Short Selling
Through LYNX you can speculate on falling stock prices by short selling (selling stocks short). This means that you can sell stocks that you don’t have. However, not all instruments traded can use this tactic. A common example is shares of companies with low liquidity or low market capitalization. Short selling is only possible in a margin account.
LYNX+
After selecting the trading instrument on order ticket, choose a Sell as an instrument you want to sell, order type, quantity etc. Once you finished those steps, click Send order and you submitted the order.
For detailed information also see the article Order Submission.
Trader Workstation
Once you opened the TWS platform, click Order at the top left corner. Now there opens up an order ticket where you have to fill in multiple things as ticker, order type and order price. Choose a Sell as an instrument you want to sell, order type, quantity etc. Once you finished those steps, click Transmit and you submitted the order.
For detailed information also see the article Order Submission.
On the TWS platform, it is easy to see which shares can be sold short and where this is not possible. This information can be found in a special column, which can be viewed as follows:
Once you opened the TWS platform, click Edit at the top left corner and than Global Configuration. Now there opens new window, click Trading Tools and than Quote monitor, and next Default layout. On the right-hand side of the column, select Market Data Columns. In the next Available Columns find Short Selling and than select Shortable Shares. Click Add and and confirm the changes by clicking OK at the bottom of the window.
On the TWS platform you can check conditions for opening a short position. In the column Shortable Action you can find the various types of colour:
- Light green: Short selling available minimum 1000 shares
- Dark green: Short selling is possible but there are currently no shares for sale
- Red: Short selling is not available for the selected instrument
Once you opened the TWS platform, click Edit at the top left corner and than Global Configuration. Now there opens new window, click Trading Tools and than Quote monitor, and next Default layout. On the right-hand side of the column, select Market Data Columns. In the next Available Columns select Fee rates. Click Add and and confirm the changes by clicking OK at the bottom of the window. The column will appear on the platform with the current interest rates.
Attention: Remember that these are updated daily. Typically, these rates vary between 1 and 2 % per annum, but there are also cases where costs reach hundreds of % per annum! Therefore, if you have an open short position, we recommend that you regularly monitor changes in the cost of financing borrowed shares to avoid unexpected problems.
LYNX Trading App
After selecting the trading instrument, creating an order as a Sell, at the bottom of the screen slide the button Preview order. You can than fill the order by sliding the button Submit order.
For detailed information also see the article Order Submission.
FAQ
- Liquidity and Availability: Shares that are not heavily traded might not be available for shorting because there might not be enough supply in the market for borrowing. Borrowing shares for short selling requires there to be willing lenders, and illiquid stocks might not have enough lenders to facilitate this.
- Regulatory Restrictions: Regulatory bodies in some countries or exchanges might impose restrictions on short selling for certain stocks. These restrictions are often put in place to prevent excessive market manipulation, volatility, or downward pressure on a particular stock.
- Market Conditions: In times of extreme market volatility or uncertainty, exchanges and brokers may limit or suspend short selling for specific stocks to prevent further market instability.
- Company Actions: Companies might request that their shares not be available for short selling, especially during critical events like mergers, acquisitions, earnings announcements, or other major corporate actions. This is to prevent potential manipulation of their stock price during sensitive periods.
- Risk Management: Brokers and clearinghouses have risk management mechanisms in place. If they perceive that shorting a particular stock carries too much risk due to potential price gaps or other factors, they might restrict short selling.
- Legal and Ethical Concerns: Certain shares might not be available for shorting due to legal or ethical concerns. For example, some companies involved in socially sensitive industries might be restricted from short selling to prevent negative impacts on their operations.
- Market Maker Approval: Some stocks require approval from market makers for short selling. Market makers are entities that facilitate liquidity and trading in a particular security. If market makers are not comfortable with shorting a particular stock, it might not be available for shorting.
- Technical Factors: Sometimes, stocks held in specialized accounts, such as retirement accounts, might not be available for short selling due to the nature of these accounts.
The reason for this is because the stock could no longer be borrowed. There isn’t always liquidity availability for us to keep borrowing the stock, particularly for stocks where there is a lot of demand.
In the context of short selling, dividend payouts and other corporate actions can have specific implications for both the short seller and the borrower of the shares. Let’s explore what happens in these scenarios:
Dividend payout:
If you are a short seller, you have borrowed and sold shares that you don’t actually own. Because of this, you are obligated to replace the borrowed shares at some point.
When a company issues a dividend, the value of the dividend is deducted from the company’s stock price. This means that if you short the stock, you will owe the dividend to the lender of the shares.
To settle this, you’ll need to reimburse the lender of the shares for the dividend amount out of your own pocket.
Essentially, short sellers end up paying the dividend to the shareholders from whom they borrowed the shares.
Other corporate actions (e.g., Stock Splits, Mergers, Spin-offs):
Similar to dividends, other corporate actions can affect the stock’s value and the short seller’s position.
In the case of a stock split, for instance, if you are short a stock that undergoes a split, the number of shares you owe to the lender increases, and you might need to provide more shares to cover your position.
Before engaging in short selling, traders and investors should thoroughly understand the terms and risks associated with borrowing shares and be prepared for potential adjustments based on corporate actions.
Once the activity statement has been generated in the Client Portal, you can check it under Interest.
To satisfy the risk related to lender of shares, IB retains up to more than 100% of short sale proceeds as collateral :
Short selling is governed by Regulation T of the Federal Reserve Board in order to manage the risk associated with selling something that you do not own. Under Regulation T, short sales require a deposit equal to 150% of the value of the position at the time the short sale is executed. This 150% includes the full value of the short (100%), plus an additional margin requirement of 50% or half the value of the position.
Source : Short Selling and Margin
In determining the cash deposit required to collateralize a stock borrow position, the general industry convention is for the lender to require a deposit equal to 102% of the prior business day’s** settlement price, rounded up to the nearest whole dollar and then multiplied by the number of shares borrowed. As borrow rates are determined based upon the value of the loan collateral, this convention impacts the cost of maintaining the short position, with the impact being most significant in the case of low-priced and hard-to-borrow shares. Note, for shares not denominated in USD the calculation will differ. Find below a table summarizing the calculations per currency:
| USD | 102%; rounded up to the nearest dollar |
| CAD | 102%; rounded up to the nearest dollar |
| EUR | 105%; rounded up to the nearest cent |
| CHF | 105%; rounded up to the nearest rappen |
| GBP | 105%; rounded up to the nearest pence |
| HKD | 105%; rounded up to the nearest cent |
For US Treasuries and corporate bonds, the collateral amount on which the borrow fee is charged will include the accrued interest.
Account holders may view this adjusted price for a given transaction in the “Borrow Fee Details” section of the daily account statement.
Source : Why does the “price” on hard to borrow stocks not agree to the closing price of the stock?
This is the interest on the proceeds of the short sale paid to you.
In order to credit interest on cash corresponding to the collateral values of shorted shares, accounts with NAV of USD 100,000 (or equivalent) or more are paid interest at the full rate for which they are eligible. Accounts with NAV of less than USD 100,000 (or equivalent) receive interest at rates proportional to the size of the account. There will be no interest paid on the first USD 100,000 of the short sale proceeds.
To determine the short sale proceeds amount eligible to get the creditor interest from it, you will need to apply this calculation :
- In the event you hold an account with Interactive Brokers Ireland Limited (IBIE), the calculation will be Ending Settled Cash – Short Stock Collateral Value.
- In the event you hold an account with Interactive Brokers U.K. Limited (IBUK), IBUK follows the steps listed in the Calculations section below to calculate the daily interest payable or receivable on cash balances. Interactive Brokers will combine, where possible, the balances held across multiple account segments of the integrated account. However, balances across multiple Interactive Brokers accounts will not be consolidated :
Calculations for IBUK clients
To see the table related to creditor interests from short sale proceeds that you could get from your short positions and for further details about it, you can check this link :
Interest on Short Sale Proceeds
Disclaimer:
The author’s remuneration is not directly or indirectly related to his/her viewpoints or ideas.
Neither do any other conflicts of interest apply in accordance with the policy around the conflicts of interests of LYNX.
The information on this webpage is neither considered as investment advice nor an investment recommendation. The page shows data that has been prepared by LYNX as general information / marketing information for private use by investors but is not intended as a personal recommendation of particular financial instruments or strategies and does not take into account the individual investor’s particular financial situation, investment knowledge and experience, investment objectives and horizon, or risk profile and preference.
Show full disclaimer