How do I sell a stock short?

Procedurally, to sell short, all you need to do is specify your order Action as 'Sell' at the point you create your order. Note that we do not allow you to be both long and short the same security, so if you maintain a long position and enter a sell order, you will close out any long positions to the extent of your sell order and open a short position to the extent, if any, your sell order exceeds a long position. Also note, that in addition to your account having sufficient equity to meet the margin requirement associated with the transaction, IB is required to meet its regulatory obligation of making a reasonable determination that we can locate the stock for borrowing purposes when the transaction settles (typically T+2). If we are unable to locate the stock based upon our inventory and the availability lists provided to us by other brokers, you will see an Order Status color in the TWS Shortable column of dark green. This indicates that there are no shares available to sell at the moment and that the system is searching for shares. The order will remain in this status until the we are able to locate the shares or the time which you specify for your order to remain in force expires, whichever occurs first. You may wish to review the Shortable Stocks link to our website below which provides a listing of stocks available for shorting. A list of shortable stocks searchable by symbol or CUSIP along with their indicative borrow rates may be found through the Short Stock Availability Tool accessible through the Tools link within Account Management. Finally, you should be aware that one of the risks of borrowing stock to support your short sale is being bought in with little or no notice. Even though a reasonable determination that the shares can be borrowed will be made prior to effecting your sale transaction, there is no assurance that those shares will actually be available at the time of settlement or any day thereafter. The supply and demand of borrowable inventory for any given security is dynamic by nature and regulations require brokers to force-close any short position having a delivery obligation subject to fail with the clearinghouse on any given day. We will make every effort to provide you with advance notice if this appears to be the case in order to provide you with the opportunity to buy in your own position, however, this is done on a best-efforts basis. Other risks to keep in mind are the special charges which tend to be associated with hard-to-borrow securities that, in aggregate may exceed any rebate or interest paid on the short stock proceeds, as well as your obligation to pay to the lender any dividends which are paid throughout the duration of the loan period.

My account was debited for a dividend payment (Payment in Lieu) for a short stock position which I don’t recognize. How did this occur?

Overview: 

 

A short stock position may originate from an option position which you held in your account.  For example, if you hold a long put position in your account, that position may be subject to automatic exercise by the clearinghouse if it is in-the-money by a defined threshold at expiration.  This put exercise will generate a short stock position in your account (assuming you do not have an offsetting long position), and you are obligated to pay any dividends should you maintain a short stock position on the ex-dividend date. 

 

Similarly, a short call position in your account is subject to assignment should a call purchaser elect to exercise their right to purchase the stock and your account be allocated through the random clearinghouse and broker assignment process.  This call assignment will generate a short stock position in your account (assuming you do not have an offsetting long position), and you are obligated to pay any dividends should you maintain a short stock position on the ex-dividend date. 

 

These payments will be reflected on your Activity Statement as a 'Payment In Lieu Of Dividend'.

What does Payment in Lieu refer to?

Overview: 

A Payment in Lieu, or Pil, typically refers to a cash debit or credit made to an account in recognition of a stock dividend.  A Pil in the form of a debit will be made when an account is holding a short position in a stock on its ex-dividend date. This debit occurs as the lender of the shares which facilitated the short sale remains entitled to all dividends paid throughout the duration of the loan period.   

Conversely, a Pil in the form of a credit is made when a long stock position in an account has been loaned out on its ex-dividend date.  Account holders should note that shares which are held long and which are the subject of a margin lien may be eligible to be loaned by the broker.  In this situation the credit originates from payment by the borrower of the shares rather than from a dividend by the share issuer.   U.S. taxpayers who are recipients of Pil credits should discuss the tax implications of Pils and non-qualified dividends with their tax adviser.

Interest credit on short stock proceeds

Overview: 

How can I determine the interest credit or fee associated with a stock borrow position?

Background: 

 

When account holders initiate a short position, IB must borrow the shares on their behalf in order to satisfy its settlement obligation with the clearinghouse.  The agreement through which these shares are borrowed requires that IB provide the lender with a cash deposit in an amount equal to or greater than the value of the loaned securities as loan collateral.  The lender charges a fee for providing this service, generally expressed as the difference between the interest which accrues to the lender on the cash deposit and the agreed upon rate of interest which is rebated back to the borrowing broker (typically pegged to the Fed Funds overnight rate for USD denominated cash deposits). 

 

While many brokers will pass a portion of this rebate only to institutional clients, all IB clients are eligible to receive an interest credit on their short stock sales proceeds to the extent those proceeds exceed the equivalent of USD 100,000.  When the supply of a given security available to borrow is high relative to it’s borrow demand, account holders can expect to receive an interest credit on their short stock balance equal the Benchmark Rate (e.g., Fed Funds Effective overnight rate for USD denominated balances), less a spread ranging from 1.25% on balances of USD 100,000 to 0.25% for balances over USD 3,000,000.

 

When the supply and demand attributes of a particular security are such that it becomes hard to borrow, the rebate provided by the lender will decline and may even become negative. These factors will be passed on in the form of either a lower rate at which credit interest is paid or a rate at which interest is charged (i.e., a cost to borrow). As rates vary by both security and date, IB recommends that customers utilize the Short Stock (SLB) Availability tool accessible via the Support section in Account Management. Note that the indicative rate reflected in this tool is intended to correspond to the amount paid on Tier III balances, that is, short sale proceeds of USD 3 million or greater. For balances which are less, the rate is adjusted based upon the tier and the Benchmark Rate associated with the trading currency.

 

EXAMPLE

Assume, for example, that the SLB tool reports an indicative rate of 3.00% for the hypothetical USD-denominated stock 'ABC'.  This rate implies a Fed Funds Effective Benchmark Rate of 3.25% (as the rate paid on Tier III balances equals the Benchmark Rate less 0.25%); a rate paid on Tier I balances (amounts between USD 100,000 and 1 million) of 2.00% (Benchmark Rate less 1.25%); and a rate paid on Tier II balances (amounts between USD 1 million and 3 million) of 2.75%.

IMPORTANT NOTE

Information provided within the SLB tool, particularly that relating to shares available to borrow and indicative rates, is offered on a best efforts basis without warranty as to its accuracy or validity. Share availability includes information from third parties which is not updated in real time. Rate information is indicative only. Trades executed in the current trading session typically settle in 2 business days and the actual availability and borrow costs are determined on settlement day. Traders should be aware that rates and availability can change significantly in the time between trade and settle dates, particularly in thinly traded stocks, small cap stocks, and classes of stock that have an upcoming corporate action (including dividends).

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