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When you short sell a stock, you are borrowing the stock from a lender, and the lender always has a right to say that they need their shares back, which might result in a forced buy-in by your broker. According to this site, buy-ins are very rare, and almost never happen.

But wouldn't it make sense that if a certain stock started plummeting (because of some negative company event, etc.), most of the lenders of that stock would want to sell their positions right away, to avoid losing even more money? If so, then forced buy-ins should happen alot more frequently - every time some stock sharply nosedives... How come that is not the case?

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Nobody is going to short sell stocks through a lender that forces people to buy in as soon as it is getting good for them.

  • Your understanding is incorrect. If the owner of the shares loaned out for shorting sells his shares, the lending broker must find replacement shares. If replacement shares cannot be found, there is a forced buy in. – Bob Baerker Dec 19 '19 at 17:02
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For the lenders to sell their positions they need buyers on the other side. For a large brokerage that means they should always be able to find another lender. For many contracts the client may have no idea they are a lender as lending is part of their agreement with the broker

  • Could you explain in more detail how this specifically answers the question? Finding stock in a different company to lend isn't a solution. – Ellie Kesselman Mar 29 '15 at 9:12
  • @EllieKesselman, not a different company, different lender. For every seller there is a buyer, and at large brokerage firms they will have many people buying as well as selling. So if A sells KO and B buys KO, the brokerage can change from borrowing A's KO shares to borrowing B's KO shares. (Roughly) – Shannon Severance Feb 20 '17 at 20:02
  • Finding stock from a different lender assumes liquidity. If there isn't any, you get a buy-in notice. – Bob Baerker Dec 19 '19 at 17:15
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Many investors don't invest for the short term and so a stock "nose-diving" in the short run will not affect their long term strategy so they will simply hold on to it until it recovers. Additionally funds that track an index have to hold on to the constituents of that index no matter what happens to its value over the period (within trading limits). Both of these kinds of investors will be able to lend stock in a company out and not trigger a forced buy-in on a short term change. If the underlying long-term health of the company changes or it is removed from indices it is likely that this will change, however. Employee stock plans and other investors who are linked directly to the company or who have a vested interest in the company other than in a financial way will also be unwilling (or unable) to sell on a down turn in the company. They will similarly be able to lend their stock in the short term.

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The author of the article in your link concluded that because he has never had a forced buy-in then forced buy-ins are very rare. He implies that dealing with a large broker reduces this possibility and that a forced buy-in "can never happen to a long position, unless you are issued a margin call." He is incorrect.

It's reasonable to say that if you're shorting very liquid large cap stocks like GOOG or AMZN then you'll never have a liquidity issue. This is because there are always a lot of new buyers at lower prices and because the float is so large.

But if you have shorted a stock where the number of borrowable shares is low, you are much more likely to have a forced buy-in and the probability of that increases if the stock takes a nosedive (in 2008-2009 I had 6-8 forced buy-ins).

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