Shorting stocks that get delisted

S

Saltynuts

So you short a stock. It gets delisted. Doesn't go bankrupt, but just delisted. So now its operating as a private company. Since its no longer publicly traded, there is no market for it, so you really can't cover your short. Company, although delisted, starts doing FABULOUS. Company is now clearly worth far, far more than it was before you shorted, and keeps going up. But you still can't find anyone to sell you their shares.

Is this a legit concern?

Thanks.
 
This is currently an issue with a stock called Hongli Energy. It was listed on the NASDAQ, and then one day it was halted roughly 1 year ago, in April 2017. The company wasn't up to date with its audit filings, and never filed them. So NASDAQ kicked the company off the exchange, it was delisted 6 months later.

However, it never relisted on the OTC. So now anybody who was short is sitting in limbo. The company is probably worthless or close to it, but it is based in China and nobody can get any information.

In theory, shorts should be in a good position, as if it relisted, it would probably trade close to 0. But for over 1 year, shorts have had no way to exit, and on top of that are still paying borrow fees!

Neither the SEC nor FINRA has made any comment or attempted to resolve the situation.

So although rare, this is a valid concern - especially if the company isn't based in te US.
 
Thanks Free one! That is exactly my worry.

Question - what borrowing fees would have to be paid in this situation? I think shorting borrowing fees are based on value of the short. So how would the fees be calculated when the value of the short is technically unknown?

Thanks!
 
It really depends on the broker, as not all brokers compute borrow fees the same way.

But in general, the most likely scenario is that the broker marks the stock at the last trading price before the halt, and then computes borrow off of that value. However, the borrow rate can change, and even go up, once the stock is halted. At that point, you are totally at the mercy of your broker as you cannot exit the position.

That is what happened to me in Hongli, the borrow rate went up much higher a few days after the halt occurred. After several months of halt, the rate finally went down significantly, but I am still paying borrow fees a year after the halt, with no apparent end in sight. It is extremely frustrating, to say the least!
 
wow.. FreestyleTrader. respect. 1 year of patience. the same just happened to me on mbfi. short at open, thinking it may be a good trade that's on its way. ping-ed mfbi & see no ticker & had a feeling this one has turned into a goner

would likely see this happening again. how can a trader do so much due diligence, & also check if a stock he is shorting is filing for bankruptcy soon. it is crazy that if the broker does not know & stop allowing the stock from being shortable, that a trader is expected to know. balls to me i guess
 
I think at some point the clearing corp writes them off and you can close your short, but it is a real problem.
 
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