Add/Remove Liquidity

Overview: 

The goal of this article is to provide proper understanding of exchange fees and add/remove liquidity fees for the Tiered 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.

Example:
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.


 

Non-Marketable orders ADD liquidity.
Non-marketable orders are buy/sell limit orders in which the limit price is below/above the current market.

1. For a non-marketable buy limit order, the limit price is below the Ask.

2. For a non-marketable sell limit order, the limit price is above the Bid.

Example:
XYZ’s stock current ASK (offer) size/price is 400 shrs at 46.00. You enter a buy limit order for 100 XYZ stock @ 45.99. This order will be considered non-marketable, because it will be posted to the market as the best bid, and instead of being immediately executed.
If and when someone else sends a marketable sell order that causes your buy limit order to be executed, you should receive a rebate (credit), if an add liquidity credit is available.
 
 

PLEASE NOTE:
1. All accounts trading options will be subject to any options exchanges’ remove/add liquidity fees or credits.
2. Per IBKR’s website, only negative numbers under the Remove/Add Liquidity schedules are rebates (credits).
 
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If I am assigned on the short leg of an option spread, will the long option leg be automatically exercised so as to offset the resulting stock position from the assignment?

 

The answer depends upon whether the assignment occurred at expiration or prior to expiration (i.e., an American Style option).  At expiration, many clearinghouses employ an exercise by exception process intended to ease the operational overhead associated with the provision of exercise instructions by clearing members.  In the case of US securities options, for example, the OCC will automatically exercise any equity or index option which is in-the-money by at least $0.01 unless contrary exercise instructions are provided by the client to the clearing member. Accordingly, if the long option has the same expiration date as the short and at expiration is in-the-money by a minimum of the stated exercise by exception threshold, the clearinghouse it will be automatically exercised, effectively offsetting the stock obligation on the assignment.  Depending upon the option strike prices, this may result in a net cash debit or credit to the account.

If the assignment takes place prior to expiration neither IBKR nor the clearinghouse will act to exercise a long option held in the account as neither party can presume the intentions of the long option holder and the exercise of the long option prior to expiration is likely result in the forfeiture of time value which could be realized via the sale of the option.

Are there commissions associated with option exercise or assignment?

The answer depends upon the option type and its region of listing. There is no IBKR commission associated with an exercise or assignment of US stock and index security options and out-of-the-money non-US index options. A commission is charged for an exercise or assignment of an in-the-money non-US index option and for options on futures. Please refer to the Other Fees section of the IBKR website for details.

What positions are eligible for Portfolio Margining?

Overview: 

Portfolio Margining is eligible for US securities positions including stocks, ETFs, stock and index options and single stock futures.  It does not apply to US futures or futures options positions or non-US stocks, which may already be margined using an exchange approved risk based margining methodology.

Are there any qualification requirements in order to receive Portfolio Margining treatment on US securities positions and how does one request this form of margin?

Overview: 

In order to enabled for portfolio margining an account must be approved for option trading and must have at least USD 110,000 in net liquidating equity (USD 100,000 to maintain, once enabled). Account holders will also be required to acknowledge and sign the Portfolio Margin Risk Disclosure document and be bound by its terms.  

Portfolio margining may be requested through the on-line application phase (in the Account Configuration step)  or after the account has been approved. To apply once the account has already been approved, log into Client Portal and select the Settings and Account Settings menu options. In the Configuration section, click the gear icon next to the words "Account Type". There you may choose the portfolio margin treatment which will initiate the approval process.  Please note that requests are subject  to review  (generally a 1-2 day process) and may be declined for  various reasons  including a  projected increase  in margin  upon upgrade  from Reg T to Portfolio Margining. 


 

What is SMA and how does it work?

Overview: 

SMA refers to the Special Memorandum Account, which represents neither equity nor cash, but rather a line of credit created when the market value of securities in a Reg. T margin account increase in value. Its purpose is to preserve the buying power that unrealized gains provide towards subsequent purchases which, absent this handling, could be assured only by withdrawing excess equity and depositing it at the time the subsequent purchase is made. In that sense, SMA helps to maintain a stable account value and minimize unnecessary funding transactions.

While SMA increases as the value of a security goes up, it does not decrease if the security falls in value. SMA will only decrease when securities are purchased or cash withdrawn and the only restriction with respect to its use is that the additional purchases or withdrawals do not bring the account below the maintenance margin requirement. Transactions which serve to increase SMA include cash deposits, interest income or dividends received (on a dollar for dollar basis) or security sales (50% of the net proceeds). It’s important to note that the SMA balance represents an aggregation of each historical bookkeeping entry impacting its level starting from the time the account was opened. Given the length of time and volume of entries this typically encompasses, reconciling the current level of SMA from daily activity statements, while feasible, is impractical. 

To illustrate how SMA operates, assume an account holder deposits $5,000 and purchases $10,000 of securities having a loan value of 50% (or margin requirement equal to 1 – loan value, or 50% as well). The before and after account values would appear as follows:

Line Item
Description
Event 1 - Initial Deposit
Event 2 - Stock Purchase
A.
Cash
$5,000
($5,000)
B.
Long Stock Market Value
$0
$10,000
C.
Net Liquidating Equity/EWL* (A + B)
$5,000
$5,000
D.
Initial Margin Requirement (B * 50%)
$0
$5,000
E
Available Funds (C - D)
$5,000
$0
F.
SMA
$5,000
$0
G.
Buying Power
$10,000
$0

Next, assume that the long stock increases in value to $12,000. This $2,000 increase in market value would create SMA of $1,000, which provides the account holder the ability to either: 1) buy additional securities valued at $2,000 without depositing up additional funds and assuming a 50% margin rate; or 2) withdraw $1,000 in cash, which may be financed by increasing the debit balance if the account holds no cash. See below:

Line Item
Description
Event 2 – Stock Purchase
Event 3 - Stock Increase
A.
Cash
($5,000)
($5,000)
B.
Long Stock Market Value
$10,000
$12,000
C.
Net Liquidating Equity/EWL* (A + B)
$5,000
$7,000
D.
Initial Margin Requirement (B * 50%)
$5,000
$6,000
E
Available Funds (C - D)
$0
$1,000
F.
SMA
$0
$1,000
G.
Buying Power
$0
$2,000

*EWL represents equity with loan value which, in this example, equals net liquidating equity.

Finally, note that SMA is a Reg. T concept used to evaluate whether securities accounts carried by IB LLC are in compliance with overnight initial margin requirements and it is not used to determine compliance with maintenance margin requirements on either an intraday or overnight basis. It is also not used to determine whether commodities accounts are margin compliant. Similarly, accounts which report negative SMA at the time each day when overnight, or Reg.T initial margin requirements go into effect (15:50 ET) are subject to position liquidations to ensure margin compliance.

 

 

How do I transfer my US securities positions from my current broker to IB?

Overview: 

Broker to broker transfers for US securities are conducted via a process known as the Automated Customer Account Transfer Service or ACATS.  This process generally takes between 4 to 8 business days to complete in order to accommodate the verification of the transferring account and positions. The request is always initiated via the receiving broker (IB in this case) and can be prompted by following the steps below.

1.      Log into Account Management and select the Transfer & Pay and then Transfer Positions menu options.

2.      From the Transaction Type drop-down list select 'Inbound Position'

3.      From the Method drop-down list select 'ACATS'.

4.      Enter the sending Broker Information in the fields provided, and click CONTINUE

5.      In the Transaction Information section, indicate whether or not you wish to transfer all assets and select Yes to the authorization option. 

a.       Note that a "transfer all assets" election does not require that you specify any assets as an attempt will be made to transfer your account in its entirety.  Account holders should note, however, that certain positions may not be on the list of securities eligible to trade at IB and others, while transferable, may be subject to a house margin requirement higher than that of the delivering broker.  In the event IB receives an asset list from the delivering broker which includes ineligible positions or the aggregate of the positions transferred are such that a margin deficit would exist were the transfer to occur, IB will attempt to contact you to remedy the situation within the allocated time frame after which an automatic reject of the full transfer would take effect.  Account holders may wish to minimize potential delays or problems associated with a ‘Full’ transfer request by verifying security eligibility and margin requirements via the Contract Search link located at the upper right hand corner of the IB homepage prior to initiating the transfer.

b.      If you elect to not "transfer all assets", the system will require that you specify the positions you wish to transfer. Click Add Asset to add the positions you wish to transfer. Fill out the Asset Search and Transaction Information sections and click Continue.

6.      On the page that appears, type your signature in the Signature field, and then click CONTINUE.
Click BACK to modify the transfer request.

Please note that brokers generally freeze the account during the transfer period to ensure an accurate snapshot of assets to transfer and may restrict the transfer of option positions during the week prior to expiration. You may wish to check with the delivering broker to verify their policy in this regard. In addition, please note if your IB account is currently maintaining positions on margin, any cash withdrawals or adverse market moves could increase the likelihood that your account falls out of margin compliance during the transfer period which may delay or prevent completion of the transfer. 

 

IMPORTANT NOTICE

Applicants may meet the initial account funding requirement through the transfer of securities positions and/or cash via the ACATS system.

Why am I not informed of the assignment on my US securities option position until the following day?

Overview: 

The processing of exercise notices for American style options on days other than the expiration date is not performed on a real-time basis, but rather as part of a nightly batch process by the Options Clearing Corporation (OCC).   The processing sequence, which by definition results in a notification lag of at least one day to the assigned client, is as follows: 

  • OCC generally allows its clearing members to submit exercise notices on behalf of the clients holding a long position electronically throughout the day, but generally no later than the start of their critical processing in the evening (Day E). 
  • As part of its evening position processing sequence, OCC randomly assigns the exercise notices it has received to the open interest of its clearing members.  That information is then made available by OCC to its clearing members early in the morning on the following day (Day E+1). 
  • At the point in which that information has been made available, clearing firms such as IBKR have already completed their processing of that day’s trade activity in order to provide timely statements, margin and settlement information to their clients.  Also, since OCC carries the client positions of its clearing members in an omnibus manner (i.e., they do not know the identity of the clients, only the clearing firm), the clearing member must, in turn, execute a random process to assign those exercise notices to clients holding a short position in that particular option series. 
  • Once IBKR receives notice of the assignment from OCC and completes its random assignment process, the assignments will be readily posted to the Trader Workstation of the impacted accounts and reflected on the Daily Activity Statement as of that day’s close (E+1). 

In addition, due to this processing sequence and the fact that a long option may have remaining time value, IBKR cannot automatically provide an exercise notice to OCC for any long option spread against the assigned short option as a means of offsetting the ensuing delivery obligation. 

Account holders should refer to the Characteristics and Risks of Standardized Options disclosure document which is provided by IBKR to every option eligible client at the point of application and which clearly spells out the risks of assignment.  This document is also available online at OCC's web site.

My account was debited for a dividend payment (Payment in Lieu) for a short stock position which I don’t recognize. How did this occur?

Overview: 

 

A short stock position may originate from an option position which you held in your account.  For example, if you hold a long put position in your account, that position may be subject to automatic exercise by the clearinghouse if it is in-the-money by a defined threshold at expiration.  This put exercise will generate a short stock position in your account (assuming you do not have an offsetting long position), and you are obligated to pay any dividends should you maintain a short stock position on the ex-dividend date. 

 

Similarly, a short call position in your account is subject to assignment should a call purchaser elect to exercise their right to purchase the stock and your account be allocated through the random clearinghouse and broker assignment process.  This call assignment will generate a short stock position in your account (assuming you do not have an offsetting long position), and you are obligated to pay any dividends should you maintain a short stock position on the ex-dividend date. 

 

These payments will be reflected on your Activity Statement as a 'Payment In Lieu Of Dividend'.

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