short interest - an educational story

K

kotika

Sometime in 2018 I shorted a stock (an ADR on OTCBB) which went under suspension on the stock market in my country, and any transactions on the OTC also went into deep freeze. The company is insolvent, but our country is very slow to resolve such things, so bankruptcy and liquidation is not happening yet but it is fairly sure to follow.

Now, IB stopped charging me the borrow fee a few months ago but still charges me "short interest" which is really puzzling given that it is a tiny fraction of my balances (per IB rules, short balances must not be bigger than your "real" cash or else). USA based brokers normally pay interest on short balances, and IB is the only one I ever heard of charging such interest. It is not a lot, but still annoying, and I wander how many years forth will they continue charging me the interest...

Should I send a message to IB asking to reverse these interest charges?
 
You can least try. It may be best to contact IB and ask for advice, as they may be able to provide more details about this situation.
 
What currency is it in? Some currencies have negative yields, and for those you'll pay a fee for short sale proceeds. See the table here.

You're fortunate not to be charged a borrow fee. In many cases those can add up to quite a lot, as it can be years before the position can be closed or is deemed worthless.
 
@elt894, its an ADR so the currency is USD. This is something like 1% of my cash balance, and IB still charges me.

elt894 said:
it can be years before the position can be closed or is deemed worthless.
More...

Would you elaborate? Is there a chance of getting trapped in such a position?
(on the long side I have some long bankrupt (since 2008) stock in my account, I wander how i can get rid of it)
 
kotika said:
Sometime in 2018 I shorted a stock (an ADR on OTCBB) which went under suspension on the stock market in my country, and any transactions on the OTC also went into deep freeze. The company is insolvent, but our country is very slow to resolve such things, so bankruptcy and liquidation is not happening yet but it is fairly sure to follow.

Now, IB stopped charging me the borrow fee a few months ago but still charges me "short interest" which is really puzzling given that it is a tiny fraction of my balances (per IB rules, short balances must not be bigger than your "real" cash or else). USA based brokers normally pay interest on short balances, and IB is the only one I ever heard of charging such interest. It is not a lot, but still annoying, and I wander how many years forth will they continue charging me the interest...

Should I send a message to IB asking to reverse these interest charges?
More...

There's no enough information available to state with certainty, however, it appears as if this is a hard-to-borrow security and the borrow fee (which is expressed as an interest rate) exceeds the credit interest available on the cash collateral securing the loan. Also note that any credit interest which might partially offset this is only paid on short sale proceeds above $100,000.

In addition, until you close the short position (thereby allowing for the delivery of shares to be returned to the lender at settlement) or the depository cancels the shares, you are obligated to pay borrow fees to the lender. This can obviously lead to a difficult situation if trading is halted, there is no market for the shares, and the depository has not yet cancelled the shares (as perhaps there are some outstanding shareholder suits). It's a risk inherent to short sales.

If you would like me to review your particular situation to determine exactly what is happening, feel free to PM me.
 
thanks, a while back I had called on the phone and was connected (i think) to Corporate Actions. They managed to confuse me - I was told that as of Dec 2018 I was no longer paying borrow fees. However, a closer look at my statements shows no difference between before/after. A year later I am still paying a borrow fee on this worthless junk - but why? And this part should be educational to beginners - its because someone keeps a bid of 2$ on the stock with no intention of buying any as far as i can tell...
 
kotika said:
Would you elaborate? Is there a chance of getting trapped in such a position?
More...
Here's one article about some of the problems that can come up. Keep in mind when calculating borrow fees, the share price is rounded up to the nearest dollar. So a 100% borrow fee on a $0.10 stock effectively becomes 1000%.
 
Whether or not a particular security is hard-to-borrow or not and its cost is not constant. Again, there isn't enough information to tell you what is happening with your account. Please PM me if you'd like further assistance.
 
No non-direct-hard-to-borrow lines on my statements... but judging from that Barrons article I will be paying the regular borrow fee for a long time to come....

2018-08-03 USD Net Short Stock Interest for Jul-2018 -XXX
....
2019-11-05 USD Net Short Stock Interest for Oct-2019 -XXX
....
 
elt894 said:
Here's one article about some of the problems that can come up. Keep in mind when calculating borrow fees, the share price is rounded up to the nearest dollar. So a 100% borrow fee on a $0.10 stock effectively becomes 1000%.
More...
Do you have a source/link that describes the rounding up? I didn't know that.
 
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