non shortable stocks

Discussion in 'Trading' started by mskl, Apr 20, 2004.

  1. mskl


    It is a little frustrating that there are some equities in the marketplace that are very difficult to short (lack of inventory). After reading the NASD rules on shorting (see below), it is my opinion that it might be legal to allow short selling on these stocks (when the broker can't borrow them) if the customer bought the shares back by the 4 PM close. For those who use IB, they could simply force liquidate those customers who don't cover their short position by say 3:50 EST (similiar to the way they treat margin liquidations).

    From NASD Rules:

    (2) "Short Sales"

    (A) Customer short sales

    No member or person associated with a member shall accept a "short" sale order for any customer in any security unless the member or person associated with a member makes an affirmative determination that the member will receive delivery of the security from the customer or that the member can borrow the security on behalf of the customer for delivery by settlement date. This requirement shall not apply, however, to transactions in corporate debt securities or transactions in security futures, as defined in Section 3(a)(55) of the Act.

    In my opinion, by forcing a purchase by the close, you would be ensuring the customer delivers by settlement but there could be some other risks, like trading halts. In such circumstances the customer would be at risk of a "buy in" and/or a liquidation when the stock settles/reopens.

    Does anyone know if this is common practice in the markeplace?

    One only has to look at a stock like TASR, where the daily volume often exceeds 3/4 times the float. It seems that there must be firms out there who are allowing this type of shorting (unlimited shorting as long as the position is covered by the close).

    Any thoughts??