Boxed Positions
For those unfamiliar with boxing, a little history... Boxing a short sale used to be commonly used by daytraders to avoid the uptick rule. The trader would establish a long position in a stock and then offset the long by establishing a short position of equal size in the same stock (on an uptick). The trader now has one long and one short position and a net zero exposure. Subsequent to this, the trader would be able to go net short this stock by selling his long position. Since he/she is selling long stock, the trader would avoid any concern of the uptick rule that is required for selling short. To close out the net short position, the trader would simply reestablish their long position to net out the effect of their ongoing short position.
This practice of boxing has always been in violation of Nasdaq rules. However, Nasdaq seemed to wink at violators for years, before recently acting as though they will get serious with this rule. See the attached link for more information.
nasdr.com
“In 1994, the National Association of Securities Dealers, Inc. (NASD®) Rule 3350 (Short-Sale Rule) was adopted to stop market-destabilizing speculative short sales in Nasdaq National Market® (NNM) securities. To prevent this conduct, the Short-Sale Rule prohibits member firms from executing customer short sales and non-Market Maker proprietary short sales in an NNM security at or below the current inside bid when the current inside bid is lower than the previous inside bid.”
“It has come to the attention of NASD Regulation, Inc. (NASD RegulationSM) that certain NASD members may be assisting customers in the circumvention of this Rule. Specifically, these members are failing to net security positions of related accounts for customers who maintain accounts in their name and exercise control over a second related account, usually held in a family member's name. The failure to net these positions has permitted these customers, which operate the two accounts with a single investment strategy, to avoid application of the Short-Sale Rule.”
“Members are required to net all positions for accounts that are related or under common control in order to determine whether a sale is long or short and subject to the Short-Sale Rule requirements. NASD Regulation is committed to ensuring strict adherence to the Short-Sale Rule and will carefully review whether firms have engaged in the conduct described in this Notice in examinations and investigations. Violations of the Short-Sale Rule will be vigorously pursued.”
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