Query on a forced buy-in of a short position

Discussion in 'Order Execution' started by rivet, May 9, 2006.

  1. rivet


    Suppose you have a short stock position and a few days later you decide to buy it back. You go on and execute the buy-back of the shares, which nullifies the short. The next working day selling pressure on the shares accelerates, the broker goes on and executes the same buy-back because he had to give back the borrowed shares, but his action effectively leaves the account net-long! Before the execution was carried, the broker sent a notification telling you of the trade but leaves little time for action. The notification includes a warning that if the short position was already bought back by you BUT HAS NOT SETTLED YET (remember we are only at T+1 for the first buy) the account will be left net long.

    Has anybody had a similar experience? Is this a justifiable action by a broker even though he failed to see the first trade? What if the forced buy was actually 5% above the intraday high? Isn't this action foul?

    Thanks in advance for all thoughts
  2. Choad


    Good lord, get a new broker!

    Name 'em and shame 'em.
  3. rivet


    I am trying to resolve it with them for the time being. I sent out this post to share similar experiences, if there are any, and to see what other trader's think.

    What would you do to escalate the issue, if not satisfied by the resolution with the broker? I mean apart from changing broker. File a complain to the SEC or the NASD?
  4. Choad


    Hopefully some more experienced traders will stop by. I've been actively trading since '99 with three different brokers, but I haven't heard of action like that from the broker.

    A forced "buy-in" of a short is, of course, no big deal and happens all the time, but to not care whether or not you already covered because of settlement - that doesn't sound right.

    Is it a "cash" account? Maybe the rules are different? Not a US broker? IRA account? PDT rules?

    Settlement or not, you covered the short before they did it again. I mean, did they want you to re-short, just so THEY could cover it??? Strange. :(

    The only thing I can think of, is that it was part of an exchange "busted trade" situation. In that case, they can do whatever the heck they want...
  5. Htrader

    Htrader Guest

    I've never heard of this happening.

    Just because your covering trade hasn't cleared does not mean they can just execute a buy-in of their own, which still must go through the normal clearing process.
  6. rivet


    To Htrader

    Exactly my thoughts

    To Choad

    It is a margin account. Not an IRA. And it is a well-known, US broker
  7. FYI, most forced short position buy-in's are same day settled, as opposed to T + 1. Often this is why there is a premium associated with the transaction's purchase price.
  8. rivet


    I see. Thanks e trader pro
  9. alanm


    It's ridiculous, AFAIK, unless it was somehow necessary for them to have special settlement (T+1) instead of waiting for the T+3 settlement of your trade, in which case, I don't know why they didn't manually handle that for your original trade instead of doing another one. I don't know why that would be, and I've never seen it happen. Notice of buy-in should always include sufficient time for the trade to settle normally, unless the broker did something wrong with the borrow to begin with.