In this photo image, the Interactive Brokers LLC logo is displayed on a smartphone.
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Market actions related to the elections are expected to be so volatile that Interactive Brokers will force clients to raise more money to trade with leverage.
The retail broker increases margin requirements – how much money an investor using leverage and derivatives has in their brokerage account after buying stocks – according to a customer letter received from CNBC.
"Increased implied volatilities in options suggest that the markets will face increased volatility both before and after the November 2020 elections," the press release said. "IBKR shares this view and believes that it is appropriate to measure leverage in advance."
A margin account contains money that a broker lends an investor to buy stocks, options, and ETFs. The margin requirement is the smallest amount of money an investor must have in their account after purchasing a particular security. There are standard requirements from the Financial Industry Regulation Authority (FINRA), but the broker option beats to a higher minimum for your own safety.
Interactive brokers serving 876,000 broker accounts typically have an initial margin requirement of 50% and a maintenance requirement of 25%. The new levels bring the initial requirement to 67.5% and a maintenance requirement of 33.75%.
Traders expect heightened volatility between incumbent President Donald Trump and Democratic candidate and former Vice President Joe Biden ahead of the 2020 election. The Cbeo volatility index, a measure of investor fear, is currently at 26 but is expected to rise above 32 in November according to futures pricing. Wall Street generally sees Trump as good for the economy, but his trade relations with China are too delicate. Investors expect Biden to raise the corporate tax rate and drive health legislation that would weigh on public health providers. Additionally, both candidates are facing a pandemic and a spate of protests against social justice.
The chances of a controversial election also increase as more people will vote by mail due to the coronavirus pandemic. This means that the official results may take longer or there may be a debate about electoral fraud.
"Option prices indicate the expectation of a prolonged period of high volatility beginning around election day and lasting months thereafter," Goldman Sachs said in a statement to customers last week. "The implied volatility jumps around election day and rates an S&P 500 step of almost 3%. The maturity structure will remain elevated well into 2021."
Interactive Brokers announced that the increase will be implemented gradually every day starting September 28th and will reach the new level by October 23rd.
In April, the broker announced it had taken on $ 88 million in success when crude oil collapsed to the unprecedented negative price of $ 37.63 a barrel and a handful of its traders were trapped in long positions were above the equity of their accounts.
"We continuously evaluate the current market environment and our margin requirements reflect this," Steve Sanders, EVP for marketing and product development for Interactive Brokers, told CNBC.
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– with reports from CNBC's Senior Markets Commentator Michael Santoli.