This is probably a silly question, but here it is: If I want to short a stock, I'll borrow shares from other clients of my brokerage and then sell them. How does a market maker go short? Obviously they never intentionally do so (at least theoretically), but if you attempt to maintain a net of zero shares you'll dip into the "negative" category on occasion. Do they have agreements with exchanges, brokerages, or some other entity to facilitate share borrowing? I understand it's also possible to short by financial derivatives like options or futures, but I think they sell borrowed shares as well.
lipstone, When you as a customer short stock, it is your clearing brokers job to borrow the stock from where ever they need to in order to make good delivery in T+2. If an equity MM is also a clearing broker, their stock loan department takes care of it. If they are not self clearing, they have a clearing broker and that stock loan department would be responsible. You are overthinking this. As long as the stock can be borrows in less than 2 days, they are not failing. Equity MM run long/short books and do not have to go out flat each day.
Well, in fairness, modern MMs are primarily HF technology outfits and probably go out flat at least sector/factor exposure and (probably) with some relatively small name-specific exposure. I would not expect Virtu to hold a billion IMB overnight, let's put it this way.
Agreed. A retail account considers flat no position. I was trying to point out that flat for a equity MM, that yes are all HF, is market neutral in some form. They do not focus on one name.
MMs have an exception, of course. They can naked short and cover a week or so later without issues. If they hold the short long enough, they need a borrow or to cover.