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Why do Portfolio Margin (PM) account margin requirements differ so much?
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Why do Portfolio Margin (PM) account margin requirements differ so much?

  #1 (permalink)
Elite Member
The Villages, Fl
 
Futures Experience: Advanced
Platform: TOS
Favorite Futures: SPX, RUT
 
Posts: 3 since Mar 2014
Thanks: 2 given, 8 received

Why do Portfolio Margin (PM) account margin requirements differ so much?

I have noticed that the buying power requirement at IB is substantially higher than the BP requirement for an identical trade at TOS. While both are substantially less than reg. T margin requirements, what I save in transaction costs with IB is offset by their increased BP requirement resulting in fewer contracts traded than I can trade in my TOS PM account. I only know of a few brokers who offer PM accounts since their introduction in 2010. What would be nice is a broker who can realistically assess risk and offer a low commission rate. I don't know of any broker and very few traders who understand how to correctly gauge risk in terms of delta, vega, rho, gamma, lambda, vanna, vomma, charm, theta, and dvega dtime, their relationships to each other, as well as, their underlying instruments. I would appreciate input from anyone else who trades complex derivatives (back ratio unbalanced condors, front ratios, broken wing butterflies, and so forth). Have you been successful in communicating to your broker's risk desk the fallacy of theoretical values? How did you do it? Also, do you know of any boutique brokerage houses who cater to the derivatives trader and offer PM? Options Express, Option House, and most of the larger houses do not. Finally, TOS has the ability to execute complex trades in a single order. Whereas, with IB, the trade has to be split into legs which are entered separately. This has the dual effect of not knowing ahead of time exactly what the BP requirements will be for the subsequent legs, as well as, requiring that the debit side be filled first. Alternatively, I may, potentially, have to chase the debit side for a fill due to time slippage and the fact that I may have hundreds of contracts in my queue. The TOS platform is very heavy with a lot of bells and whistles no trader could ever implement. I suppose this is why their commission is higher. Does anyone know of a a simple, yet, low cost PM broker? Would you share your experience? Many thanks!


Last edited by Gamma Stalker; December 6th, 2014 at 04:33 PM.
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  #2 (permalink)
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  #3 (permalink)
Market Wizard
Switzerland
 
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Lets have a look at it from a economical point of view:

Every broker company sits in the same market - but:
Bigger companies are not looking for short time clients. They are neither looking for
small accounts.
Smaller companies have smaller client base and need to attract future clients by sending
out signals like being the best: better pricing, better margins, better leverage etc.
IB for example needs a large client base with steady growth in client capital - this
is the survival plan. Platform and other things are not that important as the quick
user is not taking profit of the offer - only 10% of the offered tools are really used.
The new companies jumping in offer a big bunch of goodies, easy platform with
only the basics.
Trading market is tough! For brokers as for traders.
Benefitting of longtime security thinking of funds and traders put bigger brokers
in a better position. Maybe some better leverage or smaller margin can attract
for short time traders - the security of investment is for many investors the main thing.

Just my 2 cents
GFIs1

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  #4 (permalink)
Elite Member
The Villages, Fl
 
Futures Experience: Advanced
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Favorite Futures: SPX, RUT
 
Posts: 3 since Mar 2014
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Agree with everything you said


GFIs1 View Post
Lets have a look at it from a economical point of view:

Every broker company sits in the same market - but:
Bigger companies are not looking for short time clients. They are neither looking for
small accounts.
Smaller companies have smaller client base and need to attract future clients by sending
out signals like being the best: better pricing, better margins, better leverage etc.
IB for example needs a large client base with steady growth in client capital - this
is the survival plan. Platform and other things are not that important as the quick
user is not taking profit of the offer - only 10% of the offered tools are really used.
The new companies jumping in offer a big bunch of goodies, easy platform with
only the basics.
Trading market is tough! For brokers as for traders.
Benefitting of longtime security thinking of funds and traders put bigger brokers
in a better position. Maybe some better leverage or smaller margin can attract
for short time traders - the security of investment is for many investors the main thing.

Just my 2 cents
GFIs1

Thank you for your response. Agree with your position. Still, how can one broker's risk model be so different from another? I get your point about large vs small brokers. Yet, both TD Ameritrade and IB are vey substantial and safe firms. The fact that they are so different in their PM requirements only demonstrates that one of them is wrong in their risk analysis. From my perspective, both are incorrect. My broker transaction cost is $.55 at IB and double that at TOS. My buying power at TOS is twice what it is at IB, so I can trade twice the size. My style of trading is virtually non-directional with a slight bias toward the bullish side right now. In other words, my Lambda is structured so that my trades make more when the market rises and lose less when the market falls. Necessarily, I adjust when my other greeks suggest the time is right to do so. In a single trade that may start out as a simple 25 X 22 debit call and 11 X 11 credit call OTM condor, I may add and / or subtract hundreds of contracts to and from either, or both, sides during the life of the trade. Initiating a couple of these a month with expirations out 60 - 150 days, requires a hefty % of potential profits in transaction costs or eats up significant buying power. Although my profitable closed trades are in the 2% to 25% range and fall within 95% RPOP, my maximum loss on every trade is limited to 5% at trade initiation and decreases everyday the trade is alive, I still have huge transaction costs at the end of every trade because of all the required adjustments. I do not sell credit spreads. I am looking for a broker who understands how complex option strategies with proper and effective management can mitigate the trader's, as well as, the broker's risk. So far, I have not found a single one. Just thought through this forum I might connect with an options player who has already blazed this trail.

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  #5 (permalink)
Market Wizard
Germany
 
Futures Experience: Intermediate
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Counterparty risk, portfolio risk


Gamma Stalker View Post
..., I may add and / or subtract hundreds of contracts to and from either, or both, sides during the life of the trade. Initiating a couple of these a month with expirations out 60 - 150 days, requires a hefty % of potential profits in transaction costs or eats up significant buying power...

In relation to the open interest (often <1000 contracts from 60 days up - e.g. in the ESx series), the numbers that you mention are a risk of their own. You don't enter or exit a market, you make/are the market for these time windows. From an economical point of view: Would you - as a broker - encourage such customers? To whom would you unwind 60-150 day positions when such customers run into trouble and only the forward 30-45 days have significant supply/demand, which is the rule?

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  #6 (permalink)
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London, UK
 
Futures Experience: Advanced
Platform: TT, CQG, esignal, TWS
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Gamma Stalker View Post
Thank you for your response. Agree with your position. Still, how can one broker's risk model be so different from another? I get your point about large vs small brokers. Yet, both TD Ameritrade and IB are vey substantial and safe firms. The fact that they are so different in their PM requirements only demonstrates that one of them is wrong in their risk analysis. From my perspective, both are incorrect. My broker transaction cost is $.55 at IB and double that at TOS. My buying power at TOS is twice what it is at IB, so I can trade twice the size. My style of trading is virtually non-directional with a slight bias toward the bullish side right now. In other words, my Lambda is structured so that my trades make more when the market rises and lose less when the market falls. Necessarily, I adjust when my other greeks suggest the time is right to do so. In a single trade that may start out as a simple 25 X 22 debit call and 11 X 11 credit call OTM condor, I may add and / or subtract hundreds of contracts to and from either, or both, sides during the life of the trade. Initiating a couple of these a month with expirations out 60 - 150 days, requires a hefty % of potential profits in transaction costs or eats up significant buying power. Although my profitable closed trades are in the 2% to 25% range and fall within 95% RPOP, my maximum loss on every trade is limited to 5% at trade initiation and decreases everyday the trade is alive, I still have huge transaction costs at the end of every trade because of all the required adjustments. I do not sell credit spreads. I am looking for a broker who understands how complex option strategies with proper and effective management can mitigate the trader's, as well as, the broker's risk. So far, I have not found a single one. Just thought through this forum I might connect with an options player who has already blazed this trail.

i think in terms of retail IB is your best option otherwise there are a few option focussed prop firms in Chicago. I see you are based in Florida so not sure if they take remote traders. In terms of custom margining prop is the way to go if that is what is required. good luck.

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