Interactive Brokers (Best Kept Secret)

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hithere
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Re: Interactive Brokers (Best Kept Secret)

Post by hithere »

AlohaJoe wrote: Fri Apr 23, 2021 8:00 am
hithere wrote: Fri Apr 23, 2021 7:12 am That's why I'm trying to figure out what is the worst case scenario for this end-of-day margin requirement so I can come up with a "safe" strategy for long-term indexing with leverage.
Well the Reg-T margin requirement can be up to 100%. It has been set at 100% in the past. It has also been at 75% in the past. So the "worst case scenario" is that it gets changed to 100% and you're not allowed to use margin any more and have to unwind your margin usage.

In practice, brokers don't like sending thousands of their customers into bankruptcy. When IBKR changed the margin requirements last year -- up to 67% I think? -- before the election they gradually increased it over a period of 20 days. And they notified people 5 days before they started increasing it.

I think this is what Tanelorn meant, changing for the US election, I don't remember them changing margin requirements earlier in the year. But my memory ain't what it used to be!
Thank you for chiming in. I've heard of cases where the margin requirement for individual stocks was increased to 100%, but I haven't heard of that happening for broad ETFs. Have you? Like you said, it was temporarily increased to 67.5% last year, but that's still a fairly reasonable requirement. On the surface, it seems that it would take a very severe crash, if not a black swan event, to make IB force a 100% margin requirement on people who invest in broad ETFs.
corp_sharecropper wrote: Fri Apr 23, 2021 8:16 am
hithere wrote: Fri Apr 23, 2021 7:12 am
Tanelorn wrote: Fri Apr 23, 2021 2:57 am
hithere wrote: Thu Apr 22, 2021 5:35 pm While we're on the topic of leverage, I have a question for experienced investors. Do you recall IB increasing the margin requirements during the Great Recession, the Dot-com bubble or any other of the past crashes/crises? How big was the increase?
In the period shortly after the covid crash last year, IB raised the requirements on large cap stocks from 15% to 50-65%. Said another way, they offered 6x maximum leverage before and quickly jacked that to 1.5-2x maximum.

if you had used only 2x leverage and suffered no actual losses during that time, you very likely would still have had a margin call.
Thank you for sharing this! Did the increase only apply to large-cap stocks, or it also affected index funds?

I presume those are the intraday requirements you're talking about. Do you know if the Reg-T end-of-day requirement was changed at all? This requirement is currently at 50%, meaning that if you hold leveraged positions overnight, you can't have more than 2x leverage. Of course, 2x is still a lot of leverage for what we're trying to do, but my thinking is that during crashes, IB can raise the said requirement from 50% to, say, 75% and obliterate the people who use much modest amounts of leverage - 1.15x-1.3x. That's why I'm trying to figure out what is the worst case scenario for this end-of-day margin requirement so I can come up with a "safe" strategy for long-term indexing with leverage.
I don't recall such a huge spike in margin requirements. Then again, I don't have any single equities. I do recall receiving notices that futures exchange margin was increasing, not to ~50%, but that's not in IB's control. In the past I've usually received a few days' notice before an increase and the increases were in gradual steps, not sudden and all at once. I'd get some additional confirmation on this before making any rash decisions, I just don't recall there being any change significant enough to cause me to deleverage. I don't know know exactly but I want to say I was probably leveraged to 1.4x around this time, but that's not 1.4x equities, I use risk parity approach.
Thanks again for your input!
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Stef
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Re: Interactive Brokers (Best Kept Secret)

Post by Stef »

AlohaJoe wrote: Fri Apr 23, 2021 8:00 am
hithere wrote: Fri Apr 23, 2021 7:12 am That's why I'm trying to figure out what is the worst case scenario for this end-of-day margin requirement so I can come up with a "safe" strategy for long-term indexing with leverage.
Well the Reg-T margin requirement can be up to 100%. It has been set at 100% in the past. It has also been at 75% in the past. So the "worst case scenario" is that it gets changed to 100% and you're not allowed to use margin any more and have to unwind your margin usage.

In practice, brokers don't like sending thousands of their customers into bankruptcy. When IBKR changed the margin requirements last year -- up to 67% I think? -- before the election they gradually increased it over a period of 20 days. And they notified people 5 days before they started increasing it.

I think this is what Tanelorn meant, changing for the US election, I don't remember them changing margin requirements earlier in the year. But my memory ain't what it used to be!
Makes me wonder if it would be more safe to just use leveraged ETFs instead of margin. If aiming for 1.3x leverage, just do 70/30 VTI/SSO or something like that and rebalance often enough.
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alex_686
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Re: Interactive Brokers (Best Kept Secret)

Post by alex_686 »

AlohaJoe wrote: Fri Apr 23, 2021 8:00 am
hithere wrote: Fri Apr 23, 2021 7:12 am That's why I'm trying to figure out what is the worst case scenario for this end-of-day margin requirement so I can come up with a "safe" strategy for long-term indexing with leverage.
Well the Reg-T margin requirement can be up to 100%. It has been set at 100% in the past. It has also been at 75% in the past. So the "worst case scenario" is that it gets changed to 100% and you're not allowed to use margin any more and have to unwind your margin usage.

In practice, brokers don't like sending thousands of their customers into bankruptcy. When IBKR changed the margin requirements last year -- up to 67% I think? -- before the election they gradually increased it over a period of 20 days. And they notified people 5 days before they started increasing it.

I think this is what Tanelorn meant, changing for the US election, I don't remember them changing margin requirements earlier in the year. But my memory ain't what it used to be!
I don't think that is right.

Reg T is set by the Federal Reserve as the initial margin requirement. That is more or less set in stone. Note - Initial.

Brokers have a very wide discretion on what their maintenance requirements are. The regulations are set up to protect the brokers. The regulators do not want client's losses spilling over and blowing up the firm, which has happened in the past.

Anyways, feel free to ask me any questions. I used to work on a margin desk during the dot.com boom and bust.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
alex_686
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Re: Interactive Brokers (Best Kept Secret)

Post by alex_686 »

hithere wrote: Fri Apr 23, 2021 9:06 am Thank you for chiming in. I've heard of cases where the margin requirement for individual stocks was increased to 100%, but I haven't heard of that happening for broad ETFs. Have you? Like you said, it was temporarily increased to 67.5% last year, but that's still a fairly reasonable requirement. On the surface, it seems that it would take a very severe crash, if not a black swan event, to make IB force a 100% margin requirement on people who invest in broad ETFs.
I have never heard of that happening for broad based ETFs, and I kind of doubt it would.

The point is to protect the broker - you don't want the client to blow up leaving the broker on the hook for 100ks on unsecured debt. ETFs tend to be broader based so the volitivity tends to be lower and their liquidity is higher.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
alex_686
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Re: Interactive Brokers (Best Kept Secret)

Post by alex_686 »

Stef wrote: Fri Apr 23, 2021 9:37 am Makes me wonder if it would be more safe to just use leveraged ETFs instead of margin. If aiming for 1.3x leverage, just do 70/30 VTI/SSO or something like that and rebalance often enough.
Define safe.

However, leveraged ETFs rebalance daily so their return profile is much different than a leveraged portfolio that is rebalanced either monthly or not at all. So a leveraged ETF is not a substitute for a leverage portfolio.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Stef
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Re: Interactive Brokers (Best Kept Secret)

Post by Stef »

alex_686 wrote: Fri Apr 23, 2021 9:45 am Define safe.

However, leveraged ETFs rebalance daily so their return profile is much different than a leveraged portfolio that is rebalanced either monthly or not at all. So a leveraged ETF is not a substitute for a leverage portfolio.
More safe meaning less risky to lose a lot of money.

It's not a substitute, but a good enough approximation?
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alex_686
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Re: Interactive Brokers (Best Kept Secret)

Post by alex_686 »

Stef wrote: Fri Apr 23, 2021 10:12 am
alex_686 wrote: Fri Apr 23, 2021 9:45 am Define safe.

However, leveraged ETFs rebalance daily so their return profile is much different than a leveraged portfolio that is rebalanced either monthly or not at all. So a leveraged ETF is not a substitute for a leverage portfolio.
More safe meaning less risky to lose a lot of money.

It's not a substitute, but a good enough approximation?
If that is your definition, then no, The standard deviation for both portfolios are about the same.

It is a excellent substitute if your holding period is 1 day. It is a decent one if you holding period is 30 days. It is not a substitute if you are going to hold for 90 days or longer.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Tanelorn
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Re: Interactive Brokers (Best Kept Secret)

Post by Tanelorn »

AlohaJoe wrote: Fri Apr 23, 2021 8:00 am I think this is what Tanelorn meant, changing for the US election, I don't remember them changing margin requirements earlier in the year. But my memory ain't what it used to be!
They announced and handled the election volatility concerns much much better than they did the covid ones. For the election, they announced in advance several weeks, told you how much it would scale up each day, gave you margin tools to judge your future exposure and limits, etc.

During the covid crash and in the wake of that recovery, they were changing the risk rules on the fly, not telling anyone, and every day your portfolio would be up and your margin deficit would be twice as high as the day before. It’s very hard to plan when you don’t know whether you’re a fair bit safe on excess liquidity or in a fairly big margin call and that was changing every day.
alex_686
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Re: Interactive Brokers (Best Kept Secret)

Post by alex_686 »

Tanelorn wrote: Fri Apr 23, 2021 12:45 pm During the covid crash and in the wake of that recovery, they were changing the risk rules on the fly, not telling anyone, and every day your portfolio would be up and your margin deficit would be twice as high as the day before. It’s very hard to plan when you don’t know whether you’re a fair bit safe on excess liquidity or in a fairly big margin call and that was changing every day.
From my perspective this seems normal. I was on the margin desk during the dot.com boom and bust, plus 9/11.

What you want to do is read up on Value-at-Risk (VaR). It is a logical place to enter into risk analytics. Basically you use historic volatility of forward looking volatility indexes to predict the chance that clients will blow themselves up and thus blow up he firm. You set the limit and go from there.

The presidential election has a time table and a limited number of logical branches of where the market could go. Known unknowns. You can't use historic volatility but there are decent methods of estimating and guessing future volatility.

With COVID you did not have that. Lots of unknow unknowns. When the facts change on the ground you have to change your plan.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Interactive Brokers (Best Kept Secret)

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Neus
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Re: Interactive Brokers (Best Kept Secret)

Post by Neus »

Since recently targeted hacks become frequent news, i wonder how safe is our portfolio with IBKR?
Remember Rule 5: Never try to time the market. Two common timing mistakes: buying yesterday's top performers, and letting your emotions cause you to attempt to predict the direction of the stock market.
EddyB
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Re: Interactive Brokers (Best Kept Secret)

Post by EddyB »

Neus wrote: Tue Jun 08, 2021 10:40 am Since recently targeted hacks become frequent news, i wonder how safe is our portfolio with IBKR?
Neus, what about those hacks raises your concerns specifically about IB?
Neus
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Re: Interactive Brokers (Best Kept Secret)

Post by Neus »

EddyB wrote: Tue Jun 08, 2021 11:01 am
Neus wrote: Tue Jun 08, 2021 10:40 am Since recently targeted hacks become frequent news, i wonder how safe is our portfolio with IBKR?
Neus, what about those hacks raises your concerns specifically about IB?
hmm

Hackers targeting IB system, wiping out our portfolio data

Hackers targetting our account, liquidate and withdraw the money to their account
Remember Rule 5: Never try to time the market. Two common timing mistakes: buying yesterday's top performers, and letting your emotions cause you to attempt to predict the direction of the stock market.
Tanelorn
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Re: Interactive Brokers (Best Kept Secret)

Post by Tanelorn »

Neus wrote: Wed Jun 09, 2021 7:29 am Hackers targetting our account, liquidate and withdraw the money to their account
Have you tried to withdraw money from IB? They don’t make it super easy and that’s if you’re the actual owner! If you’ve seen how much paperwork is required to try to do a third party withdrawal, ie to an account in the hacker’s name and not yours, you wouldn’t be worried at all - that can take weeks to months with no guarantees of approval.

I guess the worst case would be they set up a new bank account somewhere under your name but with their fake ID and credentials, add that new bank account profile into IB, and try to get IB to send money to there and subsequently withdraw it from that bank. New withdrawal destinations, even your own, still get a pretty high level of security scrutiny.

Very low on my list of worries.
Rob Bertram
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Re: Interactive Brokers (Best Kept Secret)

Post by Rob Bertram »

Neus wrote: Wed Jun 09, 2021 7:29 am
EddyB wrote: Tue Jun 08, 2021 11:01 am
Neus wrote: Tue Jun 08, 2021 10:40 am Since recently targeted hacks become frequent news, i wonder how safe is our portfolio with IBKR?
Neus, what about those hacks raises your concerns specifically about IB?
hmm

Hackers targeting IB system, wiping out our portfolio data

Hackers targetting our account, liquidate and withdraw the money to their account
I believe that those are risks applicable to all brokerages, including our favorite ones like Vanguard and Fidelity. Perhaps I can rephrase EddyB's question. Are there recent events or design flaws that make Interactive Broker's platform more susceptible to hacking than another broker?

As Tanelorn mentions, Interactive Brokers has several policies that makes the hacking activities you describe difficult. There are 30-day wait limits if you try to withdraw money from IB to a new bank account. You are required to re-enter your multi-factor authentication as part of the withdrawal confirmation, email confirmations are sent, etc.
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Re: Interactive Brokers (Best Kept Secret)

Post by Neus »

Tanelorn wrote: Wed Jun 09, 2021 11:58 am
Neus wrote: Wed Jun 09, 2021 7:29 am Hackers targetting our account, liquidate and withdraw the money to their account
Have you tried to withdraw money from IB? They don’t make it super easy and that’s if you’re the actual owner! If you’ve seen how much paperwork is required to try to do a third party withdrawal, ie to an account in the hacker’s name and not yours, you wouldn’t be worried at all - that can take weeks to months with no guarantees of approval.

I guess the worst case would be they set up a new bank account somewhere under your name but with their fake ID and credentials, add that new bank account profile into IB, and try to get IB to send money to there and subsequently withdraw it from that bank. New withdrawal destinations, even your own, still get a pretty high level of security scrutiny.

Very low on my list of worries.
I see

So what is high in your list of worry?
Remember Rule 5: Never try to time the market. Two common timing mistakes: buying yesterday's top performers, and letting your emotions cause you to attempt to predict the direction of the stock market.
Neus
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Re: Interactive Brokers (Best Kept Secret)

Post by Neus »

Rob Bertram wrote: Wed Jun 09, 2021 1:10 pm
Neus wrote: Wed Jun 09, 2021 7:29 am
EddyB wrote: Tue Jun 08, 2021 11:01 am
Neus wrote: Tue Jun 08, 2021 10:40 am Since recently targeted hacks become frequent news, i wonder how safe is our portfolio with IBKR?
Neus, what about those hacks raises your concerns specifically about IB?
hmm

Hackers targeting IB system, wiping out our portfolio data

Hackers targetting our account, liquidate and withdraw the money to their account
I believe that those are risks applicable to all brokerages, including our favorite ones like Vanguard and Fidelity. Perhaps I can rephrase EddyB's question. Are there recent events or design flaws that make Interactive Broker's platform more susceptible to hacking than another broker?

As Tanelorn mentions, Interactive Brokers has several policies that makes the hacking activities you describe difficult. There are 30-day wait limits if you try to withdraw money from IB to a new bank account. You are required to re-enter your multi-factor authentication as part of the withdrawal confirmation, email confirmations are sent, etc.
The problem with asking the question on design flaw is: if normal non hacker prople can easily think of it, it will be fixed

But hackers search and see more design flaw in a way that normal people and even the institution itself can’t see yet

So i, normal people might not able to give good answer the question on design flaw, but a good hacker might
Remember Rule 5: Never try to time the market. Two common timing mistakes: buying yesterday's top performers, and letting your emotions cause you to attempt to predict the direction of the stock market.
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Re: Interactive Brokers (Best Kept Secret)

Post by AlohaJoe »

Neus wrote: Wed Jun 09, 2021 7:29 am
EddyB wrote: Tue Jun 08, 2021 11:01 am
Neus wrote: Tue Jun 08, 2021 10:40 am Since recently targeted hacks become frequent news, i wonder how safe is our portfolio with IBKR?
Neus, what about those hacks raises your concerns specifically about IB?
hmm

Hackers targeting IB system, wiping out our portfolio data
It doesn't matter if they wipe out your portfolio data at IBKR. The custodian has all the same data. And so does the depository company. So they'd need to hack all three. And at that point you're talking about a complete collapse of the global financial system.
Tanelorn
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Re: Interactive Brokers (Best Kept Secret)

Post by Tanelorn »

Neus wrote: Wed Jun 09, 2021 8:35 pm So what is high in your list of worry?
My long investments going down a lot, my short investments going up a lot, and punitive tax law changes (very high rates on capital gains, no long term treatment, wealth taxes, etc).
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Re: Interactive Brokers (Best Kept Secret)

Post by cos »

AlohaJoe wrote: Fri Apr 23, 2021 8:00 am
hithere wrote: Fri Apr 23, 2021 7:12 am That's why I'm trying to figure out what is the worst case scenario for this end-of-day margin requirement so I can come up with a "safe" strategy for long-term indexing with leverage.
Well the Reg-T margin requirement can be up to 100%. It has been set at 100% in the past. It has also been at 75% in the past. So the "worst case scenario" is that it gets changed to 100% and you're not allowed to use margin any more and have to unwind your margin usage.

In practice, brokers don't like sending thousands of their customers into bankruptcy. When IBKR changed the margin requirements last year -- up to 67% I think? -- before the election they gradually increased it over a period of 20 days. And they notified people 5 days before they started increasing it.

I think this is what Tanelorn meant, changing for the US election, I don't remember them changing margin requirements earlier in the year. But my memory ain't what it used to be!
Was that just for Reg-T, or did it affect portfolio margin as well?
Rob Bertram
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Re: Interactive Brokers (Best Kept Secret)

Post by Rob Bertram »

cos wrote: Thu Jun 10, 2021 12:36 pm
AlohaJoe wrote: Fri Apr 23, 2021 8:00 am
hithere wrote: Fri Apr 23, 2021 7:12 am That's why I'm trying to figure out what is the worst case scenario for this end-of-day margin requirement so I can come up with a "safe" strategy for long-term indexing with leverage.
Well the Reg-T margin requirement can be up to 100%. It has been set at 100% in the past. It has also been at 75% in the past. So the "worst case scenario" is that it gets changed to 100% and you're not allowed to use margin any more and have to unwind your margin usage.

In practice, brokers don't like sending thousands of their customers into bankruptcy. When IBKR changed the margin requirements last year -- up to 67% I think? -- before the election they gradually increased it over a period of 20 days. And they notified people 5 days before they started increasing it.

I think this is what Tanelorn meant, changing for the US election, I don't remember them changing margin requirements earlier in the year. But my memory ain't what it used to be!
Was that just for Reg-T, or did it affect portfolio margin as well?
I believe that the margin requirements were increased by 67% and not to 67% during the last election. For example, if the margin requirement on an asset like the e-mini S&P 500 contract is $6,000, it increased to $10,000. It did not go from $6,000 to $130,000.
parval
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Re: Interactive Brokers (Best Kept Secret)

Post by parval »

Does anyone use margin on IB?

Here's a scenario I'm not sure is achievable:

I deposit 100k, buy VTI, withdraw 50k cash as margin to invest in asset B, so my position is now:

100k VTI, -50k margin, 50k B

I get another 50k cash to deposit and I think my position becomes:
100k VTI, 0 margin, 50k B

but I don't want to negate my margin, so would prefer my new position to be
150k VTI, -50k margin, 50k B

So I can withdraw another 25k and buy more B:
150k VTI, -75k margin, 75k B

Otherwise I'd have to sell asset B, deposit 100k again and withdraw again to buy B, which is fine because B is super liquid and not volatile but just annoying because it's a full week for cash to settle between banks.
Tanelorn
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Re: Interactive Brokers (Best Kept Secret)

Post by Tanelorn »

parval wrote: Thu Jun 10, 2021 1:34 pm Does anyone use margin on IB?

Here's a scenario I'm not sure is achievable:

I deposit 100k, buy VTI, withdraw 50k cash as margin to invest in asset B, so my position is now:

100k VTI, -50k margin, 50k B

I get another 50k cash to deposit and I think my position becomes:
100k VTI, 0 margin, 50k B

but I don't want to negate my margin, so would prefer my new position to be
150k VTI, -50k margin, 50k B

So I can withdraw another 25k and buy more B:
150k VTI, -75k margin, 75k B

Otherwise I'd have to sell asset B, deposit 100k again and withdraw again to buy B, which is fine because B is super liquid and not volatile but just annoying because it's a full week for cash to settle between banks.
With a margin account, you don’t have to put the money in and then withdraw it. You can just put $50k in and buy $100k of VTI. In a portfolio margin account, they only required 10% of the amount you wanted to buy (10x leverage), although I suspect if that was your only asset or in a reg T margin account it might be 30% or so (3x leverage). Either way, that should be fine for your purposes.

When you get another $50k, you just put $25k into the IB account and buy another $50k of VTI and the other $25k into wherever you’re buying the other B asset. I’d suggest buying them both at IB if that was possible, since it reduces your risk of margin problems in extremes market conditions, but I guess that depends on what it is. Liquid assets are usually available, although perhaps not certain mutual funds.
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Re: Interactive Brokers (Best Kept Secret)

Post by calwatch »

If you want to play around with it you can certainly use the play money account to simulate portfolio margin and see what leverage you can have. Remember that IB will always auto-liquidate so it's best to keep a good buffer for March 2020-like scenarios.
parval
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Re: Interactive Brokers (Best Kept Secret)

Post by parval »

Tanelorn wrote: Thu Jun 10, 2021 2:01 pm
parval wrote: Thu Jun 10, 2021 1:34 pm Does anyone use margin on IB?

Here's a scenario I'm not sure is achievable:

I deposit 100k, buy VTI, withdraw 50k cash as margin to invest in asset B, so my position is now:

100k VTI, -50k margin, 50k B

I get another 50k cash to deposit and I think my position becomes:
100k VTI, 0 margin, 50k B

but I don't want to negate my margin, so would prefer my new position to be
150k VTI, -50k margin, 50k B

So I can withdraw another 25k and buy more B:
150k VTI, -75k margin, 75k B

Otherwise I'd have to sell asset B, deposit 100k again and withdraw again to buy B, which is fine because B is super liquid and not volatile but just annoying because it's a full week for cash to settle between banks.
With a margin account, you don’t have to put the money in and then withdraw it. You can just put $50k in and buy $100k of VTI. In a portfolio margin account, they only required 10% of the amount you wanted to buy (10x leverage), although I suspect if that was your only asset or in a reg T margin account it might be 30% or so (3x leverage). Either way, that should be fine for your purposes.

When you get another $50k, you just put $25k into the IB account and buy another $50k of VTI and the other $25k into wherever you’re buying the other B asset. I’d suggest buying them both at IB if that was possible, since it reduces your risk of margin problems in extremes market conditions, but I guess that depends on what it is. Liquid assets are usually available, although perhaps not certain mutual funds.
Oh wait you're totally right, absolute brain fart on my part, thanks!
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