Questions - Short Selling Stocks

[jpennybags 11]

I have questions, but a little backfill is required before I get to it…

 

Over the past 9 months I've made the transition to day trading. I was a "long only" swing trader, and to date, I'm a "long only" day trader. I would now like to include the short side. I've spent the last 3 months sim trading on the weekends… it's pretty much all I've gotten done. For the past 4 weeks, I've set aside 1 day per week to sim trade real time. I'm to the point that I feel comfortable with the mechanics of shorting and my trading rules. I would like to take it live with reduced position sizes, and I don't expect to get beat up too badly (we shall see). I realize the pitfalls that go with sim trading, but I'm "strapped in" during a sim session the same way that I am trading live… I take it seriously. It may be that I'm over thinking the process, but it seems to me that there will be some differences in trading short that one would never see while sim trading.

 

1. Having shares called away… does this happen frequently?

 

2. What would be a reasonable expectation for the availability of shares?

 

As an example: The brokerage lists 600,000 shares available for a stock that trades an average volume of 4,500,000 shares per day. I want to short 1000 shares… would it be reasonable to think my order would get filled? Is there a percent of daily volume on shares available, or some other formula that would indicate a likely fill?

 

I realize there may be price levels when everyone wants to get short… 600,000 shares could be gone in seconds (less), but it seems there may be a general rule that could be applied.

 

3. Is slippage on a market order greater for short trades than long trades? It seems reasonable that there may be a slight difference. The difference that I've noticed in sim trading and live trading (long only) is something I've taken into account, but I'm wondering if I need to allow for more on a short fill.

 

If there's anything else that I need to consider, please give it up… Thanks.

[SIUYA 11]

  jpennybags said:

1. Having shares called away… does this happen frequently?

 

2. What would be a reasonable expectation for the availability of shares?

 

As an example: The brokerage lists 600,000 shares available for a stock that trades an average volume of 4,500,000 shares per day. I want to short 1000 shares… would it be reasonable to think my order would get filled? Is there a percent of daily volume on shares available, or some other formula that would indicate a likely fill?

 

I realize there may be price levels when everyone wants to get short… 600,000 shares could be gone in seconds (less), but it seems there may be a general rule that could be applied.

 

3. Is slippage on a market order greater for short trades than long trades? It seems reasonable that there may be a slight difference. The difference that I've noticed in sim trading and live trading (long only) is something I've taken into account, but I'm wondering if I need to allow for more on a short fill.

.

 

A lot will depend on the broker you use, their available short book inventory (the whole prime brokerage area of short borrowing is largely built around relationships and inventory)

This will also likely determine their process.

 

Additionally after the recent witch hunts to make the shorters pay, various countries have different rules and issues regards the process involved.....and at a guess brokers will treat retail differently to wholesale/professional clients.

 

So in an attempt to answer after saying that....

 

1...it should not happen a lot -, but a lot will depend on the stock, its free float liquidity etc; if you are sticking to the main stocks it should not be an issue. Most brokers should give you a list showing whats is "tight" and hard to borrow. Plus if you really want to keep on top of it, you often need to watch this and make a judgement call. It can happen that you are called back while others are not.....preferential treatment.

 

2...share availability again depends largely on the stock and the broker you use. For your example it should be no problem --- however check with the broker as usually you have to pre-arrange available short. ie; they will say there is 600,000 available you ask to reserve some of this, alternatively you will no straight away if its rejected and not everyone will form a rush on it....so dont fret too much.

Just be aware of the exact process of how they will allocate you availability and how quickly you need to secure its loan before hand. This will explain more.

 

3...I have never noticed, except to repeat the often quoted mantra of stocks fall quicker than they rise, so i guess it depends on if you are shorting into strength or weakness.

 

Other issues off the top of the head you need to think about are....

...costs of borrowing, different brokers and different stocks apply different charges

sometimes these are passed along as a % cost per annum plus maybe a minimum charge.

....be very careful of dividends and certain countries have franking issues (eg; Australia) with regards different tax rates

....be careful about corporate events - eg; takeovers, people playing convertibles int hose stocks etc. Not only can you get hit on a short squeeze but also a short covering squeeze.

There is nothing worse than having to be the only one buying stock back as you have to cover and you know you are the only one buying it. For your size this might not be an issue, but it can happen and you just become part of the same crowd.

.......talk to the stock lenders, they are probably some guys in the back office who never talk to traders and are treated poorly by some. If you can take them out buy them a drink, its amazing how that might go along way when they need to do you a favour.