6

I shorted a particular stock which resulted in $10,000 being deposited into my Interactive Brokers account. I then put all of that $10,000 into VTI (total stock market index). Basically making the bet that the stock I shorted will perform worse than the total stock market.

I assumed I would be charged some sort of interest or fees for using that money, however it appears that I am not being charged at all. Are there really no costs for doing this?

7

You will be charged a stock borrow fee, which is inversely related to the relative supply of the stock you are shorting.

IB claims to pay a rebate on the short proceeds, which would offset part or all of that fee, but it doesn't appear relevant in your case because:

  1. Your short proceeds are less than $100k
  2. You spent the short proceeds already

It is a bit strange to me that IB would not require you to keep the cash in your account, as they need the cash to collateralize the stock borrow with the lending institution.

In fact, per Regulation​ T, the short position requires an initial margin of 150%, which includes the short proceeds. As described by Investopedia:

In the first table of Figure 1, a short sale is initiated for 1,000 shares at a price of $50. The proceeds of the short sale are $50,000, and this amount is deposited into the short sale margin account. Along with the proceeds of the sale, an additional 50% margin amount of $25,000 must be deposited in the account, bringing the total margin requirement to $75,000. At this time, the proceeds of the short sale must remain in the account; they cannot be removed or used to purchase other securities.

Here is a good answer to your question from The Street:

Even though you might see a balance in your brokerage account after shorting a stock, you're actually looking at a false credit, according to one big brokerage firm. That money is acting as collateral for the short position. So, you won't have use of these funds for investment purposes and won't earn interest on it.

And there are indeed costs associated with shorting a stock. The broker has to find stock to loan to you. That might come out of a broker's own inventory or might be borrowed from another stock lender.

  • It seems a bit odd that the proceeds can't be used to purchase other securities, surely those securities (and others in the same account) could also serve as collateral with perhaps a higher margin requirement to compensate the increase in risk? Long/short funds use long positions as collateral for their short positions all the time afaik. – Koen vd H May 21 '17 at 14:34
  • @KoenvdH Could be, but those kinds of things are more typical of institutional prime brokerage setups. I think it's pretty unlikely that the types of bespoke agreements regarding collateral quality etc would be agreed with a retail account like this. Generally, even a rebate on cash proceeds is not provided to retail investors. Considering the information I linked to, this appears to be the case. – Yosef Weiner May 21 '17 at 15:11
  • Thanks for the extra details. I do have other long positions in the account, so those are probably why I'm not running into Reg T issues. I'm still confused as to why it doesn't seem that I'm being charged margin interest or some other fee, but maybe I will in the future and they just haven't deducted it yet. – Doug May 21 '17 at 20:04
5

You sold $10,000 worth of stock so that money is essentially yours.

However, you sold this stock without actually owning any which means that you, through your broker, are currently borrowing shares amounting to (at the time of your sale) $10,000 from someone who actually owns this stock. You will be paying this person interest for the privilege of borrowing their shares, the exact amount charged varies wildly and depends on factors such as short interest in the stock (loads of people want to go short = shareholders can charge high interest) etc. If I remember correctly hovering over the "position" column in your portfolio in the IB Workstation should give you information about the interest rate charged.

You will have to buy back these shares from the lender at some point which is why the $10k isn't just "free money." If the stock has gone up in price in the meantime you are going to be paying more than the $10k you got for the same amount of shares and vice versa.

  • Hovering over it, it says fee rate 0.25%, rebate rate 0.66%. Since the rebate rate is positive, does that mean I don't get charged anything? – Kyle May 20 '17 at 19:24
  • @Kyle Short selling ain't my expertise so I could be wrong but I believe the fee rate includes the discount from the rebate rate. In other words, the "original" interest rate on the stock is 0.25 + 0.66 = 0.91% of which you pay 0.25% as the interest paid on your cash covers the remaining 0.66%. You would have to be a pretty high net worth individual to actually obtain this rebate though so there is a good chance you are straight up paying 0.91%. – Koen vd H May 20 '17 at 20:22

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .