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do you trust your broker? interactive brokers
Posted by: fk (IP Logged)
Date: September 3, 2010 03:44PM

I had this experience today with IB (interactive brokers).

30 min. before end of trading day, I put in an order to sell

25 BRK.B @ 81.30$ (set to all or none execution)

The bid ask spread is one cent apart, average daily volume is 4M, so I expect the trade would get executed in 2 seconds. But as the last trading price keeps going up, to 81.35 and higher, my order still sits there unexecuted. After about 2 minutes, I modify my order to the current bid price, and remove the "all or none execution" flag, thinking that might be the reason. Once again, the last trading price continues to climb, higher than my limit order yet my order goes on unexecuted.

Just to confirm that I think something fishy is going on, I logon to my wells fargo trading account, in which I also hold BRKB, and did the same exact order, i.e. sell 25 shares limit order at current market bid price, whihc is once cent different than ask price. 10 seconds later my order is executed.

I switch back to IB trade session, try to cancel the order, but it won't let me. So it's 40 min. past end of trading hours, there's some active after hours trading on BRKB with current price above my limit ask price and my order is still just sitting there.

My guess is IB is exploiting their market maker status and holding their clients orders longer than necessary to skim off of transactions.

Any thoughts on this, or recommendations on brokers who aren't market makers with conflict of interests? In this day of flash trading, whenever the bid/ask spread is 1 cent the order should execute pretty instantaneously for small size orders.



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Re: do you trust your broker? interactive brokers
Posted by: Sivaram (IP Logged)
Date: September 4, 2010 05:21PM



Interactive Brokers is supposed to be a big broker. I would find it surprising if they pursue actionst hat hurt their clients since their brokering is their main business. What you are saying is weird and you may want to see if Interactive Brokers has an explanation.

Whatever the cause, it does sound bizarre. Maybe a technical problem? Or have you encountered this often?

---------
Check out my investing blog - contrarian with a macro focus and a value investing tilt: Can Turtles Fly? A Contrarian Investing Blog.


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Re: do you trust your broker? interactive brokers
Posted by: augustabound (IP Logged)
Date: September 4, 2010 05:49PM

What did the customer service rep say when you called?


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Rating: 3.0/5 (2 votes)



Re: do you trust your broker? interactive brokers
Posted by: fk (IP Logged)
Date: September 5, 2010 10:55AM

I'm going to talk to IB's customer service next week. I was quite happy overall with IB the first year I used it. With commissions for small retail investors averaging 1$ per equity trade and 1$ per option trade, it's quite nice. They charge 10$ a month for data subscription fee, but probably most of that is just a fee they pass through and don't make much of a margin. After the credit crisis, they instituted an extra monthly charge, basically about 20$ a month less whatever trading commissions you generated. So originally when I signed up, I was effectively paying 10$/month for the privilege of 1$ equity or option trades. Now I'm paying 30$ a month whether I do any trades or not. That part doesn't bother me, it's all transparent and understandable, especially for clients like me who don't trade much most of the time.

The situation I described with BRKB is not the first time it happened to me. It also happened with UTMD about 6 to 12 months ago. As it's a small cap, relatively low volume trading stock, with bid/ask spread as much as 30 cents, I just shrugged it off. Although it was very puzzling when my limit sell price was 30 to 100 cents less than the current bid/ask and the last sale price and still my order went unexecuted. I also had the order set to "all or none".

For those of you who don't know what "all or none" is, it will only execute the order if it sells the entire lot you specified. Otherwise what can happen is your order can be split into several orders, generating a commission for each chunk. This really pissed me off when I had one buy order which ended up getting me a tiny lot as one of the orders, and it didn't even fill the whole order at my limit buying price. So I ended up holding 2 shares bought at something like 20$ each. So I paid a 1$ commission for moving 40$ worth of equity, then another 1$ to close such a tiny meaningless position.

Sometime in the past year, IB also made the "all or none" option hard to find. They moved it in their menu structure where it used to be easily accessible to a difficult to find submenu. And there's no way to make it a default as part of your order. Each time you order, you have specify that option.

I suspect at the very least my BRKB order not going through is a way to try to train/persuade me to stop using the "all or none" option.

IB is an extremely profitable business. They generate something like 50% pretax profit margins. With such low commisions, I'm highly skeptical they have such a high profit margin without skimming on the high volume of trades that they do. I doubt they would do it in such an egregious and obvious way such as showing slightly delayed erroneous real time prices, but I'd be incredibly surprised if they didn't skim in non-obvious ways. There are perfectly legal ways in which they probably do it. For example, when day traders decide they want a clean slate and want to choose the menu option to just close all their positions, those positions are being closed at market prices. You think IB is trying to get the best sell price for those orders, or like any other middle man they would try to skim some of each transaction on each trade? Traders probably all suspect it's going on but see it as a small price to pay for the well written software trading platform. The extraordinary volume of electronic trades happening daily, all run by software, you really think they would be so honest not to at least try to skim fractions that are hard to notice? I would venture to guess any opportunity they can do it that's within legal or even some grey area, they would. Just as long as it's not blatantly and obviously illegal.





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Re: do you trust your broker? interactive brokers
Posted by: Sivaram (IP Logged)
Date: September 6, 2010 11:08AM



FK,

I highly doubt Interactive Brokers is engaged in dubious practices that you speculate on. The only reason I'm skeptical is because their main business is brokerage services and if customers lose confidence they'll go bankrupt literally overnight. Companies usually try to earn off dubious practices not associated with their core business. For instance, many ultra-low commission brokers may provide low commissions but they may charge a lot to move money out of their account, or if you try to get a paper statement or if you convert into different currencies, and so forth. There are also laws limiting practices related to getting best prices and the like.

Also, my impression is that traders care more about small changes in prices than long-term investors. Traders may live off a 1% return (per day or week) and if the broker takes off even 0.25% of a transaction they will notice it. So I doubt Interactive Brokers could get away with trying to skim off profits.

Having said all that, you may want to investigated the 'all or none' option. It's possible that option doesn't guarantee the lowest price, and, instead, only guarantees "best" prices (or best execution). I have a feeling this option may be the culprit. (Totally unrelated but for what it's worth, in Canada, the TSX and TSX Venture, got rid of all-or-none trades a while ago because they apparently couldn't guarantee low price (regulation became stricter I think) while being profitable for brokers.)

---------
Check out my investing blog - contrarian with a macro focus and a value investing tilt: Can Turtles Fly? A Contrarian Investing Blog.


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Rating: 5.0/5 (2 votes)



Re: do you trust your broker? interactive brokers
Posted by: fk (IP Logged)
Date: September 6, 2010 04:24PM

Sivaram,

As I said, I doubt they would do anything too obvious, so in principle I agree with what you're saying. But within legal limits there are plenty of ways for them to take their cut as a middle man. One example I cited was a trader who wants to close all of his positions in one electronic command to get a clean slate quickly instead of manually setting up limit orders for all of his positions. He knows his market orders are going to get skimmed by middle men, but the price of that expedience and convenience is worth it.

Have you noticed in the past year, all highly traded equities are trading with 1 cent bid/ask spreads? This is from the prevalence of flash trading. One beneficial side effect is retail investors with smaller orders get high liquidity and quick trade executions. IB has about 12B$ of client equity. IB has real time detailed knowledge of what all their traders are doing, what orders they're thinking about placing and what price they tentatively entered before they even hit the send/confirm button to execute a trade. You think with all that juicy info at IB's disposal, they're not doing any flash trading or some type of predictive programming to take some short term positions that would happen to benefit from trades that are likely to occur? Also they know the trading historys of all their client accounts, lots of juicy data to enter into any predictive algorithms.

I get 100 free equity trades (refreshed annually) with Wellstrade, but option trades cost 10$ each. The option trading I do is mostly hedging my boring Buffett type holdings, some covered call writing. So I do just enough trading of options to justify the effective 30$/monthly IB fee for the privilege of 1$ option trades. Another nice thing about IB is their security device (effectively preventing hackers from emptying money from your account). By Wall Street standards, IB is probably honest and ethical.

No one has volunteered names of better online brokers, so perhaps no better options exist at this time.


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Re: do you trust your broker? interactive brokers
Posted by: Adib Motiwala (IP Logged)
Date: September 7, 2010 04:37PM

I use IB as well. I dont subscribe to market data. I only the $10 min if i dont trade. I have not had trouble using them.


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Re: do you trust your broker? interactive brokers
Posted by: fk (IP Logged)
Date: September 7, 2010 08:16PM

Adib,

What do you use as your market data source for equities, and especially options? Free I presume? Any delay? For equities I think google and yahoo finance are real time, but some ADR's might be 20min delayed.


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Rating: 5.0/5 (2 votes)



Re: do you trust your broker? interactive brokers
Posted by: william67 (IP Logged)
Date: May 8, 2013 02:42PM


I have a question. If I have another person trading my acct. at Interactive Brokers, is there any way that person can skim money from the acct. other than by funds transfer? Can anyone answer that question? Thanks in advance. William


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