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A stock has a last sale price of 2.5 dollars on the NYSE. Say I am shorting 1000 shares of a stock, there's an ask price of 3 dollars for 500 shares. Theres an ask of 3.5 dollars for 250 shares, and an ask price of 4 dollars for the final 250.

Do the stocks get borrowed at a price of 2.5$ each? Is the price of the stock at the first ask price get used for all 1000 shares? Or does each part get filled separately in the same way going long works?

If someone could explain the pricing mechanism for short sales I would appreciate it.

Also, how often do you find that you are unable to make a short sale?

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3 Answers 3

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When you want to short a stock, you are trying to sell shares (that you are borrowing from your broker), therefore you need buyers for the shares you are selling. The ask prices represent people who are trying to sell shares, and the bid prices represent people who are trying to buy shares.

Using your example, you could put in a limit order to short (sell) 1000 shares at $3.01, meaning that your order would become the ask price at $3.01. There is an ask price ahead of you for 500 shares at $3.00. So people would have to buy those 500 shares at $3.00 before anyone could buy your 1000 shares at $3.01.

But it's possible that your order to sell 1000 shares at $3.01 never gets filled, if the buyers don't buy all the shares ahead of you. The price could drop to $1.00 without hitting $3.01 and you will have missed out on the trade.

If you really wanted to short 1000 shares, you could use a market order. Let's say there's a bid for 750 shares at $2.50, and another bid for 250 shares at $2.49. If you entered a market order to sell 1000 shares, your order would get filled at the best bid prices, so first you would sell 750 shares at $2.50 and then you would sell 250 shares at $2.49.

I was just using your example to explain things. In reality there won't be such a wide spread between the bid and ask prices. A stock might have a bid price of $10.50 and an ask price of $10.51, so there would only be a 1 cent difference between putting in a limit order to sell 1000 shares at $10.51 and just using a market order to sell 1000 shares and getting them filled at $10.50.

Also, your example probably wouldn't work in real life, because brokers typically don't allow people to short stocks that are trading under $5 per share.

As for your question about how often you are unable to make a short sale, it can sometimes happen with stocks that are heavily shorted and your broker may not be able to find any more shares to borrow.

Also remember that you can only short stocks with a margin account, you cannot short stocks with a cash account.

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Woops yeah knew the $5 rule, but thanks for all the new info! –  Ryan Sinclair Jul 29 at 4:42

In terms of pricing the asset, this functions in exactly the same way as a regular sell, so bids will have to be hit to fill the trade.

When shorting an equity, currency is not borrowed; the equity is, so the value of per share liability is equal to it's last traded price or the ask if the equity is illiquid.

Thus when opening a short position, the asks offer nothing to the process except competition for your order getting filled.

Part of managing the trade is the interest rate risk. If the asks are as illiquid as detailed in the question, it may be difficult even to locate the shares for borrowing.

As a general rule, only illiquid equities or those in free fall may be temporarily unable for shorting.

Interactive Brokers posts their securities financing availabilities and could be used as a proxy guide for your broker.

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I would never use a market order. Some brokerages have an approval process your short-sale goes through before going to market. This can take some time. So the market prices may well be quite different later.

Some brokerages use a separate account for short sales, so you must get their approval for the account before you can do the trade.

I like the listing of shares available for shorting the Interactive Brokers has but I have experienced orders simply going into dead-air and sitting there on the screen, not being rejected, not going to market, not doing anything --- even though the shares are on the list.

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+1 for never using a market order. –  dg99 Jul 31 at 18:12

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