Illegal Short Sale Debacle - HELP!!

Discussion in 'Order Execution' started by Marc to Market, May 7, 2004.

  1. Hey guys,

    I'm in quite the predicament... I was trading ICGE today and accidentally oversold 300,000 shares. I was unable to cover the position before the markets closed at 4pm. A few minutes after the close, my broker called me to inform me that I had an "illegal short position" which was the result of overselling a long position. He then communicated to me that I needed to close the short position immediately. They went on to say that since this was an illegal short (I didn't mark my order as a "short sell" nor did I short on an uptick as required by the rules), I would have to absorb any loss from covering at a higher price, but get this... IF THE STOCK GOES DOWN AND I COVER, I CANNOT KEEP THE PROFIT! How can it be one way but not the other? This makes no sense to me. Can my broker do this legally? If so, who would keep the profits? My broker? The SEC? Just doesn't seem fair to me that I can't profit from it but CAN stand to lose money... and then somebody ELSE (my broker?) COULD profit from it... To make matters even more complicated, ICGE won't be trading in the same form come Monday... There will be a 20:1 reverse split effective at the start of trading on Monday. According to my broker, this means that I cannot cover the position until my 300,000 share position has settled, typcially taking 3 days...

    Any advice or help with this situation would be greatly appreciated.

  2. Ebo


    Sounds like you USED to be a rebate trader that did not read the rulebook. Call a compliance person from another firm for advice.
    How can you offer on a minus tick?



    Now it will be a marginable stock @ 4.80.
    It may actually be on radar screens again.
    I would find someone that has a clue before monday.

    Good Luck!
  3. pspr


    I know nothing about the stock but if it trades Monday at an offer at or lower than your short price, I would hedge the short by taking a long 300,000 share position. You should be able to offset your short then by offsetting the two positions when the broker allows you to cover the short.

    About being able to lose but not profit, that probably is correct since you are in an illegal trade. Just try to extricate yourself without a net loss. Worry about who might get any profit later.
  4. You forgot to get a locate on your short? That's bad news, you have to take the heat on that one unfortunately, buy back the outstanding short balance as soon as possible.
  5. nkhoi

    nkhoi Moderator

    long some es to offset your short and you can do it over nite.
  6. Ebo


    Thats a sure way to lose more!
    Why not NQ if you think this "hedge" works?
    They may not even let him keep the sale at all.
    It should go into the firm's error account!

  7. pspr


    On second thought, a hedge is going to be tricky since you could lose on the hedge but not profit on your illegal short.

    Ebo is right. Get hold of the compliance officer of the firm ASAP to find out exactly what your options and risk are. He may be able to suggest a way for you to offset or hedge the trade that they will accept.
  8. I think I heard the NASD acquires any profits arisen in illegal short sales. I honestly cannot confirm whether this is true.
  9. def

    def Interactive Brokers

    you wouldn't need to buy 300K Monday AM. You would need to cover 300/20 as the stock is trading ex-split. you should then see if they can settle your trade T+2 instead of T+3.

    If your broker/firm knows your position, how could their software allow you to short
    a: on a downtick
    b: without automatically flagging it.

    they caught it which is good but given they allowed you to do it and they are ultimately responsible, my guess is they'll work with you.

    I think it's true that you can't profit from illegal short sales. check with your compliance but I think regulations do not allow one to profit from an illegal short sale. to me the logic is straight forward.
  10. Make a big fuss at the firm and blame their software. Then if that fails, file a lawsuit against them...yeah, that's the ticket! :confused:
    #10     May 7, 2004