Overview of Short Stock Buy-Ins & Close-Outs

Introduction

Clients holding short stock positions are at risk of having these positions bought-in and closed out by IBKR oftentimes with little or no advance notice. This is a risk which is inherent to short selling and generally outside the control of the client. It is also subject to regulatory rules which dictate the timeframes by which brokers must act.

While similar in their effect, the term buy-in refers to an action taken by a third party with a close-out being one taken by IBKR. These actions typically result from one of three events:

1. The shares required to be delivered when a short sale settles cannot be borrowed;
2. The shares which were borrowed and delivered at settlement are later recalled; or
3. A fail to deliver with the clearinghouse occurs.

An overview of each of these three events and their considerations is provided below.


Overview of Buy-in/Close-out Events

1. Short Sale Settlement – when stock is sold short, the broker must arrange for the shares to be borrowed by settlement, which in the case of U.S. securities is the second business day following the date of the trade (T+2). Prior to executing the short sale, the broker must make a good faith determination that shares will likely be available to borrow when needed and this is accomplished by verifying their current availability. Note that, absent a pre-borrow arrangement, there is no assurance that shares available to borrow on the date of trade will remain available to borrow 2 days later and the short sale may be subject to forced close-out if the shares are no longer available to borrow. In the event that the client pre-borrows shares for settlement, the client will not be subject to a close-out as long as the borrowed shares remain available and are not subject to a recall by the lender. In addition, please note that option assignments are sales and counted as such in the Net Purchase calculation. The processing timeline for determination of close-out is as follows:

T+2 (all times in ET)
14:30 - If IBKR is so far unable to borrow shares to meet settlement, and anticipates a substantial likelihood that it will not be able to borrow shares to meet settlement, a communication will be sent, on a best efforts basis, notifying the client of the potential close-out. Clients will have until the end of extended hours trading that day to close out the short position(s) on their own to avoid forced close-out. If at any time IBKR is able to borrow shares, an attempt will be made to communicate that information to the client.

15:15 – a communication will be sent, on a best efforts basis, in the event the client has not closed out the short position(s) and IBKR has not borrowed shares. Clients will still have until the end of extended hour trading that day to close out the short position(s) to avoid forced close-out.

16:50 – If IBKR was unable to borrow shares to meet settlement, clients will be sent, on a best efforts basis, a communication informing them that if IBKR was unable to borrow shares by close of business on T+2 and that a final attempt will be made up until 09:00 on T+3.

T+3
09:00 – If IBKR is unable to borrow shares by 09:00, close-out will commence upon the market open at 09:30 ET. The close-out will be reflected within the TWS trades window at an indicative price.

09:30 – IBKR initiates close-out using a volume weighted average price order (VWAP) scheduled to run over the entire trading day. The indicative price reflected within the TWS trades window will be updated with the actual price upon completion of the close-out.


2. Loan Recall – Once a short sale has settled (i.e., stock has been borrowed and used to deliver the sales sold short to the buyer), the lender of the shares reserves the right to request their return at any time. Should a recall occur, IBKR will attempt to replace the previously borrowed shares with those from another lender. If shares cannot be borrowed, the lender reserves the right to issue a formal recall which allows for a buy-in to take place 2 business days after issuance in the event IBKR doesn’t return the recalled stock. While the issuance of this formal recall provides the lender the option to buy-in, the proportion of recall notices that actually result in a buy-in are low (typically due to IBKR's ability to source shares elsewhere). Given the volume of formal recalls which we receive but are not later acted upon, IBKR does not provide clients with advance warning of these recall notices.

Once a counterparty issues a Buy-In Warning to IBKR, the counterparty may buy-in the shares IBKR is borrowing at any time for that trade date. In the event the recall does result in buy-in, the lender executes the buy-in transaction and notifies IBKR of the execution prices. IBKR conducts vetting of counterparty buy-in prices for appropriateness with the day's trading activity.
 
IBKR, in turn, allocates the buy-in to clients based upon their settled short stock position and unsettled trades are not considered when determining liability. Recall buy-ins are viewable within the TWS trades window once posted to the account with intraday notifications sent, on a best efforts basis, by approximately 17:30 EST.


3. Fail to Deliver – a fail to deliver occurs when a broker has a net short settlement obligation with the clearinghouse and does not have the shares available within its own inventory or cannot borrow them from another broker in order to meet the delivery obligation. The fail results from sale transactions, and is not limited to short sales, but rather may result from the closing sale of a long position carried on margin and eligible to be loaned to another client.

In the case of US stocks, brokers are obligated to attend to the fail position by no later than the start of regular trading hours on the following settlement day. This can be accomplished through securities purchases or borrowing; however, in the event that available stock borrow transactions prove insufficient to satisfy the delivery obligation, IBKR will close-out clients holding short positions using a volume weighted average price (VWAP) order scheduled to run over the entire trading day. It is possible that under certain circumstances, due to limited liquidity in the market, that the buy-in order may not be executed or may be only partially executed.

 

Important Notes:

* Clients should note that on any day on which they have been closed out, they are required to end the day as a net purchaser—in aggregate across all of their accounts with the Firm—of at least the number of shares they were closed out on (in the security they were closed out on). For the remainder of the trading day on which they were closed out, they will not be permitted to (i) sell short the stock they were closed out in, (ii) write in-the-money call options on the stock they were closed out in, or (iii) exercise put options on the stock they were closed out in (the "Trading Restrictions"). If a client nevertheless does not end the day as a net purchaser of the required number of shares for the stock they have been closed out in (for example, as the result of being assigned on call options previously written)—in aggregate across all of the client's accounts with the Firm—the Firm will perform another close-out in the account on the next trading day for the number of shares that, when added to the client's aggregate net trading activity in such stock on the close-out date, would have been required to make the client a net purchaser of the required number of shares of such stock that day, and the client will again be required to remain a net purchaser across all of their accounts of that many shares and again subject to the Trading Restrictions for the remainder of that day.


* Clients should be aware that based on the manner in which IBKR is required to execute a close-out and a third party allowed to execute a buy-in, significant differences between the price at which the transaction was executed and the prior day's close may result. These differences may be especially pronounced in the case of illiquid securities. Clients should be aware of these risks and manage their portfolio accordingly.