Illegal Short Sale Debacle - HELP!!

Quote from def:

you wouldn't need to buy 300K Monday AM. You would need to cover 300/20 as the stock is trading ex-split. you should then see if they can settle your trade T+2 instead of T+3.

If your broker/firm knows your position, how could their software allow you to short
a: on a downtick
b: without automatically flagging it.

they caught it which is good but given they allowed you to do it and they are ultimately responsible, my guess is they'll work with you.

I think it's true that you can't profit from illegal short sales. check with your compliance but I think regulations do not allow one to profit from an illegal short sale. to me the logic is straight forward.
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Def is "dead on". It certainly seems that the software you're using and the firm your trading with has a very "lax" risk management or "middleware" which is only as good as the person who sets the parameters / restrictions for each trader.

The implications of profiting from an illegal short sale are the same as buying a stock, DKing it and then selling it at a profit; it's considered "freeriding", a "no no". Therefore, you may not realize the profit. Where does it go? In a broken trade (like this one will be) the net result is "zero" to both parties.

I would be concerned about not taking a loss, and less about realizing a profit. I've been in that situation once before and it can really hurt your "trading mind" on Monday.

Get the "blessing" from the GSP pre-market, and sit down with the market maker or head trader of the firm and get his/her input when closing out the trade. You may be better off closing the position in a "negotiated" transaction.

Once all is done, chalk it up for experience and then speak with the person in charge of the risk management program...see if they can upload the "hard to borrow" list into the system on a daily basis.
 
Their compliance officer should be able to explain the mistake to the exchange and bust the trade the next day before it settles. These types of mistakes happen. A few years ago, a Bear Stearns trader sat on a keyboard by mistake and sold like 600M worth of bonds.
 
Quote from def:

what do you mean you don't have the money? you are short the stock, thus you must have the funds to cover the short - i.e. the proceeds from the short should be available to cover the short as you can only short from a margin account. your broker should actually be buying you in, you're lucky that they seem willing to let you work the order.
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Def, could this event ever happen on TWS? Most times when I try to do something outside normal parameters I get a pop-up saying the order was disallowed for whatever reason.
 
Quote from roberk:

Def, could this event ever happen on TWS? Most times when I try to do something outside normal parameters I get a pop-up saying the order was disallowed for whatever reason.
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1.the trade can't be busted. The person bidding had a legitimate bid and they would be penalized if it was busted. The person illegally shorting needs to cover at their own risk and cost.

2. robertk: this should never happen at IB since we know your position and flag the trades and/or adjust the to disallow one from trading on a downtiick. jay's post is right on as well. IMO, if the firm executing the trade does MtoM's clearing - ie. they know his position - they should have never let this occur. If so it makes one wonder how many other illegal shorts they allow during the day and remain quiet as long as their traders are flat at days end.
 
Some valid points made here and some asinine comments as well.

to M I'm am surprised at a couple of things here. First it seems you are surprised by this whole affair... how long have you been trading? When you are trading that kind of size I would think that you would be aware of the implications (sorry, not trying to bust your balls, just amazed that you were unaware of the possibility of this situation).

All this talk about hedging is ridiculous. You put the short on illegally and you need to cover it! Besides going long in the same account automatically covers the trade. You must inform your BD and he must take appropriate action. Additionally, in order to add credibility to your claim that it was an honest mistake you need to mitigate (cover) it at the first possible opportunity (should have already been done already). You are not permitted to receive any profit from an illegal short, but you must bear the loss. This dove tails with the fact that you cannot break the trade as you can't break illegal trades only clearly erroneous ones. There are rules and guidelines on this that are too numerous to note here and I do not know all of them. I guess the logic is something along the lines of not punishing the other side who had every reason to believe the trade was bonafide and any pain should be borne by the 'illegal party' (you).

Nasdaqtrader makes a good point about the uptick. I don't trade ICGE so I'm not sure if it is an SM (Small Cap) stock or not but if it is then you don't have to worry about the uptick issue as it does not apply. However, if your BD is unable to borrow the stock (sounds like the case) then you are illegally short. This is exacerbated by the fact that you are holding it over the weekend and didn't trade out of it intra-day. The settlement is going to be where the shit hits the fan it would seem to me.

I might add, not sure of exactly the circumstances surrounding the trade here but your trading platform should have caught this! its not like you overfilled 1000 shares (which shouldn't matter) but it's not likely that you SOES 600k and got an instantaneous fill. The software should have identified your error and stopped it to prevent this situation. It is possible to game most software (some tougher than others) and get illegally short, but you would have been fully aware of what you were doing in that case and you seem to be pleading ignorance here. I would also think that if you regularly trade that kind of size on those kinds of stocks that you BD should have been aware of the risks and given you the heads up

A couple of other things you may want to consider, which venue executed your short shares? Was it Island or Arca? If so again no need to worry about the uptick issue, this also applies if you got filled post market. And as I said above no uptick worries if it is a small cap. However I think your issue related more to the issue of your BD/clearing firm being unable to borrow the shares.

I would think Don Bright might be able to give you some insight on this one.

Good Luck...... tough lesson, let us know how it turns out.

MACD



:( :( :( :( :(
 
I wouldn't worry too much about the regulatory issue - this kind of thing happens many times a day, and this was one of the most honest of the possible mistakes that can cause an illegal short. If you start doing it routinely, that will probably be a different story :)

If your account showed you were short 300K shares at EOD on Friday, then it should show you short 15K shares on Monday. Simply buy the 15K shares to cover the short and you're done. If you cover at a profit, they're required to debit it back out of your account. This no-win situation is how they keep people from doing this sort of thing "accidentally" (on purpose) too much.

AFAIK, there is no issue with the settlement of the pre-split shares happening the day before the post-split shares. The settlement process doesn't know (or care) whether the position was legal or not. Even if they can't borrow the stock, failure to deliver happens pretty routinely too, and there are procedures in place to handle it. Sounds like the person you spoke to was inexperienced.
 
You never have to wait for stock to settle before closing a position. e.g. It your case you just bought 15,000 ICGED

It never requires margin to close a position out. You can always buy in your short position. Even if the account is busted.

The broker can only keep the profits and stick you with the losses when you do not pay for the trade in time. They call this "freeriding."

As long as you get the money in on time they cannot do this. If you do not get the money in on time, the broker keeps the profits because they put up the capital. You eat the losses as penalty for exposing their money to risk.

I know you are squared away... but for what it is worth, my 2 cents.

:)
 
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