What Is a Hard-To-Borrow List?
Brokerages utilize a hard-to-borrow list to identify equities that are challenging to borrow for short sales. The hard-to-borrow list of equities a brokerage business keeps up-to-date is a short-sale catalog.
Compare the hard-to-borrow list to a brokerage’s easy-to-borrow list.
Understanding
Short selling involves a trader or investor borrowing shares from a broker to profit from a stock’s price drop.
Brokerages provide many techniques to allow short sales of shares. Regardless of the approach, there are only so many shares to short. The broker will post a notice on their site when shares are running low. This warns account holders that shorting those securities may result in a trade order rejection.
Short supply isn’t the only reason a security may be difficult to borrow. The inclusion may be due to significant volatility or other factors.
A brokerage client must borrow shares from their broker to short sell. The broker can utilize their inventory or borrow from a customer or another brokerage firm’s margin account to offer shares. Interest and fees are due on borrowed shares by the short seller. Those on the hard-to-borrow list may face increased stock lending fees due to limited supply.
Short-sale investors seek profits in a falling market. For instance, an investor may anticipate a decrease in Apple share prices. The investor can short-sell the stock and repurchase it for a profit if the price drops. Investors lose money if the stock increases.
Needs for Hard-to-Borrow List
Brokerages update their hard-to-borrow listings daily. Before completing a short sale, a broker must have the shares to lend to their client.
Regulation SHO’s “locate” requirement, which went into effect on Jan. 3, 2005, requires brokers to believe they can borrow and deliver shorted equities to the short seller. 1 The regulation prohibits naked short-selling when investors sell shares without holding them.
Hard-to-Borrow vs. Easy-to-Borrow
Easy-to-borrow lists are inventories of securities available for short-sale transactions, whereas hard-to-borrow lists are the reverse. Investors can usually short-sell stocks not on the hard-to-borrow list. Clients commonly have access to a brokerage firm’s easy-to-borrow list but not its hard-to-borrow list.
Brokerage customers may pay hard-to-borrow short-sale costs. In general, difficult-to-borrow equities cost more to borrow. Many large brokerage houses offer a securities lending desk that sources hard-to-borrow equities. A brokerage’s securities lending desk lends loans to other companies.
Conclusion
- Short sellers borrow stock from brokers.
- The broker puts a stock on the hard-to-borrow list if there are few shares.
- Hard-to-borrow stocks may not be short-sellable or have higher borrowing fees.
