Interactive Brokers - all eggs in one basket?

[Helix]

@ma0

Say you see that SQ has problems and the stock goes down a lot. What do you do?

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.

[Helix]

@ternes11

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

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…

[Your_Full_Name]

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

(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.

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.

[afstand]

@ma0

There is a “small” problem on this reasoning.
Say you see that SQ has problems and the stock goes down a lot. What do you do? You sell your stocks to move the money elsewhere? That might be the wrong thing to do, since you now gave money to SQ and that is not insured. If you leave your stocks/etf intact, you can get them out once (if) SQ fails.

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

[afstand]

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.

[conquestador]

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?

[Helix]

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

[EPeon]

@Your_Full_Name

only to throw another wrench …

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

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 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.

[Dr.PI]

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

[Your_Full_Name]

[EPeon]

@Dr.PI

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

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

[afstand]

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.

[Tony1337]

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

[afstand]

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.

vanguard_security_promise-fraud.pdf

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

Welcome Center for Individuals | Interactive Brokers LLC

[Your_Full_Name]

@afstand

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.

"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’ …

[afstand]

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.

[xerox5003]

7. 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.
8. 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

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

[Abs_max]

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 .

[San_Francisco]

@Abs_max

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.

It’s usually not - but that’s what we prepare for by not putting all our eggs in one basket…

[Your_Full_Name]

Great summary!

Thanks for bringing things back to focus.

So, thank you for your re-focus. Alas, I think there are no simple answers (to this, or in life).

My personal conclusion is mainly different due to fees, which perhaps become more important with Net Asset Value (NAV).

Specific to using IBKR and Swissquote (SQ) and having a rather large NAV, and, possibly, a few decades of background with end users and companies getting hacked, I’ll offer a different, very personal, perspective.

I am with two brokers, am mostly undiversified (amongst brokers), aiming to diversify over the next few years, likely to concentrate again on one broker, depending on fees.

TL;DR: it’s complicated.

Sausage making, for those interested in more details:

• I’m currently with SQ with 98.5% and with IBKR with 1.5% of my pillar 1 securities.
  I am gradually moving to IBKR as all new cash generated at SQ is transferred to IBKR (and invested there).

• I will probably* let existing assets sit in custody with SQ.

• I in general like the appeal of spreading risk.

  I thus also like spreading risk amongst two (or more) brokers, even as I think most (all?) threat models proposed in this thread are completely overblown, conflating counter party risk with personal fraud risk, mixing brokers and banks, Swiss versus not Swiss, etc etc).

  YMMV, of course.

• at a certain point fees** may force your, or rather: my hand (at least in the comparison of SQ vs. IBKR and a large enough NAV):

  If the total fees from your two brokers are in the order of a few hundred francs, I’ll lean towards using two brokers. Who cares about a few hundred francs for the augmented risk mitigation of having two brokers instead of one?
  However, if those fees amount to tens of thousands of francs versus a few hundred francs, I’ll take my chance with just IBKR and maybe monitor IBKR a little more closely as a business.

---

* As long as SQ grants me special conditions on the custody fee.

I’m at SQ’s maximum “standard” tier of CHF 200 per year but would pay an additional well above CHF 1k if they enforced their officially advertised custoday fee on me (“For assets above CHF 1 million, a fee of 0.0075% per quarter will be added to cover external safekeeping fees.” — they charged the additional fee to me initially when it was introduced, but I told them I’d move out if they wouldn’t reverse it, which they did, promptly).
Should they decide to charge me their official rates, I’ll buy a bunch of flat fee trades, sell everything at SQ, and move the cash to IBKR to repurchase my portfolio.
I’d really rather spend 1k CHF per year on myself than on SQ “to cover external safekeeping fees.”

** I am really mainly*** motivated by the fees: re-investing my expeced next 10 years of cash flow at SQ would cost me tens of thousands of dollars. Re-investing the same amount cash flow at IBKR will cost me a few hundred bucks.****

*** Other reasons would fall into the category of SQ having the feel of, excuse my language, an amateur broker to me:

• SQ’s FX conditions are ridiculous.
• SQ regularly messes up corporate actions (like simple dividend payouts) and sometimes takes multiple months [sic!] to correct them, occasionally with the year-end or tax submittal deadlines in between those multiple months … fun times ensue when filing taxes and having to provide the correct records.
• SQ’s option trading fees just doubled for the cheapest tier earlier this year, with minimum fees plus ticket size, and minimal fees being absurdly high (like CHF 5) for selling or buying a Put.
  From a very far outside look, it seems like some executive at SQ noticed that option trading exploded in the markets in the last year or two (for retail investors) and decided to milk SQ customers on this, because, you know, it’s a trend with retail investors?
• this might trigger some of the “personal relationships” and “Swissness” aficionados out there, but in my time at SQ I have not received any special treatment (apart from my custody fee treatment, mentioned above and personally negotiated) despite being in or near the “private client” NAV league at other banks.
  • convert several hundred k USD into CHF, no problemo, online interface only even after inquiring the help desk
  • send several hundred k CHF to another bank? Provide your second factor. Done. No phone call, no extra notification, no nothing.
• their web interface? I grew up to web interfaces in the 90’s, but, hey, … things can evolve? You don’t have to force people to use a Java client like IBKR’s, you can also offer a modern web interface (like IBKR), or more recently, a native client like IBKR?*****
• actually, less about the look and feel of their web interface, but about response time in times of volatility:
  • I tried buying VOO, as liquid an asset as it gets, during COVID lows. No fill. Or wait times of several hours.
    Ok, maybe extreme times and no comparison available to me at the time.
  • I tried buying WAL during the local banking crisis about a year ago. No fill. Fill at about 50% above the lows where I placed the original order.
    I was able to compare because I had access to a Bloomberg terminal by then: Swissquote seemingly just sat on things, orders were filled by other brokers when I placed mine, things were just stuck in the order flow with SQ …
  • on multiple occasions I tried selling Puts at SQ when, say, security X tanked 15 or 20% at market open. Bloomberg allows me to see open interest and positioning in real time, and my pricing for selling the Put does not show up despite my competitive price tag. My order doesn’t get filled, or it gets filled hours later, after price has moved a ton.

**** In some cases I am even re-imbursed (instead of paying a fee) by IBKR when my trades provide much desired liquidity to the market maker.

***** I’m a little conflicted here. Their “native” client feels like an “almost Windows” Java Client, at least to me. A lot more intuitive, though, I’ll give them that.