How do market makers borrow shares

[lipstone]

This is probably a silly question, but here it is:

If I want to short a stock, I'll borrow shares from other clients of my brokerage and then sell them. How does a market maker go short? Obviously they never intentionally do so (at least theoretically), but if you attempt to maintain a net of zero shares you'll dip into the "negative" category on occasion. Do they have agreements with exchanges, brokerages, or some other entity to facilitate share borrowing?

I understand it's also possible to short by financial derivatives like options or futures, but I think they sell borrowed shares as well.

 

[Robert Morse]

lipstone,

When you as a customer short stock, it is your clearing brokers job to borrow the stock from where ever they need to in order to make good delivery in T+2. If an equity MM is also a clearing broker, their stock loan department takes care of it. If they are not self clearing, they have a clearing broker and that stock loan department would be responsible.

You are overthinking this. As long as the stock can be borrows in less than 2 days, they are not failing. Equity MM run long/short books and do not have to go out flat each day.

 

[sle]

Equity MM run long/short books and do not have to go out flat each day.

Well, in fairness, modern MMs are primarily HF technology outfits and probably go out flat at least sector/factor exposure and (probably) with some relatively small name-specific exposure. I would not expect Virtu to hold a billion IMB overnight, let's put it this way.

 

[Robert Morse]

Well, in fairness, modern MMs are primarily HF technology outfits and probably go out flat at least sector/factor exposure and (probably) with some relatively small name-specific exposure. I would not expect Virtu to hold a billion IMB overnight, let's put it this way.

Agreed. A retail account considers flat no position. I was trying to point out that flat for a equity MM, that yes are all HF, is market neutral in some form. They do not focus on one name.

 

[MoreLeverage]

MMs have an exception, of course. They can naked short and cover a week or so later without issues. If they hold the short long enough, they need a borrow or to cover.