Non-Guaranteed Combination Orders
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:
- Method 1 - Users can select the Non-Guaranteed attribute in the Misc. section on the Order Ticket for a particular order
- Method 2 - Users can add the Non-Guaranteed column to the Order Management section of the TWS
Notes:
- Non-Guaranteed combination orders are not available for Financial Advisor allocation orders
The risk of such 'Non-Guaranteed' orders is illustrated through the example below:
Example
Assume the following quotes for a Stock vs. Stock combination order to purchase shares of Microsoft (MSFT) and sell shares of Appl (AAPL).
Current markets
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
Pay 224
Based on the current markets, the order would appear to be executable.
- A buy of 200 shares of AAPL are routed with a 250.30 limit. Only 100 execute.
- A sell of 200 shares of MSFT are routed with a 26.30 limit. No execution is received as the market moves to 26.29 bid.
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.
Special risks of Exchange For Physical (EFP) products
Overview:
The following article discusses the special risks associated with hedged financing transactions which employ the traditional OneChicago single stock future contract (designated by product symbol suffix of "1C") which is eligible for adjustment on special dividends or distributions but not adjusted for ordinary dividends. The particular risk described below can be avoided through use of the Exchange's dividend protected or NoDiv product (designated by product symbol suffix of "1D") which are adjusted to remove the impact of all dividends.
Discussion:
Account holders transacting in EFPs, including Low Synthetic Yield positions using the OneChicago traditional single stock future ("1C" product) are advised to pay particular attention to the risks inherent in such positions, the effect of which may be to significantly alter the cost of the position. These risks generally originate from corporate actions, specifically those involving a distribution to the holder of record for the stock with no corresponding adjustment made to the futures contract deliverable.
As background, a Low Synthetic Yield position, or EFP purchase, consists of a long single stock future coupled with a short underlying stock position. Traders maintaining this type of position are typically seeking to avail themselves of market implied borrowing rates which are more advantageous than those quoted by carrying brokers (i.e., the stock is sold and bought forward at a net carrying cost which is lower than that of the available lending rate). In certain instances, however, the single stock future may be trading at parity or even at a discount to the stock price, seemingly implying a no-cost loan of the short sale proceeds and/or a locked-in profit from selling the stock at a higher price today than that which one will be obligated to deliver at in the future.
Take, for example, the ING Group N.V. (ADR) EFP. On October 29, 2009, the stock was quoted at $13.29 and the Dec '09 future at $12.50, an implied annualized discount of approximately 43%. While the ability to sell the stock then at $13.29 and buy it back at a 51 day forward price of $12.50 appeared to guarantee a locked in profit of $0.79 per share (excluding commissions and any carrying costs), traders would also have had to take into account the likely impact of the firm's announcement three days prior of a restructuring plan which included the issuance of rights providing for repayment of a capital injection made by the Dutch State. Under the terms of this plan, announced to the public on November 18th following European Commission approval, shareholders of record as of November 27th were to receive a distribution of non-transferable rights on November 30th.
Also critical to the risk of this position was the determination announced by OCC's Securities Committee on November 23rd that no adjustment would be made to the futures contract. As a result, traders maintaining a Low Synthetic Yield position comprised of the long future and short stock held through the ex-date of November 24th, were obligated to deliver the rights on November 30th (then priced at approximately $3.32 per share) to the stock lender with no offsetting adjustment made to the long future. The effect of this corporate action upon traders initiating a single EFP position at the October 29th prices quoted above and exiting all positions at the November 30th closing prices would not have been to realize a gain, but rather sustain a loss (excluding commissions and any carrying costs) of approximately $254.00. A summary of this transaction is provided below.
|
Product/Action
|
Cash
|
|
Stock
-Sell 100 @ $13.29 on 10/29/09
-Buy 100 @ $9.50 on 11/30/09
Net
|
$1,329
(950)
$379
|
|
Future
- Buy 1 contract @ $12.50 on 10/29/09
- Sell 1 contract @ $9.49 on 11/30/09
Net Variation
|
($301)
|
|
Right
-Buy 100 @ $3.32 on 11/30/09
|
($332)
|
|
Totals
|
($254)
|
What is the exchange minimum margin requirement on SSF positions?
Overview:
In the case of a long or short SSF, the exchange 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 strategy) in which a clilent 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.
Will a long SSF ever trade at a discount to the underlying stock?
Overview:
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.
Why does a long SSF typically trade at a premium to the underlying stock?
Overview:
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).
How are SSFs priced?
Overview:
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)))
Is a US Single Stock Future a security or commodity product?
Overview:
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. IBKR elects to carry all SSFs in the security side of an 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.
What happens to a single stock future EFP at contract expiration?
Overview:
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.
Are there any particular risks that one should be aware of when using SSFs to either invest excess funds or borrow funds at available synthetic rates?
Overview:
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
Is there a benefit to using EFPs if one doesn’t have an existing long or short stock position to swap?
Overview:
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).
