I am an options trader. Imagine when I am peacefully trading on my trading account with my broker, the market collapses and causes a recession or depression.

Now can I continue to trade during the depression? Is there any possibility I would lose my money I used to trade in the worst case?

Info: I use Interactive brokers and I am from India.

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    Of course there's a chance that you lose your money in a market move, especially if you don't specify what type of positions you're taking. What do you really want to know? I think that it must be something more specific. – user32479 Mar 15 '16 at 18:51
  • If you're asking whether the cash in your brokerage account will disappear as a result of a market crash when you have no position, the answer is no. Cash in brokerage accounts are insured by the FDIC (the same entity that insures deposit accounts). – TainToTain Mar 15 '16 at 18:56
  • I mean, Is there any chance of losing money as if people in Greece could not get their money out of their savings account last year during their recession? Will that happen to a trading account my any means? – Distraction Arrestor Mar 15 '16 at 18:58
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    @DistractionArrestor, that's highly unlikely due to FDIC insurance, assuming you're maintaining less than the FDIC limit. It's important to understand that only your cash position can receive FDIC protection. Any option or other security is not covered, could go to a value of zero, and may become nonredeemable. – quid Mar 15 '16 at 19:11
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    Interactive Brokers are available in many countries. I am in Australia and they are available here. – Victor Mar 15 '16 at 21:19

In the United States, the Securities Investor Protection Corporation protects the first $500,000 you have at a brokerage including up to $250,000 in cash. This means that if the firm holding your securities fails financially, you have some coverage.

That insurance does not prevent your investment itself from losing money. Even traditionally save money market funds can potentially lose value in a situation called Breaking the buck. This means that the Net Asset Value of the fund falls below $1/share. Alas, during periods of market calamity, even traditionally safe stores of value are subject to increased risk.

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    Note that the OP is in India. You clearly indicate your answer applies to the U.S., so it should be useful to many people. – ChrisInEdmonton Mar 15 '16 at 21:29
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    @ChrisInEdmonton The OP states that he is in India but seems to be trading a US-based platform. I think it's unclear whether this does or does not apply in that situation. It seem that it may depend on whether the account is held by the US-based LLC or the India-based affiliate. – user32479 Mar 16 '16 at 18:28
  • Thanks. I saw that the OP said he/she was Indian but did not state actual country of residence or clarify where the brokerage was located. That would have an impact on the usefulness of my answer. – Stephen Grimes Mar 16 '16 at 19:36
  • @Brick, I transfer money to Interactive Brokers LLC to trade. So SIPC covers my money? – Distraction Arrestor Mar 18 '16 at 5:30
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    @DistractionArrestor As far as I know SIPC covers accounts held in the US, regardless of the nationality of the holder, so, I think you are covered in this case. – user32479 Mar 18 '16 at 13:17

A market crash won't affect your cash held with your broker - however if the broker defaults (goes bankrupt), you may lose some or all of that cash.

If you read the customer agreement that you signed when opening the account, it's very likely that there's a clause that stipulates that under certain circumstances, the broker has the right to use your cash and/or your positions without notice. If the broker default you may not be able to recover the assets they've been using.

As an example, look at clause 14 of the Interactive Brokers US customer agreement. This is a fairly standard clause.

Depending on your jurisdiction, you may have a partial or full legal protection against such an event (e.g. the SIPC protection for US-based brokers which would apply to you if your broker is IB LLC, even if you are not a US resident/citizen).

  • How to find if the broker is about to get default? – Distraction Arrestor Mar 18 '16 at 3:30
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    @DistractionArrestor If it's listed or issues bonds you can have a look at the equity price or the CDS on the company. You may also find this page instructive. – assylias Mar 18 '16 at 7:00

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