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Short Sales

 

How to Borrow and Lend in the AQS Marketplace via TWS Stock Borrow/Loan - Overview


AQS Time Deadlines

·         Market is open: 6:45 - 15:00

·         Price minimum of 200k to borrow easy-to-borrow shares is in effect from 6:45 - 11:00

·         Borrow orders must be greater than or equal to 100k.

Time deadlines for specific borrow/loan transactions are:

·         Borrow/Loan orders: 6:45 - 14:45

·         Borrow returns: 6:45 - 10:50

·         Borrow rerates: 6:45 - 10:50

·         Loan recalls: 6:45 - 14:45

·         Loan rerates: 6:45 - 10:50

 

Understanding the Stock Borrow/Loan Environment

The borrowing and lending of stock provides support for short selling, a transaction in which a trader sells shares he does not own and then borrows these shares from a lender to make delivery of the shares to the buyer. The short seller hopes that the share price will decrease in the future allowing them to buy the stock at a lower price, return the borrowed shares to the lender and keep the difference in profit. The stock borrow/loan environment comprises the following participants:

·         Stock Lenders, who own shares and are willing to lend them in exchange for cash collateral. The lender must own the stock to lend it, and depending on how in-demand the shares are, the lender may charge the borrower a fee for the privilege of borrowing.

·         Brokers, who serve as the middlemen between the stock lenders and the borrowers, and who manage the inventory of available shares for borrowing. Lendable shares come several sources, including the broker's customers, the broker's proprietary inventory, and other third party brokers.

·         Borrowers, a.k.a. Short Sellers, who sell shares that they do not own, and must then borrow the shares to deliver to the purchaser when the trade settles. The borrower is responsible for first locating the shares he plans to sell short. He puts up cash collateral in exchange for the borrowed shares, which is returned to the borrower when the shares are returned to the lender. In addition, the borrower may be required to pay a fee for a hard-to-borrow stock, and is responsible for any exchange fees, commissions, and dividend payments on the borrowed shares (if applicable).

View a simple example of a short sale:

After confirming the availability of the shares, a short seller would sell 1000 shares of XYZ at $10.00/ share, and collect $10,000.00 for the sale. Since he doesn't actually own these shares, the $10,000.00 goes to the lender or broker as collateral on the loan. Assume that a month later the price per share has dropped to $5.00. The short seller now purchases 1000 shares of XYZ for only $5000.00, returns the 1000 borrowed shares to the lender and takes back the $10,000 collateral, leaving him with a profit of $5000.00. This simple example does not account for any borrow fee, interest or dividends in lieu, but presents the basic process of the borrow and short sale relationship.

For an illustrated description of the short sale process, see The Mechanics of a Short Sale on our clearing firm's web site.

 

Compare Borrow Methods

Use TWS to borrow shares for a short sale in two different ways: the traditional "Box List" method, or using the new TWS Stock Borrow/Loan feature. While both methods require the trader to ensure that shares are available to borrow before putting on the short sale, in the traditional "Box List" method the actual borrowing of the shares is done completely by the broker, in time for settlement of the short sale and delivery of the shares to the buyer, generally three days after the trade date or "T+3."

Consider some of the pros and cons with regard to the traditional "Box List" method of borrowing:

·         Pro: There is less work for the customer as PT will manage the borrow portion of the transaction. 

·         Con: Confirming that shares are available to borrow prior to initiating a short sale transaction is no guarantee that shares will be available to borrow three days later on settlement date. If PT is unable to borrow the shares for delivery to the buyer, the customer may be bought in. This means that shares of stock will be purchased at the prevailing price to deliver on settlement date, and the short seller will lose any potential profit of the short sale transaction.

·         Con: Customer has no control of the borrow rate.

Alternatively, using the TWS Stock Borrow/Loan tool allows a trader to view stock lending rates on AQS or another market and then instruct PT to pre-borrow shares in anticipation of the short sale delivery. Consider some of the pros and cons of using the Stock Borrow/Loan tool:

·         Con: The customer must take the time to manage both the short sale and borrow portions of the transaction.

·         Pro: Since the customer can pre-borrow stock ahead of the short sale there is less concern about having shares available for delivery on settlement date. Note however, that the lender of the shares can always "recall" the shares (end the loan) even after PT borrows them on your behalf (i.e., your short sale is still subject to a forced buy-in if the lender recalls the shares and other shares are not located for the short position).

·         Pro: The customer views rates and availability directly on AQS and is in control of the rate they pay to borrow the shares.

Place Trade offers both ways to borrow shares for shorting. Regardless of the method, shares that are in demand and hard-to-borrow could carry a high borrow fee for the privilege of borrowing. Shares that are easy-to-borrow may have no borrow fee, and may even offer a rebate to make the transaction more appealing. The customer should compare the potential costs and profits of each method before choosing.


Learn more about Short Sales

 

What is a Short Sale?
Short Stock Buy-in Procedures
Exceptional Short Sale Regulations 
Regulation SHO
Securities Available to Short

Short Stock Availability Tool

How to Borrow & Lend 
Borrow & Lend Examples


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