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Author: BenHacker Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 77093  
Subject: Re: The One Share Club Date: 2/10/2013 3:01 AM
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Hey Yoda,

Ben, on some platforms 100% of REIT preferreds are not shortable. They are treated like corporate/muni bonds which are not shortable.

A side note, you can short Corp bonds on IB as well. Generally they require larger size. Issues I have looked at were 100 bond minimums (~$100k minimum) but IB is forging ahead in a lot of these areas so what is usual is quickly changing.

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.

IMO, there is limited demand at typical retail brokers for this service and that is why they don't bother trying to get decent lending inventory. It's not about protecting people from their loans being called or squeezed... although maybe the increased customer service also makes it not worthwhile.

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've shorted a lot of weird stuff on IB, so I have no doubt it will work, but I have not personally shorted a REIT preferred specifically.

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.

I don't think this is right. The margin requirement applies to both short / long margin, but does not affect ability or availability in my experience. I am currently short several issues that are on the 100% margin list. They consume marginable funds like crazy, but IB doesn't care. Maybe other brokers do, IB's margin call engine from what I've seen on the tape is ruthlessly aggressive. They don't give you a "call" they give you a "5% margin" warning email, and then they liquidate you on automatically if you breach 0% margin. They don't care about what you short. They assume that their customers are big boys and read the fine print so I don't think they have reservations here.

There are a lot of things that I think many retail brokers do that have nothing to do with legality (shorting stocks below $4, not trading certain OTC issues, etc), but IB is all driven by their cost model. So they are pretty pure in what they will let you do.

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.


I have no special knowledge of what or why DMM's do what they do. But I do know that not all DMM orders are "computer" generated. If there is some way to make money legally with a DMM's special abilities, they simply seek to find it. Also, you make a reference to the DMM for a specific stock. I believe the DMM exemption for shorting is not for the DMM, it is for ANY registered MM who is doing "bona fide" market making. So I think your ability to talk to the specialist is besides the point. It's not the MM for this preferred that is the only one who can naked short this perferred... it's any MM... this is at least my understanding (could be wrong).

I have some small reservations about the "electronification" of our exchanges and trading, but I have to say, there have been stories of short squeezes, manipulation and various scalping activities by the main traders / MM's on wall street for years before this digitalization. bid/ask spreads used to be 12.5 cents (!!!) at a minimum... do we really want to go back to that time?

Ben -- Not defending the current system. I don't know the answers but have some opinions. For those interested in the mechanics of exchanges I found "Trading and Exchanges" by Harris to be valuable (it's a textbook though, so take that for what it is).
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