Criteria for shortable

What is the criteria for whether an asset is listed as shortable?

@gbqtV The simple answer if whether an asset is ‘shortable’ or not is if it’s on the ‘easy to borrow’ list.

What is an ‘easy to borrow’ list? Let’s start with a bit of behind the scenes of what happens when one ‘shorts’ a stock. Technically, it’s very simple at first. When one ‘sells short’ there is an indicator placed on the order as being a ‘short’, but other than that initially there is no difference between selling from a current long position or selling short. The complexity happens at the end of the day. All the open short positions are summed (new and existing). Those ‘need to borrow’ amounts are subtracted from any existing borrowed shares which the broker may have. If that net is negative (ie the broker needs to borrow more shares) then the broker typically goes through a 3rd party such as OCC to borrow from institutions (and maybe individuals) who have put up their shares as ‘available to borrow’.

The potential problem in the above process is what happens if the broker cannot find anyone willing to lend their shares. This can happen if an institution is in the process of reducing their position, and therefore doesn’t have the shares to lend. This is bad. The SEC frowns on naked short selling where potentially there would be a “failure to deliver” the shares at the time of settlement. To avoid this scenario, brokers maintain ‘easy to borrow’ lists of assets they realistically assume they will be able to borrow, and therefore can lend them to short sellers, before actually borrowing the shares. Each broker has different criteria based upon the pool of shares they have available to them to borrow, the current market conditions and their risk tolerance. So one broker may list an asset as ‘easy to borrow’ while another may not. This list changes daily (and potentially intra-day).

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Would you happen to know what percentage of shares fall into this easy to borrow list? I’ve been testing out strategies by randomly selecting assets however haven’t encountered a shortable one yet.

you know your account Bal needs to be above 2,500 to short

I didn’t know that, however this is from a paper trading account with 100k in it. Does that properly simulate the shortable attribute here?

@gbqtV You asked the percentage of assets which are on the ‘easy to borrow’ list. The exact number changes each day but in general there are about 11,000 tradable assets and only about 3800 of those are shortable. That’s about 35%.

However, it should be noted that of the 11,000 tradable assets the majority (about 6000) aren’t ‘typical’ stocks. The majority are such things as warrants, rights, preferred shares, limited partnerships, etc or are very small cap stocks. One should understand those assets before trading them. There are about 5500 ‘typical’ assets which represent ‘Class A’ common shares in companies or ETFs/ETNs with trading volume over $1M/day. Of those 5500 assets about 3800 are shortable. So maybe a better percentage to think of is about 70% of typical assets are shortable.

Take a look here for more on short selling particularly the requirement to have at least $2000 in account equity, but moreover the stock borrow fees. Especially note that stock borrow fees are charged based on the nearest round lot (100 shares) regardless of how many shares were actually shorted. Stock borrow fees are not included/simulated in paper trading.

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