FAQs

Shorting "hard-to-borrow" securities

Some securities are in high demand by short sellers and considered "hard-to-borrow." When you short a hard-to-borrow security, there are some important things you should keep in mind.

What's a short sale?

When you place a short sale, you're attempting to sell shares of a security you do not own with the hope of buying the shares back at a lower price, if possible, and potentially making a profit on the trade.

To open your position, you need to borrow shares through your broker (e.g., E*TRADE). Your broker needs to make sure there are enough shares available–either in the broker's own inventory or through a counterparty–to settle your trade on the settlement date.

There may be various fees associated with a short sale, including fees associated with the cost that E*TRADE incurs for locating the security to be borrowed and borrowing the security. 

What does "hard-to-borrow" mean?

Securities with high demand to borrow and limited lending availability may be classified as "hard-to-borrow." The ability to borrow a security to short it-and at what cost-varies based on the level of supply and demand in the marketplace (i.e., how many shares are available for borrowing and how sought-after the security is among short sellers). As demand increases relative to supply, a particular security may become "hard-to-borrow" and therefore carry an interest rate payable by the short seller. Securities that are not hard-to-borrow are called easy-to-borrow.

What is the risk of selling short?

There are certain risks involved in selling short, and it's important to know what they are before placing this kind of trade.

When you buy a stock outright, and the stock price drops, the most you can lose is the amount you originally invested. When you sell a stock short, however, your losses are theoretically unlimited: Since a short seller makes money when the price of the stock drops and loses money when the price increases, the higher the stock price goes, the more you could potentially lose. Also, since selling short hard-to-borrow securities requires you to borrow the securities first, you’ll have to pay borrow fees for the duration that the short position is hard to borrow.

If the position you shorted was easy-to-borrow then becomes hard-to-borrow, additional fees will apply for holding the settled short position each day it is deemed hard-to-borrow.

In addition, whenever you sell a stock short, you must always have enough funds or purchasing power in your account to be able to place a buy-to-cover order if necessary. Otherwise, if the stock moves against you, you could find yourself lacking sufficient funds to cover the short position and at risk of a margin call. Also, a security that you have a short position in may be subject to a buy-in at any time, including, but not limited to, if E*TRADE is unable to borrow shares to allow your short position to remain open.

The Account Holder is liable for all dividends paid on securities they have sold short.

For more information on margin risks for short selling, see the Help topic "Understand how margin works for short positions."

What's a locate?

To facilitate a short sale, E*TRADE needs to find enough shares available for the short seller to borrow, either in its own inventory or through a counterparty. This is known as a “locate."

All sell-short orders may remain in pending status for up to 15 minutes as E*TRADE attempts to locate the necessary shares to borrow on your behalf. If the shares are not located in this timeframe the order will be rejected and an alert will be sent.

If we locate the shares and the sell-short trade is placed, we will deliver the shares by the settlement date: generally, one trading day after the trade is placed (T+1). Positions opened and closed intraday may still be subject to hard-to-borrow fees due to the need to locate the security for settlement.

What are the fees associated with shorting a hard-to-borrow security?

These rates are security-dependent and market-driven based on supply and demand.

If you enter a short sale order for a hard-to-borrow security, you'll be presented with an estimated rate in the Order Preview section of the trade ticket. However, the rate charged could ultimately be different depending on the market at the time the order is placed and the charge is assessed. An alert will be sent based on a rate change from previous day. If the rate change is above 25%, you will be notified for additional transparency. You can also check the daily rate on the "HTB Accrued Detail Report Page" on etrade.com by going to Transactions>> reports tab>> Hard to Borrow Link. However, depending on market conditions, the borrow rate may be subject to change without notice, including intraday, depending on the availability of the security.

When you hold a short position in a hard-to-borrow security, you'll be billed a fee to borrow the security. These aggregated fees will be billed to you monthly but will accrue daily. Note that although fees are billed monthly, fees are recorded and accounted for daily and will decrease your cash available for withdrawal and your purchasing power in real-time. Read on for an example of how this fee is calculated.

Will I be charged hard-to-borrow fees if the security I shorted was easy-to-borrow at the time I opened the position?

You could be charged hard-to-borrow fees even if the position was easy-to-borrow at the time of order execution. If at any time you hold a settled short position that becomes hard-to-borrow, you will be responsible for the applicable hard-to-borrow fee. For a detailed view of accrued fees by symbol, go to transactions>>reports>>view hard-to-borrow link.

How are hard-to-borrow fees calculated?

Here's a quick example to illustrate how hard-to-borrow charges are determined:

You're attempting to short 10,000 shares of XYZ, priced at $10 at the previous close and carrying a hard-to-borrow rate of 25%. The proceeds from your short sale would be $100,000.

1. Determine the per-share collateral amount of your trade.
   This is the previous closing price, multiplied by 102%, then rounded up to the nearest dollar–in this case, it's $10 x 1.02, or $10.20. That figure is then rounded up to $11 per share. The multiplier of 102% is subject to change without notice at the discretion of E*TRADE.
2. Figure the adjusted market value of your trade.
   To do this, we multiply the per-share collateral amount of your trade by the quantity ($11 x 10,000 shares, or $110,000).
3. Calculate each day's hard-to-borrow interest charge.
   This is the adjusted market value of your trade, multiplied by the hard-to-borrow rate, divided by 360. In this example, that would be $110,000 x 25% (0.25), or $27,500. Dividing this number by 360 would yield a daily hard-to-borrow interest charge of $76.39.

While the hard-to-borrow fee accrues daily and is reflected in your cash available for withdrawal and purchasing power, it will only be billed to your account monthly. Your accrued amount also appears at the bottom of the Balances page.

Are hard-to-borrow fees charged for option exercise/assignments?

Yes. If through the exercise or assignment of your option you end up with a short hard-to-borrow position, you will be assessed the corresponding fee.

How do I know how many days' interest I owe?

The number of days' interest owed for holding hard-to-borrow short positions depends on several factors, including whether the position is held overnight and if there's an intervening weekend between the closing trade and when that trade settles.

For short positions held overnight:

Interest doesn't start accruing until settlement of the opening transaction, and when you close your position, the interest continues to accrue until settlement of the closing.

How will I know if my hard-to-borrow rate changes?

If the hard-to-borrow interest rate changes for a short position you hold, you'll receive an alert with updated rate information. You can also view the amount of accrued interest at the bottom of the Balances page. For a detailed view of accrued fees by symbol, go to transactions>>reports>>view hard-to-borrow link.

How do I place or modify a short-sale order for a hard-to-borrow security?

To open a short sale position in a hard-to-borrow security, simply enter the short sale order as you normally would. (All short orders must be placed as day limit orders.) We'll let you know during the order entry process if the security is hard-to-borrow, and inform you of the estimated interest rate and approximate daily costs for shorting it.if the security is deemed hard-to-borrow at the time the order is placed, you will be presented with an estimated borrow rate and daily estimated interest dollar figure, which will always be an amount greater or equal to .01.

Once your order has been submitted, it may remain pending for up to 15 minutes as we seek to locate the shares. If the shares are not located in this time frame, the order will be rejected, and an alert will be sent.

While your order is pending, you can request a change to the price but not the quantity. To change the quantity, you will need to cancel and re-enter your order.

Please note: Conditional orders cannot be placed for short sales on hard-to-borrow securities.

When will I be charged hard-to-borrow fees?

Interest charges accrue daily for hard-to-borrow short positions but are billed monthly. To account for the accrued charges, your cash available for withdrawal and purchasing power will be reduced each day by the amount of the accrual.

The fee cycle for hard-to-borrow interest charges extends from the first day of the month to the last day of the month. Interest charges are typically debited from customer accounts five business days after the last day of the month.

Where can I view my hard-to-borrow fees?

To view hard-to-borrow interest charges, visit your HTB Accrued Detail Report Page on etrade.com by going to Transactions>> reports tab>> Hard to Borrow Link. You can also check the Withdrawals & Deposits section of your monthly account statement.

You can also view your hard-to-borrow accrued interest anytime at the bottom of the Balances page. This amount will be withheld from your cash available for withdrawal and your purchasing power.

PLEASE READ THE IMPORTANT DISCLOSURES BELOW.

Important note: Options transactions are intended for sophisticated investors and are complex, carry a high degree of risk, and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options prior to applying for an account. Also, there are specific risks associated with uncovered options writing that expose the investor to potentially significant loss. Please read the Special Statement for Uncovered Options Writers before you trade.

Trading on margin involves specific risks, including the possible loss of more money than you have deposited. A decline in the value of securities that are purchased on margin may require you to provide additional funds to your trading account. In addition, E*TRADE can force the sale of any securities in your account without prior notice if your equity falls below required levels, and you are not entitled to an extension of time in the event of a margin call. When trading on margin, an investor borrows a portion of the funds he/she uses to buy stocks to try to take advantage of opportunities in the market. He/she pays interest on the funds borrowed until the loan is repaid. For each trade made in a margin account, we use all available cash and sweep funds first and then charge the customer the current margin interest rate on the balance of the funds required to fill the order. The minimum equity requirement for a margin account is $2,000. Please read more information regarding the risks of trading on margin.

The material provided by Morgan Stanley Smith Barney LLC or any of its affiliates (Morgan Stanley) or by a third party not affiliated with Morgan Stanley is for educational purposes only and is not an individualized recommendation. Morgan Stanley does not guarantee the accuracy of the third-party content. The information contained in the third-party material has not been endorsed or approved by Morgan Stanley. This information neither is, nor should be construed, as an offer, or a solicitation of an offer, or a recommendation, to buy, sell or hold any security, financial product or instrument discussed therein, or to open a particular account or engage in any specific investment strategy by Morgan Stanley.