To sell short, a trader first needs to borrow shares that will be sold short. For the most part, brokers will only lend shares if they have other customers who own the shares. While there is an inter-broker stock loan market, it is not very well developed (LocateStock.com is one company that provides such services to brokers; AQS is another). The method of borrowing shares differs at different brokers. For most normal discount brokers, you need to place a short order and then if no shares are available the broker will reject the order because there are no shares to borrow. Following are instructions for many different brokers on how to borrow shares to short and how to see which stocks are available to short.
E*Trade – There is no way to determine which stocks are shortable. You must enter a short order and if it is rejected then that stock is not shortable at the present time. Shorting stocks priced below $1 per share is prohibited. Etrade has instituted a hard to borrow program that allows for the possibility of shorting hard to borrow stocks. You can read more and enroll here. If a stock is hard to borrow you will be quoted a borrow fee as an annual interest rate and once you accept that fee the order will be sent to the market.
Lightspeed Trading – Lightspeed generally sets up clients to clear through Penson, although they can clear through Goldman Sachs. They tell me that they also obtain borrows that they get from other sources as well. The Lightspeed trading platform will display a symbol if a stock is not readily available to short. According to Lightspeed, “We have a standing request with our clearing firms to locate or pre-borrow a certain quantity of every hard to borrow stock.” If a hard to borrow stock is in inventory through that standing request, it will be marked as available to short in the Lightspeed platform. If a stock is marked as hard to borrow in the trading platform, the user can send a request for the borrow through email or live chat. Lightspeed will then make an additional attempt to secure the requested shares for that specific user.
Scottrade – There is no way to determine which stocks are shortable. You must enter a short order and if it is rejected then that stock is not shortable at the present time. Scottrade generally has poor short stock availability. Shorting stocks below $5 per share is prohibited.
Centerpoint – At the bottom of the level 2 montage there are the letters “ETB”. If the stock is not easy to borrow then those letters are greyed out. In the image below they are in greyed out, meaning that CLNO is not easy to borrow/short. Stocks that are not easy to borrow may be located using the locate monitor in Sterling Trader Pro.
TD Ameritrade – There is no way to determine which stocks are shortable. You must enter a short order and if it is rejected then that stock is not shortable at the present time. TD Ameritrade generally has poor short stock availability (although sometimes they will have shares of hard-to-borrow stocks). Shorting non-marginable stocks (including all OTC stocks) is prohibited.
Tradestation – Tradestation primarily self-clears for stock trades. The trading platform does not indicate whether a stock is easy or hard to borrow. A trader can call the trade desk to obtain a borrow on a hard to borrow stock; the trade desk will then place an order in the traders account for that stock at an above-market price that the trader can then adjust to execute the trade when he wishes. Trades for OTC and Pink Sheets stocks need to be phone in (whether long or short).
Other random discount brokers – Most small discount brokers clear through Penson Financial (which has now changed its name to Apex Clearing), so the borrows would be the same, although the method for borrowing shares may be different. Noble Trading, Cobra Trading, and LowTrades.com all clear through Penson.
Interactive Brokers – I like to use the FTP text version of IB’s short stock list: Shortable Stocks FTP (when prompted for a password just hit enter or okay). The FTP link will show a large text file; use your browser’s search function to find a stock by name or ticker. An HTML version of the shortable stocks list is also available. Both show how many shares are available to short and what interest rate a trader must pay to borrow said shares. For example, the FTP link shows each stock on a line that looks like this: “AMEL|USD|Amerilithium Corp|73282418|US03077G1067|03077G106|-2.69|NA|NA|20000|”. The first entry is the ticker, the next the base currency, followed by name, two different identification numbers I’m not familiar with, the stock’s CUSIP, and then the indicative annual interest rate (positive numbers indicate a short sale rebate, in other words you get paid to hold the short position). The right-most entry is the number of shares available. The top line of the file indicates when the data were updated (ie, #BOF|2010.06.07|13:30:03) and the second line shows each column’s headers. So the line above indicates that as of 1:30pm EST on June 7, 2010 there were 20,000 AMEL to short at an annualized interest rate of 2.69%. The interest rate can change from day to day as the stock becomes more or less easily available to short.
If you log in to your account and go to “Tools > Short Stock Availability” you can see more detailed data on how many shares of a stock were available at different times. Interactive Brokers has detailed instructions on how to use this tool. I have also configured my Trader’s Workstation software to show the “Shortable” column. Below is a detailed video of how to do that. IB allows short selling stocks of any price (although short selling stocks under $2.50 requires more capital) and allows short selling of OTC BB and Pink Sheets stocks. Interactive Brokers does not allow for reserving shares to short; the first trader to get a short order filled gets the shares. Because Interactive Brokers’ system automatically searches for stock to borrow from various lenders and then displays how many shares are shortable, if it shows that there are no shares to short, placing an order to short is almost futile. You can place an order, which will cause the system to automatically look for more shares, but I have found that to almost never result in the system finding shares. The one benefit of placing an order is that TWS should notify you if you place a short order for which there are no shares and shares do later become available.
[Update 10/31/2009 – IB now allows for borrowing / lending stock through the AQS stock loan marketplace. See my post on that new feature.]
See the first video below for how to use the shortable column. The quick way to add it is to right-click the column header just to the right of where you want the shortable column, then select “Insert column before XXX column” > “Contract Description” > “Shortable”.
Below is a video about how to use Interactive Brokers’ short stock availability tool
Disclosure: Updated 1-26-2010 to add the second video. No positions. I use Interactive Brokers which I love). I have my IRA accounts at Scottrade. I have used Ameritrade and E*trade in the past and am glad I left. I have a disclosure policy.