Anybody knows what’s going on with IB? The stock falled more than 20% yesterday and it’s going down more today. -2.75% as I write.
All brokers & exchanges got hit yesterday after the Bear Sterns fire sale and MF Global rumors. IB does not hold any securitized investments and their risk is with market making and reduced trading volume. They sent out a newsletter assuring everyone the cash is safe with them.
-20% feels like a little too much for (supposedly) less trading volume during a credit crisis.
As far as what the letter claims, do you believe them?
Are you speaking as a potentially concerned investor, or customer?
As I understand it, brokers must keep customers assets seperate from their own, so that in the event of bankruptcy the customers assets are not affected.
I am no expert on this so I could be wrong: my understanding is that this is true for “cash” accounts, but if “margin” account agreements often are two way borrowing agreements: the broker lets you borrow their money for margin buying and lets you borrow stock to short sell AND you agree to let the broker borrow your stock to lend to someone who wants to short sell. So if the broker has some of your shares borrowed when it goes bankrupt, you could find yourself listed with all the other creditors who hope to get repaid. As I said, I am not an expert so I could be mistaken about this.
That being said I have not moved any of my money out of my trading account with Interactive Brokers.
From the IB Website:
Customer securities accounts at Interactive Brokers are protected up to $30 million (including up to $1 million for cash). The market value of your stocks, options, warrants, debt, and cash – denominated in all currencies – is covered by this insurance. Futures, options on futures, and single stock futures are not covered, but available cash will be swept from your futures account to your securities account periodically to take advantage of insurance coverage as much as possible. As with all securities firms, this insurance provides protection against failure of a broker-dealer, not against loss of market value of securities.
This protection is provided by the Securities Investor Protection Corporation (SIPC) and Lloyd’s of London insurers. SIPC provides the first $500,000 per customer (including up to $100,000 for cash). For customers who have received the full SIPC protection, the Lloyd’s policy provides up to an additional $29.5 million (including $900,000 for cash), subject to an aggregate limit of $150 million.
For the purpose of determining a customer account, accounts with like names and titles (e.g. Individual/John Smith and Individual/John Smith) are combined, but accounts with different titles are not (e.g. Individual/John Smith and IRA/John Smith).
SIPC is a non-profit, membership corporation funded by broker-dealers that are members of SIPC. For more information about SIPC and answers to frequently asked questions (such as how SIPC works, what is protected, how to file a claim, etc.), please refer to the following websites:
http://www.SIPC.org
http://www.finra.org/InvestorInformation/InvestorProtection/SIPCProtection/index.htm
The panic selloff may have something to do the rumor on the financial positions of MF Global. The financial sector was in a panic mode and IBKR happen to be in the similar business as MF Global.
The problem with the $30 mil limit is this: “subject to an aggregate limit of $150 million.”
In other words, if IB drags everything down, that $150m will not cover very much.
I still don’t understand the market reaction. IB does not trade. They are not involved in credit risk operations and their model is that of a financial technology firm. What’s the connection with MF Global?
I believe the aggregate limit of $150M only applies to the additional Lloyds protection, not the $500K SIPC protection per customer.
thestreet.com ran a story on this mid week last week (its under their paid service so I don’t want to infringe copyrights by posting). They basically said it was a case of sympathy selling because of MF, but concluded IB was not in the same boat as MF - so not to worry about IB. If fact, they said to buy it.
Carl