IB will issue a warning message to any margin account approaching a maintenance margin deficiency (and therefore potential forced liquidation of positions). This message is generated when the Equity With Loan Value (ELV for a stock account = Cash + Stock + Bond + Mutual Fund + Non-US Options) is less than or equal to the Maintenance Margin Requirement * 105%. The warning message reads as follows:
ALERT: the financial capacity in this account is less than 5% above the current margin requirement. To avoid a possible liquidation, please monitor the account to ensure that there is positive excess liquidity.
An account which hold stock positions that are full-paid (i.e. no cash debit) remains susceptible to liquidation if the account falls into deficit and the loan value of the stock is insufficient to cover the debit. This is often the case, for example, when a margin account holds positions subject to 100% margin and a cash balance of $0. In the event the account is assessed a fee, such as commission, monthly minimum activity or market data subscription, a negative cash balance would results and IB would not be able to extend loan value against these securities to support the debit balance. The account would therefore be subject to a liquidation in an amount sufficient to cover any cash deficit.
Accordingly, the recipient of this warning message may wish to maintain a cash balance in an amount sufficient to cover any potential charges to the account and to avoid a forced liquidation.
Mark-to-Market (MTM) refers to the method of calculating values for positions based on daily movements of the position calculated against the closing or settlement price of the product for that day. At the end of each business day, the open positions carried in an account are credited or debited funds based on the settlement price of the open positions that day.
First In, First Out (FIFO) is the practice of using the first initiated position in a security as the trade that is paired off against the most recent closing trade in that same security. This method is often used for tax accounting purposes. In other words, it is the method of valuing securities which uses the oldest items in inventory first.
The goal of this article is to provide proper understanding of exchange fees, add remove liquidity fees, for un-bundled commission schedule.
The concept of adding or removing liquidity is applicable to both stocks and stock/index options. Whether or not an order removes or adds liquidity is dependent on that order being marketable or non-marketable.
Marketable orders REMOVE liquidity.
Marketable orders are either market orders, OR buy/sell limit orders whose limit is at or above/below the current market.
1. For a marketable buy limit order, the limit price is at or above the Ask.
2. For a marketable sell limit order, the limit price is at or below the Bid.
XYZ’s stock current ASK (offer) size/price is 400 shrs at 46.00. You enter a buy limit order for 100 XYZ stock @ 46.01. This order will be considered marketable because an immediate execution will take place. If there is an exchange charge for removing liquidity, the customer will be charged that fee.
In the case of a long or short SSF, the exchange margin margin requirement is equal 20% of the underlying value of the contract (initial and maintenance margin)
In the case of a hedged position (e.g., High or Low Synthetic startegy) in which a customer is long (short) a security futures contract and short (long) the underlying security, the required maintenance margin would be equal to 5% of the instrument having the higher current market value.
When a large dividend payment is forthcoming or if the underlying stock is difficult to borrow, the futures price may trade at a discount to the actual cash price.
Single Stock Futures will typically trade at a premium to the stock price because of an adjustment for interest rates. The premium reflects the interest earned on the capital saved by not posting the full value of the underlying stock (adjusted for any dividends expected to be received prior to expiration).
Single Stock Futures (SSF) may be priced using the following formula:
Futures Price = Stock Price * (1 + (Annualized Interest Rate * Days to Expiration/365)) – Present Value of Dividends due prior to expiration.
Example: On 12/12/07 MSFT closed at $35.31 and has an expected dividend of $0.11 with an ex-date of 2/12/07 (61 days). Assuming an interest rate factor of 4.5%, what is the 12/12/07 settlement price for the MSFT March 2008 SSF (97 days to maturity)?
$35.62 = $35.31 * (1 + (.045 * 97/365)) – ($0.11/(1 + (.045 * 61/365)))
US Single tock Futures (SSF) are a hybrid product, regulated jointly by the SEC and CFTC and allowed to be carried in either a securities account or commodities account. IB elects to carry all SSFs in the security side of the universal account as this is the only way that margin offset can be provided against other security products (i.e., stock, options).
US SSFs are listed at the OneChicago exchange and are cleared through OCC.
In the case of an EFP purchase, one can let the long futures contract expire and take delivery of the long stock position at expiration, roll the futures contract prior to expiration or close the contract prior to expiration.
In the case of an EFP sale, one can let the short futures contract expire and take delivery of the short stock position at expiration, roll the futures contract prior to expiration or close the contract prior to expiration.
While the High and Low Synthetic strategies are both hedged positions, the futures leg is subject to a daily cash variation of the mark-to-market gain or loss whereas the stock leg is not (mark-to-market gain or loss is reflected in account equity but there is no cash impact until the position is closed). If, for example, an account holds a High Synthetic position and the stock prices increases significantly, the resultant variation pay on the short futures leg may erode the account’s cash balance resulting in a debit balance which is subject to interest payments. The net effect in this example would be to reduce and potentially erase the earnings on the High Synthetic position