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Industry Discussions / Real Estate Inv. Trusts: REITs

URL:  http://boards.fool.com/ben-said-im-very-confused-by-this-reit-30534447.aspx

Subject:  Re: The One Share Club Date:  2/9/2013  11:59 PM
Author:  yodaorange Number:  73656 of 77506

Ben said: I'm very confused by this. REIT preferreds are most definitely shortable. Why wouldn't they be?

Ben, on some platforms 100% of REIT preferreds are not shortable. They are treated like corporate/muni bonds which are not shortable. A large concern is the illiquidity. The brokerage does not want to let the investor get into a short squeeze position where you literally might not be able to cover the shorts at any price. I had not checked shortability on IB recently, so I was NOT aware they offer it. Have you actually shorted any to verify they will let the trade go through? I will attempt to place a few short trades. I do know that IB has restricted margin on some REIT preferreds. Even though they are NYSE traded issues and should be marginable, IB sets 100% margin requirements. I assume that IB does not allow shorting on these issues, but I will check to determine the status.

Ben said: Also, while you are making the assumption that the trades weren't a market maker, again I feel compelled to repeat that market makers can and do naked short (legally)

Ben, I 100% agree that the Designated Market Maker aka specialist can legally do naked shorting. Can you explain why the DMM which is an algorithm running on a server in Rahway, New Jersey decides to short a single share hours after the last trade? It must be a pretty interesting algorithm to do that. It is possible, I just think it is much more likely to NOT be a DMM algo.

Since specialists have gone the way of the dinosaurs, it is more difficult to find out what is really going on. In the old days, when the NYSE floor was something other than a photo op, you could find out what was going on by talking to the specialist assigned to the stock. Until you or I can see the inner workings of the DMM algo, I suspect it cannot be proven one way or the other.

BLACK BOX WARNING: Even if we stipulate that public investors can short all REIT preferreds, it is certainly NOT a recommended strategy in general. It is high risk, particularly due to their illiquid nature. Plenty of folks would like to force you into a short squeeze if you are short on one of the more illiquid issues.

Thanks,

Yoda
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