Is The Russell Bubble About To Pop - Interactive Brokers Hikes Small Cap Margins To 100%

Tyler Durden's picture




 

Three months ago, in anticipation of the now traditional year end ramp in "story stocks" (i.e., those companies in the Russell 2000 that have negligible or negative cash flow, yet have a "story" to them, and/or massive short interest usually for a reason) we penned an article titled "Presenting the most shorted stocks" focusing on the 50 most shorted/hated names in the Russell 2000. We suggested that for "the overly aggressive out there, and those who are tired of watching paint dry, one option is to create an equal-weighted basket of the 20 most hated names, and hope for the arrival of the one catalyst that forces a massive squeeze." That, or just await the traditional rotation into high beta garbage that comes every year like clockwork in the last months of the year.

Sure enough precisely this happened in 2012 as it always does, with the Russell 2000 outperforming the S&P notably since November, with the index hitting all time highs a few days ago, yet our most-shorted basket crushing the returns of both the S&P and the broader Russell 2000 by a substantial amount (see chart below).

Alas, those hoping that that the Russell bubble will continue indefinitely may want to promptly reassess, as moments ago Interactive Brokers just announced it would hike both initial and maintenance margins on all low cap stocks (under $250 million in market cap) beginning January 11, 2013, to 100%!

From IB:

Margin Increase on Low Cap Securities

 

Please be advised that IB has increased the initial margin rates to 100% on low capitalization stocks (currently defined as companies with less than $250 million in market capitalization). The maintenance margin increases will occur in stages starting with an increase to 50% beginning after each region's market close on Friday, January 11, 2013 and will be implemented as
follows:

 

Friday January 11, 2013: Maintenance Margin - 50% Wednesday January 16,2013:
Maintenance Margin - 75% Monday January 21, 2013: Maintenance Margin - 100%

 

The list of stocks which are subject to this margin increase can be found on the following page:

 

http://ibkb.interactivebrokers.com/node/2007 ( IB../2007 )

 

Upon implementation, any of the incremental margin increases may result in a margin deficit in the account. A margin deficit implies that an account becomes subject to automated liquidation. Please carefully review the current positions within your account and adjust the portfolio accordingly.

This means that countless trading accounts will be forced to dump a lot of stocks immediately or wait for the dreaded "automated liquidation" where IB decides whose accounts to liquidate. And since one broker is never alone, expect all others to promptly follow suit with a comparable margin increase that is sure to have a major impact on the index price of the Russell, of whose 2000 stocks, some 508 have market caps under $250 million.

And should the margin hike move even more aggressively and impact say companies with a market cap under $500MM, that would impact a whopping 951 of the companies in the Russell.

Needless to say, we would urge anyone still nursing profits in to the "most shorted Russell 2000" basket to close out post haste.

A list of the companies directly impacted by the IB move are listed on this following page.

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Thu, 01/10/2013 - 14:05 | 3141229 Cognitive Dissonance
Cognitive Dissonance's picture

Gold and Silver margin hikes are in the wings.

Thu, 01/10/2013 - 14:12 | 3141251 dereksatkinson
dereksatkinson's picture

They notified everyone well over a month ago that they were raising margin requirements.  This isn't news to anyone who is a customer of IB.

Thu, 01/10/2013 - 14:14 | 3141263 knukles
knukles's picture

killjoy

Thu, 01/10/2013 - 15:02 | 3141399 CPL
CPL's picture

FAZ or not to FAZ...that is the question now.

 

I'm not jumping in that pool.  TZA and FAZ need to shave first, a buck on TZA and a buck and a quarter on FAZ.

Thu, 01/10/2013 - 15:03 | 3141430 TruthInSunshine
TruthInSunshine's picture

Not only can one eat electronic shares of equities, they're both delicious & nutritious.

Thu, 01/10/2013 - 15:06 | 3141453 CPL
CPL's picture

Steaming and delicious hot cup of equities.  <sniff sniff> Is that leveraged decay?

It IS! how did you know?

Math secret.

Thu, 01/10/2013 - 14:55 | 3141401 SAT 800
SAT 800's picture

They have a customer? Stock market people are weird.

Thu, 01/10/2013 - 15:00 | 3141426 CPL
CPL's picture

No they have subscription forms like the penny millionaire newsletters flogged at Motley Fool.

 

Psssh...customers at IB.

Thu, 01/10/2013 - 15:24 | 3141581 SAT 800
SAT 800's picture

LOL.

Fri, 01/11/2013 - 00:25 | 3143416 Jake88
Jake88's picture

those of us who didn't know are thankful for the information. sorry that you are not moved.

Thu, 01/10/2013 - 14:13 | 3141252 slaughterer
slaughterer's picture

Russell (Small Cap) was the stack of playing chips in the fiscal cliff poker game.  Time to cash in those small cap chips and tip the bouncers.  

Put on your gowns and tuxedos, ladies and gentlemen.

TIME NOW FOR THE GREAT TZA CASINO! 

(Everybody is noticing the move out of small caps via the underperformance of the Russell today).  

Thu, 01/10/2013 - 14:29 | 3141319 Caracalla
Caracalla's picture

Sure noticed it and loving it!

Thu, 01/10/2013 - 15:04 | 3141442 CPL
CPL's picture

Belay that.  Wait.  RSI is still solid if comparing to other pops in the past.  Too strong.  Wait for a discount and remember tommorrow is friday on the new boss's first day.

 

So please hold off.  You'll get a chance though.  Just not today

Thu, 01/10/2013 - 16:02 | 3141748 CPL
CPL's picture

Next good entry for TZA is 11.14 working in the decay btw.

faz/fas I didn't bother doing...I don't trust anything banking wise with the banking industry with the US Fin Min switch.  So beware of it.

 

...but if you guys want to see something weird.  The shipping industry is now directly inverse to a rising market.  Market goes up.  Shipping gets demolished.  Shipping goes down, 40% jumps in a day.  So keep that in mind if wanting to throw paper money away on the market.

 

DRYS and NEWL

Thu, 01/10/2013 - 14:14 | 3141260 Winston Churchill
Winston Churchill's picture

BTFD if they do.

I would love to see JPM 'Bunker Hunted".

Thu, 01/10/2013 - 14:15 | 3141264 HedgeAccordingly
HedgeAccordingly's picture

Russell 2000 $IWM prints all time high WICK this morning | http://hedge.ly/RIgMBN

Thu, 01/10/2013 - 14:25 | 3141302 Kaiser Sousa
Kaiser Sousa's picture

"Gold and Silver margin hikes are in the wings...."

Ha....play in the FraudCino...

leave broke as a joke...

I just got thru polishing some of my pre-65 Kennedy Halves...

la, la, la, la - FUCK YOU BERNANKE...

now where'd that come from.....

Thu, 01/10/2013 - 14:58 | 3141415 SAT 800
SAT 800's picture

no. open interest is not high. prices are not high. no reason. people are sufficiently distracted by the "economic recovery". And besides we have a new Treasury Secretary who'll probably fix up all those typing errors the last Secretary made; or whatever the problem was.

Thu, 01/10/2013 - 14:08 | 3141236 reload
reload's picture

Do interactive brokers have a London office? .......perhaps they need some more client funds to `segregate`

Thu, 01/10/2013 - 14:53 | 3141393 SAT 800
SAT 800's picture

Fuck yes, they have a London Office. And about a week from now after the blood has dried on the floor somone from the Financial Regulatory board is going to call them up and say, "I say, old boy, maybe we should have a spot of lunch, you know, and talk this over".

Thu, 01/10/2013 - 14:58 | 3141417 CPL
CPL's picture

Make cheque payable in 54 bottle caps to the New New England Bank.

Thu, 01/10/2013 - 14:11 | 3141240 knukles
knukles's picture

Oh, Corzine just took over the firm?
Ah, it's all allocated, segregated and safe as the Gold in Ft Knox

For some reason this reminds me of the heroines in the War of Eternity Aliens, Monsters and Apocalypse movies who always were those skin tight partial leather body suits with 6" spiked heels in which to run about defending mankind...
Sumptin's strange around here all of a sudden, Doobieboy

Thu, 01/10/2013 - 14:44 | 3141365 Freddie
Freddie's picture

IB appears to be a pretty good firm and Thomas Petterfy is not Corzine.  I remember when  Corzine's firm was failing. IB for about a day said they were looking to buy them/takeover/save the firm.  IB quickly ran away from that idea. 

TV and Hollywood are shit but before I stopped watching Hollywood - I recall the one movie with Jenifer Garner and another with Milla Jajovivich in spandex outfits fighting the NWO/zombies.  Hot hot.

Fri, 01/11/2013 - 00:36 | 3143429 lewy14
lewy14's picture

Concur on Peterffy. He paid for an ad - which he narrated - warning against socialism (which he escaped as a young Hungarian).

I worry that he will be co-opted, or destroyed.

He's more likely to go to jail over trumped up bullshit than Corzine will be for breaking securities law and stealing billions.

Thu, 01/10/2013 - 14:09 | 3141244 Water Is Wet
Water Is Wet's picture

Quite a cannonball the dollar index is doing today.  http://finviz.com/futures_charts.ashx?t=CURRENCIES&p=h1

Thu, 01/10/2013 - 14:14 | 3141261 knukles
knukles's picture

Well of course....
U's not going anywhere 6.5% soon and there's a Trillion Dollar piece of Tinshit in Our Future.
Confidence has been reconstituted.

Thu, 01/10/2013 - 14:49 | 3141380 SAT 800
SAT 800's picture

You'll be able to tell when confidence is restored when we all have to stand in formation and shout "Heil Lew, Heil Lew"---or be investigated as non-patriotic. Until then; the floggings will continue until morale improves.

Thu, 01/10/2013 - 14:59 | 3141424 Al Huxley
Al Huxley's picture

Yeah, you laugh - but that coin will be worth a TRILLION FUCKING DOLLARS.  Let's see what all those dumbass motherfuckers shorting the USD and making 'alternate trade arrangements' do once the whole fucking debt's paid off with a mere 16 fucking coins.  Then the dollar will go through the roof!

Thu, 01/10/2013 - 14:42 | 3141355 LawsofPhysics
LawsofPhysics's picture

exporting inflation back to the E.Z., gotta make those 'merican products more attractive.

Thu, 01/10/2013 - 14:10 | 3141247 fonzannoon
fonzannoon's picture

why in the hell are they hiking margins? It's equities we are talking about here not PM's.

Thu, 01/10/2013 - 15:19 | 3141369 SAT 800
SAT 800's picture

Dude; people have been manipulating stock markets for two hundred years before there was a public precious metals market. They had to learn from somebody; they're not that bright, you know. also; good reportage, Tyler. Props. Margin hikes are one of my favorite signals in the whole world; and not because of an "opinion"; because they work; historically they've very effective. Holding my short position from 1459.25 in the Mar. S&P. Went short the Mar.'13 Euro today at 1.3257. --ORLY--You can short the Euro now!  This trade idea is based on the vertical spike on the day chart; almost certainly short covering. The "new wonderful Euro price" doesn't take out the dowtrend though and based on they're not lowering interest rates;? One of my favorite kind of trades; a big reaction to nothing; which of course, will be followed by buyers remorse. (Nothing happened, so why change the price?). We shall see.

Thu, 01/10/2013 - 14:12 | 3141254 booboo
booboo's picture

Someone check the volume on TWM for me, I'm stuck on the head and crowning.

Thu, 01/10/2013 - 14:13 | 3141257 vote_libertaria...
vote_libertarian_party's picture

That explains why IWM has been down all day today while most stocks are up.

 

Somebody 'guessed' correctly ahead of time this morning.

Thu, 01/10/2013 - 14:16 | 3141269 dereksatkinson
dereksatkinson's picture

They let customers know a long time ago.  This isn't an event.

Thu, 01/10/2013 - 14:15 | 3141266 firstdivision
firstdivision's picture

If someone had bought SKUL hoping for a short squeeze, they got their skull crushed.

Thu, 01/10/2013 - 14:15 | 3141268 dark pools of soros
dark pools of soros's picture

so they sell and rotate into higher market cap stocks..  the sheep ain't leaving the pasture, just being pushed to the other side

Thu, 01/10/2013 - 14:18 | 3141273 vote_libertaria...
vote_libertarian_party's picture

So if this is old news why is IWM at all time highs?  Short squeeze?

Thu, 01/10/2013 - 14:19 | 3141277 LawsofPhysics
LawsofPhysics's picture

Make margins 100% on everything.  Go ahead you stupid fucking paper-pushing fucks, I dare you.  A non-event.

Fri, 01/11/2013 - 00:38 | 3143433 lewy14
lewy14's picture

Raise the margin on everything. Then raise the margin on margin.

Thu, 01/10/2013 - 14:21 | 3141286 lolmao500
lolmao500's picture

School shooting in California.

2 dead and one injured. Shooter in prison.

The gun control nutjobs will love this...

Thu, 01/10/2013 - 15:18 | 3141534 SAT 800
SAT 800's picture

I always thought "We sentence you to be hanged by the neck until dead" was pretty much of a deterrent to this sort of thing; but what do I know.

Thu, 01/10/2013 - 15:34 | 3141630 kaiserhoff
kaiserhoff's picture

Ye olde English version required the judge to put a black hanky over his wig and pronounce:

"until you are dead, dead, dead...".  In case you have more than one life to give?   WTF?

Thu, 01/10/2013 - 14:21 | 3141287 ekm
ekm's picture

Re-posting. People have to understand this.

 

As I said on the other post, it's all and all and all and all about ORDERLY DELEVERAGING, as Mario Draghi said this morning.

Slip of tongue or on purpose, I don't know.

 

That's what happened from 2004 till 2007. FED tried to oppose disorderly deleveraging until 2008's baaaaaaam.

 

It's gonna pop and it's gonna be bad, way worse then 2008.

 

Rule number 1 of collapses:

A COLLAPSE OCCURS AFTER THE GOV DECLARES THAT IT'S NEVER GOING TO OCCUR SO EVERYBODY IS SUCKERED IN.

Thu, 01/10/2013 - 15:50 | 3141707 Hook Line and S...
Hook Line and Sphincter's picture

The end of orderly deleveraging... too bad that the timing of that event is loose conjecture.

Still, part of 'collapse' is perspective management. In parts of the US, I'm sure that those eating mud will still think they have a tasty spoonful of chocolate pudding in their mouth. After all, that's what they've been told.

If the gov needs to enhance 'envy' or 'fear' as a means to reach its goal, we can expect the MSM to modify their message...when they do, it's a keyhole view of the barometer of PTB intent. Predictive programming in action.

Thu, 01/10/2013 - 14:24 | 3141297 firstdivision
firstdivision's picture

The question is, who is on the margin more, longs or shorts. 

Thu, 01/10/2013 - 15:16 | 3141527 SAT 800
SAT 800's picture

Longs; the price is historically high; has recently rallied; and besides that they have the customer records! No, serioiusly, the answer is longs; it;s a signal to short the friggin thing.

Thu, 01/10/2013 - 14:28 | 3141313 NoDebt
NoDebt's picture

Can't get margin?  Not to fear, just get a Russell 2000 3X leveraged inverse ETF!

(I'm just kidding around- no need to "school" me on the shortcomings and pitfalls of those types of funds.  I got it.)

Thu, 01/10/2013 - 14:36 | 3141339 Freddie
Freddie's picture

Why is the S&P 500 rallying?  Money moving out of the RUT/IWM?  A tanker touch a bridge somewhere?  Unemployment go down based on fantasy numbers?  The Fed/Treasury designing the new $1 trillion platinum coin?

Thu, 01/10/2013 - 14:39 | 3141344 ekm
ekm's picture

Follow nanex in twitter.

40% of BAC shares get traded in dark pools.

 

As it happened in the 30s, MS sells to C, C sells to BAC, BAC sells to JPM, JPM sells to GS and GS sells it back to MS. These are primary dealers.

 

It's a closed loop. There's no buying and selling in the market. Only few crums are left to the market.

 

Thu, 01/10/2013 - 14:51 | 3141389 Freddie
Freddie's picture

+1

Thanks. This also happened during the dot bomb bubble with IPOs on the first day.  Remember who ran GS then?  Corzine. GS got sued for this pump and dump but nothing happened.   Remember how people could not believe how dog shit dot bomb garbage stocks would go from $10 to $150 in a day?  The closed loop you mentioned. 

Today the transaction fees are zero so they just circulate the inventory.  My guess is much of it is using ETFs and futures.

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