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I am trying to understand what exactly happens on "settlement date" as it pertains to short interest in a stock.

A similar question was asked here. It refers to the nasdaq.com definition here (and below), but I still don't know what it means to "settle" a short trade.

Each FINRA member firm is required to report its “total” short interest positions in all customer and proprietary accounts in NASDAQ-listed securities twice a month. These reports are used to calculate short interest in NASDAQ stocks.

FINRA member firms are required to report their short positions as of settlement on (1) the 15th of each month, or the preceding business day if the 15th is not a business day, and (2) as of settlement on the last business day of the month.* The reports must be filed by the second business day after the reporting settlement date. FINRA compiles the short interest data and provides it for publication on the 8th business day after the reporting settlement date.

...

The date on which payment is made to settle a trade. For stocks traded on US exchanges, settlement is currently three business days after the trade.

Is this referring to when a short is initiated, or closed?

Is the following a correct statement of the requirement for reporting? All open shorts which are still open by the settlement date have to be reported by the due date.

            Settlement Date  Due Date    Dissemination Date
November    11/14/2014       11/18/2014  11/25/2014
            11/28/2014       12/02/2014  12/09/2014
December    12/15/2014       12/17/2014  12/24/2014
            12/31/2014       1/05/2015   1/12/2015
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The settlement date for any trade is the date on which the seller gets the buyer's money and the buyer gets the seller's product. In US equities markets the settlement date is (almost universally) three trading days after the trade date. This settlement period gives the exchanges, the clearing houses, and the brokers time to figure out how many shares and how many dollars need to actually be moved around in order to give everyone what they're owed (and then to actually do all that moving around).

So, "settling" a short trade is the same thing as settling any other trade. It has nothing to do with "closing" (or covering) the seller's short position.

Q: Is this referring to when a short is initiated, or closed?

A: Initiated. If you initiate a short position by selling borrowed shares on day 1, then settlement occurs on day 4. (Regardless of whether your short position is still open or has been closed.)

Q: All open shorts which are still open by the settlement date have to be reported by the due date.

A: Not exactly. The requirement is that all short positions evaluated based on their settlement dates (rather than their trade dates) still open on the deadline have to be reported by the due date.

Example

You sell short 100 AAPL on day 1. You then cover that short by buying 100 AAPL on day 2.

As far as the clearing houses and brokers are concerned, however, you don't even get into the short position until your sell settles at the end of day 4, and you finally get out of your short position (in their eyes) when your buy settles at the end of day 5.

So imagine the following scenarios:

  • The NASDAQ deadline happens to be the end of day 2. Since your (FINRA member) broker has been told to report based on settlement date, it would report no open position for you in AAPL even though you executed a trade to sell on day 1.

  • The NASDAQ deadline happens to be the end of day 3. Your sell still has not settled, so there's still no open position to report for you.

  • The NASDAQ deadline happens to be the end of day 4. Your sell has settled but your buy has not, so the broker reports a 100 share open short position for you.

  • The NASDAQ deadline happens to be the end of day 5. Your sell and buy have both settled, so the broker once again has no open position to report for you.

So, the point is that when dealing with settlement dates you just pretend the world is 3 days behind where it actually is.

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