Wednesday, 3 October 2012

Interactive Brokers - The Negatives Start to Pile Up

I have previously posted on how easy it was to use the Interactive Brokers corporate actions functionality in order to participate in an equity raising (note that this equity raising was particularly annoying for me but that was the company’s fault and not Interactive Brokers).

However, there were issues with using Interactive Brokers which I highlighted at the time.  These included the following issues:
  • You had to pay and register your final decision more than a week in advance of the actual close as specified by the company
    • This is because interactive brokers acts as a custodian for your shares (there are inherent issues in this which I will post about at a later date)
    • What this means though is that you lose optionality associated with waiting until the last minute to register your interest (i.e. if you didn’t have to register in advance you could wait and see what the share price did before registering your interest)
  • You had to transfer the required funds to your Interactive Brokers account and some financial institutions limited the amount you could transfer to them to $10,000 a day
    • This is an issue because it can take a long time to transfer the funds you wish to lose and you are losing the ability to use those funds
 There were benefits though including the fact that Interactive Brokers allowed you to see all the options involved in an equity raising (whereas normally you would have to make sure you read all the fine print).

Lately though I have been coming across more issues with the biggest one being that the time it takes them to allocate you the shares is MUCH too long
  • When you participate in an equity raising you often want to flip the shares as quickly as possible.  You buy them at a depressed price and more than you actually want to hold with the idea of selling them at market price straight away
  • In the equity raising I have linked to above, FKP allotted the shares to investors on 27/9/2012 and they were tradable on 28/9/2012.  I am writing this on 2/10/2012 and I still have not yet been allotted my shares
The above point is almost a deal breaker for using Interactive Brokers.  Interactive Brokers is known around the market as the option for people who trade often and want to reduce their trade costs.  Timing for traders is important especially around strategies such as this.

I think I am going to redefine the way I use Interactive Brokers.  It still offers great trade prices for international shares and every time I buy an international share I think I shall use them because Australian brokers cost 10-20x as much.  However for Australian shares I am willing to pay significantly more to have the flexibility of DRPs (which Interactive Brokers doesn’t offer) as well as flexibility in equity raisings.

One other issue with Interactive Brokers (which I have not outlined here) is that they hold onto your shares as custodian.  This proved to be a real issue in the GFC with many people losing their shirts through no fault of their own.  I am going to dedicate a whole post to this in the near future.

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