Shorting

garfangle · Nov 4, 2003

Academic question

Is it possible to refuse to give back the shares acquired on loan and shorted if the principal owner requests it, irrespective of margin call? For example, let's say you have shorted XYZ stock at $25, but it goes up to $35. However, the owner of the shares of whom you've loaned from demands the shares back. Must you buy new shares to fulfill the request even if you are capable of meeting margin requirements?

The reason why is because if this is true then shorting has more imputed risk than otherwise long-only because of the uncertainty over the establishment of who controls the shares acquired.

spyderman · Nov 4, 2003

OF COURSE you have to deliver the shares........you borrowed them remember? The REAL owner might want to sell them also!

Don Bright · Nov 4, 2003

Quote from garfangle:

Academic question

Is it possible to refuse to give back the shares acquired on loan and shorted if the principal owner requests it, irrespective of margin call? For example, let's say you have shorted XYZ stock at $25, but it goes up to $35. However, the owner of the shares of whom you've loaned from demands the shares back. Must you buy new shares to fulfill the request even if you are capable of meeting margin requirements?

The reason why is because if this is true then shorting has more imputed risk than otherwise long-only because of the uncertainty over the establishment of who controls the shares acquired.

You have "borrowed" stock, so yes, you must give it back upon request.. at whatever price... "short squeeze" can happen when the demands all come at once.

Don

IndexTrader · Nov 4, 2003

Don,
Does the broker notify you that you're forced to "return" the shares? Or are they simply liquidated from your account as if it were a margin call?
I always thought that if I shorted a stock I could hold onto the short shares indefinetely as long as I could put up any further required margin?

Thanks!

Quote from Don Bright:

You have "borrowed" stock, so yes, you must give it back upon request.. at whatever price... "short squeeze" can happen when the demands all come at once.

Don

Don Bright · Nov 4, 2003

Quote from IndexTrader:

Don,
Does the broker notify you that you're forced to "return" the shares? Or are they simply liquidated from your account as if it were a margin call?
I always thought that if I shorted a stock I could hold onto the short shares indefinetely as long as I could put up any further required margin?

Thanks!

What happens with us is that the Clearing Firm gives me a "courtesy call" to let me know if any shares "may" be subject to buy in. This way, I can notify the trader, so they can decide whether to cover the short or take a chance. We never get "bought in" (maybe once or twice in 10 years...if that).

Other firms may have seperate accounts which means that the traders probably won't be contacted. Since all of our traders use our one main account to trade with, the Clearing Firm can keep us abreast of any possible activity.

Don

lescor · Nov 4, 2003

It's called a buy in. Happened to me 4 times so far this year (in very thin stocks though). Each time I covered before the deadline, but I may have had the position automatically liquidated if I didn't.

For some stocks, there is just very limited supply available to borrow. It's one of the risks of holding short positions.

IndexTrader · Nov 4, 2003

How long was this "deadline" generally, and how were you notified? e-mail?

Quote from lescor:

It's called a buy in. Happened to me 4 times so far this year (in very thin stocks though). Each time I covered before the deadline, but I may have had the position automatically liquidated if I didn't.

For some stocks, there is just very limited supply available to borrow. It's one of the risks of holding short positions.

lescor · Nov 4, 2003

A phone call from someone in the clearing dept. Each time it was a "potential" buy in notice with 3 days notice and corresponded with the end of the month. Once I actually didn't get the whole position covered, and nothing happened. Another time I re-shorted it the next day at the same price I covered.

These were multi thousand share positions in stocks that are extremely illiquid, so I didn't want to take the chance of someone sending a market order for me and giving me a dollar of slippage, otherwise I might have let it slide took my chances.