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 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 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.