Hi All
Now I see they have a stock yield enhancement program where they'll pay you a percentage of the yield they get for people holding shorts. This seems like a no-brainer to me, although the whole 'money for nothing' aspect leaves me a bit suspicious that I've missed something.
Does anyone else participate in this or have any thoughts on the downside potential?
DT
Short answer: DON'T (unless you like loosing your money)
Long answer: This is a first time I write such feedback but experience w/ IB triggered me to share my observations so others won’t fall into the same trap.
I am an experienced investor that had accounts with multiple brokers. Moved into IB some time ago attracted by their lowest in industry margin rates, trade commissions, etc. My overall impression is mixed, while above still holds their clunky interface (that I can live with) and the fact that sometimes it takes customer support days to get back to (in several cases never, I had to call after opening tickets online w/o any follow up for several weeks) is a big turn off. Overall I am still moderately optimistic (if SYEP is considered it makes overall experience negative BUT you don’t have to use it).
Now as to SYEP (stock yield enhancement problem) – to put bluntly it borders the scum or at minimum suffers from very unsuccessful implementation, software algorithm or whatnot. My real practical experience w/ SYEP is below.
While all the concerns quoted on this thread are true but IMO they are unlikely to materialize. The key problem is in following; IB doesn’t promise to segregate dividends but rather will attempt to do so:
http://ibkb.interactivebrokers.com/node/1839
“Participants may not receive actual dividends on loaned shares but instead a cash payment equivalent to the full dividend to be paid on the same date as the dividend (referred to as a 'Payment in Lieu'). As a Payment in Lieu is treated differently than a dividend for U.S. tax reporting purposes, certain taxpayers may not receive the more favorable tax treatment afforded to dividend payments deemed 'qualified'. IB generally seeks to avoid this consequence for SYEP participants by recalling shares 10 days prior to record date, so the actual dividend is paid, but this is not guaranteed.”
As a result I have received about %40 of my dividends as PiLs (payments in lieu that are taxed at ordinary income level). Also keep in mind that some brokers will even compensate you (like Fidelity for occasional PiLs that happened due to them loaning stock in your margin account and I never seen that reaching 2 digit percent number). Let’s do some math (this is close to real numbers rounded for simplicity).
Without SYEP: $10,000 dividend - %15 tax = $8500 your net income after tax
With SYEP:: $10,000 dividend w/ some portion paid as PiLs due to the fact that some stocks were loaned out when dividends paid. I.e. $6,000 dividends + $4000 PiL before taxes lend in your account. After tax: ($6,000 – %15) + ($4,000 - %35) = $7700. Assuming %35 ordinary income tax bracket, you might be better or worse depending on your income situation.
Conclusion: participation in SYEP was a net loss of $7700 - $8500 = -$800. Not worth it. Not even close. Expect PiLs to wipe out any gains generated by SYEP.
I contacted IB challenging them about unsuccessful nature of their program (I am hoping it is not intentional misleading of customers) based on what they wrote online “IB generally seeks to avoid this consequence for SYEP participants by recalling shares” – since that recalling resulted in the loss. The answer was that they were thinking about improving their program.
