## 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

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.

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.

## Special risk relating to offsets between options and futures

Account holders hedging or offsetting the risk of futures contracts with option contracts are encouraged to pay particular attention to a potential scenario whereby a change in the underlying price may subject the account to a forced liquidation even if the account remains in margin compliance.  This scenario is driven by a fundamental difference in which gains and losses are recognized in futures contracts vs. options contracts coupled with IB's requirement that the commodity segment of one's account maintain a positive cash balance at all times.

Gains and losses in a futures contract, by design, are settled in cash and IB updates the account holder's cash balance through the TWS on a real-time basis for any changes in the futures contract price.  An option contract is also marked-to-the-market on a real-time basis but this change in value represents an unrealized (i.e., non-cash) profit or loss with the actual cash proceeds not reflected in the account until such time the contract is either sold, exercised or expires.

To illustrate this scenario, assume, for example, at time 'X' a hypothetical portfolio consisting of a credit cash balance of \$6,850, 2 short Sep ES futures contracts, 2 Long Sep ES \$1,000 strike call options on the futures contract marked at \$31.50 each, with the cash index at \$1,006.  Also assume that at time 'X+1' the cash index increases by 100 points or approximately 10%.  A snapshot of the account equity and margin balances for each date is reflected in the table below.

 Portfolio Time 'X' Time 'X+1' Change Cash \$6,850 (\$3,150) (\$10,000) 2 Long Sep ES \$1,000 Calls* \$3,150 \$10,300 \$7,150 2 Short Sep ES Futures* - - - Total Equity \$10,000 \$7,150 (\$2,850) Margin Requirement \$2,712 \$666 (\$2,046) Margin Excess \$7,288 \$6,484 (\$804)

*Note: the contract multiplier for the ES future and option is 50.

As reflected in the table above, the projected effect of this market move would be to decrease the cash balance to a deficit level based upon the mark-to-market or variation on the futures contracts of \$10,000 (100 * 50 * 2). While the effect of this upon equity would be largely offset by a \$7,150 increase in the market value of the long calls, the unrealized gain on the options has no effect upon cash until such time they are either sold, exercised or expire.  In this instance, IB would act to liquidate positions in an amount sufficient to eliminate the cash deficit while maintaining margin compliance and attempting to preserve the greatest level of account equity.

While hypothetical in nature, this sample portfolio is intended to be illustrative of the liquidity risk associated with any portfolio containing futures and long options where the funding of any variation on the futures position must be supported by available cash or buying power from the securities segment of the account and not unrealized option gains.

## 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:

## OPTION SYMBOLOGY INITIATIVE

INTRODUCTION

Beginning in 2006, working groups comprised of brokers, exchanges, clearing houses and vendors were formed in order to represent each of the U.S. and Canadian securities industries in a multi-year effort to develop a revised data format for representing listed option symbols. These efforts, referred to as the Option Symbology Initiatives (OSIs), are intended to provide the following benefits:

-         Decrease the number of errors in the front, middle and back office processes.
-         Represent the vast majority of listed option contracts using the same symbol as the
underlying security to reduce investor confusion.
-         Reduce corporate action symbol conversions.
-         Eliminate wrap symbols.
-         Eliminate the need for LEAP rollover process.
-         Reduce the frequency of coordination among exchanges for symbol elections.
-         Support the growth in product listings through additional expiration events and more
flexible strike price designations.

The following article provides background information regarding the products impacted by the OSI, the revised data format, project timeline and client impact as well as external links where additional information may be found.

PRODUCTS IMPACTED
The table below lists the product classifications of the US and Canadian exchange listed options which are impacted by the OSIs.  Note that while the mandated conversion date for Canadian options is identical to that of the US (i.e., February 12, 2010), the conversion of Canadian options was accelerated and completed by IB in September 2009.

 US Canadian Equity Equity (short cycle, regular full cycle and long term) Index Index Yield Based Foreign Currency Short Dated Flex

OSI DATA FORMAT
Each OSI will replace the 5-character code with a 21-character OSI identifier to be used in the transmission of listed option contracts between exchanges, the clearinghouses and their constituents. The 21-character OSI identifier comprises six data elements arranged in logical order, each with a minimum field size. An example is provided in the table below.

 5-character Code 21-character OSI Identifier* OSI Data Elements (minimum field size) Option Root Symbol [6]* Yr [2] Mo [2] Day [2] C/P [1] Dollar Strike [5] Decimal Strike [3] SZVXI SPX    111216P01900000 SPX 11 12 16 P 01900 000 WMFAW MSFT  100116C00047500 MSFT 10 01 16 C 00047 500
*If the Option Root Symbol is less than 6 characters, spaces are added to equal the six character minimum.

OSI TIMELINE & CLIENT IMPACT
The industry effort has been organized into two phases:

1. The Conversion Phase in which the OPRA code format will be dropped and the 21-character record layout employed to include the expiration day and decimal strike price. This phase was completed on February 12, 2010; and

2. The Consolidation Phase during which LEAPS, wrap, FLEX, short-dated and non-standard delivery contracts will have their symbols consolidated to that of the underlying (e.g. MSQ to MSFT).  This phase will take place over the 5 weekends starting March 12, 2010 and ending May 14, 2010. Note that there are certain contracts, referred to by OCC Class Consolidation Exceptions, which will not be consolidated.  These contracts include binary and CDO options, options having a 5 character underlying as well as  options having unique settlement terms (e.g., settle on open).  In addition, adjusted symbols which are the result of a prior corporate action will be consolidated to the new OSI corporate action format at the time the underlying class consolidates.

Outlined in the table below are the key milestone and effective dates for this consolidation phase and the products impacted.

 Milestone Date Action Issues/Series Impacted Effective Date Friday, March 12, 2010 Initial group of options representing array of product scenarios to be consolidated (approx 12 classes) Options associated with a strategic group of underlyings including adjusted and non-standard symbols Monday, March 15, 2010 Saturday, March 20, 2010 Standard Expiration Wednesday, March 31, 2010 Quarterly Expiration Friday, April 9, 2010 Consolidation of options whose primary underlying starts with the letters A-C (approx 503 classes) All options associated with 'A-C' underlyings including adjusted and non-standard symbols Monday, April 12, 2010 Saturday, April 17, 2010 Standard Expiration Friday, April 23, 2010 Consolidation of options whose primary underlying starts with the letters D-I (approx 486 classes) All options associated with 'D-I' underlyings including adjusted and non-standard symbols Monday, April 26, 2010 Friday, May 7, 2010 Consolidation of options whose primary underlying starts with the letters J-IR(approx 575 classes) All options associated with 'J-R' underlyings including adjusted and non-standard symbols Monday, May 10, 2010 Friday, May 14, 2010 Consolidation of options whose primary underlying starts with the letters S-Z (approx 503 classes) All options associated with 'S-Z' underlyings including adjusted and non-standard symbols Monday, May 17, 2010

IMPORTANT NOTE:
During this consolidation phase Good-till-Canceled (GTC) and Good-till-Date (GTD) orders will need to be canceled for all the option classes which are scheduled to consolidate. To accommodate this exchange mandate, IB will cancel all customer GTC and GTD orders on the Sunday of each milestone cycle.  Confirmation of these cancellations (outs) will be provided prior to effective date open (Monday) at which point customers may re-enter these orders utilizing the post consolidation symbol.

For additional information, please visit the symbology initiative sections of the OCC and Montreal Exchange websites.

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.

## TWS Message: Order price relative to the market.

The TWS contains two checks to limit the possibility of clients entering trades at prices which are substantially inconsistent with that of the current market.

Under the first check, stock buy orders which are 10% above the prevailing NBBO ask price will be automatically rejected by IBKR as will stock sell orders which are 10% below the prevailing NBBO bid price.  In the case of options, IBKR's automatic rejection threshold percentage for both buy and sell orders is 20%.  When an order violating these parameters is transmitted, it will be rejected and a TWS pop-up window will be displayed with the following warning message: "Limit price too far outside NBBO" or "This order is not accepted.  The limit price cannot be more than 10% through the NBBO.".

The second check relates to orders which are transmitted at prices which do not violate the parameters set by IBKR as outlined above, but which do violate parameters established by the account holder.  Here the account holder is able to establish Precautionary Settings by selecting the Order and then Configure Order Presets menu options from the TWS. This will open up a window providing for the creation of price thresholds set in terms of percentage or the number of ticks outside of the NBBO (settings may also be defined in terms of share/contract quantity or total dollar value of trade).  When an order violating the account holder's parameters is transmitted, it will be rejected and a TWS pop-up window will be displayed with the following warning message: "The price specified would violate the percentage constraint specified in the default order settings.  Do you really want to submit this order?"  Unlike in the case of the check set by IBKR, the account holder has the option of overriding their own settings and transmitting the order by clicking on the "Yes" button.

Glossary terms:

The Options Clearing Corporation (OCC), the central clearinghouse for all US exchange traded securities option, operates a call center to serve the educational needs of individual investors and retail securities brokers. The resource will address the following questions and issues related to OCC cleared options products:

- Options Industry Council information regarding seminars, video and educational materials;

- Basic options-related questions such as definition of terms and product information;

- Responses to strategic and operational questions including specific trade positions and strategies.

The call center can be reached by dialing 1-800-OPTIONS. The hours of operation are Monday through Thursday from 8 a.m. to 5 p.m. (CST) and Friday from 8 a.m. to 4 p.m. (CST). Hours for the monthly expiration Friday will be extended to 5 p.m. (CST).

## Why use smart routing?

Interactive Brokers offers its clients a software product referred to as "Smart" order routing. Smart Routing software continually scans competing markets and automatically routes orders directly to the best ECN or market center -- based on price but also taking into account factors such as the availability of automatic order execution.

Each ECN and market center administers its own set of trading rules. Accordingly, clients that do not select Smart Routing should be sure to familiarize themselves with the various trading and order handling rules of those market venues to which they intend to direct route their orders. A complete listing of market venues along with website links is made available on the website under the Products and then Exchange Listings menu options.

In order to Smart Route your order, select SMART in the Destination field when placing the order.

For additional information regarding Smart Routing, select the Technology and then Smart Routing menu options from the website.

## What happens if I trade a product denominated in a currency which I do not hold in my account?

The particular currency which is necessary to purchase and settle any given product is determined by the listing exchange, not IBKR. If, for example, you enter into a transaction to purchase a security which is denominated in a currency that you do not hold and assuming that you have a margin account and sufficient margin excess, IBKR will create a loan for those funds. Note that this is necessary as IBKR is obligated to settle that trade with the clearinghouse solely in the designated currency of denomination. If you do not wish to have such a loan created and incur its associated interest costs, you would need to either first deposit funds into your account in the required currency form and amount or convert existing funds in your account using either our IdealPro (for amounts in excess of USD 25,000 or equivalent) or odd lot (for amounts below USD 25,000 or equivalent) venues, both available through the TWS.

Also note that once you close out a security position which is denominated in a given currency, the proceeds will remain in that currency regardless of whether it is the Base Currency you've selected for your account. Accordingly, such proceeds will be subject to exchange rate risk relative to your Base Currency until such time you either perform a currency conversion or use those proceeds for another similarly denominated product.

Glossary terms: