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A Guide to Short Selling Pumps

21 Apr A Guide to Short Selling Pumps

A big focus of this site is identifying potential pump and dumps prior to promotion, so that our members have an opportunity to buy in early and catch a good chunk of the upside. But one area we've neglected to cover is the potential to profit on the tail end of the promotion through short selling. Short selling of course is when you sell shares prior to buying them, betting on the collapse in share price (which is the eventual end for all promotions). Whether you're shorting a major hard mailer promotion, or a shorter lived promotion such as a "Stock Psycho" or "Tribeca" pick, there is significant potential for profit on the downside. However, there are many intricacies to short selling, such as finding shares to short, picking the right broker for you, and of course managing the risk of buy ins.  Below I will break down the best brokers for short selling to help those of you interested pick the best fit for you:

 

  • Interactive Brokers

One of the main advantages of Interactive Brokers is that it best allows you the opportunity for a longer term short position. While you still may be bought in after 3 days, they do allow you to hold positions longer than that as long as the shares remain available. Fees are $.005/share or .5% of total trade value, whichever is cheaper. However, IB does enforce the $2.50 rule, making it tough to take large positions, especially on the cheaper pumps. Another disadvantage of IB is that rather than a stock being "Easy to Borrow" all day, they start the day with a set # of shares available (often 0 for the biggest pumps). The shares are first come, first serve. Sometimes after shares are gone they will once again open up later in the day, but they go quickly. Unlike some other brokers, IB does not allow you to reserve shares to short or offer any "Hard to Borrow" stocks via the trade desk.

  • Suretrader

Suretrader is an offshore broker, so many of the regulations that come with US brokers do not apply. Two of the main advantages of Suretrader is that they do not enforce the pattern daytrader rule, and they also do not enforce the $2.50 rule. For those of you comfortable using an offshore broker, Suretrader is excellent for small accounts. Their OTC routes are not nearly as complete as Speedtrader's, but they do offer a number of options with low fees that are sufficient. One risk with Suretrader is there is no guaranteed holding period for a short stock, you do not know if/when they will announce a buyin. Suretrader clears through ETC now, and their stocks are either "Easy to borrow" or not available at all. In my opinion, they have shares to short more often than IB.

  • Centerpoint

Centerpoint is a newer broker, with two different clearing firms, ETC and Wedbush. If you open an ETC account you will have the same borrows as Suretrader. Routing fees are higher than at Suretrader, but you can trade up to 10,000 shares for $4.45/trade if you negotiate rates. ETC does not enforce the $2.50 rule intraday, but for overnight positions you must abide by this rule. The other branch, Wedbush, does offer different borrows but they are not quite as good as ETC's in my opinion. Wedbush enforces the $2.50 rule at all times. Unfortunately, the account minimum at both branches is $30,000.

One of the major benefits of Centerpoint is their flexibility obtaining borrows. If Wedbush has shares of something ETC does not (or vice versa), you can simply reserve the shares from the trade desk for a fee of $.005/share. The same goes for other brokers such as IB, if you send them a screenshot of IB having shares of a stock that is not easy to borrow at ETC or Wedbush, they will let you reserve shares from them as well for a $.005/share fee. Both branches also have a locate tool known as "Quantex" that can secure you difficult borrows from time to time for $.005/share, however these locates are only good for the day and cannot be held overnight.

 

If there are any further questions regarding short selling with these brokers please leave a comment and let me know, I'll either reply in the comments section or do a second writeup depending on how many questions I receive.

2 Comments
  • bello1863
    Posted at 10:07h, 23 April Reply

    Thanks, Kroy; contemplating opening an account with Suretrader

  • gash
    Posted at 20:49h, 22 March Reply

    For those that can’t watch the markets all day, long term shorting of promoted stocks is an profitable trading strategy to follow. For a conservative approach, use a trend following approach. Open a short position when the trend on the daily chart is downwards, and close it when the down-trend ends. If you want to get in when price is in an uptrend anticipating a big fast drop, then box your position on the uptrend – short in one account and long in another, and sell your long position when you determine that the trend is turning down. (go to goodetrades.com and search on box) Everyone is always focused on the big promotions, there are a lot of under the radar promotions that often have shares available to short. I scan the OTC markets, looking for worthless companies with large market caps. I never short without looking at the market cap, reading the latest quarterly financials, and all the 8Ks since the latest financials and doing some research to help confirm the company is actually worthless. Searching this site for key participants will often turn up something.
    NEVER make the mistake of being short in an uptrend because “it can’t possibly go any higher”. I was holding a short position in MDBX at under $10 before it spiked up to $100 a few months ago.
    A bit of academic research on technical trading related to support, resistance, and trends will help out. You need an objective way of setting trading rules for this kind of trading, and there are not a lot of traders applying a trend-trading system to promoted penny stocks.

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