividend.  The reasoning behind this is that trades executed during the extended trading hours session on Day 'T' settle at the same time ('T+3') as trades which are executed during regular trading hours on Day 'T'.  All such trades will therefore settle within a timeframe sufficient for the purchaser to be recognized as an owner of the shares prior to the close of the Record Date.

Following the same logic, an account holder who sells and closes out a long US stock position during the extended trading hours session on the day prior to that stock going ex-dividend will not be entitled to receive that dividend.  However, if the stock was sold stock (i.e. an opening trade), the account holder would be obligated to pay the dividend to the lender of the shares.

Glossary terms:

## TWS Order Checks

The TWS contains two checks to limit the possibility of customers entering trades at prices which are substantially inconsistent with that of the current market.

Under the first check, stock buy orders which are 10% above the prevailing NBBO ask price will be automatically rejected by IB as will stock sell orders which are 10% below the prevailing NBBO bid price.  In the case of options, IB's automatic rejection threshold percentage for both buy and sell orders is 20%.  When an order violating these parameters is transmitted, it will be rejected and a TWS pop-up window will be displayed with the following warning message: "Limit price too far outside NBBO".

The second check relates to orders which are transmitted at prices which do not violate the parameters set by IB as outlined above, but which do violate parameters established by the account holder.  Here the account holder is able to establish Precautionary Settings by selecting the Order and then Configure Order Presets menu options from the TWS. This will open up a window providing for the creation of price thresholds set in terms of percentage or the number of ticks outside of the NBBO (settings may also be defined in terms of share/contract quantity or total dollar value of trade).  When an order violating the account holder's parameters is transmitted, it will be rejected and a TWS pop-up window will be displayed with the following warning message: "The price specified would violate the percentage constraint specified in the default order settings.  Do you really want to submit this order".  Unlike in the case of the check set by IB, the account holder has the option of overriding their own settings and transmitting the order by clicking on the "Yes" button.

Glossary terms:

## Availability of proceeds in a 'Cash' type account

Accounts which have been set up as a 'Cash' type do not have access to the proceeds from the sale of securities until such time the transaction has settled at the clearinghouse and proceeds have been issued to IB.  Securities settlement generally takes place on the third business day following the sale transaction.  Providing access to the funds prior to settlement would constitute a loan, a transaction which is precluded from taking place within this account type.

The one exception is under the Free-Riding rule. Clients with a cash account can use the proceeds from the sale of a security to purchase a different security under the condition that the second security is held until settlement of the initial sale. If the client sells the second security prior to settlement of the initial trade, they will be in violation of the Free-Riding rule and will be locked for 90 days from utilizing this exception.

Account holders who wish to have access to settled funds prior to the settlement day may do so by electing an account type of 'Margin'.  Under this account type unsettled funds may be used for trading purposes but may not be withdrawn until settlement.  Account holders maintaining a 'Cash' account may request an upgrade to a 'Margin' type account by logging into Account Management and selecting the Trading Access and then Trading Configuration menu options.  Upgrade requests are subject to a compliance review to ensure that the account holder maintains the appropriate qualifications.

## Does IB accept physical stock certificates?

Background:

IB does not accept or hold any physical stock certificates. As a matter of operational efficiency and costs, we hold all securities in street name meaning that they are registered electronically in the name of IB on the books of the issuer. IB, in turn, holds securities for clients in what is known in the industry as 'book entry' form which simply means that we maintain a record on our books that you are the beneficial owner of the securities.

## Why use smart routing?

Interactive Brokers offers its customers a software product referred to as "Smart" order routing. Smart Routing software continually scans competing markets and automatically routes orders directly to the best ECN or market center -- based on price but also taking into account factors such as the availability of automatic order execution.

Each ECN and market center administers its own set of trading rules. Accordingly, Customers that do not select Smart Routing should be sure to familiarize themselves with the various trading and order handling rules of those market venues to which they intend to direct route their orders. A complete listing of market venues along with website links is made available on the website under the Products and then Exchange Listings menu options.

In order to Smart Route your order, select SMART in the Destination field when placing the order.

For additional information regarding Smart Routing, select the Trading and then Smart Routing menu options from the website.