The Hard to Borrow List refers to an inventory of securities the brokerage firm is unable to provide for short selling. The inventory provides a current catalog of securities which cannot be shorted by investors or short selling traders.
In trading, the reason why a security may be placed on the hard-to-borrow list is because it’s in short supply or as a result of volatility.
For a short sale to occur, the trader must borrow the shares from the broker who utilizes his or her own inventory or borrows from a client’s margin account or from another broker’s firm.
What you need to know is that the inventory is usually updated on a daily basis. To enter a short transaction, a broker should be able to provide shares which are loaned to the brokerage client thus making a short sale. Regulation SHO was implemented to prevent naked shorting.
What is Shorting a Stock?
Shorting a stock is when you borrow shares from your broker to sell in the open market which allows active traders to play both sides of the market. Some traders prefer shorting because down moves are generally more dramatic and can result in faster profits.
What is Regulation SHO?
This is a policy that helps to update legislation pertaining to short sale. The regulation helps to establish locate and close out standards which are aimed at preventing opportunities for unethical traders to engage in naked short selling practices.
When it comes to the locate requirement, the broker must have reasonable belief that the security to be short sold is borrowed and delivered to the short seller on a particular date before the event (short selling) happens.
On the other hand, a close-out requirement signifies an improved amount of delivery imposed on securities which have extended delivery failures at the clearing agency.
Naked shorting is an illegal practice of short selling shares which have yet to be determined if they exist. Today, as a result of loopholes in regulations and discrepancies in electronic and paper trading systems, naked short selling continues to occur.
How Hard-to-borrow List Works
The hard-to-borrow list for a brokerage firm is an internal list which means it’s not available to the public. Clients only have access to the easy to borrow list. Just like goods and services, securities are known to exist in a limited supply where some may be available while others may not.
Brokerage firms usually publish the hard-to-borrow list which displays all financial instruments that it’s unable to provide for short selling. The reason being the securities are in limited supply.
What you need to know is that clients may assume that financial instruments not available on the list are available to borrow especially for short selling. To learn how hard-to-borrow list works; here is a real world example.
Imagine Company A stock materializes on a hard-to-borrow list. As a result, Company A stock will not be provided to clients who want to short the stock.
The hard-to-borrow list has been found to provide security to financial instruments especially in an upfront manner thus allowing clients to alter trading strategies where needed.
It is important to know that clients have the ability of short selling financial instruments not on the list but a confirmation of the borrowed units must be delivered.