Short selling without overnight positions

[movingslow]

Short selling generally requires that one borrow the stock from another investor before selling short. However, if you enter the trade (i.e. sell) when the market opens, and buy the shares back when the market closes, do you actually need to borrow the stock?

I discussed this with some people working in finance, and the answers were mixed. No one seems to know for sure, so I need to ask from you guys who have actually done this. At the very least, the borrowing costs cannot be as high as when having the position open overnight, correct?

 

[Robert Morse]

No. If the stock is easy to borrow, you can just sell short. If the stock is not ETB, you need a locate. There is no stock borrow if you close before end of day.

 

[guru]

May depend on the broker, so ask your broker. Here is someone who supposedly paid $9k in short interest fees without even holding overnight:
https://profit.ly/user/DashSeen/blog/beware-of-etrade---got-charged-9000-short-interest-fee

Another broker states that there is daily minimum fee, though not saying if that’s equal to the daily interest, which really happens overnight.

 

[qwerty11]

Short selling generally requires that one borrow the stock from another investor before selling short. However, if you enter the trade (i.e. sell) when the market opens, and buy the shares back when the market closes, do you actually need to borrow the stock?

(as Robert already said) NO

Even if you sell short in PM at 4:00:00 AM EST and buy back in AH at 19:59:59 PM EST (the widest time frame possible for trading US stocks in a day) you should not pay a borrowing fee (i.e. the broker doesn't incur this costs itself).

 

[movingslow]

Thanks for the replies.

One more thing: I read that the SEC is strict about not allowing naked short sells (i.e. short selling without borrowing). However, does this rule only affect shorts that are held for several days? Would I be breaking the law if I were to open multiple naked shorts every day, even though I were to close those shorts at the end of each day?

Moreover, what percentage of stocks are usually easy to borrow, and hence available for short selling? I'm interested in trading smaller and slightly less liquid companies (because that's where I think it is possible to outperform). For example, are all stocks with daily volume > 1 million dollars available for shorting?

 

[FSU]

Easy to borrow, you can short every day and close at end of day or hold.
Not ETB, you will need a locate, if stock is available you can short every day and close at end of day without a charge. With some hard to borrow stocks, there are services that charge for a locate, which is separate from hard to borrow interest charges.

If you stay short over night with easy to borrow stocks, depending on the broker, you will be paid money in the form of a short stock rebate.

 

[Robert Morse]

One more thing: I read that the SEC is strict about not allowing naked short sells (i.e. short selling without borrowing). However, does this rule only affect shorts that are held for several days? Would I be breaking the law if I were to open multiple naked shorts every day, even though I were to close those shorts at the end of each day?

This started just before the financial crisis where the SEC created Regulation SHO (SHO for SHORT) or Reg-SHO.
https://www.sec.gov/investor/pubs/regsho.htm
Prior to Reg-SHO, clearing firms would fail on delivery on a regular basis. If I'm the buyer of the stock, I'm expecting delivery of the share at settlement when I pay for them. When a stock got very hard to borrow, and the selling broker could not make delivery, the buyer would issue a buy-in notice. Many buy in notices were ignored until they could get guaranteed stock (The seller had the shares). At the start of Reg-SHO, the SEC allowed clearing brokers to fail for up to 13 days. On the 14th day, if they were still failing, the customer was bought in at the open, at the market. If they did not do that, all customers at the broker could no longer short that symbol for a person of time to penalize the clearing firm. Many traders would re-set the failing period buy getting flat and then shorting again using options. The SEC picked up on that and now expects your clearing firm to find shares at settlement. The stocks that are failing are called Threshold stock. They do not allow locates or shorting at all on these.

Moreover, what percentage of stocks are usually easy to borrow, and hence available for short selling? I'm interested in trading smaller and slightly less liquid companies (because that's where I think it is possible to outperform). For example, are all stocks with daily volume > 1 million dollars available for shorting?

Our ETB list on Wednesday had 5581 symbols. The rest required a locate.

 

[ninjabruce]

The investor benefits from a fall in the market price. However, it is important to emphasize that each position in the forex market requires that an investor has a long position in one currency and cuts in another.

 

[Robert Morse]

The investor benefits from a fall in the market price. However, it is important to emphasize that each position in the forex market requires that an investor has a long position in one currency and cuts in another.

I expect the question was about shorting equities and the term "shares" was used.