IB Cash Account – Free Riding Rule

[Nick Radge]

I knew this rule applied to Macquarie, but it turns out it is also applicable to IB. Good news if you have a cash account:

“Free-Riding rule. Clients with a cash account can use the proceeds from the sale of a security to purchase a different security under the condition that the second security is held until settlement of the initial sale. If the client sells the second security prior to settlement of the initial trade, they will be in violation of the Free-Riding rule and will be locked for 90 days from utilizing this exception.’

The article is available at ibkb.interactivebrokers.com/node/814

[WENKIT LUI]

Hi Nick,

Happy New Year and thanks for sharing this. If trading a cash account without this Free-Riding rule, I believe the following code needs to be included in a system:

SetOption(“SettlementDelay”, 3 ); // this will cause that proceeds from sale are only available for trading on 3rd day after sale

If we were to include the Free-Riding rule into a system running on a cash account, please correct me if I’m wrong – but I suppose we need to include alternative code to prevent violation of the condition as described.

[Stephen James]

You may need to add a condition that prevents an entry if there has been a sell in the last three days to get around the same symbol taking entries.
It may be necessary to ensure the system holds positions for at least three days to get around the second part of the rule.

[Nick Radge]

IB update on Reg-T accounts for Australian retails clients:

Quote:

Hi Nick,

We are nearing our launch for our Australian business, ad will have an entire new offering including unique account structures for Australian clients.

I think midyear is still a realistic time-frame for the new offering to go live, may be sooner or later, no ETA yet.

Neil

[JulianCohen]

Nick Radge wrote:

IB update on Reg-T accounts for Australian retails clients:

Quote:

Hi Nick,

We are nearing our launch for our Australian business, ad will have an entire new offering including unique account structures for Australian clients.

I think midyear is still a realistic time-frame for the new offering to go live, may be sooner or later, no ETA yet.

he didn’t mention which year….

Neil

[ScottMcNab]

If we designed a system that allowed buy to occur Mon-thurs and positions were sold on fri each week, would this not avoid problems with the free-riding rule (as proceeds from the sales on fri may be used to buy new positions on monday but then these new positions would not be sold till following friday) ?

If so, then settlement delay could be left out of code too as can use proceeds to enter new positions as we have ensured second security is held until settlement (+3) of initial sale by selling on the friday ?

Think ASX going to +2 I think incidentally

[Stephen James]

Looks like business days (ASX) Scott:-

http://www.asx.com.au/services/t2.htm

[SaidBitar]

Scott McNab wrote:

If we designed a system that allowed buy to occur Mon-thurs and positions were sold on fri each week, would this not avoid problems with the free-riding rule (as proceeds from the sales on fri may be used to buy new positions on monday but then these new positions would not be sold till following friday) ?

If so, then settlement delay could be left out of code too as can use proceeds to enter new positions as we have ensured second security is held until settlement (+3) of initial sale by selling on the friday ?

Think ASX going to +2 I think incidentally

I know that MRV systems are tempting especially when you see the performance in comparison to Trend following or momentum strategies but the strength of MRV strategies is their high frequency which would be killed with twice per week trading why instead you do not trade on such account Trend following long term like monthly strategy personally I see the trends more clear and less messy on monthly charts in comparison to daily and even weekly. and using monthly strategy it makes no difference if you enter first day of the month or the fifth

[ScottMcNab]

You make a good point Said but at this stage I am like a newbie golfer…I can hit a 7 iron and that’s it….if I try and switch between a driver or a lob wedge etc it all goes to poo. So for the moment I have to work with the tools I have….which means using the moc system in a cash account for superannuation if possible.

So far, 2000-current MOC with 20 positions at 5% (with settlement delay +3) system returns approx 15% (only 11% from 2011 to current)….I would be very happy with that if I can get it up and running.

[ScottMcNab]

Anyone got a good tip for keeping track of cash available in a cash account to avoid violating free-riding rule ? Or is this calculation made clear in the accounts section (available for trading subheading) by IB ?

[#REF!McGrath]

For those of you that operate monthly rotational systems on a cash account how do you deal with your buy & sell orders.

Assume you have 5 buys & then 5 sells & your account is fully allocated. When i went to place the orders for the monthly rotation IB restricted me from placing the buys at the same time (ie I could not transmit the orders as no available cash at the time). So I then waited until the market opened & the sell orders were executed & then I was able to execute the buy orders with those proceeds.

So long as not selling the securities that have been bought before the sells settle then I thought this is not a violation of the free riding rule. Is this correct or do I need to wait for settlement of the sell orders before I can place the buys orders? This is not how my system was tested & I don’t think there is a delay settlement function for rotational systems.

Have others experienced this problem & if so how do you deal with it?

[Nick Radge]

As per email, the API adjustment will enable this to happen with ease.

[#REF!McGrath]

Excellent. Much appreciated.

[#REF!McGrath]

I have had some further correspondence with IB on this topic:

“Please be advised that your SMSF account is under our Australian entity. The free riding rule is not applicable to the Australian entity. Hence, that rule is not applicable to your SMSF account with us.”

“So can I sell and use those proceeds for a buy order (once the sell order has executed) on the same day? This is what I was advised previously.”

“Yes, you can. You can use unsettled cash to open new position.”
IBKR Client Services

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