Friday, 12 October 2012

Eating my words on Interactive Brokers

There are situations where we all have to eat our own words and this is one situation where I am having to do that.  Late last week I posted a scathing post about how long it was taking Interactive Brokers to credit my FKP rights issue shares to my account.  

As many of my regular readers would know I had already had a bad time with this particular rights issue as I went from a potential large profit to a significant loss because of the bad decisions of management whereby they gave profits that should have accrued to shareholders to their Investment Bankers, Goldman Sachs instead.  

What should have happened?

If I had invested through a broker which held shares in my own name through a regular broker instead of through a custodian type arrangement ( see summary of differences here) I would have:
  • Received my allocation under the rights issue
  • Received my overallocation of shares equivalent to 50% of the allocation above
  • Received my allocation and been able to trade shares on the date the company actually announced.
However to my eternal delight ( though as I originally posted this was significant consternation ) this is not what happened.

What actually happened?

I finally got allocated the shares just over a week late which I was originally pretty annoyed about.  However when I checked the number of shares in my account was far in excess of what I actually expected.  Below is what actually happened
  • I was allocated my shares under the rights issue a week late
  • I
    got my allocation of basic rights that I was expecting
  • Instead of a 50% over allocation of shares I got 800% over allocation
Given that the amount of money that you make on a deal like this is totally dependent on the number of shares that you are issued this gave me a HUGE windfall and at first I couldn't understand what had happened.  

The company certainly hadn't done the right thing and issued me shares at a higher level because I had complained about them as other people I know that invested through regular brokers just got the 50% over allocation as expected.  Then I realised it all came down to Interactive Brokers!

How did I get the extra shares?

When I recently went through the differences between holding shares in your own name or holding them through a custodian I noted that the company does not know you are the holder of the shares which is why you cannot participate in DRPs or receive any statements from the company.

In this case the lack of the company's knowledge worked to my advantage. This is what would have happened and why I got allocated the extra shares
  1. There are obviously several customers of interactive brokers who own shares in FKP
  2. From FKP's point of view this is all held by one entity (Interactive Brokers)
  3. The Interactive Brokers entity is entitled to a 50% over allocation compared to the rights they are entitled to
  4. Several of the Interactive Brokers customers must not have taken up their rights or their over allocation however FKP doesn't know this and they allocate the shares to Interactive Brokers on the basis that it is just one entity applying
  5. Interactive Brokers then allocates the shares to their clients on a proportionate basis (i.e. to those who applied for it)
It all centres around the fact that not all of Interactive Brokers' clients took up their allocations. This is a major advantage of trading through a custodian that I never knew existed before. Whereas before I was going to stop trading a lot of shares through Interactive Brokers because of the custodian issue, I am now going to trade many more!

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  1. Excuse my ignorance here (I've never invested in shares) but from my understanding you were given all you over allocation amount of shares? Or did the accidently allocate more to you than they were supposed to?
    Trying to get my head around through reading the post :)

    1. Hi Jeff - not a problem. It can be a little confusing if you haven't participated in a rights issue before.

      I was entitled to a certain number of shares as part of the overallocation. The company allocates these shares based on the number of shares that the 'investor' is entitled to.

      Because Interactive Brokers holds all of your shares in their own name - they (not you) are the investor.

      Some of interactive brokers customers chose not to participate in the equity raising so I was allocated THEIR shares.

      That would never have happened if I held them through something like Commsec where the shares are in my own name.

  2. Okay cool, so this would seem like a bit of an agency relationship (not purely) but they hold them on your behalf however your free to buy & sell & ultimately the client is the legal owner.. (again I could be wrong)

    Thanks for the reply, have left a few comments on various posts by yourself, hadn't been sent emails on replies..

    1. That's pretty much how it works.

      Legally though it can get a bit complex - there have been cases where people have lost a lot of money because brokers have treated the shares as their own. I outlined one such case in a previous post I had done: