Types and Procedures for Buy-Ins
Overview:
There are two general categories that buy-in activity falls into. The below provides general information on how each type of buy-in is processed by IB.
Buy-in Procedure for Short Sale Transactions
The following procedure relates to short sale transactions that fail to settle on the normal (T+3) settlement date. IB's implementation of the SEC regulations is as follows:
1. On the standard settlement date, at approximately 14:30 EST, IB will make an estimate of the transactions that have actually settled, including any borrow transactions required. Historically, stock borrowing activity is completed early in the morning of settlement day. With the 9/2008 rules, we observe settlement activity continuing right up to the DTC cutoff at 15:10 EST. Accordingly, our 14:30 estimation is a compromise which, while it does not include the last 40 minutes of settlement activity (typically less than 10% of the total activity), it does provide a longer time period to provide notification and to allow clients to make trading decisions before the end of the trading session at 16:00.
2. IB will disseminate an indication of possible buy-ins at about 14:50. Clients should recognize that these notifications communicate only the possibility, not the certainty, that we will be unable to make timely delivery thereby necessitating a buy-in. The purpose of the communication is to allow clients an opportunity to repurchase the short securities themselves thereby retaining greater control over their portfolios.
3. At about 17:00, IB will reconcile any late settlements as well as client transactions up to the end of the regular trading session at 16:00 EST. IB will consider the net of all trades on the day when determining the position, including any new short sales. Trades after 16:00 will not be included in our position reconciliation. IB will then calculate the expected buy-in requirement based on complete information.
4. IB will report predicted buy-in transactions on client statements and in the real time brokerage system shortly thereafter, using either an estimated price or the official closing price of the regular trading session, if available. The buy-in will be reflected under the Trades section of the statement with a code of "B;C" and the exchange designation of TRANSFER. The trade quantities should reflect the expected trade that will be allocated to client accounts, however, as the trades will only be executed the following day, the price is merely an estimate. IB's purpose to "pre-book" the buy-in trades is to allow clients the best possible view of their positions prior to the start of the next trading session.
5. On the morning of the next business day (generally the fourth day after trade date, also called "T+4"), and prior to the start of trading, IB will make a final attempt to locate and borrow the required securities. In the event we are able to do so, IB will send a notification reporting on an late borrow activity. The notification will list the reversal of any transactions pre-booked in step 4 (above) and will confirm remaining positions to be bought in.
6. IB will attempt to post the reversal of the pre-trade bookings prior to the start of trading at 09:30. Occasionally, it may take longer to correct the positions visible via the TWS but the adjustments will be visible in the trades window so it should be evident to clients for whom this real-time information is important.
7. On, or immediately after, the commencement of trading on T+4, IB will execute transactions in the open market to effect the actual buy-in, as required by the SEC rules. In case the buy-in transactions occur at multiple prices, we will calculate the volume weighted average price for the buy-ins.
8. On the statement of the 4th day, IB will rebook the buy-in trades by reversing the original "pre-booking" and reporting the final trade details.
IB Short Stock Buy-in Procedures
After a stock borrow transaction has been concluded, the lender of a security retains the right to request the return of the lent stock. When a stock is recalled, IB will attempt to find alternative lenders to replace the borrow transaction. If replacement is not possible, and IB fails to return the recalled stock, the lender has the right to issue a formal recall demand which allows for the execution of a buyin 3 days after issuance should IB fail to return the recalled stock. Note that the issuance of a formal recall demand (a) allows, but does not require, the lender to execute a buyin, and (b) is generally an automated process; the actual frequency of buyins is a small proportion of the recall demands. Due to this, IB does not provide advance warning to clients with respect to the issuance of a formal recall demand.
In the event a buyin is actually executed by a lender, IB does not handle the execution. Instead, the lending counterparty will effect the buyin in the open market and present IB with the execution prices. The buyin is allocated to client accounts based on a settled short stock position; therefore unsettled trades will not be considered when determining liability.
IB will try to report these buyin transactions to clients as quickly as possible through the trades window of the TWS. As such, the account will generally be updated prior to the account receiving notification which will occur at approximately 17:30 EST.
Why is my account being charged interest when my cash balance is a credit?
An account will be subject to interest charges despite maintaining an overall net long or credit cash balance under the following circumstances:
1. The account maintains a short or debit balance in a given currency.
For example, an account maintaining a net cash credit balance equivalent to USD 5,000 comprised of a long USD balance of 8,000 and a short EUR balance equivalent to USD 3,000 would be subject to an interest debit based upon the short EUR balance. There would be no offsetting credit on the long USD balance as it is less than the USD 10,000 Tier I level above which interest is earned.
Account holders should note that in the event they purchase a security which is denominated in a currency that they do not hold in their account, IB will create a loan in that currency in order to settle the trade with the clearinghouse. If one wishes to avoid such loans and their associated interest charges, they would need to either deposit funds denominated in that particular currency or convert existing cash balances via either the Ideal (for balances less than USD 25,000) or Ideal Pro (for balances of USD 25,000 or above) venue prior to entering into your trade.
2. The credit balance is comprised principally of proceeds from the short sale of securities.
For example, an account maintaining a net cash credit balance of USD 12,000 which is comprised of a USD debit of 6,000 in the security sub-account (less the market value of any short stock positions) and a short stock market value credit of USD 18,000 would be charged interest on the Tier 1 debit of USD 6,000 and would earn no interest on the short stock credit as it falls below the USD 100,000 Tier I level.
3. The credit balance includes unsettled funds.
IB determines interest debits and credits solely based upon settled funds. Just as an account holder is not assessed interest charges on funds borrowed to purchase a security until such time that purchase transaction settles, the account holder will not receive an interest credit, or offset against a debit balance, on funds originating from the sale of a security until such time the transaction has settled (and IB has been credited funds by the clearinghouse).
How can I find out if IB has stock available to short?
Overview:
From IB’s home page at www.interactivebrokers.com select the Trading menu and click on Shortable Stocks. From this page you can click on the link which corresponds to the country in which the stock you are trying to short trades. The stocks are listed in alphabetical order. Find the stock in question, and check the availability status. It is also advisable for you to click on the other tabs on the Shortable Stocks page titled Special Information, Mechanics and Buy-In Procedures. These tabs contain significant and pertinent information on how the process works, and recent changes that have affected the hypothecation of shares in the trading industry.
The other option is to access information on short stock availability through Account Management. On the Account Management home page there is an icon that looks like a toolbox, and says Tools. After clicking on this icon, scroll down to the last tool which is Short Stock Availability (SLB). You can type in different symbols and search.
Background:
Be aware that short stock availability is a very fluid situation, constantly changing throughout each trading session. Because a stock is available now does not mean it will be available the next day, or even the hour or less. IB tries to maintain a short stock availability database, but it is not possible to have this tool update in real time.
Overview of Regulation SHO
Regulation SHO, adopted by the SEC in January 2005, sets forth the regulatory framework governing short sales. Two key provisions, intended to address problems associated with persistent fails to deliver and potentially abusive naked short selling, involve locate and close-out requirements.
Under the locate requirement, a broker-dealer must have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the delivery due date before effecting a short sale order.
The close-out requirement requires that the clearing broker take immediate action to close out a fail to deliver position in a threshold security that has persisted for 13 consecutive settlement days by purchasing securities of like kind and quantity. Until the position is closed out, the broker may not effect further short sales in that threshold security without borrowing or entering into a bona fide agreement to borrow the security (known as the "pre-borrowing" requirement)
IMPORTANT NOTE:
In October 2008, the SEC amended Regulation SHO with temporary Rule 204T (in place until July 31, 2009) which requires that any broker having a fail to deliver position at NSCC on the settlement date immediately borrow or purchase securities to close out the amount of the fail to deliver position by no later than the beginning of regular trading hours on the following settlement date (the “Close-Out Date”). This close-out requirement requires that the broker take affirmative action to purchase or borrow securities and not offset the fail to deliver position with shares it will receive on the Close-Out Date. Rule 204T applies to all securities not just threshold securities.
Glossary terms:
I have an open order to sell short stock that should have been executed, but it is still on my TWS and not being filled.
Overview:
When traders attempt to sell short a stock which IB does not currently have in inventory to loan them, IB will look for these shares “on the street”, which means from other brokerage firms. This search is conducted on a best-efforts only basis. While IB searches for the shares, the order status box on the TWS Order Management page should be dark green, and will show a small icon of a pair of binoculars, which indicates we are searching. In the WebTrader, there are no status colors or icons. The order will simply not execute as IB searches for the shares on the street.
How do I sell a stock short?
Procedurally, to sell short, all you need to do is specify your order Action as 'Sell' at the point you create your order. Note that we do not allow you to be both long and short the same security, so if you maintain a long position and enter a sell order, you will close out any long positions to the extent of your sell order and open a short position to the extent, if any, your sell order exceeds a long position.
Also note, that in addition to your account having sufficient equity to meet the margin requirement associated with the transaction, IB is required to meet its regulatory obligation of making a reasonable determination that we can locate the stock for borrowing purposes when the transaction settles (typically T+3). If we are unable to locate the stock based upon our inventory and the availability lists provided to us by other brokers, you will see an Order Status color in the TWS Shortable column of dark green. This indicates that there are no shares available to sell at the moment and that the system is searching for shares. The order will remain in this status until the we are able to locate the shares or the time which you specify for your order to remain in force expires, whichever occurs first. You may wish to review the Shortable Stocks link to our website below which provides a listing of stocks available for shorting. A list of shortable stocks searchable by symbol or CUSIP along with their indicative borrow rates may be found through the Short Stock Availability Tool accessible through the Tools link within Account Management.
Finally, you should be aware that one of the risks of borrowing stock to support your short sale is being bought in with little or no notice. Even though a reasonable determination that the shares can be borrowed will be made prior to effecting your sale transaction, there is no assurance that those shares will actually be available at the time of settlement or any day thereafter. The supply and demand of borrowable inventory for any given security is dynamic by nature and regulations require brokers to force-close any short position having a delivery obligation subject to fail with the clearinghouse on any given day. We will make every effort to provide you with advance notice if this appears to be the case in order to provide you with the opportunity to buy in your own position, however, this is done on a best-efforts basis.
Other risks to keep in mind are the special charges which tend to be associated with hard-to-borrow securities that, in aggregate may exceed any rebate or interest paid on the short stock proceeds, as well as your obligation to pay to the lender any dividends which are paid throughout the duration of the loan period.
Links:
What is a single stock future EFP?
Overview:
The EFP allows for the swap of a long or short stock position for a single stock future, maintaining the same economic long or short position but at more advantageous financing rates and margin requirements. The cost to carry interest rate implied by the single stock future’s price is generally below the rate charged to purchasers of stock who buy on margin, and greater that that provided to sellers of stock on the sale proceeds.
Long Stock – alternative is to buy the EFP which involves a single transaction with two legs, a long future and short stock. The effect of the transaction is to close the long stock position with the short stock position and maintain a long futures position through expiration. The cost of financing the long stock (margin loan rate * 75% of stock price, less any dividends received) tends to be greater than the EFP cost (EFP premium at ask over stock, plus commission, less interest earned on margin balance).
Short Stock – alternative is to sell the EFP which involves a single transaction with two legs, a short future and long stock. The effect of the transaction is to close the short stock position with the long stock position and maintain a long futures position through expiration. There is generally a cost associated with holding the stock short (dividends paid in lieu, less interest earned on 30% margin balance, less interest earned on sale proceeds, if any) as opposed to the credit earned on the EFP (EFP premium at bid over stock, plus interest earned on margin balance, less commission).
My account was debited for a dividend payment (Payment in Lieu) for a short stock position which I don’t recognize. How did this occur?
Overview:
A short stock position may originate from an option position which you held in your account. For example, if you hold a long put position in your account, that position may be subject to automatic exercise by the clearinghouse if it is in-the-money by a defined threshold at expiration. This put exercise will generate a short stock position in your account (assuming you do not have an offsetting long position), and you are obligated to pay any dividends should you maintain a short stock position on the ex-dividend date.
Similarly, a short call position in your account is subject to assignment should a call purchaser elect to exercise their right to purchase the stock and your account be allocated through the random clearinghouse and broker assignment process. This call assignment will generate a short stock position in your account (assuming you do not have an offsetting long position), and you are obligated to pay any dividends should you maintain a short stock position on the ex-dividend date.
These payments will be reflected on your Activity Statement as a 'Payment In Lieu Of Dividend'.
What does Payment in Lieu refer to?
Overview:
A Payment in Lieu, or Pil, typically refers to a cash debit or credit made to an account in recognition of a stock dividend. A Pil in the form of a debit will be made when an account is holding a short position in a stock on its ex-dividend date. This debit occurs as the lender of the shares which facilitated the short sale remains entitled to all dividends paid throughout the duration of the loan period.
Conversely, a Pil in the form of a credit is made when a long stock position in an account has been loaned out on its ex-dividend date. Account holders should note that shares which are held long and which are the subject of a margin lien may be eligible to be loaned by the broker. In this situation the credit originates from payment by the borrower of the shares rather than from a dividend by the share issuer. Recipients of Pil credits should discuss the tax implications of Pils and non-qualified dividends with their tax advisor.
