Posted by: bbigtim Date: Wednesday, June 10, 2009 11:40:16 PM
In reply to: None Post # of 179364
Another Bbigtim Cameo Appearance
Wavoids have discussed the availability of their WAVX shares for shorting many times over the years. Much misinformation has been distributed, and today was no exception. So I am going to go over some basics again.
(1) If your WAVX shares are held in a margin account, they are available for lending to shorts. Period. You signed an agreement when you opened the margin account "hypothecating" the shares. It doesn't matter whether you used margin to buy the shares in the first place. It doesn't matter whether you have ANY current margin balance at all. It doesn't matter whether your brokerage has told you it has some different policy. If they need the shares to lend to shorts, they are free to take them.
(2) Shares held in a separate cash account are not supposed to be available for lending. If you have opened a separate cash account, you can typically journal your shares from your margin account to your cash account upon request. However, many brokerages have an "autojournalism" policy, and these brokerages may move your shares back to the margin account when they want them for lending without your prior knowledge or consent. No kidding. However, shares held in an IRA or 401k are not available for shorting. Shares moved from an IRA or 401k to a regular account may constitute a withdrawal, so the brokerage is not authorized to move them without your prior consent.
(3) Not all brokers are careful about getting a "locate" on specific shares that can be borrowed before they lend them to shorts. This can become problematic for the broker, particularly if the security is placed under a PIC restriction. When this happens, brokers are required to be more fastidious about getting a locate before lending the shares. When shares to be lent are in short supply, a customer who has previously opened a short position can also be forced to close the short position or "bought in." In some instances, brokers will permit their better customers to maintain a short position in these circumstances, but they may charge an extra premium for the privilege.
(4) In the past, Wave private placements were faclitated by the participation of arbitrage investors "shorting against the box." This is a practice where a participant in an impending placement can sell Wave shares short and then cover the short with new shares he will receive in the allocation. This can be quite pernicious when the placement price is determined by a discount from the market price just before the placement. If shorting against the box in advance of a placement drives the price down, the placement participant knows he will likely to be able to cover his short position at a discount. However, I think this type of arbitrage activity has become less common in recent Wave placements.
(5) Wavoids should consider whether it is really that necessary or wise to try to "protect" the stock from shorting. To be sure, shorting can exacerbate weakness, but it also adds a pool of buyers when the stock is going up. |
