mechanics of shorting

Discussion in 'Trading' started by trading1, May 14, 2010.

  1. A question: When shorting stocks, its possible to get a broker notice saying they can not find the stocks and there can be a 'buy in'. This can come out of the blue, even long after conducting the short trade. Does this infer that the stocks are 'rolled over' or something every few days, and they periodically can't find the stocks to short? I ask because does it mean that your trading volume of shorts is more than the initial volume shorted, is the total trading volume some sort of mutiple of the initial amount shorted? Thanks in advance for any help understanding this.
  2. Its my understanding that your broker has to have some client that is long the stock in order for you to short it. So if your broker has say a few hundred clients that are long ABC company, and their total collective amount of shares long are say 1 million shares, then in theory the broker only has 1 million shares that he can let you and other clients short. ABC company could have 200 million shares outstanding, but if your broker only has clients that total 1 million shares long, you cant short any more than 1 million shares with that broker(collectively with other clients) You could go to another larger broker and maybe find shares to short though.
  3. LeeD


    A broker may also go to trouble to borrow stocks from other brokers. Such borrowing is usually a 1-day rolling contract. So, each party can terminate it any time they want.

    So, if other clients of the broker close their long positions or the party the broker was borrowing from stops lending, the broker has to ask clients to terminate some shorts.
  4. In order for you to short the stock, your broker must find shares to borrow. Those shares may come from its other clients or from another broker.

    If at some point someone who is long the shares, has lent shares and wants to close his position, the broker (yours or the one your broker borrowed the shares from) must find replacement shares. If none are to be found, someone gets a Buy In notice and is forced to cover. That could be you.

    Make sure to check what, if any, the Indicative Rate is prior to shorting (the percentage rate charged when you borrow shares). It can be rather large at times (Citigroup was over 100% last year). And if your broker offers it, the number of available for borrowing.
  5. They can only lend stock from customers with a margin debit. If they are long ABC and all stock in thier portfolio is fully paid for and zero margin debit, they cannot use those shares to loan out.
  6. LeeD


    Is it regulatory requirement? My undertsanding is most brokerage agreements permit teh broker to lend customers' stocks. The difference is just whether the customer gets any share in the revenue the broker receives from lending.
  7. Are you sure that's the requirement for stock loans? If memory serves me correctly, and it often doesn't, hypothecation was(is?) 140% of the debit balance with the remainder of securities being held in safekeeping. But that's for collateralizing a margin loan... as opposed to many/most brokers requiring a Securities Lending Agreement for a margin account which lets them loan your securites out and has nothing to do with a debit balance. (?)