What is the criteria for whether an asset is listed as shortable?
@gbqtV The simple answer if whether an asset is âshortableâ or not is if itâs on the âeasy to borrowâ list.
What is an âeasy to borrowâ list? Letâs start with a bit of behind the scenes of what happens when one âshortsâ a stock. Technically, itâs very simple at first. When one âsells shortâ there is an indicator placed on the order as being a âshortâ, 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 âneed to borrowâ 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 âavailable to borrowâ.
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 doesnât have the shares to lend. This is bad. The SEC frowns on naked short selling where potentially there would be a âfailure to deliverâ the shares at the time of settlement. To avoid this scenario, brokers maintain âeasy to borrowâ 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 âeasy to borrowâ 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? Iâve been testing out strategies by randomly selecting assets however havenât encountered a shortable one yet.
you know your account Bal needs to be above 2,500 to short
I didnât 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 âeasy to borrowâ 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. Thatâs about 35%.
However, it should be noted that of the 11,000 tradable assets the majority (about 6000) arenât âtypicalâ 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 âtypicalâ assets which represent âClass Aâ 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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@Dan_Whitnable_Alpaca Why are very popular ETFs like $QQQ and $SPY often not available for shorting? I can short them almost everywhere.
@Joachim The fundamental challenge which brokers face when filling short orders (ie borrowing shares then selling those shares) is they must first find someone to borrow the shares from. The SEC looks very unfavorably on ânaked shortingâ. Itâs impractical to borrow stocks âreal timeâ with every order, so in practice, brokers consolidate all the short sales at the end of each day and borrow shares to cover those orders at the time orders are settled. Since, this happens after the order(s) are filled, and since brokers face severe penalties if they cannot borrow enough shares to cover those orders, brokers implement processes to âguessâ how many shares they can reasonably expect to borrow. Each broker uses different âguessâ criteria to reduce their risk of such an event.
One way brokers âguessâ at the number of shares able to borrow is to subscribe to 3rd party âEasy To Borrow (ETB)â lists. There are several 3rd parties which use proprietary information to come up with daily lists of stocks which they deem as 1) having enough supply of shares from stockholders willing to lend their shares and 2) low enough demand for borrowing those shares that the demand wonât outstrip the supply.
So, the first reason a stock may be available to short on one platform and not others is simply because they subscribe to different Easy To Borrow lists, or use some other method to determine if they can actually borrow the stocks. Large brokers (eg Robinhood or Interactive Brokers) can often cover any short borrowing internally. They borrow shares from their own clients and can use that to set a stocks âshortabilityâ almost real time. However, Alpaca isnât that large and relies on ETB lists.
The larger question is why one may not be able to borrow shares of a popular stock (QQQ or SPY as in this example)? It boils down to supply and demand. If a current stockholder is thinking they want to be selling some or all of the shares they currently hold they may not put their shares up for borrowing (therefore reducing supply). Likewise, if traders are thinking a stock may go down they will try to short (therefore increasing demand). At times the supply may not be able to cover all the demand. Popular stocks, while they may have more overall lenders and borrowers, can at times have an imbalance.
So, the simple answer is each broker uses different methods to determine if they can barrow enough shares to lend and therefore if they allow the stock to be shorted.
Thank you for the insights!