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
One can enter into an Exchange for Physical (EFP) to either invest excess funds or borrow funds at available synthetic rates. Synthetic rates are determined by taking the difference between the SSF and underlying stock and netting dividends to calculate an annualized synthetic implied interest rate over the period of the SSF.
High Synthetic Bid Rev Yield – represents the investment opportunity available through an EFP sale (buy stock and sell it forward at a premium higher than the interest your cash generates).
Low Synthetic Ask Rev Yield - represents the borrowing opportunity available through an EFP purchase (sell stock and buy it forward at a discount lower than the lending rate available).
The EFP allows for the swap of a long or short stock position for a single stock future, maintaining the same economic long or short position but at more advantageous financing rates and margin requirements. The cost to carry interest rate implied by the single stock future’s price is generally below the rate charged to purchasers of stock who buy on margin, and greater that that provided to sellers of stock on the sale proceeds.
Long Stock – alternative is to buy the EFP which involves a single transaction with two legs, a long future and short stock. The effect of the transaction is to close the long stock position with the short stock position and maintain a long futures position through expiration. The cost of financing the long stock (margin loan rate * 75% of stock price, less any dividends received) tends to be greater than the EFP cost (EFP premium at ask over stock, plus commission, less interest earned on margin balance).
Short Stock – alternative is to sell the EFP which involves a single transaction with two legs, a short future and long stock. The effect of the transaction is to close the short stock position with the long stock position and maintain a short futures position through expiration. There is generally a cost associated with holding the stock short (dividends paid in lieu, less interest earned on 30% margin balance, less interest earned on sale proceeds, if any) as opposed to the credit earned on the EFP (EFP premium at bid over stock, plus interest earned on margin balance, less commission).