Rule 611 of SEC Regulation NMS

Overview: 

Executions in equities will sometimes be listed as R6, which is short for Rule 611 of SEC Regulation NMS.  This condition code indicates that the execution(s) in question is not subject to trade-through rules.  R6 trades are given an SEC exemption.

Rule 611, which is the Trade Through Exemption of SEC Regulation NMS, is very lengthy to cover in detail.  Parties interested in reading the rule in its entirely should type "SEC Rule 611" into an internet search engine.  This is the portion of the document that is pertinent to IB traders, in a nutshell:

Typically the trades involved are a multi-component trade involving orders for a security and a related derivative, or, in the alternative, orders for related securities, that are executed at or near the same time.  The SIA (Securities Industry Association) notes that the economics of a contingent trade are based on the relationship between the prices of the security and the related derivative or security, and that the execution of one order is contingent upon the execution of the other order. 

The bottom line is that when a trade is ruled R6 the SEC has granted a trade-through exemption.  This means that these execution reports do not affect the resting orders in-between the market at the time, and the R6 execution.  For example, the real market is quoting 10.50 at 10.51, and an execution is reported at 10.90.  This execution was given an R6 exemption.  A sell limit order at 10.75, an an example, would not be executed because the 10.90 execution was given an R6 status. 

What is an "Odd Lot" in stocks?

Overview: 

Simply stated, an "Odd Lot" is a stock order comprised of less than 100 shares of stock.  So any stock order from 1 share to 99 shares is considered to be an odd lot. 

This is the pertinent information traders should know about odd lot orders:

  • An odd lot is a number of shares less than 100 (1-99)
  • A "Round Lot" is 100 shares of stock
  • Any number of shares that is a multiple of 100 is a round lot (i.e. 100, 600, 1,600, etc)
  • An order for a number of shares greater than 100, but not a multiple of 100 (i.e. 142, 373, 1,948, etc) is a "Mixed Lot" (AKA PRL, or partial round lot, order)
  • Odd-Lot orders are not posted to the bid/ask data on exchanges
  • Odd-Lot orders are taken into the order book at the exchange they are routed to.  When the exchange is able to match an order from the other side of the book with the odd-lot, it will be filled.  This could lead to delay on execution of an odd-lot. 
  • There are numerous guidelines for the routing of odd-lot orders:  Odd-Lot orders to initiate positions will not be routed to primary exchanges; Odd-Lot orders can be routed to primary exchanges, but only if the order in question is to close out a preexisting position; IB will not direct-route odd-lot orders which initiate positions to primary exchanges, therefore these type of orders should be Smart Routed so that IB's routing system can send the order to an ECN for execution.  The exception is that odd lots can be routed to NYSE/ARCA/AMEX, but only as part of a basket order or as a market-on-close (MOC) order.
  • A mixed lot or PRL (i.e. 257 shares) direct-routed to NYSE/AMEX will be submitted in whole to the exchange (applies to both market and limit orders).  If the order is direct-routed to NYSE/ARCA, only the round lot portion of the order will be submitted and, if it is executed, the IB system will cancel the remaining odd-lot portion of the order.  If the order is routed via IB Smart Routing, all market centers are eligible to receive the order according to the Smart Routing logic (including NYSE/ARCA, but only for the round lot portion of the order).
  • IB will not route odd-lot orders for HOLDRS.  The odd-lot portion of a PRL order for HOLDRS will be rejected by the IB system after the round lot portion of the order is executed.
  • Individual exchanges may impose certain restrictions on odd lot orders, in addition to any of the restrictions mentioned above

VWAP

VWAP, or Volume-Weighted Average Price, is a measure of the average price at which a stock traded over a given timeframe (typically one day).  Assume, for example, the aggregate trades for stock ABC on day ‘T’ equals 100 shares at $21.00, another 100 shares at $22.00 and 300 shares at $24.00. The calculation for the VWAP of ABC for day ‘T’ is as follows: 

(100 * $21.00) + (100 * $22.00) + (300 * $24.00)/(100 + 100 + 300)  = $23.00

                         

 

Overview of Accumulate / Distribute Algorithm

Overview: 

Accumulate/Distribute is a sophisticated trading algorithm which allows one to buy or sell large orders by splitting the trade into multiple orders with the goal of reducing visibility and market impact.

When to Use
This order type is geared towards traders of large position blocks as well as high frequency traders and is intended to run unattended while logged into the TWS.
 
How to Locate
The Accumulate/Distribute algorithm can be accessed from the TraderWorkstation by selecting the Trading and then Accumulate/Distribute menu options at the top of the page or it can be added to the trading tool bar menu by clicking on the Add More Buttons icon.
 
Order Set Up
Once the trader has defined the instrument and action (buy or sell), the following parameters are to be specified:
 
  1. Total Quantity – defines the aggregate order size (e.g., shares, contracts);
  2. Trade Increment – defines the unit (e.g., shares, contracts) size for each component order;
  3. Time Increment – defines the period of time (seconds, minutes or hours) between the submission of a component order and the submission of the following order;
  4. Order Type – may select from market, limit or relative. A market order will be executed at the ask price and should only be used where, for example, a stock is highly liquid with significant bid-ask sizes. Limit and Relative order types require that the trader specify additional order relationships and the choices are numerous. The execution price, for example, may be specified as being relative to a fixed value, bid, ask or last price, VWAP, moving average or last trade. These choices may be increased or decreased by an offset factor and multiple conditions may be established. For example, one may wish to create a relative order type to match the bid price plus an offset factor of $0.01 and to ensure that they don’t lift the ask if the spread is $0.01, add a condition that the bid be no less that $0.02 beneath the ask price.
  5. How to Operate – if the trader does not check the box titled “Wait for current order to fill before submitting next order” then orders which do not meet the price conditions will continue to accumulate in accordance with the established time increment, the unexecuted orders will be aggregated into one or more potentially sizable orders at the exchange. If this box is checked, then the more restrictive the buying conditions, the greater the likelihood that the algorithm will fall behind its schedule of buying or selling at every ‘X’ interval.  If this box is checked the trader may then check the box titled “Catch up in time”. When that box has been checked and should the algorithm fall behind, the next orders will be placed immediately after their predecessor fills until such time the algorithm has caught up.
  6. Randomization – check boxes are provided to allow for a +/- 20% randomization in the time increment and a +/- 55% randomization in the trade increment. Accordingly, in the case of a 30 second time increment, this would allow for randomization of between 24 and 36 seconds between orders and in the case of a 500 share trade increment, this would allow for randomization of between 200 and 800 shares (rounded to the nearest round lot) per order. Randomization serves to minimize the likelihood of others detecting your order.
  7. RTH – a check box is provided which will allow the order to be filled outside of regular trading hours.
  8. Take up Offer Size – if a limit or relative order type is selected, the trader may input an order size which if bid (in the case of a sell order) or offered (in the case of a buy order) the trader would be willing to take in its entirety, up to the remaining portion of the total order quantity (satisfies the price conditions).
Managing the Trade
The Accumulate/Distribute algorithm also allows for conditions to be established which, if not met, will cause the algorithm to either stop permanently or resume when the conditions are again satisfied. These include the following:
 
  1. Price Range - traders may specify a price range outside of which they do not want to buy the stock;
  2. News – the trader may stop the algorithm for some period of time if there is news on the stock, for example;
  3. Position - traders may stop the algorithm based upon their position in the stock; For example, a trader running multiple algorithms one to buy the stock and another to sell in an attempt to trade the stock back and forth for a profit may decide to suspend one side if the position becomes substantially imbalanced;
  4. Stock Path – a trader, for example, may wish to suspend the algorithm if a given moving average, say the 10-minute VWAP is not at least as high as another average, say the 50-day moving average. This feature enables you to set up algorithms to trade chart points even when you are not looking at the chart at that moment;
  5. Stock Path for Multiple Symbols – this condition is similar to the last except that it calls for two symbols. Here you can put in any symbol and compare some data point regarding that symbol (e.g., 10-minute VWAP, etc.) to the same or a different data point regarding the second symbol. These comparative conditions can apply to different symbols or to the same symbol.   For example, you could specify that you want to buy a certain stock only if it has been in a continuous uptrend. So in addition to the 10-minute VWAP being higher than the 50-day moving average, you would also like the 10-day moving average to be higher than the 30-day moving average on this stock.
Other Considerations
Acceptable inputs for this algorithm include:
  1. Products – any product offered by IB (stocks, options, ETFs, bonds, futures, Forex) other than mutual funds;
  2. Order Type – market, limit or relative.

IMPORTANT NOTE

This algo will only operate when the trader is logged into the TWS.  If the trader has been logged out prior to the algo completing (either by user action or by the automated nightly restart), a message will appear upon the next log in which will allow for re-activation of the algo.

Overview of the Scale Trader Algorithm

Overview: 

The ScaleTrader is a sophisticated trading algorithm which allows one to enter a large quantity order that is executed in a series of increments or components, with each component being executed at a progressively better price.

When to Use
The use of this algorithm is well suited to situations where a stock is trading at or near the bottom of a trading range and the trader is looking to average down, buying into a declining market. Alternatively, it may be used on the opposite side when the trader is looking to sell into the top of the trading range, perhaps scaling out of a long position. In either situation, the Scale Trader algorithm also allows the trader to scalp the market, submitting opposite profit taking orders against the original order.
 
How to Locate
The Scale Trader can be accessed from the TraderWorkstation by selecting the Trading and then Scale Trader menu options at the top of the page or it can be added to the trading toolbar menu by clicking on the Add More Buttons icon.
 
Order Set Up
Once the trader has defined the instrument and action (buy or sell), five parameters will need to be specified. Traders will also need to define the order type and time in force. These five parameters for a stock purchase (sale) would be as follows:
 
  1. Total Order Size (TOS) – the total number of shares the trader is willing to purchase (sell) as the price falls (increases);
  2. Initial Component Size (ICS) – the number of shares to be purchased (sold) at the Starting Price;
  3. Subsequent Component Size (SCS) – the additional number of shares to be purchased (sold) at each Price Increment (at successively lower prices in the case of a purchase and higher in the case of a sale). If a SCS is not entered, the ICS will be used for all component orders.
  4. Starting Price (SP) – the price at which you are willing to purchase (sell) the Initial Component Size
  5. Price Increment (PI) – in the case of a purchase (sale), this is the decrease (increase) in price at which each successive component order is to be executed.
Based upon the inputs provided to those parameters, the Scale Trader application will calculate a Top Price (TP) and a Bottom Price (BP) which, depending upon the buy or sell action selected, will either determine the price at which the last order will be executed (BP for purchases and TP for sales) or be relevant only if the same scale is used to close or restore the size of the position (TP for purchases and BP for sales). Adjustments made to either of these two factors will be reflected in the PI and their calculations are as follows:
 
  1. TP = (((ICS/SCS) -1) * PI) + SP
  2. BP = SP – (((TOS - ICS)/SCS) * PI
Note that once a product symbol has been entered a price chart will be displayed to assist in specifying the parameters. The algorithm will not be activated until the Transmit button has been clicked and once transmitted will run indefinitely until stopped or changed or it encounters conditions where it stops. It's important to note that this particular algo will continue to run even if the trader is not logged in to the TWS.
 
Example
Assume a GTC limit order is entered into the Scale Trader to buy 1,000 shares of hypothetical stock ABC having a NBBO of $19.95 - $20.00 at a starting price of $20.00 with 500 more shares purchased at every $0.05 down, resulting in a maximum position of 4,000 shares. The five parameters for this order would be as follows:
 
  1. TOS = 4,000;
  2. ICS = 1,000;
  3. SCS = 500;
  4. SP = $20.00
  5. PI = $0.05
This order would be then be scaled into 7 components consisting of one at 1,000 and 6 at 500 each. The first component is submitted at $20.00 and after it fills the next component (500) would be submitted at $0.05 lower. That order would wait until marketable and once it has been filled the next component will be submitted. This pattern continues until all components have been filled or the order has been cancelled.
 
Managing the Trade
  1. Profit taking orders – the Scale Trader may be set to send an offsetting order to take advantage of periodic price surges or if the trader has reached a specified profit objective. This feature may be enabled by checking the box titled “Create profit taking order” and specifying the Profit Offset. Using the example above and a Profit Offset of $1.00, once the ICS was filled at $20.00 and an SCS submitted at $19.95, two profit orders would also be submitted, one for 500 shares at $21.00 and another for 500 shares at $21.05. It should be noted that profit orders are scaled to the SCS regardless of the size of the ICS and that if the ICS > SCS then the profit order price is determined using the PI along with the Profit Offset. 
  2. Restore size after taking profit – if using the profit taking orders feature, the trader can enable the repurchase of shares sold at a profit at the price they were originally bought at by checking the box titled “Restore size after taking profit”. This feature remains active whenever the price is within the range of TP + Profit Offset and BP. Using the example above, if order to sell 500 shares at $21.00 was executed this fill quantity would be put back into the original order at $20.00 and the order submitted at $19.95 would be cancelled.
  3. Restart Scale Trader & Restart Scale Trader with Filled Component Size – these features allow traders using the profit taking order and restore size features to restart the algorithm if stopped, helping to resume the order starting from the point at which the scaled sequence left off.
  4. Auto Price Adjustment – selecting this check box allows for an increase or decrease in the starting price automatically at stated time intervals (e.g., increase $0.01 every hour)
  5. Scale Trader Page – provides a view of the real-time status of scale orders, including filled and total quantity, filled, remaining, and total value, and the percent filled for each scale. Accessible via the Page and then Create Scale Trader Page menu options.
  6. View Scale Progress - right-click on the scale order line and select View Scale Progress. This will open a window displaying the complete scale price ladder, the Open/Filled component list for the parent scale order, and the Open/Filled component list for the child profit orders.
Other Considerations
Acceptable inputs for this algorithm include:
  1. Products – any product offered by IB other than mutual funds (e.g., stocks, options, ETFs, bonds, futures, Forex);
  2. Order Type - limit or relative (relative not offered for combination orders)
  3. Time in Force – Day, Good-til-Cancel or Day-til-Cancel. May also specify if order is allowed to be filled outside of regular trading hours, if executions may be routed and executed during pre-open session and whether to ignore opening auction.

 

Assets eligible to be transferred through ACATS

Instruments handled by the ACATS system include the following asset classes: equities, options, corporate bonds, municipal bonds, mutual funds and cash. It should be noted; however, that ACATS eligibility does not guarantee that any given security will transfer as each receiving broker maintains its own requirements as to which asset classes as well as securities within a particular asset class it will accept.

Account holders are encouraged to use the Contract Search link on IB’s homepage to assess transfer eligibility prior to initiating a full account transfer request.  In the case of mutual funds, please click here for a list of fund families and funds offered by IB.

ACATS Rejections - Most Common Causes

The rejection of an ACATS transfer request is typically initiated by action of the delivering broker once that broker has had an opportunity to review the request and confirm the details of the account to be transferred.  In the case of certain rejection notices (i.e., categories 1-5 and 10 below), the ACATS process affords the receiving broker (IB) a 24-hour window within which revised information may be transmitted and after which time the transfer request will require resubmission by the client.  During this 24-hour window, IB will attempt to contact the transferring client in an effort to reconcile any discrepancies causing the initial rejection notice. Rejections generally fall into the following categories:

 
Rejections by the Delivering Broker:
  1. Social Security Number/Tax ID Mismatch - the client taxpayer identification number as provided by the receiving broker does not agree with that of the delivering broker’s records. 
  1. Account Title Mismatch - the client account title as provided by the receiving broker does not agree with that of the delivering broker’s records. 
  1. Documentation Needed – the delivering broker requires additional account documentation in order to process a transfer request (e.g., death or marriage legal documents). 
  1. Account Flat – account holds no transferable assets. 
  1. Invalid Account Number – the client account number as provided by the receiving broker is not on delivering member’s books. 
  1. Duplicate – delivering broker is already in receipt of a transfer request involving the same receiving broker and client account..
  1. Account in Distribution or Transfer – another ACATS transfer or other distribution of account assets directly to client is already underway. 
  1. Client Rescinded – client has submitted written request to cancel transfer request. 
  1. Missing Authorization Signature – transfer request requires an additional client and/or custodian signature.

 

Rejections by the Receiving Broker: 

10. Credit Violation - the result of the transfer if effected would be to place the account in margin deficit and subject to forced liquidation.

Glossary terms: 

Dividend Tax Rates

Overview: 

Virtually all countries apply withholding taxes when local companies seek to distribute dividends to externally based shareholders (whether those shareholders are corporate or not).  The rate at which IBKR is obligated to withhold for a given payment depends largely upon whether there is a tax treaty in place between the US and the country of residence of the dividend recipient.  .

The table below depicts certain the rates of withholding as applied by IBKR effective 6-1-2012.

 

Dividend Withholding Rates
  Jurisdiction #1         
Jurisdiction #2          Withholding Rate
  United States Australia 15.0%
  United States Austria 15.0%
  United States Bangladesh 15.0%
  United States Barbados 15.0%
  United States Belgium 15.0%
  United States Bulgaria 10.0%
  United States Canada 15.0%
  United States China 10.0%
  United States Cyprus 15.0%
  United States Czech Republic 15.0%
  United States Denmark 15.0%
  United States Egypt 15.0%
  United States Estonia 15.0%
  United States Finland 15.0%
  United States France 15.0%
  United States Germany 15.0%
  United States Hungary 15.0%
  United States Iceland 15.0%
  United States India 25.0%
  United States Indonesia 15.0%
  United States Ireland 15.0%
  United States Israel 25.0%
  United States Italy 15.0%
  United States Jamaica 15.0%
  United States Japan 10.0%
  United States Kazakhstan 15.0%
  United States Korea 15.0%
  United States Latvia 15.0%
  United States Lithuania 15.0%
  United States Luxembourg 15.0%
  United States Malta 15.0%
  United States Mexico 10.0%
  United States Morocco 15.0%
  United States Netherlands 15.0%
  United States New Zealand 15.0%
  United States Norway 15.0%
  United States Pakistan 30.0%
  United States Philippines 25.0%
  United States Poland 15.0%
  United States Portugal 15.0%
  United States Romania 10.0%
  United States Russia 10.0%
  United States Slovakia 15.0%
  United States Slovenia 15.0%
  United States South Africa 15.0%
  United States Spain 15.0%
  United States Sri Lanka 15.0%
  United States Sweden 15.0%
  United States Switzerland 15.0%
  United States Thailand 15.0%
  United States Trinidad and Tobago 25.0%
  United States Tunisia 20.0%
  United States Turkey 20.0%
  United States Ukraine 15.0%
  United States United Kingdom 15.0%
  United States Venezuela 15.0%
  Canada Algeria 15.0%
  Canada Argentina 15.0%
  Canada Armenia 15.0%
  Canada Australia 15.0%
  Canada Austria 15.0%
  Canada Azerbaijan 15.0%
  Canada Bangladesh 15.0%
  Canada Barbados 15.0%
  Canada Belgium 15.0%
  Canada Brazil 15.0%
  Canada Bulgaria 15.0%
  Canada Cameroon 15.0%
  Canada Chile 15.0%
  Canada China 15.0%
  Canada Croatia 15.0%
  Canada Cyprus 15.0%
  Canada Czech Republic 15.0%
  Canada Denmark 15.0%
  Canada Dominican Republic 18.0%
  Canada Dubai 15.0%
  Canada Ecuador 15.0%
  Canada Egypt 15.0%
  Canada Estonia 15.0%
  Canada Finland 15.0%
  Canada France 15.0%
  Canada Gabon 15.0%
  Canada Germany 15.0%
  Canada Guyana 15.0%
  Canada Hungary 15.0%
  Canada Iceland 15.0%
  Canada India 25.0%
  Canada Indonesia 15.0%
  Canada Ireland 15.0%
  Canada Israel 15.0%
  Canada Italy 15.0%
  Canada Ivory Coast 15.0%
  Canada Jamaica 15.0%
  Canada Japan 15.0%
  Canada Jordan 15.0%
  Canada Kazakhstan 15.0%
  Canada Kenya 25.0%
  Canada Korea 15.0%
  Canada Kuwait 15.0%
  Canada Kyrgyzstan 15.0%
  Canada Latvia 15.0%
  Canada Lithuania 15.0%
  Canada Luxembourg 15.0%
  Canada Malaysia 15.0%
  Canada Malta 15.0%
  Canada Mexico 15.0%
  Canada Moldova 15.0%
  Canada Mongolia 15.0%
  Canada Morocco 15.0%
  Canada Netherlands 15.0%
  Canada New Zealand 15.0%
  Canada Nigeria 15.0%
  Canada Norway 15.0%
  Canada Oman 15.0%
  Canada Pakistan 20.0%
  Canada Papua New Guinea 15.0%
  Canada Peru 15.0%
  Canada Philippines 15.0%
  Canada Poland 15.0%
  Canada Portugal 15.0%
  Canada Romania 15.0%
  Canada Russia 15.0%
  Canada Senegal 15.0%
  Canada Singapore 15.0%
  Canada Slovakia 15.0%
  Canada Slovenia 15.0%
  Canada South Africa 15.0%
  Canada Spain 15.0%
  Canada Sri Lanka 15.0%
  Canada Sweden 15.0%
  Canada Switzerland 15.0%
  Canada Tanzania 25.0%
  Canada Thailand 15.0%
  Canada Trinidad and Tobago 15.0%
  Canada Tunisia 15.0%
  Canada Turkey 20.0%
  Canada Ukraine 15.0%
  Canada United Kingdom 15.0%
  Canada United States 15.0%
  Canada Uzbekistan 15.0%
  Canada Venezuela 15.0%
  Canada Vietnam 15.0%
  Canada Zambia 15.0%
  Canada Zimbabwe 15.0%


Trading Access to the Indian Financial Markets for Non-Residents

By regulation, trading access to the Indian financial markets for individuals residing outside India is currently restricted to "Non-Resident Indians" ("NRIs") and "Financial Institution Intermediaries" ("FIIs") only.

NRI

NRIs are defined in the Indian Foreign Exchange Management Act of 1999 and the Indian Foreign Exchange Management Deposit Regulations of 2000.

In short, to qualify for NRI status you must:

a. Reside outside of India for more than 182 days per year, and;

b. Hold Indian citizenship, or;

c. Be a Person of Indian Origin as defined in the Indian Foreign Exchange Management Deposit Regulations of 2000.

Please note that applicants must satisfy criteria (a) and criteria (b) or (c) and will be prompted to review the aforementioned legislation and confirm their status at the point of application.  To trade Indian products as an NRI, new or existing clients may apply for an account through the IBKR website.

FII
Currently not supported.

Dividend Considerations - US Extended Trading Session

An account holder who purchases a US stock outside of normal or regular trading hours (i.e., 9:30 a.m. to 4:00 p.m. Eastern time) but during the extended trading hours session (i.e., 4:00 p.m. to 8:00 p.m. Eastern time) on the day prior to that stock going ex-dividend is entitled to receive that dividend.  The reasoning behind this is that trades executed during the extended trading hours session on Day 'T' settle at the same time ('T+2') as trades which are executed during regular trading hours on Day 'T'.  All such trades will therefore settle within a timeframe sufficient for the purchaser to be recognized as an owner of the shares prior to the close of the Record Date. 

Following the same logic, an account holder who sells and closes out a long US stock position during the extended trading hours session on the day prior to that stock going ex-dividend will not be entitled to receive that dividend.  However, if the stock was sold stock (i.e. an opening trade), the account holder would be obligated to pay the dividend to the lender of the shares.

Glossary terms: 
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