Bad Fill or Bad Rule??
BY DANIEL P. COLLINS
Published 3/19/2009??
Oct. 10, 2008 was an extremely volatile day in equity markets. Glenn Pafumi, however, was enjoying a vacation in Australia. Unfortunately he had not kept an eye on the numerous options positions in his Interactive Brokers (IB) account and his margin fell below the required amount. IB has instituted an automatic system when customer margin levels fall below requirements. It does not issue margin calls but will automatically and almost immediately liquidate customer positions systematically until the account is above the proper levels.
They tout this as a way to protect customers and the brokerage. It also is part of the agreement customers sign when opening an account. It obviously eliminates delays and protects the account and brokerage from a worsening margin situation.
The reason that the various exchanges have rules allowing for wider options spreads for electronic trading is to protect market makers from being hit on all their bids or offers across multiple options and multiple strikes. A floor trader can take the other side of a particular order but ?electronic market makers are making markets for thousands of strikes across dozens of equities? says Mark Longo, founder of the OptionsInsider.com.