# Short selling: Who lends you the stock? **URL:** \ **Category:** Factual Questions\ **Created:** [February 1, 2021, 2:30am UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952 "2021-02-01T02:30:39Z")\ **Posts on this page:** 17\ **Page:** 3
**Author:** ![Melbourne](https://avatars.discourse-cdn.com/v4/letter/m/b5e925/32.png) [@Melbourne](https://boards.straightdope.com/u/Melbourne)\ **Post date:** [February 15, 2021, 8:26am UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/41 "2021-02-15T08:26:46Z")
> [@Whack-a-Mole](#): > > I am arguing that the current law allows a bullshit dodge around naked short selling Are you sure? There are a whole bunch of problems a technical ‘locate’ can avoid, while still being practically the same as buying the shares: the ‘bullshit dodge’ being on the other side of the transaction: I sell the shares to you, covering your position, while pretending, for technical reasons, that in some sense I haven’t really done so. I don’t know how ‘locate’ works, but it’s obvious that running it that way would still have some real\* advantages to the vendors, so I’m not assuming it works the bad way. \*Apart from the tax thing, there’s a whole stack of intermediate-party bankruptcy/possession risk that could be avoided by lending a ‘secured option to cover’ instead of a ‘cover’, while still providing protection to the market investors. ---
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [February 15, 2021, 10:20am UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/42 "2021-02-15T10:20:50Z")
> [@Melbourne](#): > > Are you sure? There are a whole bunch of problems a technical ‘locate’ can avoid, while still being practically the same as buying the shares: the ‘bullshit dodge’ being on the other side of the transaction: **I sell the shares to you** , covering your position, while pretending, for technical reasons, that in some sense I haven’t really done so. But you have not sold the shares to me. I have not bought them or even borrowed them. I have only made note that you have shares to sell. You (or your broker) do not get paid for me selling your shares since I have not actually borrowed them…I only noted that I could. Why not make it so the person actually needs to borrow the shares from you? ---
**Author:** ![Melbourne](https://avatars.discourse-cdn.com/v4/letter/m/b5e925/32.png) [@Melbourne](https://boards.straightdope.com/u/Melbourne)\ **Post date:** [February 15, 2021, 11:50am UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/43 "2021-02-15T11:50:27Z")
> [@Whack-a-Mole](#): > > I have only made note that you have shares to sell. You (or your broker) do not get paid for me selling your shares since I have not actually borrowed them…I only noted that I could. Do you know this? Or are you going only on the name? Because one thing I learned while working in finance was that technical words don’t always mean what you think they mean. ---
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [February 16, 2021, 2:55pm UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/44 "2021-02-16T14:55:33Z")
I do not know it. But then why do shorts this way unless it is easier/cheaper? ---
**Author:** ![Melbourne](https://avatars.discourse-cdn.com/v4/letter/m/b5e925/32.png) [@Melbourne](https://boards.straightdope.com/u/Melbourne)\ **Post date:** [February 17, 2021, 12:14am UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/45 "2021-02-17T00:14:45Z")
It would be easier or cheaper regardless of which side of the deal was skirting around a difficulty. If I actually lend you my clients shares, when you go bust your bankruptcy administrator has actual possession of the shares, and I am owed a debt that may be partly paid out at an indeterminate time. If I make a binding commitment to cover your shorts, and certify that I haven’t done so for any other party, you’ve ‘located’ the shares, even though you don’t have actual possession. And there are tax implications. **I don’t know how ‘locate’ works** , I’m only saying that I don’t **assume** it’s a cheat. ---
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [February 17, 2021, 1:30am UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/46 "2021-02-17T01:30:54Z")
So, if you go bust and into bankruptcy while in this position with “located” shares, who is left holding the bag? Seems to me you have just shifted who is getting screwed. ---
**Author:** ![Tired\_and\_Cranky](https://avatars.discourse-cdn.com/v4/letter/t/a87d85/32.png) [@Tired\_and\_Cranky](https://boards.straightdope.com/u/Tired_and_Cranky)\ **Post date:** [February 17, 2021, 3:26am UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/47 "2021-02-17T03:26:26Z")
> [@Whack-a-Mole](#): > > A naked short is illegal but this is all they have to do to make it legal? If you’ve located the shares, it’s not a naked short sale, so it’s legal. > [@Whack-a-Mole](#): > > Let’s say GameStop has 1 million shares outstanding. This we know for certain (for this question). We absolutely know how many shares of stock GameStop has issued…1 million. > > At the height of the GameStop fiasco we freeze the market and have everyone report how many shares they own at that moment. Shares in their hand. If they loaned them out they don’t get to count. Only the people with shares in their hands at that moment in time. People who in the next second could sell those shares. > > How many shares would we count? 1 million shares in hand although there are more people who could sell shares. Potential sellers include anyone who owns shares that have been loaned out and people who can short stock, which is (to simplify this) anyone who can borrow shares or locate shares to borrow if they need them. > [@Whack-a-Mole](#): > > For example, do the people who actually own the stock get paid (as is usual when borrowing stock for a short) if the person shorting only locates the stock? Retail investors don’t generally get paid when their stock is borrowed from them. Institutional investors get paid when their stock gets borrowed. There is a whole group of intermediaries, called stock lending agents who get paid when they find hard-to-borrow stocks for short sellers to borrow. Honestly, I think most of them get paid only if you actually borrow the stock but Trom reports paying a stock locate fee separate from the stock borrow fee. It sounds like that might be a fee from the stock lending agent for locating a stock even if it doesn’t get borrowed. > [@Whack-a-Mole](#): > > Is this something you can do from home or is it only available to a certain class of investor? Will your Robinhood app let you do it? I’m not sure what “this” is that you’re asking about here. If you’re still interested, please clarify your question. ---
**Author:** ![Melbourne](https://avatars.discourse-cdn.com/v4/letter/m/b5e925/32.png) [@Melbourne](https://boards.straightdope.com/u/Melbourne)\ **Post date:** [February 17, 2021, 5:22am UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/48 "2021-02-17T05:22:17Z")
> [@Whack-a-Mole](#): > > Seems to me you have just shifted who is getting screwed. Correct, the owners and debtors of the bankrupt company are still screwed. However, the actual owners of the shares aren’t screwed, nor is the market. Allocation of risk, and transparency, are both things that people value and pay for. **I don’t know what ‘location’ means** , I just know that isolating third-party risk, and avoiding artificial tax liabilities, aren’t shady dodges. ---
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [February 17, 2021, 6:00am UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/49 "2021-02-17T06:00:59Z")
It’s a little weird that none of us here can say how “location” works. We do know that it is used rather than actually borrowing the stock to short a company. Why? And what is this “artificial tax liability” you mentioned? ---
**Author:** ![Tired\_and\_Cranky](https://avatars.discourse-cdn.com/v4/letter/t/a87d85/32.png) [@Tired\_and\_Cranky](https://boards.straightdope.com/u/Tired_and_Cranky)\ **Post date:** [February 17, 2021, 3:26pm UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/50 "2021-02-17T15:26:39Z")
Well, I can say how location works. Exchange Act Regulation SHO, Rule 203(b)(1) and (2) collectively create for broker-dealers what is referred to as the “locate requirement.” It says, in brief, that _before_ a broker-dealer executes a short sale (whether for the broker’s account or for a customer), the broker-dealer must document that it can locate the shares and deliver them before the settlement date. The broker-dealer can complete its locate obligation by borrowing the shares ahead of time, entering into an arrangement to borrow the shares ahead of time, or having reasonable grounds to believe that the shares can be borrowed ahead of time. The “reasonable grounds” is often found by finding the security on an “easy to borrow” list maintained by a prime broker (other than the one doing the short). Those are basically lists of large, liquid stocks wherein the prime broker reports to market participants, “I have millions of these shares available to lend if you just ask.” For other stocks, the locate requirement can by fulfilled by documenting with a prime broker or other reliable source that they have the shares to lend. For more thinly-traded or heavily-shorted stocks, the locate requirement can be fulfilled by making an arrangement with a stock lending agent. The locate requirement is intended to prevent naked short selling by making the broker find the stock it intends to short before it effects a short sale. Yes, there is an exception for bona fide market making by the broker. But that exception does not apply to short sales that the broker effects for its customers nor does it apply to any manipulative trades for the broker’s (more properly here, dealer’s) own account, which are not bona fide market making. Regulation SHO, Rule 204 imposes on brokers a close-out requirement to deliver the securities on the settlement date. If the broker can’t deliver the securities, it must close out the fail to deliver. For a short sale, that means by the end of the next business day. Again, this prevents the problem of a naked short sale just sort of hanging our forever. Yes, some of this stuff is complicated. Believe it or not, there are many people who understand it. You don’t need to dismiss the rules because you don’t understand them. ---
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [February 19, 2021, 5:43am UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/51 "2021-02-19T05:43:26Z")
There is no magic to people understanding things. Loads of people understood the very legal means to manipulate the markets leading up to the 2007/2008 financial crisis. But it was murky to most people. Believe it or not many people understanding something does not make it a good idea. You should not dismiss that because you can Google Investopedia. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [February 19, 2021, 3:03pm UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/52 "2021-02-19T15:03:05Z")
> [@Whack-a-Mole](#): > > Believe it or not many people understanding something does not make it a good idea. You should not dismiss that because you can Google Investopedia. IMO that was uncalled for. 1) it does not appear that you understood what T&C was saying altogether. 2) if I had to bet, I would guess that T&C is some sort of investment professional. ---
**Author:** ![Tired\_and\_Cranky](https://avatars.discourse-cdn.com/v4/letter/t/a87d85/32.png) [@Tired\_and\_Cranky](https://boards.straightdope.com/u/Tired_and_Cranky)\ **Post date:** [February 19, 2021, 4:18pm UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/53 "2021-02-19T16:18:12Z")
Thanks Fotheringay-Phipps. I was an investment professional years ago but not now. I have an interest in keeping this account separate from my professional life keep so I won’t provide any further information about my credentials today. I will say, Investopedia isn’t my source. ---
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [February 21, 2021, 2:47am UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/54 "2021-02-21T02:47:44Z")
Not uncalled for at all. Go back to the crash of 2007/2008. Everything @Tired_and_Cranky said now could have been said then. There is nothing magical about being legal that makes something right to do. That many “understand” it doesn’t make it better either. Especially when it is cryptic to most but a special few. In @Tired_and_Cranky’s world a few thousand is “many” in a country of a few hundred million. This was no little hiccup. Copy/pasting (or cribbing at best) stuff from Investopedia doesn’t help. This seems a sidestep to avoid paying people who own the stocks for lending them (I know individuals don’t loan stock in this way…it remains the firms who do this are not being paid). Also, if 20 firms see I am willing to loan 1 million shares have they met their requirements? What happens if all 20 firms need my 1 million shares? This has all the hallmarks of a market dodge which usually works. It is not something available to most investors but rather only available to a special class of investor. That tilts the market unfairly. > **[GameStop frenzy brought the market 'dangerously close' to collapse, says...](https://markets.businessinsider.com/news/stocks/gamestop-reddit-frenzy-market-collapse-thomas-petterffy-interactive-brokers-2021-2-1030098476)** > > Peterffy blames the volatility unleashed by the GameStop saga on the volume of short interest in GameStop and a surge in options activity. ---
**Author:** ![Whack-a-Mole](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/whack-a-mole/32/141_2.png) [@Whack-a-Mole](https://boards.straightdope.com/u/Whack-a-Mole)\ **Post date:** [February 21, 2021, 2:53am UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/55 "2021-02-21T02:53:54Z")
I missed the edit window: Looks a lot like Investopedia. Bottom line: Why not just make it that the stock actually has to be borrowed? ---
**Author:** ![Tired\_and\_Cranky](https://avatars.discourse-cdn.com/v4/letter/t/a87d85/32.png) [@Tired\_and\_Cranky](https://boards.straightdope.com/u/Tired_and_Cranky)\ **Post date:** [February 22, 2021, 6:28pm UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/56 "2021-02-22T18:28:40Z")
My summary was something I had in the can that I edited for this venue. Investopedia likely copied from the same source where I copied some of my summary, which is from this [SEC staff statement](https://www.sec.gov/investor/pubs/regsho.htm). That said, part of my summary comes from years of experience understanding and applying regulation SHO in my work. Some of what I said there won’t be found anywhere on the internet. Regulation SHO does mean that the stock actually has to be borrowed or else actually bought so the shares can be delivered. What are you suggesting? Do you mean why not make the stock have to be borrowed before the stock is sold? Because, in many cases, it would mean borrowing stock that never gets sold (because the price changes in the interim - it takes two days to settle), which adds to the cost of considering short selling, which reduces the number of people who are doing it, which reduces the impact on prices that potential short sellers can have. It also means that shares that people have borrowed but not sold are not available to other potential short sellers who may want to act with them. Simplifying here, it means fewer people who can act on their investment analysis in a timely way and only at higher cost, which reduces the efficiency of the market at discovering the true market clearing price. Why do you think this proposal would be better? Your proposal is basically a half measure between keeping things as they are and banning short sales altogether. The assertion that the market was dangerously close to collapse is untestable and unfalsifiable speculation. In my humble opinion, it is also unfounded alarmism. This is not like when AIG, Bear Stearns, or Merrill Lynch failed. Some individual investors in Game Stop got hurt but this is a relatively tiny stock compared to the stock market and the stock market is relatively small compared to the US financial markets. The republic survived and there was almost no chance it wouldn’t have due solely to the machinations of some people on Reddit and a few hedge funds that miscalculated. . . ---
**Author:** ![Melbourne](https://avatars.discourse-cdn.com/v4/letter/m/b5e925/32.png) [@Melbourne](https://boards.straightdope.com/u/Melbourne)\ **Post date:** [February 22, 2021, 11:23pm UTC](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952/57 "2021-02-22T23:23:10Z")
> [@Whack-a-Mole](#): > > This seems a sidestep to avoid paying people who own the stocks for lending them Is there evidence that no payment is made? I would imagine that payment could be much less, because of the risk avoidance and tax assignment, but the finance world I knew 20 years ago didn’t involve anyone doing anything for free. [Previous page](https://boards.straightdope.com/t/short-selling-who-lends-you-the-stock/931952.md?page=2)