@DesertTrader, @all I had 3100 short GW till monday 22th december. On that day I closed all my shorts: bought 3100 GW. => So my account showed no more stock positions in GW. Then suddenly since december 30th my account showes with valuta date 19th december: a) 3100 long GW with a price of $3.41 b) 527 short PDS c) my cash was reduced for $5.37*3100 Did I walk right into a trap because I wanted to close my short position on 22th december (after election deadline) or is my broker wrong? Thanks for your help
This is always confusing. When you short a stock, in theory, you have borrowed specific certificates of stock from a specific individual's or institution's account. Unlike a long ownership position, a short position has many liabilities falling to the borrower as detailed in the stock loan agreement. In the GW deal, once a valid election is made the owner pledged not to take any action under which ownership is changed (like selling it) or his election becomes invalid. Since you borrowed and sold his stock, you invalidated his election and as part of the stock loan agreement you agreed to make him whole as a condition of the loan. The stock shares you purchased after the deadline were clearly not subject to a valid election and can not be used to eliminate your obligation under the stock loan agreement. The free lunch strategy may occassionally work if you are lucky enough to have borrowed stock without a valid election. People often try this with large size hoping to get a few non-electing shares or benefit from a sanfu in the clearing house. If you make money from a windfall, someone lost money and will be looking to get it back. At the end of the day, your broker gets to decide who borrowed which shares. As much as I trust my firm, I know who will get screwed even if I did get lucky enough to have borrowed shares without a valid election.
can we think in another scenario? I buy GW shares on the last date of the tender and inform my broker to tender for cash. After receiving the confirmation, I sell the shares I just bought. In this way, I owe the shares I tendered. Now, after the deadline, I buy back the shares at a discount price to cover the borrowing. Thus, I realize a arbitrage. Is this working?
You sent in an election to choose cash over stock. The shares are sent and held by the agent. If you want to sell your shares that you bought, you would have to cancel your election. Then you will get your stock back. Then you can sell it. Sorry, no free lunch.
No. For example, the ib sometimes confirms in the middle of the day. And they change the ticker to indicate the election after market close. You can still sell the shares after receiving the confirmation.
This is always confusing. When you short a stock, in theory, you have borrowed specific certificates of stock from a specific individual's or institution's account. Unlike a long ownership position, a short position has many liabilities falling to the borrower as detailed in the stock loan agreement. In the GW deal, once a valid election is made the owner pledged not to take any action under which ownership is changed (like selling it) or his election becomes invalid. Since you borrowed and sold his stock, you invalidated his election and as part of the stock loan agreement you agreed to make him whole as a condition of the loan. The stock shares you purchased after the deadline were clearly not subject to a valid election and can not be used to eliminate your obligation under the stock loan agreement. The free lunch strategy may occassionally work if you are lucky enough to have borrowed stock without a valid election. People often try this with large size hoping to get a few non-electing shares or benefit from a sanfu in the clearing house. If you make money from a windfall, someone lost money and will be looking to get it back. At the end of the day, your broker gets to decide who borrowed which shares. As much as I trust my firm, I know who will get screwed even if I did get lucky enough to have borrowed shares without a valid election.
@DestertTrader Thanks a lot for your detailled answer. Election deadline was Dec. 19th Election was on Dec. 23th. One thing is confusing me. On Dec. 22th I had 3100 short GW and I bought them back that day. My broker statement says that it was a "closing buy" and for the following 8 days no more GW positions were in my account and broker statements. And suddenly on Dec. 30th my account shows positions (+GW, -PDS, -Cash) with valuta of Dec. 19th. So, is this normal or is the broker wrong? Thanks and regards