IB Doubles Intraday Margin
Interactive Brokers (IB) is one of the most popular day trading brokerages for professional traders. However, IB has recently done something quite unprofessional, which will have caught many beginning and professional traders off guard.
For many years, Interactive Brokers has offered reduced intraday margin requirements, where the the margin that is required by an exchange was reduced by 50%. For example, the exchange margin requirement for the DAX futures market is 15,000 Euros, but IB was only requiring 8000 Euros for intraday trading. However, as of yesterday at 12:00 PM Eastern Time, IB has removed their intraday margin, so that the exchange margin is now required both intraday and overnight (i.e. the DAX margin is now 15,000 Euros at any time of day).
Interactive Brokers claims that the reason for this sudden increase in margin is the recent market volatility. However, the markets are no more volatile now than they were last year, and last year IB was still offering reduced intraday margin. The only difference is that this year, the markets are moving down instead of up. From June 2006 to June 2007 the S&P 500 stock index went from 1250 to 1550, and there were no margin increases. However, from June 2007 to June 2008 the S&P 500 went from 1550 back down to 1250 (the exact same range), and all of a sudden the margin requirements have been increased.
In IB's defense, they have only increased their margin up to the margin that is required by the exchanges, but they did so without any warning at all (other than a bulletin a couple of hours before the increase). Many beginning and professional traders alike will have started trading this morning, only to find that they cannot make any trades because they no longer cover the required margin (i.e. yesterday you could trade the FTSE100 futures market with only 2200 Pounds, but today you need 4400 Pounds).
I find it interesting that Interactive Brokers only accepts professional traders (traders with at least $ 10,000 in their account, and some years of experience), yet they increase their margin requirements simply because the markets are moving down. Professional traders trade markets in both directions, and do not react to downward price movements any more than they do upward price movements, so IB should have nothing to fear from the current down trend. However, what really bothers me is the lack of warning. If IB really believes that they have to increase their margin requirements, they should have given the warning about their margin increases at least a week or two in advance, in order to give their traders time to either adjust their portfolios or deposit additional money into their trading account.
It would be interesting to know what other traders think about this, so if you would like to make your feelings about the Interactive Brokers' margin increases known, you can do so by leaving a comment in the blog.
Comments
[Some brokers’] margins are still $500 and their minimum account balance is $5,000.
Each time IB raised their margins, the markets set an intermediate bottom. It’s a great contrarian indicator, but still a shame they feel the need to have 5k margins while other firms can do with $500 for the same contract on the e-minis.
This act is actually understandable.
When there were numerous instances in the past 6 months of %5-10% intra-day low-to-high intraday moves - it make sense to even require more than the overnight requirements.
You need to understand that Interactive Brokers are not capable dealing with a big mass of active professional traders since their risk management system will be overloaded. In this case their size is actually not an advantage. Professional traders who needs leverage don’t work with IB anyway (platforms, connectivity issues, support, etc.). They either join a prop trading group or trade with a broker that are dedicated to high volume traders and provides between 15%-25% day trading margins that gives you plenty of leverage in this volatile market.
Be careful from the churn-and-burn brokers who offer $500-$300 margins on E-Minis since you will blow the account very fast.