Short Stock Borrowing Costs

[tripledtrader]

I wrote an article discussing these borrowing costs for CFA magazine, here is the link:

http://premarketinfo.com/wp-content/uploads/2012/05/cfm.v23.n1.pdf

You have to be really careful to check these costs if you're holding stocks short over a longer period of time. I know SHLD was over 60%/yr at one point last year. These borrowing costs can make longer term short positions cost prohibitive.

 

[atticus]

The OP should quote the ATM synthetic to solve for mkt rates on any potential short. It's fungible and will solve for mkt vs. broker's rates.

 

[atticus]

Quote from RangeTrader:

It's much simpler to just buy far ITM puts that are 3-6 months out instead of shorting a stock...

Of course the downsides are only certain stocks have good liquidity and a narrow spread in their options, and with the time decay you need the move to happen fast.

I think there are some ways to create a synthetic short(options position that acts just like a short position on shares) with options with little time decay... Not sure how, ask around...

There is no decay -- the synthetic is delta1 -- the discount is analogous to shorting a zero in FI.

 

[Rehoboth]

Quote from VTTrader:

Doublet83, thanks for that additional information. Now, here's a question that may be difficult to answer, but:

Do you (or anyone) happen to know what criteria are used to place a security on a 'hard to borrow' list, or do the criteria vary from broker to broker? Searching my own broker's site, I haven't yet come across any such information. If the criterion is something like 'less than X percent shares in the security's float are available to short, or 'less than X percent shares held in our broker client inventory are available to short', that would be useful information to know, as I could then more accurately decide which securities NOT to short (assuming my broker actually publishes such info).

Perhaps some brokers do actually publish the number of shares they hold available to short as well as any 'hard to borrow' costs?

Thanks again for your additional info.

The criteria varies from broker to broker, but in general, a the broker's clearing firm will have its general amount of stock that they are long. In addition the clearing will have a relationship with other clearing firms that they can borrow stock from the other firms general pool. Sometimes if these pools start to decrease then the firm with the amount of stock left with charge a rate that is passed to you with or without a markup depending on the broker.

Now it can get more complicated with clearing firms not really locating the stock or that was loaned changes ownership therefore trigger buyins. etc...

 

[doublet83]

Quote from VTTrader:

Doublet83, thanks for that additional information. Now, here's a question that may be difficult to answer, but:

Do you (or anyone) happen to know what criteria are used to place a security on a 'hard to borrow' list, or do the criteria vary from broker to broker? Searching my own broker's site, I haven't yet come across any such information. If the criterion is something like 'less than X percent shares in the security's float are available to short, or 'less than X percent shares held in our broker client inventory are available to short', that would be useful information to know, as I could then more accurately decide which securities NOT to short (assuming my broker actually publishes such info).

Perhaps some brokers do actually publish the number of shares they hold available to short as well as any 'hard to borrow' costs?

Thanks again for your additional info.

There's no prefect hard criteria but if 30% of the float is short then you should watch out.

The hard to borrow stocks are the ones institutions think make really good shorts and are therefore willing to pay high interest rates to borrow them, and therefore the brokers charge high interest rates. Interactive brokers lets you check pretty easily what they charge.

Since I am a fundamental equity analyst, I can offer some guidelines which I don't think you'd necessary be able to apply.

If firms think a blow up is inminent, such as stock CALL, they will pay high rates of borrow (Interactive is charging about 80% right now), even if the shorts outstanding is about 30% of float. However, for a stock like USG, which is more a valuation short, people will not pay as much (Interactive charging about 2%), eventhough the short oustanding is still 30% of float.

 

[VTTrader]

A sincere thank-you to everyone who's posted the very useful information and links here (all of which I've followed up and read)!