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Place Trade Short Stock Buy-in Procedures


SEC regulations implemented in September 2008 require that short sellers comply with their delivery obligations on the standard settlement date, generally three business days after the trade date. The regulations additionally require a repurchase of securities that are not delivered ("fail") by the next trading session for the securities. This contrasts with previous practice wherein a trade could "fail" for several days after the target settlement date, permitting brokers more time to make delivery by finding lenders for the stock(s).

As a result of the more stringent regulatory enforcement of the delivery rules, lenders have generally become more conservative in their lending activities leading to a decline in the general availability of inventory in many less widely held stocks. This creates an additional effect on the securities borrow/loan market by causing dealers to more readily recall existing loans rather than establishing new borrows to manage their inventory needs. For a fuller discussion of short sale and stock borrow and lend ("SLB") mechanics, please review Mechanics of a Short Sale.

 PT's implementation of the SEC regulations is as follows:

1.     On the standard settlement date, at approximately 14:30 EST, PT will make an estimate of the transactions that have actually settled, including any borrow transactions required. Historically, stock borrowing activity is completed early in the morning of settlement day. With the 9/2008 rules, we observe settlement activity continuing right up to the DTC cutoff at 15:10 EST. Accordingly, our 14:30 estimation is a compromise which, while it does not include the last 40 minutes of settlement activity (typically less than 10% of the total activity), it does provide a longer time period to provide notification and to allow clients to make trading decisions before the end of the trading session at 16:00.

2.     PT will disseminate an indication of possible buy-ins at about 14:50. Clients should recognize that these notifications communicate only the possibility, not the certainty, that we will be unable to make timely delivery thereby necessitating a buy-in. The purpose of the communication is to allow clients an opportunity to repurchase the short securities themselves thereby retaining greater control over their portfolios.

3.     At about 17:00, PT will reconcile any late settlements as well as client transactions up to the end of the regular trading session at 16:00 EST. PT will consider the net of all trades on the day when determining the position, including any new short sales. Trades after 16:00 will not be included in our position reconciliation. PT will then calculate the expected buy-in requirement based on complete information. PT applies, on a best efforts basis, last in, first out (LIFO) logic when determining buy-in allocations.

4.     On the morning of the next business day (generally the fourth day after trade date, also called "T+4"), and prior to the start of trading, PT will make a final attempt to locate and borrow the required securities. In the event we are able to do so, PT will send a notification reporting on an late borrow activity. The notification will confirm positions to be bought in.

5.     PT will attempt to post the bookings prior to the start of trading at 09:30. Occasionally, it may take longer to correct the positions visible via the TWS but the adjustments will be visible in the trades window so it should be evident to clients for whom this real-time information is important.

6.     On T+4, PT will execute transactions in the open market to effect the actual buy-in, as required by the SEC rules. In case the buy-in transactions occur at multiple prices, we will calculate the volume weighted average price for the buy-ins.

7.     On the statement of the 4th day, PT will book the buy-in trades with the code B.

In order to ensure compliance with SEC regulations, for Execution-Only accounts where receipt on a long sale is pending, PT will proceed with a buyin transaction under the above guidelines in the event the settlement is not received by 09:15 New York time.

The above procedure refers to transactions that fail to settle directly resulting from a short sale. A nearly identical procedure will be applied for existing stock borrows that are recalled by lenders. Recalls can occur at any time so in many cases little, and sometimes no, adequate notification can be distributed to clients. For recalls made in the morning, PT will be able to provide notification as described above. For late recalls after 13:00, PT will attempt to provide notification on a best efforts basis.


 Learn more about Short Sales 

 

How to Borrow & Lend

How to Borrow & Lend 

What is a Short Sale?

Short Stock Buy-in Procedures

Exceptional Short Sale Regulations

Regulation SHO

Securities Available to Short

 

 

 
     

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