Forums  > Risk Management  > Broker Risk - how to manage?  
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Total Posts: 19
Joined: Dec 2011
Posted: 2015-06-19 03:05
Given recent debacles (MFG etc) I am concerned about broker risk and wondering what I can do to manage it. I have had a couple of near misses already.

Done so far:

- Watch broker's stock price like a hawk and try and get out if it starts tanking.

- Look into buying put options - through another broker - but they are prohibitively expensive and volume is very low. A $20 Jan 2016 put on IBKR currently trading at around $40 for example goes for 35c. So let's say I want to cover a $600k exposure. Assume the stock price goes to zero then I would get $20 for my 35c investment, So the cost is about 1/60th of my exposure, twice a year or ~3% per annum or ~$18k. Which is a lot. And this doesn't cover me for correlated risk when a number of brokers go under.

- Shorting. Also expensive and creates major risk by way of exposure to the upside price movements of the broker.

I hear about credit default swaps. Can anyone tell me what these might cost and how I might arrange them?

Any other ideas? This is for my personal trading so I can't just walk away to another job in these situations. I bear the loss.


Total Posts: 220
Joined: Apr 2009
Posted: 2015-06-19 16:09
I do the following:

- watch the stock price of the broker
- watch the stock price of all the banks the broker deposits customer funds at
- read the financial statements
- Have a news alert about articles that mention the broker

Apart from that, you could ask an insurer if he is willing to insure your account. I guess that is expensive.


Total Posts: 2798
Joined: Feb 2005
Posted: 2015-06-19 16:26
For CDS you need an ISDA agreement with one of shops still trading single name CDS. Afaik there are not many left (if at all), so liquidity might be an issue. And whether CDS on some broker actually exist (assuming they have traded bonds outstanding) is an entirely different question.

The put route sounds more promising imo.

"Sad wings of destiny / Where have they gone? / I know eternally / I'll carry on" (Rob Halford, Sad Wings)

Founding Member

Total Posts: 8333
Joined: Mar 2004
Posted: 2015-06-19 16:30
Certainly buying equity protection via puts or default protection via CDS is going to be prohibitively expensive.

By far the best way to do this is by having not one broker. This not only reduces financial risk, but also guarantees operational resiliency, which is just as important.

If you split between 4 brokers, you have single name exposure at 25%. And remember that there often is a recovery rate significantly above 50%, bringing your total capital risk from single-broker default into a single digit scenario, which is quite acceptable in most people's minds.

The Figs Protocol.

Nuclear Energy Trader

Total Posts: 1237
Joined: May 2004
Posted: 2015-06-20 05:33
> A $20 Jan 2016 put on IBKR currently trading
> at around $40 for example goes for 35c

well, would something like a higher number of spreads work ... buy $10 strike vs sell $5 put ... or maybe try a butterfly, sell one $10 put, buy two $7.50 puts, sell one $5 dollar put ... lotta legs but might be cheaper than outright 10 put

flaneur/boulevardier/remittance man/energy trader

Nuclear Energy Trader

Total Posts: 1237
Joined: May 2004
Posted: 2015-06-20 05:41
> So let's say I want to cover
> a $600k exposure

in USA SIPC insurance covers a total of 5 million in securities and 500k of cash (money market funds are considered a security) ... but it gets trickier with a margin account. as some folks found out if you have a margin account with Lehman NYC your counterparty might actually be Lehman London (which wasn't covered by SIPC)

Stay under the limit by having accounts at different firms

flaneur/boulevardier/remittance man/energy trader
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