Short Sale Brain Teaser

Discussion in 'Trading' started by Hurricane, Aug 25, 2003.

  1. Perhaps this is purely theoretical but I've wondered how voting on stock acquired through a short sale works.

    As an example, suppose that XYZ Corp has 5 shares outstanding. One each is owned by A, B, C, D, and E who hold the stock in street name through a common broker. Person F comes along and borrows one share of the stock from the broker and sells it to G.

    So the books are in balance, but now it's time for voting for the annual meeting. A, B, C, D, E, and G each expect to cast their vote. But since there are only 5 shares outstanding, one of them can't vote. How do they each get to cast their vote?
  2. newtoet


    There is a little known and often misunderstood rule regarding shortselling. In your example, person G and person C would have to fight in a "Death Cage Match", where only one survives ("there can be only one").

    The person who survives gets to cast the vote.
  3. kernan


    LOL. Is that why you always here the mass media say that not many people sell short?

    And I thought the biggest danger was losing all my money!

  4. jrweiner,

    Maybe the question is not that difficult to answer. I may not be 100% right on this but this what I believe happens.

    If you buy stock at a broker you most of the time do not take delivery but leave the stock with the broker. If you read the fine print on your agreement you will probably find that you authorized your broker to lend your stock without you even knowing. This may surprise you but this is common practice in many cases, big and small.

    Now, if you make your shortsale, your broker borrows the stock someplace from a "willing lender" and sells it. If a sharholder's vote would come up, too bad they have to let the guy vote who owns it at that time. The lender's willingness to lend it out makes it impossible to vote, he does not have the shares at that moment, he lend them to somebody.

    So I think the answer is quite simple. If you like to vote, don't authorize your shares to be lend out. Your broker may no longer want you as a customer though, especially if you have a margin account!

    It may be that there are many legal aspects to all this, but this is the story for the common case.
  5. I like the "Death Cage Match" idea better :D

  6. TGregg


    That is correct (found out in that swell book IB sent me). If you sign the right agreement with your broker (the one that lets you short stock), then your stock can be loaned out, and you lose voting priviledges. But you won't know it :).

    You see, most broker agreements basically have the broker owning the stock. When you vote, you are actually directing your broker to vote for you. If he loaned out that stock, then he doesn't vote.
  7. Thanks for the replies. I did say that the stock was in street name, so this makes sense. So in my example, the broker would get to decide which of the shareholders (A, B, C, D, or E) would not get to vote.
  8. MR.NBBO


    There are 3 parties to a Short sale.

    1)The short seller

    2) the person the short stock is borrowed from

    3) and the person who was the counterparty to the shortsale you made (the buyer of your shortsale).

    The counterparty to the shortsale (buyer) has the voting rights to these specific shares. NOT the shortseller OR the person they were borrowed from.

  9. Yes, the issue is that the stock is held "in street name" and not in yours once you have a margin account...

    The downside of margin accounts is that your broker gets to borrow stock from you for free but you have to pay them interest to borrow capital from them...

    Of course if you are a perennial short seller like myself your broker will pay you interest on your cash from short sale proceeds...but alas it is at a somewhat lower rate than you might pay them to borrow shares...:eek: