# Stock borrowing/shorting settlement mechanics/legals



## cuttlefish (12 December 2007)

Hi

A question about various aspects of shorting.

* are insto's allowed to short any stock they can borrow (i.e. do they have to be on an asx shorting list or could they literally short anything that they can negotiate a borrow on).

* what are the settlement mechanics of borrowing in order to short - is the end purchaser of the borrowed/shorted stock buying unencumbered stock (I'm assuming so it would be bizzarre if not) and if so, how is the borrowed stock secured - is it against other stock in the insto's portfolio, cash, cash deposit, is the cash from the short sale lodged in escrow with the stock lender etc.? 

* when insto's borrow to short do they usually borrow from their own portfolios or from other institutions/brokers? If from other funds/ brokers how is this process negotiated.  Is the borrowed stock ever borrowed from private clients without their knowing about it?

* can/do wealthy individuals have access to the same borrowing/shorting situations as insto's

* who's left holding the baby if a borrower of stock can't return it?  I'm assuming the lender is and will go after whatever security is supplied as part of the borrow.  Is the purchaser of the borrowed/shorted stock ever at risk in this scenario?

thanks to anyone that can answer these questions.


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## Trembling Hand (12 December 2007)

Anyone can short a stock in the ASX list as long their broker allows shorting.

There is no difference to a purchaser that buys from someone selling short. They now own it. The short seller must return to the market and buy back the same amount of stock to cover the sort position. That’s it.

When you sell short your broker takes margin on your account usually 50% of the value. If the position goes against you, you will get a margin call, if your account $$ cannot cover it. If you don't top up your account they close the position. It’s mostly all automated and tightly controlled.


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## cuttlefish (12 December 2007)

Thanks trembling hand.

If I short a stock through my broker, where does the borrowed stock come from? And what is the process of arranging for it to be borrowed or arranging a pool of borrowed stock?


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## cuttlefish (12 December 2007)

By way of background the reason for me asking the questions is more to understand some of the parameters surrounding institutional use of shorting to accumulate stock and so I'm wondering how they go about negotiating the borrowing of the larger volumes of stock they need to have the supply required to achieve the outcomes they want.


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## cuttlefish (12 December 2007)

Might just rephrase that a little bit - I'm *assuming* institutions make use of shorting as part of their trading strategies when accumulating stock, this is based on some of the trading records they show when they put in substantial shareholder announcements - that often include records of borrows/shorts as well as purchases.   If they _are_ using shorting then they need to borrow stock - I'm again assuming that this requires the owner of the borrowed stock to be aware their stock is being borrowed.  If someone is borrowing significant amounts of stock, how do the do this discreetly?


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## Trembling Hand (12 December 2007)

Not really sure what you are trying to get at here. And of what benefit it will be to you. If you are short a stock your broker has some arrangement with large holders on some level. It’s really not of any great importance where these stocks came from. 

There is no need to do this discreetly. It doesn’t give a toss who is short a stock. You can find out the total amount short for a stock Here as you can see it is only ever a tiny portion of the total outstanding shares.


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## cuttlefish (13 December 2007)

I'm not looking for any specific advantage out of this, I'm simply seeking to understand the process, as the whole stock borrow thing seems pretty strange to me.

So I'm curious where the stock gets borrowed from, what the process is for creating the pool of stock a broker provides to shorts, and how the stock lender is secured (by whom and by what mechanism). 

Anyone able to provide some details?


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## Trembling Hand (13 December 2007)

cuttlefish said:


> I'm not looking for any specific advantage out of this, I'm simply seeking to understand the process, as the whole stock borrow thing seems pretty strange to me.
> 
> So I'm curious where the stock gets borrowed from,





If a company/fund/insto lends out stock they get income in the form of interest like any lender gets from the borrower. As well as still getting all the divs and entitlements etc. If you are a long term holder like a fund it’s a way to get some extra return on the shares.

I would guess that the big brokers (Macquarie’s etc.) shuffle their own fund holdings between funds for shorting and the smaller brokers use something like Fortis to borrow stocks. I know that’s who my broker uses. http://www.fortis.com/companies/ClientCorner_Details.asp?B=119


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