Professional Customer designation with IB

[equus]

Just got the following notice from IB. Does anyone know what the consequences are of passing over the threshold for "Professional Customer designation"? Does it mean being on the hook for Professional data subscription fees? 

 

This notice is intended to assist with monitoring your U.S. option orders for purposes of the Professional Customer designation. As background, the option exchanges require any retail customer who submits over 390 listed option orders on an average daily basis for a given month to be designated as a Professional. Professionals are then treated the same as broker dealers for purposes of execution priority and transaction fees in the following quarter.

Based upon a review of your activity in U******* and any related accounts for the month of Oct 2024, you’ve submitted orders totaling 7078 contracts, representing a daily average of 373 contracts through 25 Oct 2024. Based upon this data, we project that you will meet the Professional classification if your total orders for the remainder of this month exceed 1892.

 

[Peeyotch]

The 390 rule exists to stop professionals from masquerading as non-professional customers and taking advantage of the lower fees and higher order priority to gain a market-making advantage. If you end up crossing the threshold, you will be designated as a Professional and your orders must be handled the same as any other Professional trader. This means that your per-order fees will change according to each exchange's much-more-complicated professional fee schedule, and your orders will be deprioritized when compared to retail orders. 

Luckily you are with Interactive Brokers, who can handle this designation. Many other brokers cannot and will just cut you off before you reach the threshold. IB will take the professional fees into account when using smart routing, but your overall fees will probably increase significantly regardless. Hope that helps.

[ex3y7s]

I’m confused by their wording—the 390 rule states “orders”, but they appear to be referring to your average daily number of contracts. Do you actually average that many discrete orders (eg algotrading), or is this a case of IB interpreting the rule in an erroneously strict fashion? In other words, if I place one order per day for 1000 contracts that should not trigger the rule; 391 orders for 1 contract each should.

 

It is worth noting if you’re not actually filling that many orders but are constantly moving limit orders around (either using software or constantly dragging them around the price ladder) you may inadvertently be registering many “orders” if they are being cancelled/replaced or rerouted.

Edited October 30, 2024 by ex3y7s

[equus]

Yes, I believe constantly moving limit orders in that way would contribute to the count.

 

According to IB, the following counts as "a single order":
A complex order of 8 or fewer option legs;
Each option leg of a complex order of 9 or more option legs"

 

It took a bit of digging, but it seems the number of contracts does not change the count. Nasdaq gives an example here:
A customer enters an order to buy 10 XYZ6Dec100.0C at 1.00. The customer cancels and replaces the order three times. In this case, the count of orders is four (the original order plus 3 cancel/replace orders).
https://www.nasdaqtrader.com/Content/NewsAlerts/ISERics/ISE-RIC-2016-007$Professional_Customer$20160930.pdf

Edited October 31, 2024 by equus

[ex3y7s]

4 minutes ago, equus said:

Yes, I believe constantly moving limit orders in that way would contribute to the count.

 

According to IB, the following counts as "a single order":
A complex order of 8 or fewer option legs;
Each option leg of a complex order of 9 or more option legs"

 

It took a bit of digging, but it seems the number of contracts does not change the count. Nasdaq gives an example here:
A customer enters an order to buy 10 XYZ6Dec100.0C at 1.00. The customer cancels and replaces the order three times. In this case, the count of orders is four (the original order plus 3 cancel/replace orders).
https://www.nasdaqtrader.com/Content/NewsAlerts/ISERics/ISE-RIC-2016-007$Professional_Customer$20160930.pdf

Thanks for updating—so it sounds like IB is correctly interpreting the rule, but for some reason their email is telling you about contracts (instead of orders) when that's totally irrelevant?

 

Are you actually placing that many orders? It's strange/troubling that they would say "daily average of 373 contracts" because that's really not that much if you're daytrading options. It would not be the first time IB has (mis-)interpreted regulatory rules in a way that results in more restrictions for customers.

Edited October 31, 2024 by ex3y7s

[equus]

I do play around with limit orders but the numbers they give are way above what I imagined I was doing.

Yes, they seem to be mixing the two terms in the very same email. Customer support didn't have much of a clue, I spoke with two different agents.