Comments on: What’s a pre-borrow?

By: Jash

Jash — Sun, 27 Sep 2009 01:51:29 +0000

Do you know how the “borrowed shares against short sales are actually settled i.e. since the buyer has only borrowed and not bought these shares, how and when does he submit them through the NSCC CNS cycle and what happens at DTC since the ownership is still with the stock lender?

By: Randy Miller

Randy Miller — Mon, 08 Jun 2009 03:32:06 +0000

Somebody has to explain to me the difference between a put option and a naked short sale. Reading about Bear Stearns downfall, and the role that put options can play in driving down a stock price, is cause for great concern. If a stock’s price is $50, and somebody buys a 10 day put option with a strike price of $30, he has virtually no risk, because the trade is optional. Some hedge fund manager does a $1 billion dollar put option on those terms, several others jump on the bandwagon, and the value of the stock will almost certainly drop like a rock, regardless of the genuine value of the stock. And, again, if it does not drop, he loses nothing, except for some fees. It makes a great deal of sense to ban short selling, but we need to close this loophole also.

By: Dave

Dave — Fri, 05 Jun 2009 13:53:53 +0000

Felix, since you have spent so much time writing about all these short sale issues I would have expected that you at least understood the issues.

The reason for a mandatory pre-borrow is to address the abuses in the stock locate and short process. Hedge funds have found a way to short more than shares available in locate with INTENT on a failure. The pre-borrow addresses this issue. The pre-borrow similarly imposes a fee on those short sellers who want to sell short and cover within the settlement window. Presently day trading short allows you to throttle stocks intra-day without ever taking ownership of what you sell to another. This too has become abused.

As for borrowing costs, that is yet another PR pitch from the short sellers who can’t justify the rhetoric. Short sellers in 2004 claimed that Reg SHO would reduce liquidity in the markets if the SEC imposed these restrictions. It never happened. A pre-Borrow at trade vs. a Borrow at T+3 is negligible in cost and adds protection to the markets. It also reduces those 700 Million shares that rest on the CNS system as failed each day. The fact that the threshold list is smaller is illustrating a change in the style and process used in shorting today. Short sellers must punish stocks more quickly because the time to cover has reduced.

By: dWj

dWj — Thu, 04 Jun 2009 21:19:52 +0000

See, there’s another derivative the SEC regulates: the three-day forward contracts that trade on NYSE.

By: Manshu

Manshu — Thu, 04 Jun 2009 20:53:56 +0000

Moving to T+1 or T+2 is a much better solution than forcing these interim and arbitrary rules. That is a long term solution and will not deter liquidity as much as ad hoc rules may do.