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EFPs Java Application
	Requirements: The EFPs Java application requires you to have free Java software installed on your computer. To download Java, click here.

Trading costs for stocks come in the form of commissions, execution cost, and financing costs. A great deal of attention is paid to commissions which are explicit, and with the advent of smart routers, more attention is being paid to execution cost. But despite the fact that most trade cost comes from financing charges or lack of interest paid, little attention is focused on financing rates because they are not transparent.

An Exchange for Physical (EFP) is the simultaneous selling of a stock and buying of a Single Stock Future or the buying of a stock and the selling of a Single Stock Future. It allows the swap of a long or short stock position for a Single Stock Future (SSF). SSFs have an interest rate built into their price that is determined competitively by numerous market participants. Like Repos and Reverse Repos in the debt markets, EFPs provide a cheap and efficient financing vehicle. The EFP transaction is one where you sell the stock and buy it back for future delivery by buying the SSF future, or you buy the stock and sell the SSF. You do the two legs as one transaction via an EFP.

There are several reasons to use this type of transaction:

a) If you carry a long stock position on margin, the EFP gives you the opportunity to reduce your financing cost because you will likely be able to sell the stock and buy the forward at a premium that is lower than your margin rate.

b) If you are short the stock, you receive interest on the credit balance generated by your short sale, but this interest is less than the premium you would receive by selling the SSF and buying back the short stock.

c) If you have excess cash in your account and would like to earn a higher return, you could buy stock and sell it forward at a premium higher than the interest your cash generates.

You must post margin when you carry a future contract. The margin is 20% of the value of the underlying stock and IB pays interest on all SSF margins.

All SSFs are settled through the Options Clearing Corporation, an AAA rated entity, making any interest earned through implied interest safer than with many other interest earning alternatives. IB displays the EFP spread on an annualized basis net of dividends for easy comparison with broker interest rates.

Long Stock Comparison

Hold 1 share long of Microsoft for 60 days with 25% of the stock value held in cash as margin, or enter into an EFP to sell the stock and buy an SSF.

At the end of the sixty day period, 1 share of Microsoft stock is held under each scenario. The trade cost savings of $0.055 from entering into an EFP to purchase an SSF instead of holding the stock would significantly reduce the cost of holding stock.

Short Stock Comparison

Go short 1 share of Microsoft for 60 days with 30% of the stock value held in cash as margin, or enter into an EFP to buy the stock and sell an SSF.

At the end of the sixty day period, 1 share of Microsoft stock is held short under each scenario. The trade cost savings of $0.195 from entering an EFP to sell an SSF instead of holding the stock short would significantly reduce the cost of shorting the stock.

• Increased leverage, SSFs have only a 20% margin requirement.
• Elimination of US dividend withholdings for non-US investors.
• Ability to sell SSFs short on a downtick.

Security Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading security futures, please read the Security Futures Risk Disclosure Statement. For a copy click here or call (203) 618-5800.

The default display for EFPs is the stock vs. Single Stock Future spread. EFPs can also be displayed as an implied annual interest rate percentage, which can be directly compared to broker interest rates. This direct comparison is achieved by netting dividends and annualizing the EFP spread. ^[1]

To display implied annual interest rates or implied compounded annual interest rates right-click the top of the bid or ask price column and choose Display EFP prices as annualized interest rate or Display EFP prices as continuously compounded interest rate. EFPs may then be bought or sold by clicking the interest rate bid or ask price. To swap a long stock position for a long SSF, click the Ask price. To swap a short stock position for a short SSF, click the Bid price. EFPs may be added to the main trading window by entering a symbol and then selecting the Comb/IBEFP asset type. They may also be added to the SpreadTrader by typing a symbol and selecting Show EFP for XXX.

The top twenty EFP highest and lowest implied interest rates may also be displayed in the market scanners to highlight interest rate opportunities. To access these scans, choose US EFP, Highest or Lowest Synthetic Interest in the Market Scanner window.

To encourage EFP trading, Interactive Brokers has special all-in pricing for EFPs which includes the cost of the stock and SSF legs. This pricing is based on the size of the order as follows:

These rates are not tiered, so 250 contracts would cost 250*$0.30 or $75.

^[1] Interactive Brokers LLC is not liable for any losses resulting from inaccuracies in the EFP interest rate calculations due to the misreporting of dividends or market data.

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray a recommendation. Supporting documentation for any claims and statistical information will be provided upon request.