Message to Matthew,
I would like to trade more futures system but am reluctant to add additional funds to OEC. In addition to some recent connection problems with some exchanges (admittedly a rare event so far) it is very thinnly capitalized, only 2.2 Mill in Excess Capital (EC), that is the excess over the regulatory minimum requirement. Its parent company OX is stronger, 69.3 Mill EC, but there is no guarantee that OX will bail out all the creditors of OEC if it should go under when the next financial storm comes. The other Gen3 futures brokers are also weak: MB Trading 5.8 Mill, Dorman 9 Mill and Vision 17.1 Mill, in addition they have other problems, for example, MB Trading shuts down for 35 minutes during the night and the other two don’t seem to have much experience handling C2 systems.
Compare that with IB, it has $1.1 Billion in Excess Capital, has excellent risk control, lots of redundancy, in my opinion the best broker in the world.
Trading futures systems which trade frequently in many different markets are just too dangerous to trade via APIs on one’s computer.
Karl
Karl -
There are lots of reasons to like Interactive Brokers (I like them, too!) and there are also always reasons to criticize other brokers (including those that currently partner with C2.)
But insufficient capital isn’t one of them. Futures trading in the US is highly regulated, and is different from over-the-counter derivatives markets. When you deposit money in a FCM brokerage account, brokers do not use that money for their own purposes. That money is segregated, untouchable, not part of their operating accounts.
When you trade futures, you are required to put up a good-faith deposit (“margin”) by the exchange. Each side of the trade must do this. The exchange determines the amount of deposit that is required, and the exchange ultimately guarantees your trade, backstopping your broker (I believe) and effectively becoming your counterparty.
So I can’t see how a broker’s “excess capital” is related to this. If you want to worry about anything, worry about whether the regulated futures exchanges can make good on their counter-party roles – a risk I always wonder about (what would happen if - God forbid - there was a nuclear attack in Manhattan, and the S&P dropped by 70% in 2 minutes … no amount of good-faith deposit could make good on the financial loss, and I have no idea what the regulators would do.)
So you see, if ever there is a case where a regulated futures exchange such as CME or ICE can not guarantee resolution of trades, it would indicate our problems are much more serious than whether OEC (now owned by Charles Schwab, incidentally) can pay its utility bills.
I think you may be misunderstanding what minimum capital actually means, and how FCMs and futures exchanges work. I don’t pretend to be an expert, but I’m pretty sure that “excess capital” is not particularly germane – at least not with regards to any sort scenario you are worried about. If anyone reading this post thinks I’ve said something incorrect, or missed something salient, by all means let me know.
- Matthew
But - P.S. - we’re working on Gen3 IB!
Matthew,
I am well aware that when you buy or sell regulated futures you are not dealing directly with the counter party and, BTW, not with the exchanges but with the Option Clearing Corporation (the same with option contracts) which is the largest clearing entity in the world and owned by verious exchanges. I am not worried that the OCC goes bankrupt.
What could happen with a small brokerage company is that they or one of their rogue traders when trading for their own account incur big losses, as has happened with verious brokerage companies, big and small ones, then illegally tap into the seggregated clients account and possibly collapse.
In addition, undercapitalized companies usually don’t have the best available internal risk controls and system redundancy.
Another important thing to remember is that IB swipes all funds in excess of margin requirements from the futures account to the securities account so that it is protected by the SICP and additional private insurance IB has.
"Futures trading in the US is highly regulated, and is different from over-the-counter derivatives markets. When you deposit money in a FCM brokerage account, brokers do not use that money for their own purposes. That money is segregated, untouchable, not part of their operating accounts."
Matthew – Perhaps you’d like to reconsider your statement above in light of recent events?
p.s. How’s IB/Gen3 coming?
Yes, please, can we get an official IB/Gen3 update. It’s
1. in final testing. should be another week or two
2. Not in the queue but next month it’s a priority
3. Not really a priority, why not change brokers
And yes I would echo the concerns regarding the solvency of smaller brokers. The guys at Interactive got the last look at the MF Global books, sifted through then said “no thank you”. And yes sweeping cash into a SPIC-backed account is a very good practice.
BTW how many have written to the ombudsman of the CFTC regarding MF Global? ANYONE using a financial firm that has “segregated accounts” should be very worried.
