Interactive Brokers - all eggs in one basket?

Perform a title transfer to another broker?

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Credit ratings can usually be found on the investors relation website or annual reports.

I thought about this too, but it is an independent problem. First you identify that your broker has a hightened risk to implode, then you need to act on this information.

The implosion of a broker has a different risk profile for its clients and investors. As a client, you gain next to nothing if the broker performs unexpectedly well, but you could lose a lot to everything if they defraud you and go bankrupt. The investor, on the other hand, has to deal with the market, which sets the prices of all instruments in ranges that prevent excessive expected returns (and losses). So the old adage that you should just short the stock if you are so confident does not apply. The client will have reason to act to have more expected return (less loss), where the market denies the same to the investor.

I also thought about enabling crypto in IBKR. You can quickly transfer out (in, say, 5% intervals). Once the BTC is in my wallet, there is no clawback, the dumpsterfire becomes an other-people’s-problem. You just need to reconvert at another broker. Many companies start offering crypto at the moment (e.g., Postfinance). Withdrawing everything could be a matter of a few hours.

The S&P credit rating of IBKR is on their website and can be found quickly by search engine. I also had a look around FlatexDegiro, but found nothing. They talk about risk in their own annual report, but well…

Creepily letting myself into this topic again … only to throw another wrench …

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(because clearly this topic isn’t convoluted enough yet):

Your broker actually doesn’t have to be your custodian. It often is not. I am guessing the larger and the more volatile your order, the more often your custodian/broker is not your broker for the deal given.

In this thread so far, the two - broker and custodian - seem to be joined at the hip, or at least married, which is probably the perspective of most retail investors: they conflate their custodian with being their broker. Let’s call this conflated entity CusBr (CustodianBroker).

What happens in reality (or should happen - I personally am not so sure at least with Swissquote) is, AFAIK:*

  1. You place an order for security S on exchange(s) E with your CusBr.
  2. Your CusBr is supposed to find the best conditions for your order, regardless of the dealers (brokers) permitted as traders on the exchange(s) E for your security S. The CusBr where you placed the order might offer you the best conditions, e.g. executing your trade on their own book, but if another broker (a not-CusBr, or another different CusBr) offers a better deal (for you and your conditions), then your CusBr is supposed to hand the deal to the other (non-)CusBr (taking into account all your order instructions, e.g. Limit, Market, etc, etc).
  3. The best deal for your order closes, with your CusBr or another (non-)CusBr.
  4. Settlement time!
    • an independent 3rd party settlement agency matches your order instructions with the order actually executed at your CusBr or another (not-)Cusbr.
    • the settlement agency also adds and substracts any “small misunderstandings” from both parties making the deal at the said broker (your CusBr or someone else), e.g. differences in misunderstandings about executions fees, etc. These things can be arcane, and they can change at the whim of the broker involved, the market / exhange you’re trading in, regulations that just changed, corporate actions that were announced around your time of trading, you name it. Most of the time it goes through very smoothly – no surprises – but every now and then, guaranteed, settlement requires manual intervention to make things go through. For a retail investor, this all takes place behind the curtains.
    • the money and the security change their hand at the will of the settlement agency with T+2.***

Ok, rookie time is over now.

:smiley:

Here’s how it works for professional investors. Note that they typically have multiple custodians (and lots more brokers via their intermediary order brokers).

  1. They place their order at an intermediary independent order broker for placing their order with all the brokers allowed to participate for trading the security S at exchange E.
  2. The intermediary independent order broker selects the broker with the best conditions. Steps 3 and 4 from above ensue.

Independent order brokers include Bloomberg. Their “exchange” for equity orders is EMSX; the one for bonds is TSOX. They have others for FX and possibly for other types of securities. At any rate, Bloomberg offers these exchanges of exchanges (and of course takes a cut, too). Other independant order brokers probably exist, but I am not aware of them.

Getting back on topic:

Theoretically, if you were to work with the safest custodian ever (for some of you apparently Switzerland only), you’d still be dealing with many many brokers for getting your orders executed.

For those safeguarding against your custodian going belly up and you taking possession of your assets ASAP, I would recomment to doing your research.

If I made things less clear to some of you, I apologize.

Good luck.

(To be clear: I believe that in the end, things work out just fine for the asset holder, regardless of custodian, broker, you name it, it might just take a few more days depending on whether it’s IBKR or SwissQuote or someone else … but you will be in possession of your securities eventually, relatively quickly, and you won’t have an advantage from you CusBr being Swiss or not.)

I’ll see myself out again.


* I’m not an expert on the mechanics of this, but this is what I learned as a noob at a small asset management company in the past couple of years.
** BTW, mechanically, this is done through the Message Transfer (MT) Protocol on the SWIFT network.
The latter — SWIFT — is heavily regulated and has a God-Emperor (the US) and the former — MT — is as ancient as it gets. The MT protocol wasn’t formulated yet on Moses’ tables of stone (at least not on the front side, but probably shortly after on the back side of those tables).
*** Soon changing to T+1 for some US markets. Search the forum for ‘T+2’ if you are interested in learning more.

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This. When the broker is failing the last thing you’d want is to give it money.

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As far as i know IBKR custodies VT directly at the CSD. The shortest custody chain possible. If your account is at IBIE, the chain is IBIE-US IBKR-CSD.

Broker bankruptcy is unpleasant, but for a piblicly traded broker as IBKR with some 450 bln of client assets the chance of a fraud of more than a dozen billion is not so high.

Their online security and refusal to compensate in case of a hack worries me more.

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Can you actually transfer out your coins from a broker directly to a personal wallet? I remembered that once SQ started having coins they did not allow for direct wallet transfer in or out but only allow buying selling on their platform. Has that changed?

I know you can transfer out from IBKR (but not into).

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Are we talking about arcane processes - may I meddle, too then :sweat_smile:

For a given security in a given market, there is a central custodian, also called the CSD. For Swiss equities this tends to be SIX SIS, part of SIX group. For the US, DTCC.

Smaller investors would typically have no direct account there but with a sub-custodian, often a bank, who in turn has an account at the CSD. If I read it correctly Swissquote uses Swissquote Bank SA as their sub-custodian.

Once a trade has been executed, the broker instructs its custodian (sub-custodian or CSD) to exchange securities vs. cash against the „opposing“ broker‘s custodian. This is where the SWIFT messages often come into play, MT541 and MT543 in case any geeks out there :wink: Those instructions are matched and ultimately settled. You can see why things take two days (or one soon, for the US).

There are some varieties for ‚cleared‘ security trades through e.g. x-Clear in Switzerland.

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This is all very interesting, of course, but I would rather focus on security of securities that were already settled :joy:.

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Then again, to correctly gauge the risk one needs to understand what entities other than the „Broker“ is involved, what their role is, and where things might go pearshaped - there is some method to my madness :wink:

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That’s true. But the broker is where you’re at the most concentrated. Brokers are rather small and less regulated compared to fund provides (Vanguard et al), and their custodians (where e.g. Vanguard keeps shares belonging to their funds). As Brokers provide access to your account through wide and open internet, there is a risk that your account might be hacked. And of course, there is risk of fraud at the broker.

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IBKR is huge with 4 billion revenue. Vanguard has 9 billion revenue as comparison. That’s a similar ballpark range.

I meant AUM, 450 vs 7200 bln and attention of the regulators.

Again, Vanguard brokerage in the US promises security w.r.t. online hacks, this is what I miss at IBKR.

We’ll reimburse you the amount taken from your Vanguard account in an
unauthorized online transaction on vanguard.com if you’ve followed the
steps described in the Your responsibilities section below.

  • Interactive Brokers will not compensate you or credit your account in the event it is compromised by hackers or identity thieves.
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"Your responsibilities

You should be aware of the risks of sharing your account information:
If you share your vanguard.com user name and password, or if you allow
someone to access your account information
, activities performed with your
shared or accessed credentials or information may be considered authorized."

If you’re phished, you allow someone else to access your account information.

Just sayin’ …

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I came to a realization that this is a fruitless discussion, because the risks related to the custody chain of your assets, where brokers play a prominent role, is difficult to assess. What I can say for sure is that:

  1. Diversification of brokers is a good thing from the point of mitigation of catastrophic events.
  2. Diversification of brokers increases the chance that something happens to your assets, as you multiply vulnerabilities
  3. The same holds for fund providers and their custody chains
  4. IBKR is no black/white case. It has strengths and vulnerabilities
  5. Vigilance is a good thing, but it becomes bad if it consumes too much time / mental energy
  6. More evidence (examples) is needed on the real world cases and how they have been handled.
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  1. Have an account at a bank where you have a (good) personal relationship to and they are aware that you will never sell your assets.
  2. Deactivate your depot from your e-banking services (and delete the app from the smartphone) and live old school; call your relationship manager once a month to ask for the current value :smiley:

Maybe one can set up two accounts with IBRK; a trust, where the assets are stored and a second account used just to buy assets. So, you will only use the log-in details of the trust in many, many years (e.g. stored at a banks vault). You can even burn them, since you can probably get access with your passport copy or something like this :smiley:

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All sorry to be a bit sarcastic but I am starting to think that this thread is moving away from the original discussion.

We should keep in mind that in future when someone new comes to this forum and have same question as original poster, they should be able to draw some conclusions

If I read all of the comments above, it seems like everything is a problem because everything can collapse if cards are placed in right order.

So perhaps after all this discussion, maybe we should submit our final conclusions too.

My conclusion is following -:

Even though IBKR is reputable broker, I would like to hedge my risks for my mental peace and hence I decided to have an additional & alternative Swiss broker. Knowing very well that this would increase my overall costs, I chose this solution because no one is too big to fail and nothing is guaranteed and specially my own stupid mistakes when it comes to cyber security.

This is specific to securities and don’t include other financial topics like bank accounts, pension, 3a etc.

So for me - not all eggs is one basket. That’s the bottom line .

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