LG, If I can butt in, yes it is true. The shorter typically borrows the stock from a brokerage (sometimes a large institutional holder for the big boys.) The broker gets his stock from his inventory in the vault, from customer's margin accounts which hold the stock long (where the customer as a normal part of opening the account has agreed to let the brokerage lend it out) and sometimes from large institutional holders through borrowing agreements.
Should the long stock leave the brokerage, say through individual customer sales or a block lender calling the stock back, the brokerage has to scrounge around for new long shares to borrow. If he can't find them it is tough luck for the shorting customer and the customer either has to find shares to borrow on his own or he is forced to cover at market to return the borrowed shares.
While it doesn't happen often, it is murder for the shorts when it does. So much so that many bears will not short a stock but only buy puts (which is what I have done in AMZN. Puts also have the advantage of limiting downside, of course.) The oft used term "short squeeze" really describes several components, most of which I think occurred in AMZN on the run to $147. One typical component (and most cited) is a forced buy in by the shorts because the position has turned so bad that they need more equity (margin call) to support it; they can't come up with it and they are forced to buy back at market, no matter what market is.
But a real killer that many shorts don't realize is when the long lenders take back their shares by whatever means. Even if the shorter has all sorts of cash to support his position, he is forced to close it. It is a common tactic used by longs against shorts in a bull/bear battle. It usually will only work on a thin free float stock that is heavily shorted. AMZN is a perfect example. This will not work on a GE or IBM because too many shares are laying around.
Now that you have heard of this, Lord help you if you get first hand experience. -ng-
Regards, IS |
