i heard that naked shorts are no longer allowed. so people need to locate the shares before they can short. how does this locating work for HFT? isnt it too slow?
Just to explain a few things... When you sell shares, you have 3 business days to deliver them. You do NOT have to be in possession of shares when you sell them. If you buy the number of shares you sold on the day of sale, you are covered. HFT traders don't hold "overnight" positions. So, they are not affected by any clamp-down on "naked shorts". When you borrow shares, the standard delivery is 2 business days. So, if you sold shares you didn't own you start worrying the next morning because you have a full day to borrow the required number of shares. Now, if you didn't buy shares back on the same day (which is what HFT and most responsible "day" traders do), you didn't borrow the shares the next day (which is most responsible short-sellers do), you didn't borrow the shares the day after with 1-day delivery (which is irresponsible short-sellers do), then you either got caught in the market you don't understand or you are a crook who wants to short more shares than there are in free circulation (or such a crook didn't deliver to you on time). Hence, the clamp-down. Summary: HFT traders are not affected in any conceivable way.
If a stock is on the easy to borrow list, you can sell short. If not, you require a locate prior to entering the order. In some cases, like a REG SHO stock, where the clearance firm is failing on delivery, you will require a pre-borrow. Locates are normally free, pre-borrows normally have a charge even if you don't use them. Most traders that trade hard to borrow securities, will normally ask for a locate on the stock they believe they will require BEFORE the opening. Then they will place those limits into their system.
I hate to correct people here, but all equities settle in T+3 unless the trade was negotiated differently. If the seller is long or short, there is no difference. Also, just because you received a locate, you're not except from being bought in. You can be bought in by your margin department at anytime after failure. Even two weeks later, if you're still short , but they lose their borrow and can't replace it, you can get a buy in notice When you short stocks, you assume the hard to borrow rate can change, and you can be bought in on any of these securities. It's a cost of doing business from the short side.
From what I've read on deepcapture.com, the locate process is a requirement that can be circumvented by shoddy brokerages, and most definitely has over the year as deepcapture has implied that the depository trust and clearing corporation is complicit in this matter. Apparently Penson has gotten the most volume in equities trading in recent years by doing just that (see deepcapture.com)- You might want to read the ongoing 20 chapter series. Its both frightening and enlightening and very well researched. I found it hard to believe, but I have a relative who worked in a major brokerage and he wouldn't tell me specifically what goes on behind the scenes, but brokerages lets just say, bend the rules for their best customers..
How about the margin? Suppose you short a large number of shares intraday in HFT, and then by the end of day you close your positions. What should be the margin rate here? What about Hong Kong? Anybody knows the margin rate for short in HK?
Making market usually comes with an obligation to provide bid and offer on the instrument at all times, including periods of high volatility. Even larger HFT shops prefer to avoid the obligation. Instead they prefer to trade via CFDs using the privilege on another market maker.