Shorting a downtick

S

skydiver

Hello everyone,

I'm new to trading and this board, but I have an important question. I have my account with IB and I was wondering if I'm doing something wrong. (Sorry if this is a dumb question).

I know you're not supposed to short a stock on a downtick but I think I may have done it in the past. Is this even possible? I have my TWS screen set up with Island and Best ECN only. Those are the only two ways I ever execute. Sometimes the bid and ask prices are red, sometimes green, sometimes one is red and one is green. I'm assuming red means downtick and green is uptick? No matter what color they are, I've never NOT been able to short a stock. It's almost instantaneous. When I was with Datek it seemed like I could never short a stock. It would always say "can't short on a downtick".

So how does this work with direct access? Am I responsible to not short until it's green or does IB have something built in that won't allow it anyway? Maybe I'm not doing anything wrong at all. I've wondered if it's different with ECN's because of the instant order matching and that it doesn't matter anyway. Even if I am doing it wrong....then what? Am I in trouble? Am I going to jail? Lol.

Thanks for your replies.

 
skydiver =)

i dont use IB but all direct access firms have the short sale rule (uptick restriction) implemented in their software to prevent shorting on the bid on a downtick.. keep in mind that you can short on a downtick as long as you offer your short at least 1 cent above the bid.. and yes, the uptick rule applies to orders routed to ecns too..

good trading

-qwik
 
If you try to short on a downtick, IB will raise your price 1 penny above the prevailing bid. Check your execution prices, you probably are getting a slightly better fill.
 
Skydiver,

Essentially, (with IB) you are not selling to a waiting buyer. Instead, you are offering stock for sale and someone is buying it from you. Normally by selling at the bid, there is a buyer awaiting stock at the inside price. The uptick rule simply means that buyers must be "stepping up" by raising the price at which they are willing to buy and not retreating - as with a stock in free-fall.

It sounds like IB is helping your efforts by closing the spread and bringing your order to the inside. Datek will not do that for you, nor will they hold your sell order until an uptick is present - it is evaluated by their system and either accepted or rejected at that moment. For this reason, your timing must be precise with Datek if you are trying to short a falling stock.

Good Luck

 
I asked the IB help desk if TWS would allow me to short on a down-tick, and the person I spoke to said that it would indeed allow an illegal trade. This was about a month ago, so maybe things have changed, or maybe I was misinformed. TWS will not, however, allow you to short a stock that is not available to borrow.

Also, I thought the down-tick rule applied to the actual trade, not the bid. In other words, if a stock has up-ticked to .39, a legal short would have to be .39 or above. If a stock has down ticked to .39, a legal short would have to be at .40 or above? Can anyone clarify this for me?
 
on Nasdaq its the bid that is relevant (a trade on uptick does not have to take place)

go to nasdaqtrader.com for the official dope

I seriously doubt that IB's TWS would allow you to short a downtick (unfortunately most people at IB are great techies but not traders so I would NOT ask them trading/execution questions, just stuff about their software)
 
eldredege,
perhaps there was mis-communication between you and the help desk. You can place an order to sell at a price that is a downtick. IB will take the order and adjust the price to an uptick. I tested this myself well over on month ago.

Babak,
Got to put your comment in perspective. Perhaps the people you deal with are techies but the Timber Hill side of the operation is loaded with traders (albeit with a bent towards math and computers). I myself am a trader (with a good understanding of tech). The programmers writing the code are definately not day traders but they have an excellent understanding of the markets and have written perhaps the most advanced trading system in the business (read the S&P rating description from the IB web site to get an idea of the magnitude of the trading side). Most of the nuances you question are related to NASDAQ and manual entry interfaces. Perhaps thats why I'm trying to help out by bridging the two together. (no need to comment as this is off topic).
 
One thing that is important to remember is that many of the ECNs have downtick rules implemented into their logic, but of course the information that have as to the timing of the upticks and downticks will be different than what is displayed on your screen simply because of latency.

With the penny increments, one can have an order (routed to and ECN) executed at a moment that it looks like a downtick while the market is actually on a quick uptick.

Of course, the other side of this is you can also miss those quick upticks because of latency. This will cause your order to make it through IBs downtick protection logic only to be rejected by the ECN or Nas.

JB
 
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