Why does the "price" on hard to borrow stocks not agree to the closing price of the stock?

In determining the cash deposit required to collateralize a stock borrow position, the general industry convention is for the lender to require a deposit equal to 102% of the prior business day's** settlement price, rounded up to the nearest whole dollar and then multiplied by the number of shares borrowed.  As borrow rates are determined based upon the value of the loan collateral, this convention impacts the cost of maintaining the short position, with the impact being most significant in the case of low-priced and hard-to-borrow shares. Note, for shares not denominated in USD the calculation will differ. Find below a table summarizing the calculations per currency:

Currency Calculation Method
USD 102%; rounded up to the nearest dollar
CAD 102%; rounded up to the nearest dollar
EUR 105%; rounded up to the nearest cent
CHF 105%; rounded up to the nearest rappen
GBP 105%; rounded up to the nearest pence
HKD 105%; rounded up to the nearest cent

 

Account holders may view this adjusted price for a given transaction in the "Non-Direct Hard to Borrow Details"  section of the daily account statement.  Two examples of this collateral calculation and its impact upon borrow fees are provided below.

 

Example 1

Sell short 100,000 shares of ABC at a price of $1.50

Short sale proceeds received = $150,000.00

Assume the price of ABC falls to $0.25 and the stock has a borrow fee rate of 50%

 

Short stock collateral value calculation

Price = 0.25 x 102% = 0.255; round up to $1.00

Value = 100,000 shares x $1.00 = $100,000.00

Borrow fee = $100,000 x 50% / 360 days in year = $138.89 per day

Assuming the account holder's cash balance does not include proceeds from any other short sale transaction then this borrow fee will not be offset by any credit interest on the short sale proceeds as the balance does not exceed the minimum $100,000 Tier 1 threshold necessary to accrue interest.

 

Example 2 (EUR denominated stock)

Sell short 100,000 shares of ABC at a price of EUR 1.50

Assume a prior business day's close price of EUR 1.55 and a borrow fee rate of 50%

Short stock collateral value calculation

Price = EUR 1.55 x 105% = 1.6275; round up to EUR 1.63

Value = 100,000 shares x 1.63 = $163,000.00

Borrow fee = EUR 163,000 x 50% / 360 days in year = EUR 226.38 per day

 

** Please note, Saturdays and Sundays are treated as a Friday and will use Thursday's settlement price to calculate the required deposit.

When I short a stock, when will the hard to borrow interest begin accruing?

Short positions will have a borrow interest/fee associated with them.

Borrow interest will begin being charged on a short position from short settlement date to buy-to-cover settlement date.

For example, you sell XYZ on Monday, and you close the position on Tuesday. Borrow interest would start to be charged upon Wednesday's settlement date (T+2). Interest would cease to be charged on Thursday, the settlement date (T+2) of the buy-to-cover order.

 

Overview of Short Stock Buy-Ins & Close-Outs

Introduction

Clients holding short stock positions are at risk of having these positions bought-in and closed out by IBKR oftentimes with little or no advance notice. This is a risk which is inherent to short selling and generally outside the control of the client. It is also subject to regulatory rules which dictate the timeframes by which brokers must act.

While similar in their effect, the term buy-in refers to an action taken by a third party with a close-out being one taken by IBKR. These actions typically result from one of three events:

1. The shares required to be delivered when a short sale settles cannot be borrowed;
2. The shares which were borrowed and delivered at settlement are later recalled; or
3. A fail to deliver with the clearinghouse occurs.

An overview of each of these three events and their considerations is provided below.


Overview of Buy-in/Close-out Events

1. Short Sale Settlement – when stock is sold short, the broker must arrange for the shares to be borrowed by settlement, which in the case of U.S. securities is the second business day following the date of the trade (T+2). Prior to executing the short sale, the broker must make a good faith determination that shares will likely be available to borrow when needed and this is accomplished by verifying their current availability. Note that, absent a pre-borrow arrangement, there is no assurance that shares available to borrow on the date of trade will remain available to borrow 2 days later and the short sale may be subject to forced close-out if the shares are no longer available to borrow. In the event that the client pre-borrows shares for settlement, the client will not be subject to a close-out as long as the borrowed shares remain available and are not subject to a recall by the lender. In addition, please note that option assignments are sales and counted as such in the Net Purchase calculation. The processing timeline for determination of close-out is as follows:

T+2 (all times in ET)
14:30 - If IBKR is so far unable to borrow shares to meet settlement, and anticipates a substantial likelihood that it will not be able to borrow shares to meet settlement, a communication will be sent, on a best efforts basis, notifying the client of the potential close-out. Clients will have until the end of extended hours trading that day to close out the short position(s) on their own to avoid forced close-out. If at any time IBKR is able to borrow shares, an attempt will be made to communicate that information to the client.

15:15 – a communication will be sent, on a best efforts basis, in the event the client has not closed out the short position(s) and IBKR has not borrowed shares. Clients will still have until the end of extended hour trading that day to close out the short position(s) to avoid forced close-out.

16:50 – If IBKR was unable to borrow shares to meet settlement, clients will be sent, on a best efforts basis, a communication informing them that if IBKR was unable to borrow shares by close of business on T+2 and that a final attempt will be made up until 09:00 on T+3.

T+3
09:00 – If IBKR is unable to borrow shares by 09:00, close-out will commence upon the market open at 09:30 ET. The close-out will be reflected within the TWS trades window at an indicative price.

09:30 – IBKR initiates close-out using a volume weighted average price order (VWAP) scheduled to run over the entire trading day. The indicative price reflected within the TWS trades window will be updated with the actual price upon completion of the close-out.


2. Loan Recall – Once a short sale has settled (i.e., stock has been borrowed and used to deliver the sales sold short to the buyer), the lender of the shares reserves the right to request their return at any time. Should a recall occur, IBKR will attempt to replace the previously borrowed shares with those from another lender. If shares cannot be borrowed, the lender reserves the right to issue a formal recall which allows for a buy-in to take place 2 business days after issuance in the event IBKR doesn’t return the recalled stock. While the issuance of this formal recall provides the lender the option to buy-in, the proportion of recall notices that actually result in a buy-in are low (typically due to IBKR's ability to source shares elsewhere). Given the volume of formal recalls which we receive but are not later acted upon, IBKR does not provide clients with advance warning of these recall notices.

Once a counterparty issues a Buy-In Warning to IBKR, the counterparty may buy-in the shares IBKR is borrowing at any time for that trade date. In the event the recall does result in buy-in, the lender executes the buy-in transaction and notifies IBKR of the execution prices. IBKR conducts vetting of counterparty buy-in prices for appropriateness with the day's trading activity.
 
IBKR, in turn, allocates the buy-in to clients based upon their settled short stock position and unsettled trades are not considered when determining liability. Recall buy-ins are viewable within the TWS trades window once posted to the account with intraday notifications sent, on a best efforts basis, by approximately 17:30 EST.


3. Fail to Deliver – a fail to deliver occurs when a broker has a net short settlement obligation with the clearinghouse and does not have the shares available within its own inventory or cannot borrow them from another broker in order to meet the delivery obligation. The fail results from sale transactions, and is not limited to short sales, but rather may result from the closing sale of a long position carried on margin and eligible to be loaned to another client.

In the case of US stocks, brokers are obligated to attend to the fail position by no later than the start of regular trading hours on the following settlement day. This can be accomplished through securities purchases or borrowing; however, in the event that available stock borrow transactions prove insufficient to satisfy the delivery obligation, IBKR will close-out clients holding short positions using a volume weighted average price (VWAP) order scheduled to run over the entire trading day. It is possible that under certain circumstances, due to limited liquidity in the market, that the buy-in order may not be executed or may be only partially executed.

 

Important Notes:

* Clients should note that on any day on which they have been closed out, they are required to end the day as a net purchaser—in aggregate across all of their accounts with the Firm—of at least the number of shares they were closed out on (in the security they were closed out on). For the remainder of the trading day on which they were closed out, they will not be permitted to (i) sell short the stock they were closed out in, (ii) write in-the-money call options on the stock they were closed out in, or (iii) exercise put options on the stock they were closed out in (the "Trading Restrictions"). If a client nevertheless does not end the day as a net purchaser of the required number of shares for the stock they have been closed out in (for example, as the result of being assigned on call options previously written)—in aggregate across all of the client's accounts with the Firm—the Firm will perform another close-out in the account on the next trading day for the number of shares that, when added to the client's aggregate net trading activity in such stock on the close-out date, would have been required to make the client a net purchaser of the required number of shares of such stock that day, and the client will again be required to remain a net purchaser across all of their accounts of that many shares and again subject to the Trading Restrictions for the remainder of that day.


* Clients should be aware that based on the manner in which IBKR is required to execute a close-out and a third party allowed to execute a buy-in, significant differences between the price at which the transaction was executed and the prior day's close may result. These differences may be especially pronounced in the case of illiquid securities. Clients should be aware of these risks and manage their portfolio accordingly.
 

 

Why do I receive a notice of a potential buy-in of my short position when your Short Stock Availability List is showing shares available to borrow?

As background, the short stock availability list represents the inventory of shares which IBKR has available to lend and which other brokers have indicated that they have available to lend. While it is updated on a near real-time basis throughout the day for changes to IBKR's inventory and periodically throughout the day to reflect updates to the availability lists of other brokers, many brokers provide updates only once per day.


It should be noted that the purpose of the short stock availability list is to meet the broker's regulatory obligation that they have made a reasonable determination that a security can be borrowed in time for settlement three business days later. There is no regulatory requirement, in most instances, that the broker pre-borrow shares to effect delivery on a short sale prior to settlement and the requirement which this list serves to address is completely separate from the SEC rules which require that the broker force-close any short position having a delivery obligation subject to fail with the clearinghouse on any given day.


It is these rules which we are adhering to when we review your short positions relative to our settlement obligations with the clearinghouse each day. While the shares necessary to cover your short sale may have been available as of the date your trade took place and subsequently thereafter, there can be no assurance that those shares can be borrowed indefinitely. The inventory of available shares to borrow is dynamic and subject to change throughout a given day. When we believe that there is a reasonable chance that we will not be able to maintain your borrow position on a particular day, we will make every effort to provide you with a notice of those short positions which are likely to be bought in absent preemptive action on your part.

Understanding interest charges when the net 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, IBKR 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 the Ideal Pro (for balances of USD 25,000 or above) or odd lot (for balances less than USD 25,000) 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.

IBKR 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 IBKR has been credited funds by the clearinghouse).

 

How can I find out if IBKR has stock available to short?

Overview: 

From IBKR’s home page at www.interactivebrokers.com select the Products menu and click on "Securities Financing" in the Services section. Scroll down to the section titled Availability List. 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 advisable that you also review the Overview of Short Stock Buy-Ins & Close-Outs article as this will contain important information regarding potential buy-ins and close-outs of short stock positions.

The other option is to access information on short stock availability through Client Portal. Open the navigation menu and click on Support. On the Support page you will see the Short Stock (SLB) Availability tool. Here you can type in different symbols and search for availability. 

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. IBKR 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 IBKR does not currently have in inventory to loan them, IBKR 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 IBKR 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 IBKR 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. Please note that you must maintain a "Margin" type account with net liquidating equity of at least USD 2,000 for a short sale order to be accepted. Short sales are not allowed in "Cash" type accounts.

Also note, that in addition to your account having sufficient equity to meet the margin requirement associated with the transaction, IBKR 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+2). 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 Client Portal.

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.

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 short 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).

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